We sold USIA, formally our third-party administration business, in April 2002. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we reflect USIA in our financial statements as a Discontinued Operation. In the fourth quarter of 2001, following the provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,” we reduced the carrying value of USIA’s intangible assets to their estimated fair value. This resulted in an impairment charge of $46.9 million against USIA-related goodwill and expiration rights. For the years ended December 31, 2002, 2001, 2000, 1999 and 1998, the loss from discontinued operations is reported net of income tax expense (benefit) of zero, $(4.5) million, $0.3 million, $0.9 million, and $(4.6) million, respectively. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Discontinued Operations.”
The majority of our operating expenses relates to Compensation and Employee Benefits, which equated to approximately 61% of revenues in 2002. We refer to the balance of our operating expenses as “Other Operating Expenses,” which includes selling-related expenses, rent, communication expenses and other items. Other Operating Expenses were approximately 21% of total revenues in 2002.
From the inception of our existing credit facility on September 17, 1999 through December 31, 2002, we amended the facility five times to adjust financial covenants. Without these amendments, we would have been in default under the facility. Failure to comply with financial covenants in our existing credit facility could cause all or a portion of our debt to become immediately due and payable. As of December 31, 2002 we were in compliance with the facility as amended.
We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121 and accounting and reporting provisions of Accounting Principles Board, or APB, Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for a disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We adopted SFAS No. 144 beginning January 1, 2002. As a result of our decision to discontinue USIA’s operations in January 2002, the prior years financial statements have been restated to separately reflect continuing and discontinued operations. Please read Note 16 “Discontinued Operations” in our annual financial statements.
In April 2002, FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB No. 30 will now be used to classify those gains and losses. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB No. 30 for classification as an extraordinary item shall be reclassified. We will adopt SFAS No. 145 beginning January 1, 2003. We do not expect that the adoption of this statement will have a significant impact on our financial position or results of operations.
Cash and cash equivalents, premiums and commissions receivable, receivable from the sale of discontinued operations, premiums payable to insurance companies, other current liabilities, current portion of long-term debt and long-term debt are considered financial instruments. The Company believes that due to the short duration of certain financial instruments, specifically cash and cash equivalents, premiums and commissions receivable, receivable from the sale of discontinued operations, premiums payable to insurance companies, other current liabilities and current portion of long-term debt, the carrying amounts approximate fair value. For long-term debt, the Company uses the present value of future cash flows, discounted at the Company’s current incremental rate of borrowing on similar debt, to ascertain a fair value. At December 31, 2002 and 2001, the fair value of the Company’s long-term debt approximates the carrying value of such debt.
On March 2, 1999, the Company replaced a $100,000,000 revolving credit facility (the Previously Existing Credit Facility) with a $200,000,000 credit facility (Credit Facility). The Credit Facility was structured as follows: a $75,000,000 revolving credit facility expiring on December 31, 2004, a $35,000,000 term loan expiring on December 31, 2005, and a $90,000,000 bridge loan expiring on June 30, 2000. The proceeds from borrowings under the Credit Facility were drawn to (i) repay all or a portion of certain notes issued for acquisitions, (ii) refinance amounts outstanding under the Previously Existing Credit Facility, (iii) repay senior subordinated notes, (iv) pay accrued interest on the repaid or refinanced notes issued for acquisitions, Previously Existing Credit Facility and the senior subordinated notes and (v) pay fees and expenses in connection with the Credit Facility, including a prepayment penalty in connection with the prepayment of the senior subordinated notes.
The following table shows the income (loss) from continuing operations before income taxes for the years ended December 31, 2002, 2001 and 2000.
The following table summarizes transactions related to the employee termination benefits, the producer compensation restructuring costs and terminated office lease costs:
Mutual of Omaha Litigation. USIA, as the third-party administrator of health benefits for the employees of Nassau County, placed stop-loss insurance with the Mutual of Omaha Insurance Company (Mutual). In 1999, Mutual brought an action against USIA asserting breach of contract, breach of warranty, fraud and negligent misrepresentation on the part of USIA arising out of contracts between Mutual and USIA. All claims in this litigation were settled pursuant to a settlement agreement dated as of November 30, 2001 and dismissed with prejudice pursuant to a stipulation of dismissal with prejudice filed with the court on December 17, 2001. Pursuant to the settlement agreement, USIA’s insurer, Fireman’s Fund, paid Mutual $2,216,667. No payment by USIA was required. However, as a result of the settlement, USIA wrote off in 2001 a $1,000,000 commission receivable from Mutual recorded over a four-year period from 1995 through 1999. This write off is reflected in the results from discontinued operations included in the accompanying statement of operations for the year ended December 31, 2001.