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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[ ] Preliminary Proxy Statement.
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RULE 14a-6(e)(2)).
[X] Definitive Proxy Statement.
[ ] Definitive Additional Materials.
[ ] Soliciting Material Pursuant to Section 240.14a-12
UICI
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SEC 1913 (02-02)
[UICI LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 14, 2003
The Annual Meeting of the Stockholders of UICI (the "Company"), a Delaware
corporation, will be held at the Harvey Hotel DFW Airport, 4545 West John
Carpenter Freeway, Irving, Texas 75063, on Wednesday, May 14, 2003, at 10:00
a.m., Central Daylight Time, for the following purposes:
1. To elect nine (9) directors of the Company to hold office until the
next annual meeting of stockholders and until their respective successors
are chosen and qualified.
2. To ratify the appointment of KPMG LLP as independent public
accountants to audit the accounts of the Company for the fiscal year ending
December 31, 2003.
3. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed March 26, 2003 as the record date for the
meeting. Holders of the Company's Common Stock of record at the close of
business on such date will be entitled to notice of and to vote at such meeting
or any adjournment thereof. A list of such stockholders will be available, as
required by law, at our principal offices at 9151 Grapevine Highway, North
Richland Hills, Texas. The stock transfer books will not be closed.
The Company will supply, upon written request and without charge, a copy of
the Company's Annual Report on Form 10-K for the year ended December 31, 2002 as
filed with the Securities and Exchange Commission. Requests for the Annual
Report should be directed to Investor Relations, UICI, 9151 Grapevine Highway,
North Richland Hills, Texas 76180-5605.
All stockholders are cordially invited to attend the meeting. It is
important that your shares be represented and voted whether or not you plan to
attend the Annual Meeting in person. You may vote in person, on the Internet, by
telephone, or by completing and mailing the enclosed proxy card. Voting over the
Internet, by telephone or by written proxy will ensure your shares are
represented at the Annual Meeting. Please review the instructions on the proxy
card or the information forwarded by your bank, broker or other holder of record
regarding these voting options.
By Order of the Board of Directors
-s- PEGGY G. SIMPSON
Peggy G. Simpson
Secretary
Date: April 7, 2003
UICI, 9151 Grapevine Highway, North Richland Hills, Texas 76180-5605
UICI
9151 GRAPEVINE HIGHWAY
NORTH RICHLAND HILLS, TEXAS 76180-5605
---------------------
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 14, 2003
---------------------
This proxy statement and the accompanying proxy card are being furnished in
connection with the solicitation of proxies by the Board of Directors of UICI, a
Delaware corporation (the "Company"), from holders of the Company's outstanding
shares of Common Stock, par value $0.01 per share (the "Common Stock"), for the
Annual Meeting of Stockholders to be held on Wednesday, May 14, 2003 for the
purposes set forth in the accompanying notice (the "Annual Meeting"). The Board
of Directors does not know of any other matters to be presented at the meeting,
but, if any other matters are properly presented to the meeting for action, the
persons named in the accompanying proxy will vote upon such matters in
accordance with their best judgment. The Company will bear the costs of
soliciting proxies from its stockholders. In addition to soliciting proxies by
mail, directors, officers and employees of the Company, without receiving
additional compensation therefor, may solicit proxies by telephone, by telegram
or in person. Arrangements also will be made with brokerage firms and other
custodians, nominees and fiduciaries to forward solicitation materials to the
beneficial owners of Common Stock held of record by such persons, and the
Company will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in connection
therewith.
The Company's Common Stock trades on The New York Stock Exchange under the
symbol: UCI. This proxy statement is being mailed on or about April 16, 2003 to
stockholders of record at the close of business on March 26, 2003, who are the
only stockholders entitled to receive notice of and to vote at the meeting. At
March 26, 2003 the Company had outstanding 46,899,782 shares of Common Stock. A
quorum of stockholders is necessary to take action at the Annual Meeting. A
majority of the outstanding shares of Common Stock of the Company, represented
in person or by proxy, will constitute a quorum. Each share of the outstanding
Common Stock is entitled to one vote. The affirmative vote of the holders of a
majority of the total voting power present in person or by proxy and entitled to
vote at the Annual Meeting is required to elect directors and ratify or approve
the other items being voted on at this time. Abstentions will have the same
effect as votes against the proposals, although abstentions will count toward
the presence of a quorum.
Your vote is important. You can vote in one of four ways: (1) in
person -- by casting your vote in person at the Annual Meeting, (2) by
mail -- by marking, signing and dating the enclosed proxy card, and returning it
promptly in the enclosed postage-paid envelope, (3) on the Internet -- by
visiting the website indicated on the enclosed proxy card, or (4) by
telephone -- by using the toll-free number indicated on the enclosed proxy card.
The Internet voting procedure is designed to authenticate stockholder
identities, to allow stockholders to give voting instructions, and to confirm
that stockholders' instructions have been recorded properly. Stockholders voting
by internet should be aware that there may be costs associated with electronic
access, such as usage charges from internet access and telephone or cable
service providers, that must be borne by the stockholder. If you choose to vote
on the Internet, you will be offered the option to receive future annual meeting
materials electronically through the Internet, which is cost-effective for the
Company. We hope the convenience and cost savings of voting by computer will
attract you. A sizable electronic "turnout" would save the Company significant
return-postage fees.
The Company is pleased to announce that it will broadcast the annual
meeting live on-line (listen only) at www.uici.net for stockholders unable to
attend in person. The replay of the Webcast will be available through June 16,
2003.
A proxy may be revoked at any time before its exercise (i) by notifying
UICI in writing at 9151 Grapevine Highway, North Richland Hills, Texas
76180-5605, Attention: Secretary; (ii) by completing a later-dated proxy and
returning it to UICI; or (iii) by appearing at the Annual Meeting in person and
revoking the proxy orally by notifying the Secretary before the vote takes
place. Properly executed proxies will, unless such proxies have been revoked, be
voted in the manner specified in the proxies. If no instructions are indicated,
such shares will be voted FOR the election of the nine directors and FOR the
ratification of KPMG LLP as independent public accountants for UICI for 2003.
1. ELECTION OF DIRECTORS
The Board of Directors (the "Board") has fixed the number of directors for
the ensuing year at nine (9). The Nominating Committee of the Board has
nominated Messrs. Ronald L. Jensen, Gregory T. Mutz, Richard T. Mockler, Stuart
D. Bilton, William J. Gedwed, Patrick J. McLaughlin, Glenn W. Reed, Thomas P.
Cooper, M.D. and Mural R. Josephson for election as directors at the 2003 Annual
Meeting of Stockholders. At the meeting, it is intended that such number of
directors will be elected to hold office until the next Annual Meeting of
Stockholders and until their respective successors are chosen and qualified. It
is intended that the proxies will be voted to elect as directors the nominees
listed above. All of the nominees, except Mr. Josephson, are currently directors
of the Company. Although the Board does not anticipate that any of such nominees
will be unable to serve as a director, in the event of such occurrence, the
proxy holders shall have the right to vote for such substitute, if any, as the
present Board may designate.
Mr. Josephson has been nominated by the Nominating Committee of the Board
to fill the vacancy created by the increase in the number of Directors
constituting the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION AS DIRECTORS OF
EACH OF THE NOMINEES LISTED ABOVE
NOMINEES FOR DIRECTOR
Set forth below is a biographical summary of the experience of each of the
nominees for director:
Ronald L. Jensen (age 72) has served as Chairman of the Board of Directors
of the Company and its predecessor company since December 1983. Mr. Jensen
served as President and Chief Executive Officer ("CEO") of the Company in 1993
and 1994 and from September 1997 to January 1999.
Gregory T. Mutz (age 57) has served as a director, President and CEO of the
Company since January 1999 and is a member of the Executive and Investment
Committees of the Board of Directors of the Company. Mr. Mutz also serves as
Chairman of the Board of Directors of The Chesapeake Life Insurance Company, The
MEGA Life and Health Insurance Company, Mid-West National Life Insurance Company
of Tennessee and Fidelity First Insurance Company. He has served as Chairman of
the Board of Trustees of AMLI Residential Properties Trust (NYSE: AML) since
1994. He has served as a Trustee of ABN AMRO Mutual Fund since 1996.
Richard T. Mockler (age 65) has served as a director of the Company since
1991. Mr. Mockler is a member of the Audit Committee of the Board of Directors.
Mr. Mockler retired as a partner with Ernst & Young LLP in 1989 after 27 years
with the firm. Mr. Mockler has served as a member of the Board of Directors of
Georgetown Rail Equipment Company since 1994 and as Treasurer since October
1996. Mr. Mockler served as a Director of Snead Research Labs from 1995 until
January 1998 and as Treasurer from October 1996 until January 1998.
Patrick J. McLaughlin (age 45) has served as a director of the Company
since May 1999. Mr. McLaughlin also serves on the Executive, Stock Option Plan,
Executive Compensation, Investment,
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Nominating and Privacy Committees of the Board. Since 1993, Mr. McLaughlin has
served as a Managing Director of Emerald Capital Group, Ltd., an insurance
advisory and investment banking firm. Mr. McLaughlin has served as a director of
Universal American Financial Corp., an insurance holding company, since January
1995.
Stuart D. Bilton (age 56) has served as a director of the Company since May
1999. Mr. Bilton has served as President and CEO of ABN AMRO Asset Management
Holdings, Inc. (U.S.) since February 2001. He previously served as President and
CEO of Chicago Trust Company (an institutional money manager and mutual fund
sponsor) since 1994 and as President and CEO of Alleghany Asset Management, Inc.
since January 1997 and as a Director since 1994. Alleghany Asset Management,
Inc. and Chicago Trust Company were acquired by ABN AMRO in February 2001. Mr.
Bilton has served as a Director of Baldwin & Lyons, Inc. since 1987 and as
Chairman of The ABN AMRO Funds (formerly the Alleghany Funds) since 1993. Mr.
Bilton serves on the Audit, Stock Option Plan, Executive Compensation and
Nominating Committees of the UICI Board of Directors.
William J. Gedwed (age 47) has served as a director of the Company since
June 2000. He is also a member of the Investment, Stock Option Plan, Executive
Compensation and Privacy Committees of the Board of Directors. He served as a
Vice President of the Company from August 1999 and as Executive Vice President
of the Company from May 2000 until December 31, 2000. From 1993 until July 2000,
Mr. Gedwed served as President and CEO of NMC Holdings, Inc. and National Motor
Club of America, Inc. (subsidiaries of the Company from 1997 until July 2000),
and from 1997 until July 2000 he served as Chairman of the Board of National
Motor Club of America. From January 1, 2001 until May 2002, Mr. Gedwed served as
President and CEO of NMC Holdings, Inc. and Chairman, President and CEO of
National Motor Club of America, Inc. Until February 1, 2001, Mr. Gedwed served
as Chairman and director of The MEGA Life and Health Insurance Company, Mid-West
National Life Insurance Company of Tennessee, The Chesapeake Life Insurance
Company and Fidelity First Insurance Company (subsidiaries of the Company). Mr.
Gedwed currently is Chairman, President and CEO of Gedwed Enterprises, LLC,
President and CEO of DirectoryNet, LLC, and Chairman, President and CEO of
Landen Bias Corporation (an indirect subsidiary of NMC Holdings Inc.).
Glenn W. Reed (age 50) has served as a director of the Company since May
2001 and as Executive Vice President and General Counsel of the Company since
July 1999. Prior to joining the Company, Mr. Reed was a partner in the Chicago,
Illinois law firm of Gardner, Carton & Douglas. Mr. Reed serves on the Executive
and Privacy Committees of the Board. Mr. Reed also serves as a director and Vice
President of The MEGA Life and Health Insurance Company, Mid-West National Life
Insurance Company of Tennessee, The Chesapeake Life Insurance Company and
Fidelity First Insurance Company. He has served as a director of The Pepper
Companies, Inc. (a Chicago-based general contractor) since 1990 and as a
director of Peoples Bancorp, Inc. (a bank holding company located in Arlington
Heights, Illinois) since 1999.
Thomas P. Cooper, M.D. (age 59) has served as a director of the Company
since May 2002. Dr. Cooper serves on the Audit, Executive Compensation, Stock
Option Plan and Nominating Committees of the Board. He has served as CEO of
Senior Psychology Services, Inc. (a company providing mental health services to
patients in long-term care facilities) since 1991 and as a director since 1994.
Dr. Cooper has also served as a director of Hanger Orthopedic Group, Inc. since
1991. Dr. Cooper also served as CEO of OnCall Healthcare from November 2000
until November 2001 and has been an Adjunct Professor at Columbia Business
School since September 1999. Dr. Cooper served as CEO of Cove Healthcare, Inc.
from 1997 to 1999.
Mural R. Josephson (age 54) retired as Senior Vice President and Chief
Financial Officer of Lumbermen's Mutual Casualty Company (the lead company of
Kemper Insurance Companies) in October 2002. In July 1998, Mr. Josephson retired
as a partner with KPMG LLP after 28 years with the firm. Mr. Josephson is a
licensed Certified Public Accountant in the State of Illinois, and is a member
of the American Institute of Certified Public Accountants. It is anticipated
that Mr. Josephson will serve on the Audit Committee of the Board.
3
Certain affiliations exist between the Company and certain directors and
nominees. See " COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION;
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
THE BOARD OF DIRECTORS AND COMMITTEES
GENERAL INFORMATION
The UICI Board of Directors currently consists of eight directors, three of
whom are independent directors under the requirements set forth in the proposed
New York Stock Exchange listing rules. Mr. Josephson, if elected to the Board by
the Company's stockholders, will also be an independent director. The Board has
responsibility for establishing broad corporate policies and for the overall
performance of the Company, although it is not involved in day-to-day
operations. Members of the Board are kept informed of the Company's businesses
by various reports and documents sent to them, as well as by operating and
financial reports made at Board and committee meetings. Regular meetings of the
Board are held each quarter, and special meetings are held as necessary. The
annual organizational meeting follows immediately after the Annual Meeting of
Stockholders. During the fiscal year ended December 31, 2002, the Board of
Directors of the Company met five times and took action on other occasions by
unanimous consent of its members. Each member of the Board of Directors who held
such position in 2002 attended at least 75% in the aggregate of all meetings of
the Board and any committee on which such Board Member served.
To promote open discussion and foster better communication among the
non-management directors, regular executive sessions are held after each
quarterly Board meeting in which the non-management directors meet without
management participation. No single director has been designated as the
presiding director at such meetings, and the non-management directors have
alternated serving as presiding director at such meetings.
COMMITTEES OF THE BOARD
Various committees of the Board of Directors have been established to
assist the Board in the discharge of its responsibilities. The functions and
composition of the Board committees are described below:
Audit Committee
The Audit Committee (of which Richard T. Mockler (Chairman), Stuart D.
Bilton and Thomas P. Cooper, M.D. serve as members) confers with the Company's
independent accountants and internal auditors regarding audit procedures,
including proposed scope of examination, audit results and related management
letters. The Audit Committee reviews the services performed by the independent
auditors in connection with determining their independence, reviews the reports
of the independent accountants and internal auditors, and reviews
recommendations about internal controls. The Committee recommends selection of
independent auditors to the Board and approves any significant non-audit
relationship with the independent auditors. The Audit Committee held eight
meetings during 2002. It is anticipated that Mural R. Josephson (a director
nominee) will serve on the Audit Committee if elected to the Board.
The Audit Committee's Report appears elsewhere in this proxy statement. The
Audit Committee is comprised solely of independent directors, and it operates
under a written charter adopted by the Board of Directors. The Committee reviews
and assesses the adequacy of its charter on an annual basis. The composition of
the Audit Committee, the attributes of its members and the responsibilities of
the Committee, as reflected in its charter, are intended to be in accordance
with applicable requirements for corporate audit committees. The Company's
securities are listed on the New York Stock Exchange ("NYSE") and are governed
by the NYSE's listing standards. Each of the members of the Audit Committee meet
the current independence requirements of these standards and the requirements of
independence as set forth in proposed revisions to the NYSE listing standards.
The Board of Directors has determined in its business judgment that one or more
members of the Audit Committee possess accounting or related financial
management expertise.
4
Executive Committee
The Executive Committee (of which Gregory T. Mutz (Chairman), Glenn W. Reed
and Patrick J. McLaughlin serve as members) has the authority of the full Board
of Directors in the management and affairs of the Company, except that the
Committee may not effect certain fundamental corporate actions, such as (a)
declaring a dividend, (b) amending the Certificate of Incorporation or By-Laws,
(c) adopting an agreement of merger or consolidation, or (d) imposing a lien on
substantially all of the assets of the Company. In practice, the Executive
Committee meets infrequently and does not act except on matters that are not
sufficiently important to require action by the full Board of Directors. During
2002 the Executive Committee did not meet, but the Committee took action on
selected occasions by unanimous consent of its members.
Stock Option Plan Committee
The Stock Option Plan Committee (of which Patrick J. McLaughlin (Chairman),
Stuart D. Bilton, William J. Gedwed and Thomas P. Cooper, M.D serve as members)
administers the various stock option plans of the Company.
During 2002 the Stock Option Plan Committee did not meet, but the Committee
took action on several occasions by unanimous written consent of its members.
Investment Committee
The Investment Committee (of which Gregory T. Mutz (Chairman), Patrick J.
McLaughlin and William J. Gedwed serve as members) coordinates with the
Investment/Finance Committees of the Company's insurance subsidiaries in
supervising and implementing the investments of the funds of the Company and its
insurance subsidiaries. Mr. McLaughlin also serves as an advisory member of each
of the insurance company's Investment/Finance Committee. The Investment
Committee held four meetings during 2002.
Nominating Committee
The Nominating Committee (of which Patrick J. McLaughlin (Chairman), Stuart
D. Bilton and Thomas P. Cooper, M.D. serve as members) identifies individuals
qualified to become Board members and recommends to the Board nominees for
election as directors at the next annual meeting of shareholders. The Committee
also makes recommendations concerning the structure, size and membership of the
various committees of the Board of Directors and considers question of corporate
governance, management organization and management succession. During 2002 the
Nominating Committee held one meeting and took action on selected occasions by
unanimous written consent of its members.
In carrying out its responsibilities to nominate directors, the Nominating
Committee will consider candidates recommended by the Board of Directors and by
stockholders of the Company. All suggestions by stockholders for nominees for
director for 2004 must be made in writing and received by the Secretary of the
Company, 9151 Grapevine Highway, North Richland Hills, Texas 76180 no later than
December 9, 2003 (see "Deadline for Submission of Stockholder Proposals and
Nominations for Director"). Such writing must set forth (i) the name and address
of the stockholder who intends to make the nomination and of each person to be
nominated, (ii) a representation that the stockholder is a holder of record of
the Company's stock entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to nominate the person named, (iii) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person pursuant to which the nomination is to be made
by the stockholder, (iv) the consent of each proposed nominee to serve as a
director of the Company if so elected and (v) such other information regarding
each proposed nominee as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission.
5
Executive Compensation Committee
The Executive Compensation Committee (of which Patrick J. McLaughlin
(Chairman), Stuart D. Bilton, William J. Gedwed and Thomas P. Cooper, M.D serve
as members) administers the Company's compensation programs and remuneration
arrangements for its highest-paid executives. The Committee reviews and approves
corporate goals and objectives relative to CEO compensation, evaluates the CEO's
performance in light of those goals and objectives and sets the CEO's
compensation level based on this evaluation. The Committee also makes
recommendations to the Board with respect to incentive-compensation plans and
equity-based plans. The Committee held two meetings during 2002.
The Executive Compensation Committee's Report on Executive Compensation
appears elsewhere in this proxy statement.
Privacy Committee
The Privacy Committee (of which Glenn W. Reed (Chairman), William J. Gedwed
and Patrick J. McLaughlin serve as members) oversees implementation and
administration of the privacy, security, transaction codes set and other
requirements imposed under the federal Gramm-Leach-Bliley Act and Health
Insurance Portability and Accountability Act. During 2002 the Privacy Committee
took action on selected occasions by unanimous written consent of its members.
6
COMPENSATION OF DIRECTORS
UICI does not compensate directors who are also officers of the Company for
their service as directors. The following chart reflects the compensation for
the non-employee directors of the Company effective May 1, 2002 and as modified
by the Executive Compensation Committee on February 22, 2003 to be effective May
1, 2003:
AS MODIFIED ON FEBRUARY 22,
CURRENT- 2003 TO BE EFFECTIVE
FEATURE EFFECTIVE MAY 1, 2002 MAY 1, 2003
------- --------------------- ---------------------------
Annual Retainer $6,000 $7,500
Per Quarterly Meeting Attendance $4,000 $6,000
Fee
Audit Committee Chairman:
Annual Retainer: $2,000 $4,000
Per Meeting Attendance Fee: None $ 500
Annual Retainer for Other Non- $2,000 $3,000
Employee Members of Audit
Committee, Compensation
Committee and the Privacy
Committee:
Stock in Lieu of Cash Feature For fees otherwise payable in No change
cash, outside directors may elect
to receive UICI stock, in whole or
in part, in lieu of cash, at a 15%
discount to the market price. Each
director electing to receive stock
in lieu of cash will receive an
option to purchase one share of
UICI stock for each share of UICI
purchased pursuant to stock-in-
lieu-of-cash feature.(1)
Stock Purchase Feature Each outside director may purchase No change
up to $60,000 of UICI stock at a
15% discount to the market price
and will receive an option to
purchase one share of UICI for
every two shares so purchased.(2)
---------------
(1) All stock options granted under the Stock In Lieu of Cash Feature have an
exercise price equal to the fair market value on the date of grant and will
otherwise be governed by the UICI 1987 Amended and Restated Stock Option
Plan.
(2) All stock options granted under the Stock Purchase Feature will have an
exercise price equal to the fair market value on the date of grant and will
otherwise be governed by the UICI 1987 Amended and Restated Stock Option
Plan.
During 2002, all non-employee directors elected to receive 100% of their
director compensation in stock (except Messrs. Mockler and Gedwed, who elected
to receive such director compensation in cash).
In May 2002, Thomas P. Cooper elected to purchase $60,000 worth of UICI
stock pursuant to the stock purchase feature of the director compensation
program. Dr. Cooper received an option to purchase 1,904 shares of UICI stock at
an exercise price of $18.47.
7
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's compensation objectives include attracting and retaining the
best possible executive talent, motivating executive officers to achieve the
Company's performance objectives, rewarding individual performance and
contributions, and linking to the extent possible executive and stockholder
interests through equity-based (stock option and restricted stock) plans. The
Company's executive compensation consists of four key components: annual base
salary, annual cash incentive bonus compensation, stock option grants and
restricted stock grants. Each component of compensation is designed to
complement the other components and, when considered together, to meet the
Company's overall compensation objectives.
Historically, the Executive Compensation Committee of the Board of
Directors (the "Committee") has approved base compensation for senior executives
(including Mr. Mutz) based on reference to base salaries of comparable executive
positions at a peer group of comparably sized insurance and insurance holding
companies. Mr. Mutz's base compensation is intended to be comparable with the
50th percentile of salaries within such peer group. Consistent with past
practice, in December 2001 the Committee reviewed and approved base compensation
to be paid to executives in 2002. In establishing base compensation for 2002 to
officers other than Mr. Mutz, the Committee considered the recommendations of
Mr. Mutz and approved, subject to any modifications it deemed appropriate, base
compensation to be paid to such executive officers. The recommendations of the
Committee with respect to 2002 base compensation were subsequently approved by
the full Board of Directors at a meeting held on February 6, 2002.
Commencing in 2001, the Company established and implemented a more
structured incentive compensation plan, pursuant to which the Company set a
maximum bonus potential for each executive as a percentage of base compensation
and established quantitative and qualitative bonus criteria. For 2002, the
quantitative performance goals included, among other things, UICI consolidated
financial results, business unit profitability and attainment of specific
revenue (annualized premium volume) goals. Throughout the year, each executive's
progress toward meeting his or her incentive compensation goals was measured and
monitored, and final determination of incentive compensation awards was made in
December 2002 in light of anticipated year end results. At meetings held on
December 17 and December 27, 2002, the Committee, composed of Stuart D. Bilton,
William J. Gedwed, Thomas P. Cooper and Patrick J. McLaughlin (Chairman),
reviewed and approved incentive bonus compensation in accordance with the plan
for all Named Executive Officers below and approximately ten other officers and
key employees of the Company.
The Company's executive officers are also entitled to participate in the
Company's 1987 Amended and Restated Stock Option Plan. Under the 1987 Plan,
nonqualified options to purchase Common Stock of the Company may be granted at
exercise prices not less than the fair market value of the Common Stock at the
date of grant. Options granted under the 1987 Plan become exercisable generally
in annual cumulative installments of 20% of the number of options granted over a
five-year period, or sooner at the discretion of the Stock Option Committee.
With respect to 2002 performance, the Committee determined to award options to
acquire an aggregate of 194,500 UICI shares to selected UICI officers (including
Named Executive Officers) under the 1987 Plan, which options are exercisable at
$11.50 per share (the fair market value of UICI Common Stock on February 12,
2003, the date of grant).
Section 162(m) of the U.S. Internal Revenue Code limits the deductibility
of compensation in excess of $1.0 million paid to the Company's Chairman, chief
executive officer and president or to any of the Company's four highest-paid
other executive officers unless certain specific and detailed criteria are
satisfied. The Committee considers the anticipated tax treatment to the Company
and its executive officers in its review and establishment of compensation
programs and payments, but has determined that it will not necessarily seek to
limit compensation to that amount otherwise deductible under Section 162(m).
To provide an additional equity-based vehicle to incentivize officers and
other key employees, in February 2000 and January 2001, the Board of Directors
of the Company approved and adopted the UICI 2000 Restricted Stock Plan and 2001
Restricted Stock Plan, respectively, pursuant to which the Company may from time
to time and subject to the terms thereof make awards of restricted shares of the
Company's
8
Common Stock to eligible participants in the Plan. The shareholders of UICI
approved the UICI 2000 Restricted Stock Plan and 2001 Restricted Stock Plan on
May 16, 2001. Shares of Common Stock granted to eligible participants generally
vest on the second anniversary of the date of grant and are otherwise
forfeitable if the participant ceases to provide material services to the
Company as an employee, independent contractor, consultant, advisor, director or
otherwise for any reason other than death prior to vesting. Shares of restricted
stock also vest upon a Change of Control (as defined) or upon the death of the
participant. With respect to 2002 performance, in February 2003 the Committee
awarded to UICI key executives under the 2001 Plan an aggregate of 61,182 shares
of restricted stock. Mr. Mutz was granted 3,000 shares of restricted stock
pursuant to the UICI 2001 Restricted Stock Plan. The shares are subject to a
two-year vesting period.
Executive Compensation Committee
Patrick J. McLaughlin
Stuart D. Bilton
Thomas P. Cooper
William J. Gedwed
9
SUMMARY COMPENSATION TABLE
The following table summarizes all compensation for services to the Company
and its subsidiaries for the fiscal years ended December 31, 2002, 2001, and
2000, earned by or awarded or paid to the persons who were the Chairman of the
Board, the chief executive officer, and the four other most highly compensated
executive officers of the Company serving as such at December 31, 2002, (the
"Named Executive Officers").
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- -------------------------
OTHER RESTRICTED SECURITIES ALL
ANNUAL STOCK UNDERLYING OTHER
NAME AND PRINCIPAL COMPENSATION AWARDS OPTIONS COMPENSATION
POSITION YEAR SALARY($) BONUS($)(a) ($)(b) ($)(c) (#)(d) ($)(e)
------------------ ---- --------- ----------- ------------ ------------ ---------- ------------
Ronald L. Jensen........... 2002 1 -- -- -- -- --
Chairman of the Board 2001 1 -- -- -- -- --
2000 1 -- -- -- -- --
Gregory T. Mutz............ 2002 500,000 997,000 -- 34,500 -- 42,683
CEO and Director 2001 500,000 (f) -- -- 150,000(g) 27,123
2000 500,000 50,000 -- 59,375 -- 3,233,700(h)
Glenn W. Reed.............. 2002 390,000 200,000 -- 232,875 17,000 53,213
Executive Vice 2001 390,000 175,000 -- -- 20,000 35,385
President & General 2000 375,000 85,000 -- 59,375 -- 492,320(i)
Counsel
Steven K. Arnold........... 2002 300,000 125,000 -- 46,000 20,000 12,289
Executive Vice
President -- 2001 300,000 100,000 -- -- 5,000 12,345
Insurance Group 2000 280,000 30,000 -- 59,375 -- 273,303(j)
Phillip J. Myhra........... 2002 275,000 300,000 -- 126,500 45,000 32,781
Executive Vice
President -- 2001 225,000 210,000 -- -- 20,000 47,232
Insurance Group 2000 210,000 65,000 -- 82,000 5,000 36,986
James N. Plato............. 2002 267,323 358,150 102,330 -- 10,000 20,545
President -- Life
Insurance 2001 120,595 107,100 -- 45,050 20,000 77,695
Division(k) 2000 -- -- -- -- -- --
---------------
(a) Reflects cash bonuses accrued for the year presented.
(b) Mr. Plato received an aggregate of $102,330 for reimbursement of certain
housing expenses (consisting of reimbursement for interest on mortgage
loans in the amount of $59,137, real estate taxes in the amount of $23,448,
an employment tax gross up in the amount of $19,745). No other Named
Executive Officer received perquisites or other personal benefits in excess
of the lesser of $50,000 or 10% of the total of annual salary and bonus
reported for the Named Executive Officer.
(c) With respect to 2002, reflects market value of restricted stock granted
February 12, 2003. With respect to 2001, reflects market value of
restricted stock granted on June 11, 2001. With respect to 2000, reflects
the market value of restricted stock granted on January 2, 2001 (February
1, 2001 with respect to Mr. Myhra). The number of shares awarded for 2002,
2001, and 2000 was as follows: Mr. Mutz, 3,000 shares, -0- shares, and
10,000 shares; Mr. Reed, 20,250 shares, -0- shares, and 10,000 shares; Mr.
Arnold, 4,000 shares, -0- shares, and 10,000 shares; Mr. Myhra, 11,000
shares, -0- shares, and 10,000 shares; and Mr. Plato, -0- shares, 5,000
shares, and -0- shares. Dividends are paid, if any, to holders with respect
to restricted stock at the same rate paid to all stockholders. Shares of
restricted stock granted to all executives (other than Mr. Plato) vest on
the second anniversary of the date of grant. Shares of restricted stock
granted to Mr. Plato vest in 20% increments over five years. At December
31, 2002, the number of unvested shares and market value of all restricted
stock then held (excluding shares of restricted stock granted on February
12, 2003) by Messrs. Mutz, Reed, Arnold, Myhra and Plato was 10,000 shares
and $155,500; 10,000 shares and $155,500; 10,000 shares and $155,500;
10,000 shares and $155,500; and 4,000 shares and $62,200, respectively.
(d) With respect to 2002, includes options granted on February 12, 2003.
(e) Amounts for 2002 include Company contributions to its Employee Stock
Ownership and Savings Plan of $12,000 for the benefit of Messrs. Mutz,
Arnold, Myhra and Plato and $11,500 for the benefit of Mr. Reed. Amounts
for 2002 for Mr. Mutz, Mr. Reed, Mr. Myhra and Mr. Plato include
reimbursement of housing expenses of $17,785, $41,424, $20,493, and $8,545,
respectively. Amounts for Mr. Mutz in 2002 include reimbursement of tax
preparation fees of $12,609. Amounts for 2001 include Company contributions
to its Employee Stock Ownership and Savings Plan for the benefit of Messrs.
Mutz, Reed, Arnold, Myhra and Plato in the amount of $10,200, $10,200,
$10,200, $10,200 and $6,872, respectively. Also includes in 2002
contributions to the Company's Medical Savings Account Health Insurance
Plan for the benefit of Messrs. Mutz, Reed, Arnold, Myhra and Plato in the
amount of $2,000, $2,000,
10
$2,000, $1,000 and $-0-, respectively. Amounts for Mr. Mutz, Mr. Reed, Mr.
Myhra and Mr. Plato in 2001 also include reimbursement of housing expenses
in the amount of $14,778, $23,040, $35,887 and $15,751, respectively.
Amounts for Mr. Plato in 2001 include reimbursement of interest on mortgage
loans in the amount of $55,072.
(f) In lieu of a cash bonus for 2001 performance in the amount of $200,000, Mr.
Mutz was awarded immediately exercisable options to purchase 100,000 shares
of UICI Common Stock at an exercise price of $11.40 per share.
(g) Includes immediately exercisable options to purchase 100,000 shares of UICI
Common Stock at an exercise price of $11.40 per share, which were granted
to Mr. Mutz in lieu of a cash bonus for 2001 performance.
(h) Includes $3,201,623 associated with modifications to the Company's
Executive Stock Purchase Program made in January 2001, consisting of
forgiveness of indebtedness in the amount of $1,445,125, the value
($635,930) of 107,104 shares of UICI Common Stock granted on January 2,
2001, and a tax gross-up payment in the amount of $1,120,568.
(i) Includes $457,434 associated with modifications to the Company's Executive
Stock Purchase Program made in January 2001, consisting of forgiveness of
indebtedness in the amount of $297,332 and a tax gross-up payment in the
amount of $160,102.
(j) Includes $261,374 associated with modifications to the Company's Executive
Stock Purchase Program made in January 2001, consisting of forgiveness of
indebtedness in the amount of $169,893 and a tax gross-up payment in the
amount of $91,481.
(k) Mr. Plato commenced employment with the Company on June 11, 2001.
2002 STOCK OPTIONS
The following table summarizes options granted to the named executive
officers during 2002, along with the present value of such options on the date
they were granted, calculated as described in the footnote to the table.
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED(2)(#) FISCAL YEAR ($/SH) DATE VALUE(1)($)
---- ------------- ------------- ----------- ---------- -----------
Ronald L. Jensen............... 0 0 -- -- --
Gregory T. Mutz................ 0 0 -- -- --
Glenn W. Reed.................. 17,000 8.11% $11.50 3/13/2008 76,670
Steven K. Arnold............... 20,000 9.54% $11.50 3/13/2008 90,200
Phillip Myhra.................. 45,000 21.48% $11.50 3/13/2008 202,950
James N. Plato................. 10,000 4.77% $11.50 3/13/2008 45,100
---------------
(1) In accordance with the Securities and Exchange Commission rules, grant date
present value is determined using the Black-Scholes Model. The Black-Scholes
Model is a mathematical formula widely used to value exchange-traded
options. However, stock options granted by the Company are long-term,
non-transferable and subject to vesting in equal annual increments over a
five-year period, while exchange-traded options are short-term and can be
exercised or sold immediately in the liquid market. The Black-Scholes Model
relies on several key assumptions to estimate the present value of options,
including the volatility of, and dividend yield on, the security underlying
the option, the risk-free rate of return on the date of grant and the
estimated time period until exercise of the option. Based on the Black-
Scholes option valuation model with the actual option price, the key
weighted average input variables used in valuing the options granted on
February 12, 2003 were as follows: risk free interest rate 2.07%; dividend
yield, 0.00%; stock price volatility, 57.42%; option term, three (3) years.
The volatility variable reflects actual daily stock price trading data for
the period equal to the expected life of the options immediately preceding
the grant date. The actual value, if any, that a grantee may realize will
depend on the excess of the stock price over the exercise price on the date
the option is exercised, so there is no assurance the value realized will be
at or near the value estimated by the Black-Scholes Model.
(2) Reflects options that were granted on February 12, 2003.
11
AGGREGATE STOCK OPTION EXERCISES
IN 2002 AND YEAR-END VALUES
The following table summarizes for each of the named executive officers the
total number of unexercised stock options held at December 31, 2002, and the
aggregate dollar value of in-the-money, unexercised stock options held at
December 31, 2002.
VALUE OF
NUMBER OF UNEXERCISED IN-THE-
UNEXERCISED STOCK MONEY STOCK
OPTIONS AT YEAR OPTIONS AT YEAR
END(#)(a) END($)(b)
SHARES --------------------------- ---------------------------
ACQUIRED
ON VALUE
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
Ronald L. Jensen....... -- -- -- -- 0 0
Gregory T. Mutz........ -- -- 264,537 226,000 1,633,803 1,826,050
Glenn W. Reed.......... -- -- 22,100 55,900 132,626 309,288
Steven K. Arnold....... -- -- 16,500 47,250 142,488 305,106
Phillip J. Myhra....... -- -- 12,200 75,800 90,473 383,490
James N. Plato......... -- -- 2,000 28,000 13,080 115,820
---------------
(a) Includes options issued on February 12, 2003 as follows: Reed, 17,000;
Arnold, 20,000; Myhra, 45,000; and Plato, 10,000.
(b) The closing stock price per share at December 31, 2002 was $15.55. Includes
value for options issued on February 12, 2003 as follows: Reed, $68,850;
Arnold, $81,000; Myhra, $182,250; and Plato, $40,500.
12
COMPARISON OF TOTAL SHAREHOLDER RETURN
The following graph compares the cumulative total stockholder return on
UICI Common Stock for the last five years with the cumulative return for the
same period of the S&P 600 Small Cap Market Index and the S&P Insurance Index.
The graph assumes the investment of $100 at the beginning of the period in the
Company's Common Stock.
(PERFORMANCE GRAPH)
----------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002
----------------------------------------------------------------------------------------------------------------
UICI 100 70 30 17 39 45
S&P 600 Small Cap Market Index 100 98 109 121 128 109
S&P Insurance Index 100 107 78 117 91 85
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 (subject to overall salary
deferral 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. Shares contributed to the ESOP
or purchased with the Company's contributions are allocated to the participant's
account on a monthly basis, and forfeitures are allocated to employees who are
participants on the last day of the plan year based upon the ratio of each
participant's annual credited compensation (up to $40,000) to the total annual
credited compensation of all participants entitled to share in such
contributions for such Plan Year. Effective January 1, 2002, contributions by
UICI and its subsidiaries to the Employee Plan under the ESOP feature currently
vest in prescribed increments over a six-year period.
13
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 had a maturity date of three years and was secured by a pledge of the
purchased shares. The shares of UICI common stock purchased with the Plan Note
(the "$5.25 ESOP Shares") were held in a suspense account for allocation among
participants as and when the Company's matching and supplemental contributions
to the ESOP were made. As of December 31, 2002, all $5.25 ESOP Shares had been
allocated to participants' accounts, and the Plan Note had been paid in full.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth the number of shares of Common Stock
beneficially owned and the percentage of Common Stock so owned, as of March 26,
2003, by (a) each person known by management to own beneficially five percent or
more of the Company's Common Stock, (b) each director of the Company, each
nominee for director of the Company and each Named Executive Officer and (c) all
directors and executive officers as a group:
COMMON SHARES
BENEFICIALLY PERCENT OF
NAME & ADDRESS OF BENEFICIAL OWNER OWNED COMMON STOCK
---------------------------------- ------------- ------------
Ronald L. Jensen............................................ 7,668,986(1) 16.4%
6500 N. Beltline Road, Suite 170
Irving, TX 75063
Dimensional Fund Advisors................................... 2,824,500 6.0%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Comerica Bank, as Trustee(2)................................ 3,065,852 6.5%
One Detroit Center
Detroit, MI 48275
Onward and Upward, Inc...................................... 2,734,483 5.8%
6500 N. Beltline Road
Irving, TX 75063
Steven K. Arnold............................................ 58,754(3)(4) (5)
Stuart D. Bilton............................................ 15,176(6) (5)
Thomas P. Cooper, M.D....................................... 5,216(7)(14) (5)
William J. Gedwed........................................... 62,693(3)(8) (5)
Patrick J. McLaughlin....................................... 61,821(9) (5)
Richard T. Mockler.......................................... 21,825(10) (5)
Mural R. Josephson.......................................... -- --
Gregory T. Mutz............................................. 1,322,651(3)(11) 2.8%
Phillip J. Myhra............................................ 65,967(3)(12) (5)
James N. Plato.............................................. 16,184(3)(13) (5)
Glenn W. Reed............................................... 76,104(3)(14) (5)
All executive officers and directors (13 individuals) as a
group..................................................... 9,407,171 19.9%
---------------
(1) Includes 4,100,000 shares held by Mr. Jensen's spouse. Does not include
shares held directly or indirectly by Mr. Jensen's five adult children, as
to which Mr. Jensen disclaims beneficial ownership. Mr. Jensen's adult
children directly hold in the aggregate approximately 5.3% of the
outstanding Common Stock. Mr. Jensen's adult children are also the
stockholders of Onward and Upward, Inc., which holds approximately 5.8% of
the outstanding Common Stock. Does not include 890,600 (1.9%) shares owned
by various foundations and trusts controlled by Mr. Jensen's adult
children, as to which Mr. Jensen disclaims beneficial ownership.
14
(2) Represents shares held as Trustee under the Company's Employee Stock
Ownership and Savings Plan. See "EMPLOYEE STOCK OWNERSHIP AND SAVINGS
PLAN."
(3) Includes shares of Common Stock held by the Trustee under the Company's
Employee Stock Ownership and Savings Plan. The shares of Common Stock held
by the Trustee under the Plan that are purchased with contributions made by
the Company are subject to the vesting requirements of the Plan.
(4) Includes 24,250 shares subject to options exercisable within 60 days.
(5) Represents less than 1% of outstanding UICI Common Stock.
(6) Includes 3,675 shares subject to options exercisable within 60 days.
(7) Includes 121 shares subject to options exercisable within 60 days
(8) Includes 35,483 shares subject to options exercisable within 60 days.
(9) Includes 36,108 shares subject to options exercisable within 60 days.
(10) Includes 2,663 shares subject to options exercisable within 60 days.
(11) Includes 42,995 shares held by a partnership in which Mr. Mutz holds a
33.3% ownership interest; 400 shares held by two partnerships in each of
which Mr. Mutz holds a 20% ownership interest; 4,879 shares held by Mr.
Mutz as custodian for his minor children; 255 shares held in IRAs for his
minor children; 99,092 shares held by several family trusts, of which Mr.
Mutz serves either as the Trustee or the investment advisor, and of which
Mr. Mutz is a beneficiary; and 808 shares held in an IRA for Mr. Mutz. Also
includes 316,937 shares subject to options exercisable within 60 days.
(12) Includes 16,800 shares subject to options exercisable within 60 days.
(13) Includes 4,000 shares subject to options exercisable within 60 days.
(14) Includes 28,600 shares subject to options exercisable within 60 days.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors,
executive and certain officers, and any persons holding more than ten percent of
the Company's common stock are required to report their ownership of the
Company's common stock and any changes in that ownership to the Securities and
Exchange Commission (the "Commission") and, in the Company's case, The New York
Stock Exchange. Specific due dates for these reports have been established and
the Company is required to report in this proxy statement any failure to file by
these dates during 2002. Based solely upon a review of Reports on Forms 3, 4 and
5 and any amendments thereto furnished to the Company pursuant to Section 16 of
the Securities Exchange Act of 1934, as amended, and written representations
from the executive officers and directors that no other reports were required,
the Company believes that all of such reports were filed on a timely basis by
executive officers and directors during 2002.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION;
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INTRODUCTION
Historically, the Company and its subsidiaries have engaged from time to
time in transactions and joint investments with executive officers and entities
controlled by executive officers, particularly Ronald L. Jensen (the Company's
Chairman) and entities in which Mr. Jensen and his adult children have an
interest ("Jensen Affiliates").
Under the Company's by-laws, any contract or other transaction between the
Company and any director (or company in which a director is interested) is valid
for all purposes if the interest of such director is disclosed or known and such
transaction is authorized by a majority of directors not interested in the
transaction. The Board of Directors has adopted a policy requiring the
prospective review and approval by a majority of the "Disinterested Outside
Directors" of any contract or transaction with a related party involving
15
payments of $250,000 or more in any twelve-month period or $1.0 million over the
life of the contract. For purposes of the policy, a "related-party" is a person
or entity that is an "affiliate" of the Company or any entity in which any
officer or director of the Company has a 5% or greater equity interest, and a
"Disinterested Outside Director" is any director of UICI who is an employee of
neither the Company nor any affiliate of the Company and otherwise holds no
interest in any person or entity with which the Company proposes to enter into a
transaction in question.
The Company believes that the terms of all such transactions with all
related parties, including all Jensen Affiliates, are and have been on terms no
less favorable to the Company than could have been obtained in arms' length
transactions with unrelated third parties. Mr. Jensen has never voted with
respect to any matter in which he or his children have or have had an interest.
TRANSACTIONS WITH MEMBERS OF THE EXECUTIVE COMPENSATION COMMITTEE
The members of the Company's Executive Compensation Committee are Messrs.
Stuart D. Bilton, George H. Lane III (until May 2002), William J. Gedwed, Thomas
P. Cooper and Patrick J. McLaughlin. During 2002, each of these individuals
engaged in certain transactions with the Company as described below.
The Company receives investment management services from investment
advisory firms affiliated with two of its directors. During 2002, the Company
paid advisory fees in the amount of $186,000 to Emerald Capital Group, Ltd., for
which Patrick J. McLaughlin (a director of the Company) serves as a managing
director and owner. During 2002, the Company paid investment advisory fees in
the amount of $405,000 to The Chicago Trust Company, for which Stuart D. Bilton
(a director of the Company) serves as President and Chief Executive Officer.
From time to time the Company has also retained Emerald Capital Group, Ltd.
to perform investment banking and insurance advisory services. In accordance
with the terms of a Consulting Agreement dated September 14, 1999, as amended,
the Company formally retained the services of Emerald Capital Group, Ltd. for an
annual fee of $400,000, payable in monthly installments. During 2002, the
Company paid an aggregate of $557,000 in fees and expenses to Emerald Capital
Group, Ltd. for investment banking and insurance advisory services.
Effective December 31, 2000, the Company entered into an agreement with
William J. Gedwed (a director of the Company), pursuant to which Mr. Gedwed
resigned as an executive officer of the Company effective December 31, 2000 and
as an officer of various UICI affiliates effective February 1, 2001. In
accordance with the agreement, Mr. Gedwed agreed to provide consulting services
to MEGA for a two-year term that expired December 31, 2002 for an annual fee of
$120,000.
In accordance with the Company's Executive Stock Purchase Program (the
"ESPP"), during 1999 the Company extended loans to William J. Gedwed (until
December 31, 2000 an executive officer of UICI and currently a Director of the
Company) in the amounts of $203,000, the proceeds of which were used to purchase
Company Common Stock. The loan to Mr. Gedwed bears interest at 5.37% per annum.
The six-year term loan required quarterly interest payments, had a six-year
term, are full recourse to the borrower and is payable in full upon the
occurrence of certain events, including the termination of employment.
At December 31, 2000, Mr. Gedwed had outstanding loans payable to the
Company under the ESPP in the amount of $203,000. At December 31, 2002, the
amount outstanding under Mr. Gedwed's ESPP loan was $139,000.
In accordance with the terms of the Company's compensation arrangement for
directors, in May 1999 Messrs. Bilton and Lane (then directors of the Company)
purchased 2,408 shares and 2,408 shares, respectively, of the Company's Common
Stock, at a purchase price equal to 85% of the then market value of such shares.
In June 2000, Mr. Lane purchased 7,767 shares of UICI common stock in exchange
for cash in the amount of $23,301 and a promissory note in the amount of
$26,699. At December 31, 2002, the amount outstanding on Mr. Lane's note was
$26,699. In accordance with the terms of the Company's compensation arrangement
for directors, in May 2002 Dr. Cooper (a director of the Company) purchased
3,809 shares, of the Company's Common Stock, at a purchase price equal to 85% of
the then market value of such shares.
16
OTHER TRANSACTIONS WITH CERTAIN MEMBERS OF MANAGEMENT
TRANSACTIONS WITH MR. JENSEN AND JENSEN AFFILIATES
Special Investment Risks, Ltd.
From the Company's inception through 1996, Special Investment Risks, Ltd.
("SIR") (formerly United Group Association, Inc. ("UGA")) sold health insurance
policies that were issued by AEGON USA and coinsured by the Company or policies
issued directly by the Company. SIR is owned by Mr. Jensen. Effective January 1,
1997, the Company acquired the agency force of SIR and certain tangible assets
of SIR for a price equal to the net book value of the tangible assets acquired
and assumed certain agent commitments of $3.9 million. The tangible assets
acquired consisted primarily of agent debit balances, a building, and related
furniture and fixtures having a net book value of $13.1 million.
In accordance with the terms of the asset sale to the Company, SIR retained
the right to receive all commissions on policies written prior to January 1,
1997, including the policies previously issued by AEGON and coinsured by the
Company and the policies previously issued directly by the Company. The
commissions paid to SIR on the coinsured policies issued by AEGON are based on
commission rates negotiated and agreed to by AEGON and SIR at the time the
policies were issued prior to 1997, and the commission rates paid on policies
issued directly by the Company are commensurate with the AEGON renewal
commission rates. The Company expenses its proportionate share of commissions
payable to SIR on co-insured policies issued by AEGON. During 2002, SIR received
insurance commissions of $3.1 million on the policies previously issued by AEGON
prior to January 1, 1997 and coinsured by the Company. During 2002, SIR received
commissions of $2.5 million on policies issued prior to January 1, 1997 and
issued directly by the Company.
In accordance with the terms of an amendment, dated July 22, 1998, to the
terms of the sale of the UGA assets to the Company, SIR was granted the right to
retain 10% of net renewal commissions (computed at the UGA -- Association Field
Services agency level) on any new business written by the UGA agency force after
January 1, 1997. During the years ended December 31, 2002, 2001 and 2000, the
Company paid to SIR the amount of $1.9 million, $1.2 million and $1.1 million,
respectively, pursuant to this arrangement.
In 1986 and 1996, respectively, SIR established, for the benefit of its
independent insurance agents, independent sales representatives and independent
organizations associated with SIR, the Agency Matching Total Ownership Plan I
and the Agency Matching Total Ownership Plan II (collectively, the "Plans"),
entitling participants to purchase and receive Company Common Stock. In
connection with SIR's transfer to the Company of SIR's agency operations
effective January 1, 1997, SIR agreed to retain the liability to fund the Plans
to the extent of 922,587 shares of UICI Common Stock, representing the
corresponding number of unvested AMTOP Credits (as defined in the Plans) at
January 1, 1997. As of August 30, 1999, the liability of SIR to fund the Plans
remained undischarged to the extent of 369,174 shares of UICI Common Stock (the
"Unfunded Obligation").
Effective September 15, 1999, SIR and the Company entered into an
Assumption Agreement, pursuant to which UICI agreed to assume and discharge the
Unfunded Obligation, in consideration of a cash payment made by SIR to the
Company in the amount of $10.1 million, representing the dollar value of 369,174
shares of UICI Common Stock at $27.4375 per share (the closing price of UICI
common stock at September 15, 1999). On October 29, 1999, SIR funded the cash
payment.
During 2002, the Company received $2,000 from SIR as reimbursement of
office supply and occupancy expenses.
Richland State Bank
Richland State Bank ("RSB") is a state-chartered bank in which Mr. Jensen
holds a 100% equity interest.
RSB originated student loans for AMS and resold originated loans to AMS at
par less an origination fee of 31 basis points (0.31%). The agreement governing
the terms of RSB's origination services for AMS formally expired on January 20,
2002 and has been extended for an indefinite term pending negotiation of the
17
terms of a new arrangement. During 2002, RSB originated $77.6 million aggregate
principal amount of student loans for AMS, for which it received $241,000 in
origination fees.
RSB also provides student loan origination services for the Company's
College Fund Life Insurance Division of MEGA and Mid-West. Pursuant to a Loan
Origination and Purchase Agreement, dated June 12, 1999, RSB originated student
loans and resold such loans to UICI Funding Corp. 2 ("Funding") (a wholly owned
subsidiary of UICI) at par (plus accrued interest) less an origination fee of 31
basis points (0.31%). Effective June 12, 2000, RSB and Funding amended the
agreement to provide that student loans originated by RSB would be resold to
Funding at par (plus accrued interest). During 2002, RSB originated $17.7
million aggregate principal amount plus accrued interest, respectively, of
student loans for College Fund Life Division, for which it received origination
fees in the amounts of $-0-.
During 2002, RSB collected on behalf of, and paid to, Funding $1.6 million,
in guarantee fees paid by student borrowers in connection with the origination
of student loans.
In June 1999, RSB entered into a service agreement with College Fund Life
Division, pursuant to which College Fund Life Division provides underwriting
services to permit RSB to approve prospective student loans. During 2002, RSB
collected on behalf of and collectively paid to College Fund Life Division fees
of $442,000 in origination fees paid by student borrowers in connection with the
origination of student loans.
During 2002, Funding received from RSB interest income in the amount of
$4,000, on money market reserve accounts maintained at RSB by the Company.
Specialized Association Services, Inc.
Pursuant to an agreement entered into in July 1998 and terminated effective
December 31, 2002, Specialized Association Services, Inc. ("SAS") (which is
controlled by Mr. Jensen's adult children) paid UICI Marketing for certain
benefits provided to association members. UICI Marketing, in turn, purchased
such benefits from third parties (including NMC, which was sold July 27, 2000 to
an investor group consisting of Jensen family members). During 2002, SAS paid to
UICI Marketing $14.6 million, respectively, pursuant to this arrangement. During
2002, UICI Marketing paid NMC $161,000, pursuant to this arrangement. Effective
January 1, 2003, UICI Marketing sells new membership sales leads to the
enrollers and video and print services to the associations and to SAS.
During 2002, SAS began purchasing directly from MEGA certain ancillary
benefit products (including accidental death, hospital confinement and emergency
room benefits) for the benefit of the membership associations that endorse the
Company's health insurance products. The aggregate amount paid by SAS to MEGA
for these benefit products was $6.4 million in 2002.
During 2002, the Company paid to SAS $441,000 for various services and
reimbursement of expenses. The Company received from SAS $357,000 during 2002
for reimbursement of expenses. During 2002, SAS paid to MEGA $347,000 for leased
office facilities.
NetLojix Communications, Inc. (formerly AvTel Communications, Inc.)
Until November 2002, NetLojix Communications, Inc. ("NetLojix") provided
long distance voice telecommunications services to the Company and its
subsidiaries, pursuant to a series of agreements originally executed in 1998 and
most recently extended for a two-year period in November 2000. At December 31,
2002, Mr. Jensen and his adult children beneficially held in the aggregate
approximately 59% of the issued capital stock of NetLojix. The Company's most
recent agreement with NetLojix expired on October 31, 2002 and was not extended
upon expiration. The agreement required UICI to purchase a minimum of $86,000 in
service per month at a rate of $0.0299 per minute for interstate calls and
$0.070 per minute, or $0.075 per minute, depending on the state, for intrastate
calls. Pursuant to the terms of the agreement, in 2002 the Company paid NetLojix
$2.5 million for long distance telecommunications services.
On August 23, 2002, UICI and NetLojix entered into a one-year master
services agreement, pursuant to which NetLojix will provide to UICI and its
subsidiaries certain technical support services. During the year
18
ended December 31, 2002, the Company paid to NetLojix $39,590 pursuant to this
agreement. At December 31, 2002, the Company had accounts payable owing to
NetLojix under the services agreement in the amount of approximately $29,000.
Excell Global Services, Inc.
Excell Global Services, Inc. ("Excell Global") is a holding company, the
principal subsidiary of which is Excell Agent Services, LLC ("Excell"). Excell
Global and members of management of Excell Global hold, in the aggregate, 99% of
the equity interest in Excell, and Mr. Jensen holds the remaining 1% equity
interest. Excell provides telephone directory assistance services. Mr. Jensen
serves as a director of Excell Global and at December 31, 2002 was the
beneficial holder of 100% of the outstanding equity of Excell Global. Until
February 2001, Mr. Mutz also served on the board of directors of Excell Global.
Mr. Mutz held 13.2% of the outstanding equity of Excell Global until August
2002, at which date he disposed of all of his holdings.
Onward and Upward, Inc. and Other Entities Owned by the Jensen Adult Children
Mr. Jensen's five adult children hold in the aggregate 100% of the equity
interest in Onward & Upward, Inc. ("OUI"), the holder of approximately 5.8% of
the Company's outstanding Common Stock.
Effective September 15, 1999, the Company entered into an Assumption
Agreement with an affiliate of Mr. Jensen, pursuant to which UICI agreed to
assume and discharge an unfunded obligation to fund certain agent stock
accumulation plans established for the benefit of independent sales agents and
representatives. In consideration of a cash payment made by the related party to
the Company in the amount of $10.1 million (representing the dollar value of
369,174 shares of UICI Common Stock at $27.4375 per share (the closing price of
UICI common stock at September 15, 1999)), UICI agreed to assume the liability
and fund the agent plans to the extent of 369,174 shares of UICI common stock.
On October 29, 1999, the Company received the cash payment.
To ensure that the dollar value of the unfunded obligation would not exceed
the dollar proceeds received from SIR plus a reasonable allowance for the cost
of funds, effective September 15, 1999, the Company and OUI entered into a
Put/Call Agreement. Pursuant to the Put/Call Agreement, for a thirty day period
commencing on July 1 of each year, the Company had an option to purchase from
OUI, and OUI had a corresponding right to require the Company to purchase, up to
369,174 shares of Common Stock at a purchase price per share equal to $28.50 in
2000, $30.25 in 2001, $32.25 in 2002, $34.25 in 2003, $36.25 in 2004, $38.25 in
2005 and $40.25 in 2006. The call/put price escalated over time in annual dollar
increments designed to recognize an increase in value of the underlying UICI
stock based upon historical past performance (an approximate 6.0% annual rate of
appreciation). On July 1, 2002, pursuant to the terms of the Put/Call Agreement,
the Company exercised its option to purchase from OUI 369,174 shares of Common
Stock at the then-effective call price of $32.25 per share, or $11.9 million in
the aggregate.
OUI holds a 21% equity interest in U.S. Managers Life Insurance Company,
Ltd., a subsidiary of the Company. The Company has a right-of-first-offer to
purchase from OUI, and OUI has a corresponding put right to sell to the Company,
OUI's 21% equity interest in U.S. Managers Life Insurance Company, Ltd. at a
price equal to 21% of the book value of U.S. Managers Life Insurance Company,
Ltd. (determined in accordance with generally accepted accounting principles) at
the date of purchase.
In 2002, the Company paid $257,000 to Small Business Ink, a division of
SAS, for printing services.
Sun Communications, Inc. Litigation
As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are parties to litigation (Sun Communications, Inc. v. SunTech Processing
Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation") with Sun
Communications, Inc. ("Sun") concerning the distribution of the cash proceeds
from the sale and liquidation of SunTech Processing Systems, LLC ("STP") assets
in February 1998.
Assignment and Release Agreement. Effective April 2, 2002, the Company and
Mr. Jensen entered into an Assignment and Release Agreement (the "Assignment and
Release Agreement"), which was intended to
19
effectively transfer the Company's 80% interest in STP to Mr. Jensen and to
terminate the Company's active participation in, and limit the Company's
financial exposure associated with, the Sun Litigation. In accordance with the
terms of the Assignment and Release Agreement, on April 2, 2002 Mr. Jensen made
a total payment to UICI of $15.6 million and granted to UICI various indemnities
against possible losses which UICI might incur resulting from the Sun
Litigation, including (i) any losses arising from the breach of fiduciary duty
claim asserted by Sun against the Company and Sun's related claim for attorneys'
fees, (ii) Sun's claim for attorneys' fees arising out of the distribution issue
in the Sun Litigation, and (iii) all other claims of any nature asserted by Sun
against the Company in the Sun Litigation arising out of or relating directly to
the March 1997 agreement governing the distribution of cash proceeds from the
sale and liquidation of STP. In exchange therefor, (i) UICI assigned to Mr.
Jensen all of UICI's right, title and interest to the funds held in the registry
of the Court in the Sun Litigation and released Mr. Jensen from any and all
obligations arising under the Jensen 1996 Guaranty and the Assurance Agreement;
(ii) UICI granted to Mr. Jensen an option, exercisable at a nominal exercise
price, to transfer to Mr. Jensen UICI's 80% interest in STP; (iii) UICI agreed
to cooperate with Mr. Jensen in all reasonable respects in connection with the
Sun Litigation; and (iv) UICI granted to Mr. Jensen an irrevocable proxy to vote
UICI's membership interest in STP all matters coming before the members of STP
for a vote.
Exercise of STP Texas Draw. In accordance with an agreement entered into
as of December 31, 1996, by and between Sun and the Company (the "STP Texas Draw
Agreement"), either of Sun or the Company may, at any time after July 1, 1999,
offer to purchase all, but not less than all, of the membership interest in STP
owned by the other party by delivering notice of the offer setting forth, among
other things, a cash purchase price and all other essential terms of the offer.
Pursuant to the terms of the STP Texas Draw Agreement, the party receiving the
initial offer must in turn deliver to the offering party notice of its
unambiguous election to either (a) sell all of its membership interest in STP to
the offering party or (b) counteroffer to purchase all of the offering party's
membership interest in STP, in both cases pursuant to terms and conditions
identical to those contained in the initial offer. On December 12, 2002, Mr.
Jensen and the Company entered into an agreement, pursuant to which (a) in
accordance with UICI's undertaking to cooperate with Mr. Jensen in the Sun
Litigation as provided in the Assignment and Release Agreement, UICI at the
request of Mr. Jensen made an offer to purchase all, but not less than all, of
Sun's membership interest in STP in accordance with the STP Texas Draw
Agreement, (b) Mr. Jensen acknowledged that UICI's undertaking to make such
offer would be without monetary or other obligation on the part of UICI and (c)
Mr. Jensen agreed to indemnify and hold UICI harmless from and against any and
all liability that UICI might incur as a result of making such offer.
Sun subsequently filed a motion for a temporary injunction to enjoin
closing of the transactions contemplated by the STP Texas Draw Agreement. Mr.
Jensen has agreed to postpone the closing of the transactions contemplated by
the STP Texas Draw Agreement pending the court's ruling on a summary judgment
motion that he intends to file with respect to Sun's objections to those
transactions.
Release of Ronald L. Jensen
On June 1, 1999, the Company was named as a nominal defendant in a
shareholder derivative action captioned Richard Schappel v. UICI, Ronald Jensen,
Richard Estell, Vernon Woelke, J. Michael Jaynes, Gary Friedman, John Allen,
Charles T. Prater, Richard Mockler and Robert B. Vlach, which was filed in the
District Court of Dallas County, Texas (the "Shareholder Derivative
Litigation").
On December 21, 2001, the District Court of Dallas County, Texas, approved
the terms of a Settlement Agreement and Mutual Release between UICI and each of
Richard J. Estell, Vernon Woelke, J. Michael Jaynes, Gary L. Friedman, John E.
Allen, Charles T. Prater, Richard T. Mockler, and Robert B. Vlach (collectively,
the "Individual Defendants"), on the one hand, and Richard Schappel and Mr.
Schappel's counsel, on the other hand. Pursuant to the Settlement Agreement, the
parties reached agreement with respect to the payment of attorneys' fees and
expenses on termination of the Shareholder Derivative Action, and the Court also
entered a Modified Final Judgment in the case, vacating certain findings of fact
that formed a part of an earlier ruling by the Court rendered on October 14,
2001. The Settlement Agreement and the Modified Final Judgment had the effect of
fully and finally resolving the matters in dispute in the
20
Shareholder Derivative Litigation between UICI and the Individual Defendants, on
the one hand, and Mr. Schappel, on the other hand. The terms of the settlement
did not have a material effect on the results of operations or financial
condition of UICI.
In accordance with the terms of a Release Agreement, dated as of April 2,
2002, the Company agreed to release Mr. Jensen from any and all claims that the
derivative plaintiff in the Shareholder Derivative Litigation brought or could
have brought against Mr. Jensen on behalf of UICI in the Shareholder Derivative
Litigation, and Mr. Jensen agreed to waive and release UICI from any obligation
to indemnify Mr. Jensen for any future costs and/or out-of-pocket expenses
associated with any claims that the derivative plaintiff brought or could have
brought against Mr. Jensen in the Shareholder Derivative Litigation.
National Motor Club
On July 27, 2000, the Company sold its 97% interest in NMC Holdings, Inc.
("NMC"), the parent company of its National Motor Club of America ("NMCA") unit,
to an investor group consisting of Jensen family members (including Mr. Jensen)
for a purchase price of $56.8 million, representing 97% of the value of NMC as
determined by independent appraisal. William J. Gedwed (a director of the
Company) holds 3% of the issued and outstanding common stock of NMC. The
Chesapeake Life Insurance Company ("CLICO") (formerly a direct wholly owned
subsidiary of the Company) and NMCA were previously parties to an administrative
service agreement, pursuant to which CLICO agreed to issue life, accident and
health insurance polices to NMCA for the benefit of NMCA members in selected
states. NMCA, in turn, agreed to provide to CLICO certain administrative and
record keeping services in connection with the NMCA members for whose benefit
the policies have been issued. Following the acquisition of CLICO by The MEGA
Life and Health Insurance Company ("MEGA") (a wholly-owned insurance subsidiary
of the Company) in July 2000, MEGA and NMCA entered into a similar
administrative service agreement for a two-year term ending December 31, 2002.
During the year ended December 31, 2002, 2001 and 2000, NMCA paid to MEGA and
CLICO insurance premiums in the amount of $1.7 million, $2.4 million and $2.6
million, respectively, pursuant to such arrangements. Effective January 1, 2003,
MEGA and NMCA entered into a new administrative services agreement for a term
ending December 31, 2004.
During 2002, NMC paid the Company $231,000 for printing and various other
services.
Funding of BOB Program
In August 1998, Mr. Jensen and his wife established an incentive program
(the "BOB Program"), pursuant to which they agreed to distribute to "eligible
participants" on August 15, 2002, in cash an aggregate of the dollar equivalent
value of 100,000 UICI shares. Eligible participants in the BOB Program consisted
of full-time employees of UICI and its subsidiaries and independent agents
associated with UICI's insurance subsidiaries who were employed by or contracted
with UICI, as the case may be, at the close of business on August 14, 1998, and
who remain employed by or contracted with UICI at the close of business on
August 14, 2002. In accordance with the BOB Program, each eligible participant
was entitled to receive his or her portion of the aggregate cash payment
determined by reference to a formula based on, among other things, such eligible
participant's tenure with UICI and level of compensation. In a series of
celebrations occurring in August 2002, Mr. and Mrs. Jensen distributed cash in
the aggregate amount of $1.8 million to the eligible participants in the BOB
Program.
Other Jensen Transactions
In 2002, the Company received $1,000, from United Group Service Center,
Inc. (a company owned by one of the adult children of Mr. Jensen), which amount
represents premiums on a stop loss policy issued by MEGA and reimbursement of
office expenses.
21
OTHER TRANSACTIONS WITH CERTAIN MEMBERS OF MANAGEMENT
Transaction with AMLI Residential Properties Trust
At December 31, 2002, 2001 and 2000, the Company held a 10.5%, 10.2% and
10.4% fully diluted interest, respectively, in AMLI Residential Properties
Trust, a publicly-traded real estate investment trust ("AMLI"). Mr. Mutz (a
director and the President and Chief Executive Officer of the Company) also
serves as Chairman of the Board of AMLI. Pursuant to the terms of a Purchase
Agreement, dated as of December 16, 2002, in exchange for aggregate
consideration of $700,000 in cash payable to the Company, (a) an affiliate of
AMLI purchased the Company's minority economic interests in each of four service
affiliates of AMLI Residential Properties Trust and (b) the transfer to AMLI of
the Company's rights to the service mark "AMLI" and the right to use the name
"AMLI", which rights a subsidiary of the Company formerly held and licensed to
AMLI and certain AMLI affiliates. In connection with this transaction, the Board
of Directors of UICI received an independent opinion, utilizing the methodology
and subject to the limitations and assumptions set forth in the opinion, that
the transaction contemplated by the Purchase Agreement was fair from a financial
point of view.
Transactions with Mr. Mutz
AMLI Residential Properties Trust. During 2000, 2001 and 2002, Mr. Mutz (a
director and the President and Chief Executive Officer of the Company) also
served as Chairman of the Board of AMLI Residential Properties Trust, a
publicly-traded real estate investment trust ("AMLI"). At December 31, 2002,
2001 and 2000, the Company held a 10.5%, 10.2% and 10.4% fully diluted interest,
respectively, in AMLI. As Chairman of the Board of AMLI, Mr. Mutz received
certain compensation and participated in various option and deferred
compensation programs, all of which are described in the AMLI proxy statement.
In addition, as of December 31, 2002, 2001 and 2000, AMLI had outstanding
secured and unsecured loans owing from Mr. Mutz in the aggregate amount of
$763,000, $1.0 million and $2.1 million, respectively, the proceeds of which
were used to purchase 108,891 shares of AMLI beneficial interest.
AMLI Commercial Properties Trust. Mr. Mutz also served as chairman of the
board of AMLI Commercial Properties Trust ("ACPT"), a private real estate
investment trust in which the Company formerly held a 20% equity interest. Mr.
Mutz was the beneficial holder of less than one percent of the issued and
outstanding shares of beneficial interest of ACPT. At December 31, 2000, ACPT
had an outstanding loan owing from Mr. Mutz (or companies affiliated with Mr.
Mutz) in the amount of $508,000, the proceeds of which were used to purchase
stock in ACPT. During the year ended December 31, 2001, ACPT sold substantially
all of its assets for an aggregate sale price of approximately $226.3 million,
distributed the proceeds and was liquidated in October 2001. In connection with
such sale, the Company recognized a gain in the amount of $5.3 million and Mr.
Mutz repaid his loan in full.
UICI Executive Stock Purchase Program. In accordance with the Company's
Executive Stock Purchase Program (the "ESPP") (see Note P), in December 1998 the
Company extended a loan to Mr. Mutz in the amount of $3.3 million, the proceeds
of which were used to purchase 200,000 shares of Common Stock of the Company at
a purchase price of $19.50 per share. The loan bears interest at the rate of 5%
per annum, payable quarterly, had a six-year term, and is full recourse to Mr.
Mutz. In June 1999, the Company extended an additional loan to Mr. Mutz pursuant
to the ESPP in the amount of $429,000, the proceeds of which were used to
purchase 20,000 shares of Company Common Stock at a purchase price of $24.45 per
share. The loan bears interest at 5.37%, payable quarterly, had a six-year term,
and was full recourse to Mr. Mutz.
As part of modifications to the ESPP adopted by the Company's Board of
Directors on January 2, 2001, the Company granted to Mr. Mutz 107,104 shares of
UICI common stock, discharged $1.5 million principal amount of the ESPP loan,
and paid to Mr. Mutz a one-time cash bonus in the amount of $1.1 million (which
was calculated to reimburse Mr. Mutz for income and other taxes payable upon
receipt of the UICI stock and discharge of the portion of the ESPP loan). The
terms of the ESPP loans were modified to extend the maturity date to January 1,
2007.
22
The amount outstanding under Mr. Mutz' ESPP loans at December 31, 2002,
2001 and 2000, was $1.3 million, $1.3 million and $2.8 million, respectively.
Termination of Split Dollar Life Insurance Arrangement. As a long-term
incentive for continued employment, in 1985 AMLI Realty Co. (a wholly owned
subsidiary of the Company acquired by the Company in 1996) entered into a split
dollar life insurance arrangement with Mr. Mutz, who then served as Chairman of
AMLI Realty Co. ("ARC"). Under the arrangement, Mr. Mutz and/or trusts
affiliated with Mr. Mutz purchased and held a life insurance policy on his life.
ARC agreed to pay a substantial portion of the annual premium on such policies
in exchange for Mr. Mutz's assigning an interest in the policy death benefit and
cash value equal to the cumulative premiums paid by ARC. ARC was to be paid its
interest at Mr. Mutz's death, or earlier if (a) Mr. Mutz prematurely terminated
his employment, or (b) the policy cash values were sufficient to withdraw the
amount due ARC. The amount of the annual premium paid by Mr. Mutz was calculated
according to a formula based on his age, the net amount of death benefit, and
the basic term insurance rates of the carrier.
In each of the years ended December 31, 2002, 2001 and 2000, the total
annual premiums on the policies were $20,432, of which UICI (through ARC) paid
premiums pursuant to the arrangement in the amount of $19,901, $19,898 and
$19,937, respectively. At December 31, 2001, and September 30, 2002, the Company
had reflected on its books a receivable in an amount of $182,559 and $202,500,
respectively, which receivable corresponded to the cumulative premium paid by
ARC pursuant to the arrangement.
In accordance with the terms of an agreement, dated December 19, 2002, Mr.
Mutz and the Company terminated the split dollar arrangement. In exchange for a
cash payment by Mr. Mutz made to the Company in the amount of $11,173 (which
amount was calculated actuarially as the present value of ARC's future right to
collect on the policies), Mr. Mutz discharged ARC from all future obligation to
pay premiums and ARC released its interest in the policies. Following the
transaction, Mr. Mutz owns the three policies outright and is fully responsible
for all future required premium payments, and ARC no longer has any interest in
or any obligations with respect to the policies. In connection with the
transaction, UICI recognized for financial accounting purposes a charge against
pre-tax earnings in the amount of $191,327.
Purchase of Real Estate Interest. Prior to its acquisition by UICI in
1996, AMLI Realty Co. ("ARC") from time to time sponsored limited partnerships
to raise capital and to acquire, develop and sell real estate. The limited
partners in these partnerships included ARC officers and affiliates of ARC
officers, including Mr. Mutz and entities affiliated with Mr. Mutz. To eliminate
the nuisance and cost to the investors and to ARC of partnership administration
for substantially completed investment programs, ARC has from time to time
purchased its' investors limited partnership interests.
On October 22, 2002, ARC purchased the interest held by Mr. Mutz and all
other 41 limited partners in AMLI Augusta Properties L.P., which was originally
formed on July 8, 1985 to acquire, develop and sell 162 acres of vacant land in
Augusta, Georgia. Mr. Mutz received $13,125 in exchange for 1/80 of the economic
interests of all the limited partners in the partnership.
Other Loans to Management
In accordance with the Company's Executive Stock Purchase Program (the
"ESPP"), during 1999 the Company extended a loan to Glenn W. Reed (the Company's
Executive Vice President and General Counsel) in the amount of $417,000, the
proceeds of which were used to purchase Company Common Stock. The loan to Mr.
Reed bore interest at 5.37% per annum. The six-year term loan required quarterly
interest payments, had a six-year term, is full recourse to the borrower and is
payable in full upon the occurrence of certain events, including the termination
of employment.
At December 31, 2000, Mr. Reed had outstanding loan payable to the Company
under the ESPP in the amount of $417,000.
As part of modifications to the ESPP adopted by the Company's Board of
Directors on January 2, 2001, the Company discharged $297,000 principal amount
of indebtedness under the ESPP owing by Mr. Reed and paid to Mr. Reed a one-time
cash bonus in the amount of $160,000 (which was calculated to reimburse
23
Mr. Reed for income and other taxes payable upon discharge of the portion of the
ESPP loan). The terms of Mr. Reed's ESPP loan were modified to extend the
maturity date to January 1, 2007.
At December 31, 2001, the amount outstanding under Mr. Reed's ESPP loan was
$120,000. Mr. Reed repaid his ESPP loan in full on June 5, 2002.
On March 10, 2000, the Company extended a loan to Mr. Myhra in the amount
of $25,000, pursuant to the terms of a full recourse promissory note bearing
interest at the rate of 6.69% per annum. At December 31, 2002, the amount of
$25,000 was outstanding under the loan.
Other Transactions
In accordance with the terms of the Company's ESPP, in June 2000 Mr.
Mockler (a director of the Company), purchased 2,000 shares of UICI common stock
in exchange for cash in the amount of $6,000 and a promissory note in the amount
of $8,000. At each of December 31, 2002 and 2001, the amount outstanding on Mr.
Mockler's note was $8,000.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process, including the systems of
internal controls. KPMG LLP, the Company's independent auditors, is responsible
for expressing an opinion on the conformity of the audited financial statements
with generally accepted accounting principles and that their audit is conducted
in accordance with generally acceptable auditing standards. The Audit Committee
is responsible for monitoring and reviewing these procedures. It is not the
Committee's duty or responsibility to conduct auditing or accounting reviews or
procedures. The members of the Audit Committee are not employees of the Company
and are not necessarily accountants or auditors by profession or experts in the
fields of accounting or auditing. Therefore, the Audit Committee has relied,
without independent verification, on management's representation that the
consolidated financial statements of the Company have been prepared with
integrity and objectivity and in conformity with generally accepted accounting
principles and on the representations of the independent auditors included in
their report on the Company's consolidated financial statements.
In fulfilling its oversight responsibilities, the Committee reviewed with
management the audited financial statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002, including a discussion of the
quality, not just the acceptability, of the accounting principles, the
reasonableness of significant judgments, and the clarity of disclosures in the
financial statements.
The Committee reviewed with representatives of KPMG LLP, the Company's
independent auditors, its judgments as to the quality, not just the
acceptability, of the Company's accounting principles and such other matters as
are required to be discussed with the Committee under Statement on Auditing
Standards No. 61, Communications with Audit Committees. In addition, the
Committee has discussed with the independent auditors the auditors' independence
from management and the Company, including the matters in the written
disclosures required by the Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, and considered the compatibility
of non-audit services with the auditors' independence. The Audit Committee has
determined that the provision of non-audit services will not compromise KPMG
LLP's independence.
The Committee discussed with the Company's independent auditors the overall
scope and plans for their audits. The Committee meets with the internal and
independent auditors, with and without management present, to discuss the
results of their examinations, their evaluations of the Company's internal
controls and the overall quality of the Company's financial reporting. The
Committee held eight meetings during fiscal year 2002.
24
In reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors (and the Board has approved) that the
audited financial statements be included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002, for filing with the Securities and
Exchange Commission. The Committee and the Board have also recommended, subject
to shareholder ratification, the selection of the Company's independent
auditors.
Richard T. Mockler, Audit Committee
Chairman
Stuart D. Bilton, Audit Committee
Member
Thomas P. Cooper, Audit Committee
Member
25
INDEPENDENT AUDITORS
CHANGE IN INDEPENDENT AUDITORS
As previously disclosed in a Current Report on Form 8-K (as amended in a
Form 8-K/A) dated August 26, 2002, on August 26, 2002, UICI dismissed Ernst &
Young LLP as its independent accountants and selected KPMG LLP as its new
independent accountants effective August 26, 2002. The Company's Audit Committee
participated in and approved the decision to change independent accountants.
The reports of Ernst & Young LLP on the financial statements for each of
the two fiscal years ended December 31, 2001 and 2000 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
In addition, in connection with its audits of the Company's financial
statements for each of the years ended December 31, 2001 and 2000 and the
subsequent interim period through August 26, 2002, there were no disagreements
with Ernst & Young LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would
have caused Ernst & Young LLP to make reference thereto in their report on the
financial statements for such years.
Except as described in the next succeeding paragraphs, during each of the
years ended December 31, 2001 and 2000 and the subsequent interim period through
August 26, 2002, there were no reportable events (as defined in Regulation S-K
Item 304(a)(1)(v)).
In a letter dated April 4, 2000 to the Audit Committee of the Company's
Board of Directors, Ernst & Young LLP advised the Company that, during the
course of and in connection with Ernst & Young LLP's audit of the Company's
consolidated financial statements as of, and for the year ended, December 31,
1999, Ernst & Young LLP had noted certain matters involving the Company's
internal controls and its operations that Ernst & Young LLP considered to be
"reportable conditions" and "material weaknesses" under standards established by
the American Institute of Certified Public Accountants.
In particular, Ernst & Young LLP identified material weaknesses at the
Company's former United CreditServ, Inc. credit card operations and UICI's
Academic Management Services Corp. (formerly Educational Finance Group, Inc.)
subsidiary ("AMS") and a reportable condition with respect to UICI. With respect
to UICI's credit card operations, Ernst & Young LLP identified as material
weaknesses the failure to maintain credit card account-by-account detail of a
liability account and the failure to conduct regular periodic reconciliations of
that account, lack of segregation of duties with respect to preparation and
review of the calculation of the credit card loan loss reserve, certain credit
card aging matters, and failure to maintain a proper review and approval process
for general ledger entries. With respect to UICI's AMS operations, Ernst & Young
LLP identified as material weaknesses AMS' failure to maintain timely and
accurate accounting records for the purchasing and originating of student loans,
the failure to reconcile on a regular periodic basis its student loan
receivables assets with the records of the student loan servicers, certain
inadequacies in AMS' systems leading to delays in closing AMS' books on a timely
basis, the lack of a formal review and approval process on the part of UICI (the
parent) with respect to transactions entered into by AMS (the subsidiary), and
certain inadequacies in AMS' methodologies for accounting for deferred student
loan premiums and origination costs. With respect to UICI, Ernst & Young LLP
identified as a reportable condition that the likelihood was high that related
party transactions would not be properly recorded.
UICI's Audit Committee discussed the nature of these material weaknesses
and the reportable condition with Ernst & Young LLP and directed that the
recommendations contained in the April 4, 2000 letter be adopted and that
corrective action be taken. During the course of 2000, management completed the
corrective action. UICI's credit card operations (which had been designated as a
discontinued operation for financial reporting purposes effective December 31,
1999) effectively ceased doing business in February 2000, and with respect to
AMS the Company undertook an extensive reconciliation of its loan ledger with
its servicing records and implemented a procedure of regular and periodic
reconciliations thereafter. At the parent level, UICI's Board of Directors
adopted enhanced procedures designed to ensure the proper identification,
approval and
26
reporting of related party transactions. As indicated above, Ernst & Young LLP
subsequently delivered an unqualified opinion with respect to the UICI
consolidated financial statements as of, and for the year ended December 31,
2000.
The Company authorized Ernst & Young LLP to respond fully to inquiries of
the Company's new accountants concerning these matters.
The Company provided Ernst & Young LLP with a copy of the disclosure made
under Item 4 of the previously filed Form 8-K/A and requested that Ernst & Young
LLP furnish it with a letter addressed to the Securities and Exchange Commission
stating whether or not it agreed with the above statements. A copy of such
letter, dated September 27, 2002, was filed as Exhibit 16 to the Form 8-K/A.
During the years ended December 31, 2001 and 2000 and the subsequent
interim period through August 26, 2002, neither the Company nor anyone on its
behalf consulted with KPMG LLP regarding: (i) either the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements; or (ii) any matter that was either the subject of a disagreement, as
that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K, or a reportable event, as that term
is defined in Item 304(a)(1)(v) of Regulation S-K.
OTHER MATTERS
In addition to retaining KPMG LLP to audit UICI's consolidated financial
statements for 2002, UICI and its affiliates retained KPMG LLP and many other
accounting and consulting firms to provide advisory, auditing and consulting
services in 2002. The Company understands the need for KPMG LLP to maintain
objectivity and independence in its audit of the Company's consolidated
financial statements. To minimize relationships that could appear to impair the
objectivity of KPMG LLP, the UICI Audit Committee has restricted the non-audit
services that KPMG LLP may provide to UICI primarily to tax services and merger
and acquisition due diligence and audit services, and the Audit Committee has
determined that UICI will obtain non-audit services from KPMG LLP only when the
services offered by KPMG LLP are more effective or economical than services
available from other service providers.
The Charter of the Company's Audit Committee provides that the Audit
Committee shall pre-approve all non-audit work to be performed by KPMG LLP
involving services in excess of $100,000. In determining the appropriateness of
a particular non-audit service to be performed by the audit firm, the Audit
Committee shall consider whether the service facilitates the performance of the
audit, improves the Company's financial reporting process or is otherwise in the
public interest.
The aggregate fees billed for professional services by Ernst & Young LLP in
2001 and through August 26, 2002 were as follows:
2002
(THROUGH
TYPE OF FEES AUGUST 26) 2001
------------ ---------- ----------
Audit Fees.................................................. $184,000 $1,477,000
Audit-Related Fees.......................................... 125,000 67,000
Tax Fees.................................................... 384,000 286,000
All Other Fees.............................................. 56,000 138,000
-------- ----------
Total..................................................... $749,000 $1,968,000
======== ==========
27
The aggregate fees billed for professional services by KPMG LLP in 2002
were as follows:
TYPE OF FEES 2002
------------ --------
Audit Fees.................................................. $872,000
Audit-Related Fees.......................................... 0
Tax Fees.................................................... 2,100
All Other Fees.............................................. 49,000
--------
Total..................................................... $923,100
========
For purposes of the tables above, and in accordance with new SEC
definitions and rules that UICI has elected to adopt for this Proxy Statement,
"audit fees" are fees that the Company paid to the accounting firm in question
for the audit of the Company's consolidated financial statements included in
UICI's Annual Report on Form 10-K and review of financial statements included in
Quarterly Reports on Form 10-Q, or for services that are normally provided by
the accounting firm in connection with statutory and regulatory filings or
engagements; "non-audit fees" are fees billed by the accounting firm for
assurance and related services that are reasonably related to the performance of
the audit or review of the Company's financial statements; "tax fees" are fees
for tax compliance, tax advice and tax planning; and "all other fees" are fees
billed by the accounting firm to the Company for any services not included in
the first three categories.
2. RATIFICATION OF APPOINTMENT OF AUDITORS
Although Delaware law does not require that the selection by the Board of
Directors of the Company's auditors be approved each year by the stockholders,
the Board of Directors believes it is appropriate to submit its selection to the
stockholders for their approval and to abide by the result of the stockholders'
vote. Subject to ratification by the stockholders, the Board of Directors
reappointed the firm of KPMG LLP as the Company's independent auditors to audit
the financial statements of the Company for the fiscal year ending December 31,
2003. In recommending ratification by the stockholders of the appointment of
KPMG LLP, the Board of Directors has satisfied itself as to that firm's
professional competence and standing.
Representatives of KPMG LLP are expected to be present at the Annual
Meeting and will have the opportunity to make a statement if they so desire.
Such representatives will also be available to respond to appropriate questions
from stockholders at the meeting.
THE AUDIT COMMITTEE AND THE BOARD OF DIRECTORS RECOMMEND THE STOCKHOLDERS
VOTE "FOR" THE PROPOSAL TO RATIFY THE SELECTION OF KPMG LLP AS INDEPENDENT
AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2003.
3. OTHER MATTERS
The Board of Directors knows of no other matters that are likely to be
brought before the Annual Meeting. However, if any other matters should be
properly brought before the meeting, it is the intention of the persons named in
the accompanying form of proxy to vote, or otherwise act, with respect to any
such matters in accordance with their best judgment. The persons appointed as
proxies also will have discretion to vote on a motion to adjourn the Annual
Meeting, if such a motion is submitted to a vote of the stockholders.
DEADLINE FOR SUBMISSION OF STOCKHOLDER PROPOSALS
AND NOMINATIONS FOR DIRECTOR
FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD IN MAY 2004
In order for stockholder proposals that are submitted pursuant to Rule
14a-8 of the Securities Exchange Act of 1934 (the "Exchange Act") to be
considered by the Company for inclusion in the proxy material for the Annual
Meeting of Stockholders to be held in May 2004, they must be received by the
Secretary of the Company by December 9, 2003.
28
For proposals that stockholders intend to present at the Annual Meeting of
Stockholders to be held in May 2004 outside the processes of Rule 14a-8 of the
Exchange Act, unless the stockholder notifies the Secretary of the Company of
such intent by March 3, 2004, the proposal will be considered untimely, and any
proxy that management solicits for such Annual Meeting will confer on the holder
of the proxy discretionary authority to vote on the proposal if such proposal is
properly presented at the meeting.
In order for suggestions by stockholders for nominees for director to be
considered by the Nominating Committee, they must be received by the Secretary
of the Company by December 9, 2003. See "Meetings and Committees of the Board of
Directors -- Nominating Committee."
All such communications to the Secretary of the Company must be in writing
and must be received by the Company at its principal executive offices (9151
Grapevine Highway, North Richland Hills, Texas 76180-5605) by the applicable
date.
By Order of the Board of Directors
-s- Peggy G. Simpson
Peggy G. Simpson
Secretary
Date: April 7, 2003
---------------------
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, ALL STOCKHOLDERS ARE URGED TO
PROMPTLY COMPLETE, DATE, SIGN, AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE OR TO VOTE ON THE INTERNET. STOCKHOLDERS WHO ATTEND THE MEETING MAY
VOTE THEIR STOCK PERSONALLY EVEN THOUGH THEY HAVE SENT IN THEIR PROXIES.
29
(UICI LOGO) VOTE BY INTERNET - WWW.PROXYVOTE.COM
Use the Internet to transmit your voting
9151 GRAPEVINE HIGHWAY instructions and for electronic delivery
NORTH RICHLAND HILLS, TEXAS 76180 of information up until 11:59 P.M.
Eastern Time the day before the cut-off
date or meeting date. Have your proxy
card in hand when you access the web
site. You will be prompted to enter your
12-digit Control Number which is located
below to obtain your records and to
create an electronic voting instruction
form.
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit
your voting instructions up until 11:59
P.M. Eastern Time the day before the
cut-off date or meeting date. Have your
proxy card in hand when you call. You
will be prompted to enter your 12-digit
Control Number which is located below and
then follow the simple instructions the
Vote Voice provides you.
VOTE BY MAIL -
Mark, sign, and date your proxy card and
return it in the postage-paid envelope we
have provided or return it to UICI, c/o
ADP, 51 Mercedes Way, Edgewood, NY 11717.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: UICI01 KEEP THIS PORTION FOR YOUR RECORDS
------------------------------------------------------------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
UICI
1. ELECTION OF DIRECTORS
FOR WITHHOLD FOR ALL To withhold authority to vote, mark
01) Ronald L. Jensen 06) William J. Gedwed ALL ALL EXCEPT "For All Except" and write the
02) Gregory T. Mutz 07) Glenn W. Reed nominee's number on the line below.
03) Richard T. Mockler 08) Thomas P. Cooper, M.D. [ ] [ ] [ ]
04) Patrick J. McLaughlin 09) Mural R. Josephson ------------------------------------
05) Stuart D. Bilton
FOR AGAINST ABSTAIN
VOTE ON PROPOSAL
2. PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG LLP as the independent public accountants for the
fiscal year ending December 31, 2003. [ ] [ ] [ ]
3. OTHER MATTERS The proxies named on the reverse side are authorized to vote in their
discretion with respect to other matters that properly come before the Annual Meeting or
any adjournment of the Annual Meeting. As of April 4, 2003, UICI does not know of any such
other matters to be presented at the Annual Meeting.
(Joint Owners Should Each Sign. Attorneys-in-Fact, Executors,
Administrators, Custodians, Partners, or Corporation Officers
Should Give Full Title)
YES NO
HOUSEHOLDING ELECTION - Please indicate if you
consent to receive certain future investor
communications in a single package per household [ ] [ ]
[ ] [ ] [ ] [ ]
Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date
--------------------------------------------------------------------------------
UICI
PROXY
9151 GRAPEVINE HIGHWAY, NORTH RICHLAND HILLS, TEXAS 76180
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Glenn W. Reed and Connie Palacios, and each or
either of them, as true and lawful agents and proxies with full power of
substitution in each, to represent the undersigned in all matters coming before
the 2003 Annual Metting of Stockholders of UICI to be held at The Harvey Hotel
DFW Airport, 4545 John Carpenter Freeway, Irving, Texas 75063, on Wednesday, May
14, 2003 at 10:00 a.m., Central Daylight Time, and any adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THE IS PROXY WILL BE
VOTED FOR PROPOSALS 1 AND 2.
PLEASE MARK, SIGN, DATE AND RETURN PROXY CARD PROMPTLY.