<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NO. 001-14953
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UICI
(Exact name of registrant as specified in its charter)
Delaware 75-2044750
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 McEwen, Suite 200, Dallas, Texas 75244
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (972) 392-6700
Not Applicable
--------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 Par Value,
46,817,446 shares as of November 6, 2000.
<PAGE> 2
INDEX
UICI AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated condensed balance sheets-September 30, 2000 (unaudited) and
December 31, 1999 3
Consolidated condensed statements of income (loss) (unaudited) - three
months ended September 30, 2000 and 1999 and nine months ended September 30,
2000 and 1999 4
Consolidated statements of comprehensive income (loss) (unaudited) - three
months ended September 30, 2000 and 1999 and nine months ended September 30,
2000 and 1999 5
Consolidated condensed statements of cash flows (unaudited) - nine months
ended September 30, 2000 and 1999 6
Notes to consolidated condensed financial statements (unaudited) - September
30, 2000 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 6. Exhibits and Reports on Form 8-K 39
SIGNATURES 40
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments
Securities available for sale --
Fixed maturities, at fair value (cost:
2000-- $831,840; 1999-- $904,662) .......................... $ 800,656 $ 861,337
Equity securities, at fair value (cost:
2000-- $23,409; 1999-- $25,951) ........................... 20,522 23,079
Mortgage and collateral loans ................................. 5,433 6,324
Policy loans .................................................. 21,954 20,444
Investment in HealthAxis.com .................................. 12,827 --
Investment in other equity investees .......................... 42,220 47,696
Short-term investments ........................................ 92,361 79,608
------------ ------------
Total Investments ...................................... 995,973 1,038,488
Cash ............................................................ 30,159 74,091
Student loans ................................................... 1,166,602 1,326,050
Restricted cash ................................................. 288,116 489,720
Reinsurance receivables ......................................... 125,479 104,946
Due premiums, other receivables and assets ...................... 87,811 58,800
Investment income due and accrued ............................... 68,386 51,751
Deferred acquisition costs ...................................... 67,944 80,188
Goodwill ........................................................ 93,793 152,668
Deferred income tax ............................................. 67,898 105,664
Property and equipment, net ..................................... 48,706 56,978
------------ ------------
$ 3,040,867 $ 3,539,344
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy and contract benefits ........................... $ 434,078 $ 452,776
Claims ........................................................ 348,625 335,943
Unearned premiums ............................................. 90,922 97,548
Other policy liabilities ...................................... 18,105 19,090
Other liabilities ............................................... 102,687 112,631
Collections payable ............................................. 132,161 113,057
Debt ............................................................ 118,598 120,637
Student loan credit facilities .................................. 1,356,718 1,730,348
Net liabilities of discontinued operations (includes reserve
for loss on disposal) ......................................... -- 149,880
------------ ------------
2,601,894 3,131,910
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $0.01 per share .................... -- --
Common Stock, par value $0.01 per share ....................... 483 466
Additional paid-in capital .................................... 181,185 173,585
Accumulated other comprehensive loss .......................... (22,317) (30,432)
Retained earnings ............................................. 280,372 268,544
Treasury stock, at cost ....................................... (750) (4,729)
------------ ------------
438,973 407,434
------------ ------------
$ 3,040,867 $ 3,539,344
============ ============
</TABLE>
NOTE: The balance sheet as of December 31, 1999 has been derived from the
audited financial statements at that date.
See notes to consolidated condensed financial statements.
3
<PAGE> 4
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE
Premiums:
Health ........................................................... $ 166,225 $ 169,061 $ 497,027 $ 519,847
Life premiums and other considerations ........................... 9,979 12,521 31,164 36,328
---------- ---------- ---------- ----------
176,204 181,582 528,191 556,175
Investment income ................................................... 23,394 20,244 69,205 62,146
Interest income ..................................................... 27,946 18,595 87,886 48,883
Other fee income .................................................... 25,615 29,329 87,972 84,830
Other income ........................................................ 710 1,262 2,852 3,244
Gain on sale of HealthAxis.com shares ............................... -- -- 26,300 --
Gains (losses) on sale of other investments ......................... 1,372 (89) 14 1,306
---------- ---------- ---------- ----------
255,241 250,923 802,420 756,584
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses ........................... 113,060 122,840 344,504 388,472
Underwriting, acquisition, and insurance expenses ................... 63,302 57,853 184,103 185,509
Stock appreciation expense .......................................... 510 -- 510 5,000
Other expenses ...................................................... 29,626 26,513 97,283 65,417
Depreciation ........................................................ 2,340 3,815 5,905 8,819
Interest expense .................................................... 3,701 2,066 10,229 4,281
Interest expense-- student loan credit facilities ................... 23,768 13,737 73,626 37,605
Equity in operating loss from HealthAxis.com investment ............. 1,115 -- 16,269 --
---------- ---------- ---------- ----------
237,422 226,824 732,429 695,103
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE GOODWILL
AMORTIZATION AND INCOME TAXES ........................................ 17,819 24,099 69,991 61,481
Goodwill amortization ................................................ 1,333 2,203 4,570 4,609
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ................. 16,486 21,896 65,421 56,872
Federal income taxes .................................................. 7,470 6,642 30,194 19,436
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS ..................................... 9,016 15,254 35,227 37,436
DISCONTINUED OPERATION
(net of income tax benefit of $0, and $15,605, respectively, for
the three months ended September 30, 2000 and 1999, and $12,600,
and $31,180, respectively, for the nine months ended September 30,
2000 and 1999) ...................................................... -- (29,081) (23,400) (58,228)
---------- ---------- ---------- ----------
NET INCOME (LOSS) ..................................................... $ 9,016 $ (13,827) $ 11,827 $ (20,792)
========== ========== ========== ==========
Earnings (loss) per share:
Basic earnings (loss)
Income from continuing operations ................................ $ 0.19 $ 0.33 $ 0.76 $ 0.81
Loss from discontinued operations ................................ -- (0.63) (0.50) (1.26)
---------- ---------- ---------- ----------
Net income (loss) ................................................ $ 0.19 $ (0.30) $ 0.26 $ (0.45)
========== ========== ========== ==========
Diluted earnings (loss)
Income from continuing operations ................................ $ 0.19 $ 0.32 $ 0.74 $ 0.79
Loss from discontinued operations ................................ -- (0.61) (0.49) (1.22)
---------- ---------- ---------- ----------
Net income (loss) ................................................ $ 0.19 $ (0.29) $ 0.25 $ (0.43)
========== ========== ========== ==========
</TABLE>
See notes to consolidated condensed financial statements.
4
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UICI AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED) (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) ............................................. $ 9,016 $ (13,827) $ 11,827 $ (20,792)
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period .. 13,030 (12,074) 13,889 (52,705)
Reclassification adjustment for gains (losses)
included in net income (loss) .......................... (238) 154 (1,428) 1,190
---------- ---------- ---------- ----------
Other comprehensive income (losses), before tax .... 12,792 (11,920) 12,461 (51,515)
Income tax (provision) benefit related to items of
other comprehensive income ............................. (4,475) 4,167 (4,346) 18,010
---------- ---------- ---------- ----------
Other comprehensive income (losses), net of
tax benefits ..................................... 8,317 (7,753) 8,115 (33,505)
---------- ---------- ---------- ----------
Comprehensive income (loss) ................................... $ 17,333 $ (21,580) $ 19,942 $ (54,297)
========== ========== ========== ==========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
------------ ------------
(NOTE)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................................... $ 11,827 $ (20,792)
Adjustments to reconcile net income (loss) to
cash provided by (used) in operating activities:
Increase (decrease) in policy liabilities .......................... 13,210 (17,784)
Decrease in other liabilities ...................................... (1,500) (71,729)
Increase (decrease) in income taxes ............................... 38,298 (28,716)
Decrease in deferred acquisition costs ............................. 2,510 9,176
Increase in accrued investment income .............................. (16,635) (26,997)
Increase in reinsurance and other receivables ...................... (53,708) (11,630)
Depreciation and amortization ...................................... 10,475 13,428
Decrease in collections payable .................................... 19,104 176,256
Operating loss of HealthAxis.com ................................... 16,269 --
Gains on sale of investments ....................................... (26,314) (1,306)
Amounts (contributed to) received from discontinued operations .... (150,300) 161,152
Other items, net ................................................... 1,499 1,680
------------ ------------
Cash Provided by (Used in) Operating Activities ................ (135,266) 182,738
------------ ------------
INVESTING ACTIVITIES
Decrease (increase) in student loans ................................. 159,448 (511,061)
Decrease (increase) in other investments ............................ 66,240 (58,772)
Proceeds from sale of HealthAxis.com shares .......................... 30,000 --
Decrease (increase) in restricted cash ............................... 201,604 (233,847)
Increase in agents' receivables ...................................... (4,516) (1,151)
Book value of subsidiaries sold net of cash disposed of $8,319 ....... 36,854 --
Purchase of subsidiary ............................................... (4,481) --
Increase in property and equipment ................................... (7,227) (9,994)
------------ ------------
Cash Provided by (Used in) Investing Activities ................ 477,922 (814,825)
------------ ------------
FINANCING ACTIVITIES
Deposits from investment products .................................... 12,264 11,998
Withdrawals from investment products ................................. (34,815) (26,805)
Proceeds from student loan borrowings ................................ 556,315 1,640,924
Repayment of student loan borrowings ................................. (929,944) (1,082,063)
Proceeds from debt ................................................... 182,004 146,424
Repayment of debt .................................................... (182,005) (46,089)
Other items, net ..................................................... 11,596 (7,964)
------------ ------------
Cash Provided by (Used in) Financing Activities ................ (386,588) 636,425
------------ ------------
Net Increase (Decrease) in Cash ................................ (43,932) 4,338
Net Cash at Beginning of Period ................................ 74,091 16,900
------------ ------------
Cash at End of Period .......................................... $ 30,159 $ 21,238
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
Note: Certain 1999 amounts have been reclassified to conform to the 2000
financial statement presentation.
6
<PAGE> 7
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements for
UICI and its subsidiaries (the "Company" or "UICI") have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, such financial statements do not include all of the
information and notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments, except as otherwise
described herein, consist of normal recurring accruals. Operating results for
the nine-month period ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2000. For
further information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. Certain amounts in the 1999 financial statements have been
reclassified to conform to the 2000 financial statement presentation.
NOTE B - DISCONTINUED OPERATION
The Company has classified its United CreditServ business unit (consisting
of United CreditServ, Inc. ("UCS") and its subsidiaries, including Specialized
Card Services, Inc., United Membership Marketing Group, Inc. ("UMMG") and United
Credit National Bank ("UCNB")) as a discontinued operation. Accordingly, the
assets, liabilities, and results of operations for this business unit have been
reflected as discontinued operations for all periods presented.
On September 29, 2000, the Company completed the sale of substantially all
of the non-cash assets associated with its United CreditServ credit card unit,
including its credit card receivables portfolios and its Sioux Falls, South
Dakota servicing operations, for a cash sales price of approximately $124.0
million. In addition to the cash sales price received at closing, the
transaction contemplates an incentive cash payment contingent upon the
post-closing performance of the ACE credit card portfolio over a one-year
period. The Company has retained United CreditServ's Texas collections facility
and United CreditServ's building and real estate in Sioux Falls, South Dakota.
The Company has leased the Sioux Falls facilities to the purchaser of the credit
card assets pursuant to a long-term lease. UICI also retained the right to
collect approximately $250 million face amount of previously written off credit
card receivables. In connection with the sale, UICI or certain of its
subsidiaries retained substantially all liabilities associated with its credit
card business, including liability for payment of all certificates of deposit
issued by UCNB, merchant holdback liabilities, liabilities associated with
pending litigation and other contingencies.
At December 31, 1999, the Company established a liability for loss on the
disposal of the discontinued operation in the amount of $130 million (pre-tax),
which liability was included in net liabilities of discontinued operations. The
liability for loss on disposal established by the Company at December 31, 1999
represented the Company's then-current estimate of all additional losses
(including asset write-downs, the estimated loss on the sale of the business
and/or the assets and continuing operating losses through the date of sale) that
it then believed it would incur as part of any sale of the United CreditServ
unit. Reflecting the terms of the Company's then-pending sale of its United
CreditServ business, during the quarter ended June 30, 2000 the Company recorded
an additional pre-tax loss, and correspondingly increased the liability for loss
on the disposal of the discontinued operation, in the amount of $36.0 million
($23.4 million net of tax). During the quarter and nine-month periods ended
September 30, 2000, the discontinued operation incurred a loss from operations
in the amount of approximately $95.6 million and $129.0 million, respectively,
which losses were charged to the liability for loss on disposal. The Company
estimates that the remaining liability for loss on disposal will be adequate to
absorb all remaining costs of disposal, including all costs associated with the
Company's Texas collections facility.
At December 31, 1999 and September 30, 2000, UCNB had $290.0 million and
$78.9 million, respectively, of certificates of deposits outstanding, and UCNB
held approximately $110.5 million and $96.8 million, respectively, in cash, cash
equivalents and short term U.S. Treasury securities. Following the sale of the
Company's United
7
<PAGE> 8
CreditServ unit, UCNB initiated a program to prepay all of its outstanding
certificates of deposit, and all such deposit liabilities were discharged as of
October 23, 2000. Following the prepayment of all deposit liabilities of UCNB,
at October 24, 2000 UCNB held cash, cash equivalents and U.S. Treasury
securities in the amount of $29.4 million.
The operating losses at United CreditServ have had a material adverse effect
upon the liquidity and cash flow of the Company. Since January 1, 2000, UICI has
contributed to United CreditServ an aggregate of $165.9 million in cash. UICI
has funded these cash contributions and other cash needs with the proceeds of
sale of investment securities, a borrowing from a third party in the amount of
$24.0 million funded in July 2000, approved sales of assets from the parent
company to the Company's regulated insurance company subsidiaries completed in
June and July 2000 generating cash proceeds in the aggregate amount of
approximately $26.2 million, dividends in the amount of $19.0 million paid
during the six months ended September 30, 2000 from The Chesapeake Life
Insurance Company ("CLICO") (one of its regulated insurance company
subsidiaries), the sale to The MEGA Life and Health Insurance Company of CLICO
for $19.0 million in July 2000, cash proceeds in the amount of $21.8 million
from the disposition of its National Motor Club unit completed in July 2000, and
cash on hand.
On February 25, 2000, UCNB agreed to the issuance of a Consent Order by the
OCC (the "February Consent Order"). Among other things, the February Consent
Order required UCNB, until further notice from the OCC, to cease all activities
with ACE and AFCA (UCNB's only marketing organizations) and prohibited UCNB from
introducing new products or services, without accompanying policies and
procedures reviewed and approved by the OCC providing for, among other things,
appropriate risk management, internal control, management information and data
processing systems.
On June 29, 2000, the Company, UCS and UCNB agreed to the issuance by the
OCC of separate Consent Orders (the "June Consent Orders") memorializing the
terms of a definitive Capital Plan previously submitted by the Company and UCNB
and approved by the OCC as required by the February Consent Order (the "UCNB
Capital Plan"). The June Consent Orders required, among other things, (a) the
Company through UCS to contribute additional capital to UCNB in the amount of
$50.0 million in prescribed increments over a thirty-day period ended July 29,
2000 (which $50.0 million was contributed as required); (b) UCNB to maintain
prescribed capital ratios throughout the plan period; (c) UCNB to adopt and
implement certain credit card administrative policies and procedures; and (d)
the Company, on or before December 31, 2000, to assume all of UCNB's remaining
contingent liabilities. In accordance with the June Consent Orders, the
Company's obligations under the UCNB Capital Plan were initially secured by (a)
a pledge by Mr. Jensen of $7.1 million face amount of investment securities
owned by Mr. Jensen and (b) a pledge by the Company of a short-term promissory
note in the principal amount of $35.0 million issued to the Company and
guaranteed by Mr. Jensen in connection with the purchase by an investment group
consisting of Jensen family members (including Mr. Jensen) of the Company's
National Motor Club unit. On October 31, 2000, the OCC consented to the release
by UCNB of its security interest in the $35.0 million promissory note.
In the event that UCNB fails to comply with the terms of the February
Consent Order, or in the event that the Company, UCS or UCNB fail to comply with
the June Consent Orders, such failure could result in sanctions brought against
the Company, UCS, UCNB, and their respective officers and directors and UCNB's
"institution-related parties," including the assessment of civil money penalties
and enforcement of the Consent Orders in Federal District Court.
On October 10, 2000, the shareholders of UCNB approved a formal voluntary
plan of liquidation to be filed with and approved by the Office of the
Comptroller of the Currency, and UICI currently anticipates that the voluntary
liquidation of UCNB, including the provision for all remaining liabilities and
distribution to UICI of all residual cash, will be completed on or before
December 31, 2000. As part of the plan of liquidation, and in accordance with
the terms of the June Consent Orders, UICI agreed to assume and indemnify UCNB
from and against (a) any and all remaining residual liabilities resulting from
any of the receivables portfolios of UCNB, (including any contingent reserves
for unfunded commitments and any merchant holdback accounts, and any accrued
amounts payable to any third party for customer kits, holdbacks or other
payables), and (b) any and all remaining contingent liabilities of UCNB,
including liability associated with pending and future litigation.
8
<PAGE> 9
A liquidity and capital assurances agreement, dated May 15, 1998, between
UICI and UCNB provides that, upon demand by UCNB, UICI will purchase
certificates of deposit issued by UCNB to assure sufficient liquidity to meet
UCNB's funding demands and will contribute capital to UCNB sufficient for UCNB
to comply with its stated policy of maintaining a total risk-based capital ratio
of at least 12%. Total risk-based capital includes both Tier I and Tier II
capital.
Effective July 31, 2000, UCS sold all of its outstanding shares of UMMG for
a purchase price in the amount of $25,000 in cash, with an additional amount of
up to $2.0 million payable over the next five years, contingent upon the
performance of the business. The purchaser is an entity controlled by the former
President of UMMG. UMMG is a Lakewood, Colorado-based provider of marketing,
administrative and support services for the Company's credit card programs. In
addition, on July 31, 2000, UICI signed a credit agreement with the purchaser,
pursuant to which it has agreed to lend to the purchaser up to $1,000,000 on a
revolving basis. As of October 24, 2000, $800,000 had been advanced under the
credit agreement.
Set forth below is a summary of the operating results of the United
CreditServ business for the three and nine month periods ended September 30,
2000 and 1999, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUE
Net interest income .............................. $ 4,957 $ 5,799 $ 15,409 $ 16,519
Credit card fees and other fee income ............ 12,250 69,542 106,851 169,734
---------- ---------- ---------- ----------
Total revenues ........................... 17,207 75,341 122,260 186,253
EXPENSES
Provision for loan losses and loss on disposal of
credit card assets ............................ 94,411 84,033 178,480 160,402
Operating expenses ............................... 18,397 35,994 72,734 115,259
---------- ---------- ---------- ----------
Total expenses ........................... 112,808 120,027 251,214 275,661
---------- ---------- ---------- ----------
Loss from operations before federal income taxes ... (95,601) (44,686) (128,954) (89,408)
Amount charged to allowance for loss on disposal ... 95,601 -- 128,954 --
---------- ---------- ---------- ----------
Loss from operations before income taxes ........... -- (44,686) -- (89,408)
Additional estimated loss on disposal .............. -- -- (36,000) --
Federal income tax benefit ......................... -- (15,605) (12,600) (31,180)
---------- ---------- ---------- ----------
Loss from discontinued operations .................. $ -- $ (29,081) $ (23,400) $ (58,228)
========== ========== ========== ==========
</TABLE>
NOTE C - LIQUIDITY
Historically, the Company's primary sources of cash have been premium
revenues from policies issued, investment income, fees and other income,
deposits to fund the credit card receivables, and borrowings to fund student
loans. The primary uses of cash have been payments for benefits, claims and
commissions under those policies, operating expenses and the funding of credit
card receivables and student loans. In the nine-month periods ended September
30, 2000 and 1999, net cash used in and provided by operations totaled
approximately $135.3 million and $182.7 million, respectively.
UICI is a holding company, the principal assets of which are its investments
in its separate operating subsidiaries, including its regulated insurance
subsidiaries. The holding company's ability to fund its cash requirements is
largely dependent upon its ability to access cash, by means of dividends or
other means, from its subsidiaries. The laws governing the Company's insurance
subsidiaries restrict dividends paid by the Company's domestic insurance
subsidiaries in any year. Inability to access cash from its subsidiaries could
have a material adverse effect upon the Company's liquidity and capital
resources.
The operating losses at United CreditServ have had a material adverse effect
upon the liquidity and cash flow of the Company. Since January 1, 2000, UICI has
contributed to United CreditServ an aggregate of $165.9 million in cash. In
addition, on June 28, 2000, the Company funded an $8.0 million principal
prepayment owing on its bank credit facility, on June 1, 2000 the Company made a
mandatory principal payment on its senior notes outstanding in the amount of
$3.95 million, and effective July 27, 2000 the Company prepaid $6.0 million
owing to an affiliated lender (see Note J to Notes to Consolidated Condensed
Financial Statements). UICI has funded these cash contributions and other cash
needs with the proceeds of the sale of investment securities, a borrowing from a
third party in the amount of $24.0 million funded in July 2000, approved sales
of assets from the parent company to the Company's regulated insurance company
subsidiaries completed in June and July 2000 generating cash proceeds in
9
<PAGE> 10
the aggregate amount of approximately $26.2 million, dividends in the amount of
$19.0 million paid during the six months ended September 30, 2000 from CLICO,
the sale to The MEGA Life and Health Insurance Company of CLICO for $19.0
million in July 2000, cash proceeds in the amount of $21.8 million from the
disposition of its National Motor Club unit completed in July 2000, and cash on
hand.
Based on projections as of November 3, 2000, the Company believes that its
exit from the credit card business will not require the holding company to
generate additional cash. Following the sale of its credit card assets (which
was completed on September 29, 2000) and the prepayment of all deposit
liabilities of UCNB (which was completed on October 23, 2000), at October 24,
2000 UCNB held cash, cash equivalents and U.S. Treasury securities in the amount
of $29.4 million. Through December 31, 2000 the holding company will have
additional operating cash requirements in the amount of approximately $15.0
million. The Company currently anticipates that these cash requirements at the
holding company level will be funded by cash on hand ($22.0 million at November
3, 2000), cash received from interest income, residual cash to be received in
the liquidation of UCNB and tax sharing reimbursements from subsidiaries (which
will be partially offset by holding company operating expenses).
There can be no assurance that the cash requirements at the holding company
level will not exceed current estimates, or that the holding company will be
able to raise sufficient cash to fund cash requirements on a timely basis.
NOTE D - INSURDATA -- HEALTHAXIS.COM INVESTMENT
During 1999 the Company held substantially all of the capital stock of
Insurdata Incorporated ("Insurdata"), a provider of Internet-enabled, integrated
proprietary software applications that address the workflow and processing
inefficiencies embedded in the healthcare insurance industry. On January 7,
2000, Insurdata merged with and into HealthAxis.com, Inc. ("HealthAxis.com"), a
web-based retailer of health insurance products and related consumer services.
Following the merger (the "HealthAxis Merger"), the Company held approximately
44%, and HealthAxis Inc. (formerly Provident American Corporation) ("HAI") held
approximately 28.1%, of the issued and outstanding capital stock of
HealthAxis.com, the surviving corporation in the merger. The Company recognized
no gain on the non-monetary exchange of stock in the HealthAxis Merger due to
uncertainty of realization of the gain.
On March 14, 2000, the Company sold in a private sale to an institutional
purchaser 2,000,000 shares of HealthAxis.com common stock. In connection with
the sale of such shares, the Company recognized a gain in the amount of $26.3
million. Giving effect to such sale, the Company holds 39% of the issued and
outstanding shares of common stock of HealthAxis.com.
The Company accounts for its investment in HealthAxis.com utilizing the
equity method and recognizes its ratable share of HealthAxis.com's income and
loss (computed prior to amortization of goodwill recorded by HealthAxis.com in
connection with the HealthAxis Merger). At September 30, 2000, the Company's
carrying value of its investment in HealthAxis.com was $12.8 million,
representing its carryover investment in Insurdata plus the Company's investment
in shares of HealthAxis.com acquired prior to the HealthAxis Merger and HAI
debentures purchased in September 2000, reduced by the Company's cost of the
shares of HealthAxis.com sold in March 2000 and by the Company's equity in the
losses of HealthAxis.com for the nine months ended September 30, 2000 in the
amount of $16.3 million. The Company has an additional $5.0 million investment
in preferred stock of HealthAxis.com which is reflected in equity securities in
the balance sheet.
On January 26, 2000, HAI and HealthAxis.com entered into an Agreement and
Plan of Merger (as amended as of September 29, 2000, the "Merger Agreement"),
pursuant to which HAI has agreed to acquire all of the outstanding shares of
HealthAxis.com that HAI does not currently own through the merger of
HealthAxis.com with a wholly-owned subsidiary of HAI (the "Proposed HAI
Merger"). Upon consummation of the Proposed HAI Merger, HealthAxis.com
shareholders (including the Company) would receive 1.334 shares of HAI common
stock for each share of HealthAxis.com common stock outstanding. The
consummation of the Proposed HAI Merger is subject to various conditions,
including the approval of both HAI and HealthAxis.com shareholders, as well as
regulatory approval.
On September 29, 2000, UICI purchased from a third party $1.667 million
principal amount of HAI 2% convertible subordinated debentures and a warrant to
purchase 12,291 shares of HAI common stock at an exercise
10
<PAGE> 11
price of $3.01 per share, for a total purchase price of $1.167 million. The
debentures mature in September 2005 and are convertible into 185,185 shares of
HAI common stock.
If the Proposed HAI Merger proceeds in accordance with its current terms,
the Company will hold approximately 23.9 million shares of HAI common stock
(including the 185,185 shares issuable upon conversion of the HAI convertible
subordinated debentures), representing approximately 45.4% of the issued and
outstanding shares of HAI.
Set forth below is summary condensed balance sheet and income statement data
for HealthAxis.com as of and for the three and nine-month periods ended,
September 30, 2000. This financial information has been adjusted to exclude the
effects of push-down accounting for the HealthAxis Merger.
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000
-------------
(IN THOUSANDS)
<S> <C>
Assets
Cash ...................................... $ 25,167
Accounts receivable ....................... 11,296
Property and equipment .................... 7,241
Other assets .............................. 5,866
------------
Total assets ...................... $ 49,570
============
Liabilities
Accounts payable and accrued expenses ..... 6,469
Other liabilities ......................... 2,804
------------
Total liabilities ......................... 9,273
Stockholders' equity ...................... 40,297
------------
Total liabilities and equity ................ $ 49,570
============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Revenue ......................... $ 11,016 $ 33,426
Operating expenses .............. (13,860) (73,673)
---------- ----------
Net loss .............. $ (2,844) $ (40,247)
========== ==========
</TABLE>
NOTE E - LONG TERM DEBT
On July 19, 2000, the Company's offshore-domiciled insurance companies
incurred indebtedness with an institutional lender in the amount of $24.0
million. The indebtedness bears interest at the per annum rate of 11.0%, matures
on August 1, 2001, is secured by a pledge of all of the assets of the offshore
companies, and is guaranteed by the Company. The proceeds of the borrowing were
advanced to the parent company to fulfill liquidity needs at the parent company.
Effective June 29, 2000, UICI executed and delivered an unsecured promissory
note payable to a systems vendor in the amount of $10,000,125, which note bears
interest at LIBOR plus 150 basis points (1.5%) (8.14% at September 30, 2000),
and is payable as to principal in equal quarterly installments in the amount of
$500,006, commencing October 1, 2000, with a final maturity of June 30, 2005.
The note was delivered to discharge an account payable by UCS in the amount of
$10,000,000 owing to the systems vendor, which payable was reflected in the
consolidated balance sheet of the Company (included in net liabilities of
discontinued operations).
On March 14, 2000, a limited liability company controlled by the Company's
Chairman ("Lender LLC") loaned $70.0 million to a newly-formed subsidiary of the
Company (the "Lender LLC Loan"). The Lender LLC Loan bears interest at the
prevailing prime rate, was guaranteed by UICI, was due and payable in July 2001
and was secured by a pledge of investment securities and shares of the Company's
National Motor Club unit.
On March 14, 2000, UICI reduced indebtedness outstanding under its unsecured
credit facility with a group of banks from $100.0 million to $25.0 million,
utilizing $5.0 million of cash on hand and the proceeds of the Lender LLC Loan.
As part of the paydown, the bank credit facility was amended to provide, among
other things, that the $25.0 million balance outstanding would be due and
payable on July 10, 2000, amounts outstanding under the facility would be
secured by a pledge of investment securities and shares of Mid-West National
Life Insurance
11
<PAGE> 12
Company of Tennessee ("Mid-West"), and the restrictive covenants formerly
applicable to UICI and its restricted subsidiaries (primarily the Company's
insurance companies) were made applicable solely to Mid-West. Amounts
outstanding under the bank credit facility continued to bear interest at LIBOR
plus 100 basis points per annum.
On April 11, 2000 and June 28, 2000, the Company made principal payments of
$11.0 million and $8.0 million, respectively, under the bank credit facility,
and on June 30, 2000, Lender LLC, against payment to the banks of $6.0 million,
assumed 100% of the banks' remaining $6.0 million position in the bank credit
facility. As a result of these transactions, at June 30, 2000, the Company (or
its subsidiary) had indebtedness outstanding owing to Lender LLC in the
aggregate amount of $76.0 million, and all of the Company's indebtedness owing
to commercial banks under the bank credit facility had been paid in full.
Effective July 27, 2000, the Company and the Lender LLC completed the
restructuring of the terms of the Lender LLC Loan. As part of the restructuring,
the Company paid to Lender LLC principal owing on the Lender LLC Loan in the
amount of $6.0 million. Giving effect to the restructuring, at September 30,
2000 Lender LLC held indebtedness in the aggregate principal amount of $70.0
million owing by the Company, which indebtedness (the "Amended Lender LLC Loan")
consisted of a $32.0 million unsecured tranche and a $38.0 million tranche
secured by a pledge of 100% of the capital stock of Mid-West. The Amended Lender
LLC Loan (a) matures on January 1, 2002, (b) continues to bear interest at the
prevailing prime rate from time to time, with interest accruing but not payable
until the earlier to occur of full prepayment of the Lender LLC Loan or January
1, 2002, and (c) is mandatorily prepayable monthly to the extent of 1% of the
outstanding principal balance of the Amended Lender LLC Loan. The security
interest in all remaining collateral previously pledged to secure payment of the
Lender LLC Loan and indebtedness outstanding under the bank credit facility
(including all investment securities and shares of the Company's National Motor
Club unit) was released in full.
The unsecured tranche of the Amended Lender LLC Loan is mandatorily
prepayable by the Company upon and to the extent of the Company's receipt of an
anticipated tax refund, which is estimated to be in the amount of approximately
$22.0 million. On October 20, 2000, the Company prepaid the unsecured tranche of
the Amended Lender LLC Loan in the amount of $12.5 million, representing the
initial installment of the anticipated tax refund. In addition, on November 2,
2000, the Company prepaid an additional $17.4 million of the unsecured tranche
and $17.6 million of the secured tranche. Accordingly, at November 2, 2000, the
Company had no indebtedness outstanding under the unsecured tranche and $20.4
million outstanding under the secured tranche of the Amended Lender LLC Loan.
Effective October 1, 2000, the Company's Academic Management Services Corp.
subsidiary amended the terms of its unsecured term loan facility (under which,
at September 30, 2000, $21.25 million of indebtedness was outstanding) to
eliminate all financial covenants. In connection with the amendment of the
facility, the Company agreed to unconditionally guarantee the payment when due
of such indebtedness.
NOTE F - INCOME TAXES
The Company's effective tax rate on continuing operations for each of the
three-month and nine-month periods ended September 30, 2000 was approximately
45% and 46%, respectively. Academic Management Services Corp. (formerly
Educational Finance Group, Inc.) ("AMS") is 75% owned by the Company, and files
a separate federal income tax return. Operating losses at AMS are not eligible
for utilization in the Company's consolidated income tax return, and no tax
benefit was provided on AMS's loss for the three and nine months ended September
30, 2000 of $2.6 million and $13.8 million, respectively (including amortization
of goodwill).
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<PAGE> 13
NOTE G - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income (loss) available to common shareholders:
Income from continuing operations available
to Common shareholders ...................... $ 9,016 $ 15,254 $ 35,227 $ 37,436
Loss from discontinued operations .............. -- (29,081) (23,400) (58,228)
---------- ---------- ---------- ----------
Net income (loss) .............................. $ 9,016 $ (13,827) $ 11,827 $ (20,792)
========== ========== ========== ==========
Weighted average shares outstanding
-- basic earnings (loss) per share ............. 46,626 46,305 46,491 46,303
Effect of dilutive securities:
Employee stock options and other shares .......... 1,161 1,541 1,185 1,414
---------- ---------- ---------- ----------
Weighted average shares outstanding-- dilutive
earnings (loss) per share ...................... 47,787 47,846 47,676 47,717
========== ========== ========== ==========
Basic earnings (loss) per share
From continuing operations ..................... $ 0.19 $ 0.33 $ 0.76 $ 0.81
From discontinued operations ................... -- (0.63) (0.50) (1.26)
---------- ---------- ---------- ----------
Net income (loss) .............................. $ 0.19 $ (0.30) $ 0.26 $ (0.45)
========== ========== ========== ==========
Diluted earnings (loss) per share
From continuing operations ..................... $ 0.19 $ 0.32 $ 0.74 $ 0.79
From discontinued operations ................... -- (0.61) (0.49) (1.22)
---------- ---------- ---------- ----------
Net income (loss) .............................. $ 0.19 $ (0.29) $ 0.25 $ (0.43)
========== ========== ========== ==========
</TABLE>
NOTE H - LEGAL PROCEEDINGS
The Company is a party to the following material legal proceedings:
SECURITIES CLASS ACTION LITIGATION
As previously disclosed, in December 1999 and February 2000, the Company and
certain of its executive officers were named as defendants in three securities
class action lawsuits alleging, among other things, that UICI's periodic filings
with the SEC contained untrue statements of material facts and/or failed to
disclose all material facts relating to the condition of UICI's credit card
business, in violation of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 thereunder. The three cases have been subsequently consolidated
as Herbert R. Silver, et al. v. UICI et al, which is pending in U.S. District
Court for the Northern District of Texas. Plaintiffs purport to represent a
class of persons who purchased UICI common stock from April 16, 1999 through
December 9, 1999. On June 12, 2000, plaintiffs filed a consolidated amended
class action complaint, amending, consolidating and supplementing the
allegations made in the original cases.
On August 4, 2000, UICI and the individual defendants filed a motion to
dismiss the case in its entirety, asserting that plaintiffs failed to properly
plead the elements of a Section 10(b) claim. The Court has not ruled on the
motion. The Company intends to continue to vigorously contest the allegations in
the cases.
SUN COMMUNICATIONS LITIGATION
As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are involved in litigation (Sun Communications, Inc. v. SunTech Processing
Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation") with a third
party concerning the distribution of the cash proceeds from the sale and
liquidation of SunTech Processing Systems, LLC ("STP") assets in February 1998.
The Dallas County, Texas District Court ruled in December 1998 that, as a matter
of law, a March 1997 agreement governing the distribution of such cash proceeds
should be read in the manner urged by Sun Communications, Inc. ("Sun") and
consistent with a court-appointed liquidator's previous ruling. The District
Court entered a judgment directing distribution of the sales proceeds in the
manner urged by Sun. The District Court also entered a finding that UICI had
violated Texas securities disclosure laws and breached a fiduciary duty owed to
Sun, and the District Court awarded the plaintiff $1.7 million in attorneys'
fees, which amount could be increased to $2.1 million under certain
circumstances.
13
<PAGE> 14
On September 10, 1999, the Company filed its initial briefs in support of
its appeal of the District Court's decision as to the awarding of attorneys'
fees and its finding that UICI violated Texas securities laws and breached a
fiduciary duty. The Company did not, however, appeal the District Court's ruling
with regard to the interpretation of the March 1997 agreement. On September 10,
1999, Mr. Jensen filed his initial brief in support of his appeal of, among
other things, the trial court's December 1998 finding in the Sun Litigation that
Mr. Jensen was not entitled to any of the proceeds from the sale of Sun.
On August 1, 2000, the Court of Appeals for the Fifth District of Texas at
Dallas rendered its opinion on the appeal, reversing the trial court's judgment
as to UICI's liability for attorneys' fees and its finding that UICI violated
Texas securities laws and breached a fiduciary duty. The Appeals Court also
reversed the trial court's judgment that directed distribution of the STP sales
proceeds in the manner urged by Sun. The Company, Mr. Jensen and Sun filed
motions for rehearing, which remain pending.
In the brief filed in his appeal of the District Court's December 1998
finding, Mr. Jensen reasserted that the March 1997 agreement requires that,
before STP can make a distribution to UICI and Sun, it must advance
approximately $10 million to Mr. Jensen in satisfaction of certain creditor and
preferred equity claims. If and to the extent that Mr. Jensen's interpretation
of the March 1997 agreement is ultimately adopted in the Sun Litigation after
all rights to appeal have been exhausted, the amount of such proceeds which UICI
may ultimately receive directly from STP may be reduced. However, in such event
and in accordance with an agreement reached with the Company in June 1998 (the
"Assurance Agreement"), Mr. Jensen has agreed that, if UICI receives less than
$15.149 million in the lawsuit, then Mr. Jensen will advance funds to UICI
sufficient to increase UICI's recovery to $15.149 million. The Assurance
Agreement also restricts the manner in which UICI can seek funds in satisfaction
of Mr. Jensen's previously unconditional agreement (the "Jensen 1996 Guaranty")
to indemnify the Company for any loss or reduction in value of the Company's
Class A investment in Cash Delivery Systems, LLC.
By letter dated July 7, 2000, Mr. Jensen submitted a formal proposal to
purchase the Company's 80% interest in STP for $15.6 million ("Proposal A") or,
alternatively, to purchase for $15.1 million the Company's rights and claim of
rights to receive funds held in the registry of the Court in the Sun Litigation
("Proposal B"). As part of either proposal, the Company would agree to terminate
and release Mr. Jensen from any and all obligations arising under the Jensen
1996 Guaranty and the Assurance Agreement. As part of Mr. Jensen's proposals,
Mr. Jensen has offered to indemnify and hold the Company harmless from and
against, among other things, (a) the breach of fiduciary duty claim asserted by
Sun against the Company and Sun's related claim for attorneys' fees, (b) Sun's
claim for attorneys' fees arising out of the distribution issue in the Sun
Litigation, and (c) any and all other claims of any nature asserted by Sun
against the Company in the Sun Litigation arising out of or relating directly to
the March 1997 agreement governing the distribution of cash proceeds from the
sale and liquidation of STP.
Mr. Jensen's proposal to purchase UICI's 80% interest in STP contemplated by
Proposal A may be subject to the consent of Sun. The Company solicited the
consent of Sun to the transfer so that it might accept Proposal A, but Sun was
unwilling to grant such consent and objected to Proposal B, claiming that Sun's
consent is required to consummate either Proposal. Following approval of the
disinterested outside directors of UICI in accordance with the related party
transactions policies and procedures adopted by the UICI Board, on July 21,
2000, the Company formally accepted Proposal A and, in the alternative, Proposal
B. On October 6, 2000, the Company filed a motion to join Sun in the Shareholder
Derivative Litigation described below, seeking, among other things, a
declaratory judgment that Sun's consent is not required or that, in the
alternative, Sun waived its rights to consent. The court in the Shareholder
Derivative Litigation has yet to rule on the Company's motion.
The Company cannot at this time predict how, when or in what fashion the Sun
Litigation will ultimately be resolved. However, for financial reporting
purposes, any cash ultimately received by the Company from Mr. Jensen pursuant
to the Assurance Agreement may be treated as a capital contribution to the
Company, and the gain would be reduced by a corresponding amount. In such case,
however, the Company's consolidated stockholders' equity would not be adversely
affected. In 1998, the Company's results of operations reflected a pre-tax gain
from the STP sale of $9.7 million ($6.7 million after-tax, or $0.15 per share).
14
<PAGE> 15
SHAREHOLDER DERIVATIVE LITIGATION
As previously disclosed, on June 1, 1999, the Company was named as a nominal
defendant in a shareholder derivative action captioned Richard Schappel v. UICI,
Ronald Jensen, Richard Estell, Vernon Woelke, J. Michael Jaynes, Gary Friedman,
John Allen, Charles T. Prater, Richard Mockler and Robert B. Vlach, which was
filed and is pending in the District Court of Dallas County, Texas (the
"Shareholder Derivative Litigation"). The plaintiff has asserted on behalf of
UICI various derivative claims brought against the individual defendants,
alleging, among other things, breach of fiduciary duty, conversion, waste of
corporate assets, constructive fraud, negligent misrepresentation, conspiracy
and breach of contract. Plaintiff seeks to compel UICI's directors and officers
to conduct a complete accounting and audit relating to all related party
transactions and to fully and completely restate, report and disclose such
transactions. Plaintiff further seeks to recover for UICI's benefit all damages
caused by such alleged breach of the officers' and directors' duties to UICI.
The plaintiff in the Shareholder Derivative Litigation is also the president of
Sun (the plaintiff in the Sun Litigation), and substantially all of the initial
claims made in the Shareholder Derivative Litigation arose out of the same
transactions that serve as the factual underpinning to the Sun Communications
Litigation referred to above.
At the regular quarterly meeting of the Company's Board of Directors held on
August 4, 1999, George Lane III and Stuart D. Bilton (non-employee directors of
the Company) were appointed, in accordance with Texas and Delaware law, to serve
as a special committee (the "Special Litigation Committee") to investigate and
assess on behalf of the Company the underlying claims made in the Shareholder
Derivative Litigation.
On January 18, 2000, plaintiff filed an amended petition and request for
injunctive relief. Plaintiff expanded his complaint to include a request for an
injunction against the Company prohibiting, among other things, any existing or
future transactions between UICI and any and all entities related to Ronald L.
Jensen unless each such transaction is fully and fairly disclosed to UICI
shareholders, together with an opinion from an independent public accounting
firm opining with particularity as to the fairness of each proposed transaction.
On February 4, 2000, the Court granted the Company's motion for a statutory
stay of all further proceedings in the case, in accordance with Texas law
(including action on plaintiff's request for injunctive relief), pending
completion of the review of the claims currently undertaken by the Special
Litigation Committee, and its determination as to what further action, if any,
should be taken with respect to those claims. Subsequent to imposition of the
statutory stay, plaintiff filed (a) a motion to lift the statutory stay for the
limited purpose of hearing a motion for summary judgement to enforce Mr.
Jensen's 1996 agreement (the "Jensen 1996 Guaranty") to indemnify the Company
for any loss or reduction in value of the Company's Class A investment in Cash
Delivery Systems, LLC, (b) a second amended complaint and (c) a motion to lift
the statutory stay for the limited purpose of hearing a motion for summary
judgment against certain individual defendants with respect to the breach of
fiduciary duty claim in the Sun Litigation. The second amended complaint added
reference to the consent order issued by the OCC; attempted to quantify damages
alleged to have resulted from numerous related party transactions previously
disclosed in the Company's public filings; added an allegation of usurpation of
corporate opportunities; and requested injunctive relief that would require the
Company to, among other things, freeze, review and where appropriate rescind all
related party transactions, and require detailed reporting of related party
transactions.
On March 20, 2000, the Special Litigation Committee delivered to the Board
of Directors of UICI its findings with respect to the allegations in the
original complaint. Based on its review and assessment of the allegations in the
original complaint, the Special Litigation Committee recommended that the
Company (a) seek dismissal of claims raised in the original complaint in the
derivative lawsuit, including dismissal of claims relating to the Jensen 1996
Guaranty (see discussion below); (b) seek the release to UICI of approximately
$7.55 million of uncontested proceeds from the STP sale held in the District
Court's registry; (c) seek from Mr. Jensen and/or former management certain
legal fees incurred by UICI in connection with the Sun Litigation that it
believes were incurred without appropriate board approval (which fees were
reimbursed by Mr. Jensen on July 5, 2000); (d) seek reimbursement of certain
legal fees awarded to Sun if and only if certain ongoing appeals prove
unsuccessful; and (e) implement certain heightened related-party transaction
controls. The Special Litigation Committee also recommended that UICI ratify the
Assurance Agreement, which allows UICI to recover up to $15.149 million from the
STP sale and which also requires UICI to look to the proceeds from the STP sale
to satisfy the Jensen 1996 Guaranty of the value of UICI's initial investment in
a predecessor company to STP. The Company's Board of Directors affirmed the
15
<PAGE> 16
Special Litigation Committee's findings and recommendations and directed
management to implement the specific recommendations as promptly as practicable.
On March 22, 2000, the Special Litigation Committee reported to the Court
its findings and recommendations with respect to the allegations in the original
complaint, and the Court granted plaintiff's motion to lift the statutory stay
in the proceedings for the purposes of evaluating the Special Litigation
Committee's decision on the Jensen 1996 Guaranty (and the derivative plaintiff's
motion for summary judgment on the Jensen 1996 Guaranty) and releasing the $7.55
million of uncontested funds from the sale of STP to the Company. The Company
filed a motion with the appeals court in the Sun Litigation seeking a
distribution to UICI of $7.55 million of uncontested funds. Following Sun's
demand that a portion of the remaining funds held in the court's registry in the
Sun Litigation be distributed to Sun, the court of appeals denied all requested
relief.
On April 26, 2000, the Special Litigation Committee filed a motion to
dismiss certain derivative claims, contending that plaintiff's claims arising
from or relating to the Jensen 1996 Guaranty were without merit and should be
dismissed from the lawsuit. On June 10, 2000, the Court granted the motion to
dismiss those claims. On April 30, 2000, UICI filed a motion to disqualify
plaintiff and his counsel, alleging that they were not fair and adequate
representatives of UICI. On May 4, 2000, plaintiff filed a Motion to Show
Authority, alleging that UICI did not have the authority to file the motion to
disqualify. The motion to disqualify and the motion to show authority are still
pending before the Court.
On September 11, 2000, the Court lifted the statutory stay in the case at
the request of the Special Litigation Committee, in anticipation of the
Committee's report with respect to nine specific transactions that were the
subject of allegations made in plaintiff's first and second amended complaints.
On September 21, 2000, the Special Litigation Committee delivered to the Board
of Directors of UICI its findings with respect to these specific allegations.
Based on its review and assessment, the Special Litigation Committee recommended
that the Company (a) seek dismissal of the claims related to eight of the nine
transactions reviewed, (b) make certain supplemental disclosures with respect to
certain of the related party transactions that were the subject of the first and
second amended complaints, and (c), with respect to one of the nine
transactions, seek reimbursement of a portion of compensation paid to an
employee of the Company during the period 1995-1996. The Company's Board of
Directors affirmed the Special Litigation Committee's findings and
recommendations and directed management to implement the specific
recommendations as promptly as practicable.
In October 2000, the Company and the Special Litigation Committee filed
motions to (a) approve a settlement between the Company and Mr. Jensen related
to certain legal fees incurred by the Company in the Sun Litigation, (b) approve
Mr. Jensen's Proposal A (see discussion above) or, in the alternative, Mr.
Jensen's Proposal B with respect to resolution of the Sun Litigation, (c) enter
a declaratory judgment finding that Sun's consent to Mr. Jensen's Proposal A
and/or Proposal B is unnecessary as a matter of law, and (d) dismiss all
remaining derivative claims asserted by the plaintiff in the Shareholder
Derivative Litigation allegedly arising from the transactions forming the
factual underpinning to the Sun Litigation These motions, together with the
Company's motion to disqualify plaintiff and his counsel, have been set for
hearing by the court on November 16, 2000.
ACE AND AFCA LITIGATION
As previously disclosed, the Company and UCNB are parties to separate
lawsuits filed in February 2000 by American Credit Educators, Inc. ("ACE") and
American Fair Credit Association, Inc. ("AFCA"), organizations through which
United CreditServ formerly marketed its credit card programs (American Credit
Educators, LLC v. United Credit National Bank and UICI and American Fair Credit
Association, Inc. v. United Credit National Bank and UICI, each pending in the
United States District Court for the District of Colorado). In the suits,
plaintiffs have alleged, among other things, that UCNB has breached its
agreements with ACE and AFCA and have claimed damages in an indeterminate
amount. ACE and AFCA are each controlled by Phillip A. Gray, the former head of
UICI's credit card operations. On June 26, 2000, AFCA filed a first amended
complaint seeking, among other things, a declaratory judgement and injunctive
relief and alleging breach of contract and other causes of action.
On September 28, 2000, ACE and AFCA filed motions to compel UICI to, among
other things, deposit a significant portion of the proceeds of the sale of
UICI's credit card business in escrow under court supervision. On October 16,
2000, the Company and UCNB filed motions to dismiss both cases, and on October
18, 2000, the
16
<PAGE> 17
Company and UCNB filed motions in opposition to AFCA's and ACE's motions for a
preliminary injunction. The court has yet to rule on the Company's and UCNB's
motion to dismiss and ACE's and AFCA's motions for a preliminary injunction.
The Company believes that it and UCNB have meritorious defenses to the
allegations and intends to vigorously contest the cases.
MITCHELL LITIGATION
As previously disclosed, the Company is one of three named defendants in a
class action suit filed in 1997 (Dadra Mitchell v. American Fair Credit
Association, United Membership Marketing Group, LLC and UICI) pending in
California state court (the "Mitchell case"), in which plaintiffs have alleged
that defendants violated California law regarding unfair and deceptive trade
practices by making misleading representations about, and falsely advertising
the nature and quality of, the benefits of membership in American Fair Credit
Association ("AFCA"). Plaintiffs also filed a companion case in federal district
court in San Francisco captioned Dadra Mitchell v. BankFirst, N.A., which
alleges violations of the federal Truth in Lending Act and Regulation Z. on the
theory that the 90-day notice period required for termination of AFCA membership
was not properly disclosed. The only defendant in the federal case (the
"BankFirst case") is BankFirst, N.A., a bank that issued a VISA credit card made
available through the AFCA program.
On April 12, 1999, the California state court in the Mitchell case certified
a class of all California residents who entered into a membership contract with
AFCA through April 12, 1999.
On September 27, 1999, the parties reached a tentative settlement with
respect to the AFCA case and the BankFirst case. However, the existence of the
Consent Order to which UCNB is now subject and certain subsequent statements by
AFCA's principal, Phillip A. Gray, called into question whether consummation of
the tentative settlement was possible or practicable. Accordingly, the parties
advised the courts that the settlement was unlikely to occur.
On May 4, 2000, the court in the BankFirst case granted Bankfirst's motion
for summary judgment and entered a judgment terminating the case in favor of
Bankfirst and against plaintiff Mitchell. Plaintiff Mitchell subsequently filed
a notice of appeal to the United States Court of Appeals for the Ninth Circuit.
With the permission of the State Court, on June 30, 2000 UICI, jointly with
defendants AFCA and UMMG, filed two separate motions to compel arbitration and
to narrow the scope of the class previously defined by the State Court's April
12, 1999 order granting class certification. By order dated October 3, 2000, the
State Court granted, in part, and denied, in part, both motions.
The State Court severed from the class action the claims for recovery of
money by way of damages or restitution of class members who joined AFCA after
January 1, 1998 and who executed signed arbitration agreements. However, the
State Court denied UICI's motion to compel arbitration with respect to these
class members' claims for injunctive relief and, as a result, their claims for
injunctive relief remain part of the class action. With respect to class members
who were existing members of AFCA in January of 1998 and who received through
the mail an amendment adding arbitration of disputes to their AFCA membership
agreement, the State Court denied UICI's motion to compel arbitration unless the
member also signed a separate arbitration agreement.
With respect to UICI's motion to narrow the scope of the class, the State
Court, consistent with its decision on UICI's motion to compel arbitration,
severed from the class action the claims for monetary relief (damages or
restitution) by class members who joined AFCA after January 1, 1998 and executed
signed arbitration agreements. Similarly, the State Court refused to narrow the
class definition with respect to injunctive relief claims of these persons. In
addition, the State Court clarified that its prior April 12, 1999 order
certified a class with respect to all claims pleaded in the complaint, not
solely claims under the California Credit Services Act of 1984.
On October 12, 2000, UICI, jointly with defendants AFCA and UMMG, filed a
Notice of Appeal from both of the State Court's orders dated October 3, 2000 and
from its original class certification order dated April 12, 1999. By letter
dated October 12, 2000, defendants notified plaintiffs of the filing of their
Notice of Appeal and that,
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<PAGE> 18
consequently, all proceedings in the Mitchell case were stayed. At this time, it
is unclear whether or not plaintiffs will seek relief from the stay of
proceedings, and, if so, what relief from the stay, if any, will be granted to
plaintiffs pending the outcome of UICI's appeal.
ALABAMA LITIGATION
As previously disclosed, UCNB is a named defendant in two lawsuits in Macon
County, Alabama (LaTonya Tarver v. UCNB, American Credit Educators, L.L.C.
("ACE") and various unnamed defendants and Wylean Tarver v. UCNB, ACE and
unnamed defendants) arising from 1999 telemarketing activities undertaken by
UCNB and/or ACE. UCNB filed motions to dismiss and motions to compel arbitration
in the suits, and hearings on the defendants' motions to compel arbitration have
been postponed indefinitely at the request of plaintiffs' counsel. The Company
believes that it has meritorious defenses to the allegations in the Macon County
suits and intends to vigorously contest the cases.
KLINEFELTER LITIGATION
As previously disclosed, The MEGA Life and Health Insurance Company (a
wholly-owned subsidiary of the Company) ("MEGA") is a party defendant in a
purported class action suit filed in December 1996 (The Klinefelter Family
Revocable Living Trust, et al. v. First Life Assurance Company, et al. pending
in the District Court of Hidalgo County, Texas), in which the named plaintiffs
have alleged breach of contract, violations of the Texas Deceptive Trade
Practices Act and the Texas Insurance Code arising from the sale of so-called
"vanishing premium" life insurance policies.
In May 2000 the Company reached an agreement with respect to substantially
all monetary and non-monetary issues in the case. The final settlement was
approved by the court on October 16, 2000.
GOTTSTEIN LITIGATION
As previously disclosed, UICI, Ronald L. Jensen, and UGA, Inc. are party
defendants in a purported class action lawsuit filed in November 1998
(Gottstein, et al. v. The National Association for the Self-Employed, et al.,
pending in the United States District Court for the District of Kansas). The
class representatives have alleged fraud, conspiracy to commit fraud, breach of
fiduciary duty, violation of the Kansas Consumer Protection Act, conspiracy to
commit RICO violations, and violation of RICO, all arising out of the concurrent
sales of individual health insurance policies underwritten and marketed by PFL
Life Insurance Company (PFL) and memberships in The National Association for the
Self-Employed (NASE).
On November 10, 1999, a tentative settlement was reached to include all
potential class members in all states, including Kansas. The formal terms of the
settlement agreement and the administration of the settlement are currently
being negotiated by the parties, and any settlement will be subject to
certification of a nationwide class and court approval. Under the terms of a
cost sharing agreement with a unit of AEGON USA, UICI and/or MEGA will be
obligated to reimburse the AEGON USA unit for 50% of the cash cost of the
settlement.
KATZ LITIGATION
As previously disclosed, the Company is currently involved in a dispute with
the former owners of a student loan marketing business acquired by the Company
in December 1997. The former owners allege that, as part of the negotiations
leading to the acquisition, the Company and the former owners entered into an
oral option agreement, pursuant to which the former owners were granted the
right, for a five-year period, to purchase 6.5% of the student loan business of
Academic Management Services Corp. (formerly Educational Finance Group, Inc.)
("AMS") for $5.7 million. The former owners further allege that the 6.5%
percentage is subject to adjustment of up to 50% based on the relative
post-acquisition performance of ELA Corporation to the performance of AMS
(including ELA Corporation) as a whole. Attempts to reach agreement on the terms
of the option over an 18-month period were unsuccessful.
On July 28, 1999, AMS filed a declaratory judgment action in U.S. District
Court in Boston (AMS, Inc. v. Marcus Katz, et al) seeking a finding that no
option existed since there had been no agreement on essential terms.
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<PAGE> 19
The former owners filed a motion to dismiss the action, which motion was denied
on December 30, 1999. The former owners of ELA have filed an amended
counterclaim, alleging breach of contract, breach of the implied covenant of
good faith and fair dealing, tortious interference with contract and business
relationships and a breach of the Massachusetts Deceptive Trade Practices Act.
The Company has filed an amended answer, denying all allegations in the amended
counterclaim.
On June 12, 2000, AMS filed and served its first amended complaint, in which
AMS recited the claims from the first complaint and added additional
breach-of-contract counts seeking recovery for a series of twenty-one promissory
notes. On July 7, 2000, the defendants filed their answer to the amended
complaint, asserting several affirmative defenses. Discovery in the case
continues.
STATE OF CONNECTICUT INVESTIGATION
As previously disclosed, on April 19, 2000, the Connecticut Attorney
General's Office served upon UCNB a Civil Investigative Demand, seeking
information regarding UCNB's credit card fees, disclosures, marketing practices,
affinity relationships and the handling of payments from consumers to UCNB. On
May 26, 2000, UCNB submitted a timely response to the information request.
UNITED CREDIT NATIONAL BANK
As previously disclosed, on February 25, 2000, the Board of Directors of
United Credit National Bank ("UCNB") consented to the issuance by the OCC of a
Consent Order (the "February Consent Order"). UCNB is a special purpose national
bank headquartered in Sioux Falls, South Dakota, and an indirect wholly owned
(except for directors' qualifying shares) subsidiary of the Company. Among other
things, the February Consent Order required UCNB, until further notice from the
OCC, to cease all activities with ACE and AFCA (UCNB's only marketing
organizations) and prohibited UCNB from introducing new products or services,
without accompanying policies and procedures reviewed and approved by the OCC
providing for, among other things, appropriate risk management, internal
control, management information and data processing systems.
On June 29, 2000, the Company, UCS and UCNB agreed to the issuance by the
OCC of separate Consent Orders (the "June Consent Orders") memorializing the
terms of a definitive Capital Plan previously submitted by the Company and UCNB
and approved by the OCC as required by the February Consent Order (the "UCNB
Capital Plan"). The June Consent Orders required, among other things, (a) the
Company through UCS to contribute additional capital to UCNB in the amount of
$50.0 million in prescribed increments over a thirty-day period ended July 29,
2000 (which $50.0 million was contributed as required); (b) UCNB to maintain
prescribed capital ratios throughout the plan period; (c) UCNB to adopt and
implement certain credit card administrative policies and procedures; and (d)
the Company, on or before December 31, 2000, to assume all of UCNB's remaining
contingent liabilities. In accordance with the June Consent Orders, the
Company's obligations under the UCNB Capital Plan were initially secured by (a)
a pledge by Mr. Jensen of $7.1 million face amount of investment securities
owned by Mr. Jensen and (b) a pledge by the Company of a short-term promissory
note in the principal amount of $35.0 million issued to the Company and
guaranteed by Mr. Jensen in connection with the purchase by an investment group
consisting of Jensen family members (including Mr. Jensen) of the Company's
National Motor Club unit. See Note J of Notes to Consolidated Condensed
Financial Statements. On October 31, 2000, the OCC consented to the release by
UCNB of its security interest in the $35.0 million promissory note.
In the event that UCNB fails to comply with the terms of the February
Consent Order, or in the event that the Company, UCS or UCNB fail to comply with
the June Consent Orders, such failure could result in sanctions brought against
the Company, UCS, UCNB and their respective officers and directors and UCNB's
"institution-related parties," including the assessment of civil money penalties
and enforcement of the Consent Orders in Federal District Court.
Transactions between an insured bank (including UCNB, the Company's indirect
wholly owned subsidiary) and the insured bank's affiliates are subject to, among
other things, the quantitative and qualitative restrictions of Section 23A of
the Federal Reserve Act, as well as safety and soundness considerations. The OCC
has expressed criticism with respect to certain of the transactions that have
taken place between UCNB and the Company and/or certain of
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<PAGE> 20
its wholly owned subsidiaries. The Company disagrees, but cannot predict at this
time, what action, if any, the OCC will ultimately take with respect to these
transactions.
OTHER MATTERS
The Company and its subsidiaries are parties to various other pending legal
proceedings arising in the ordinary course of business, including some asserting
significant damages arising from claims under insurance policies, disputes with
agents and other matters. Based in part upon the opinion of counsel as to the
ultimate disposition of such lawsuits and claims, management believes that the
liability, if any, resulting from the disposition of such proceedings will not
be material to the Company's financial condition or results of operations.
NOTE I - SEGMENT INFORMATION (CONTINUING OPERATIONS)
The Company's operating segments included in continuing operations are: (i)
Insurance, which includes the businesses of the Self Employed Agency Division,
the Student Insurance Division, the OKC Division, the Special Risk Division and
the National Motor Club Division; (ii) Financial Services, which includes the
businesses of Academic Management Services Corp. (formerly Educational Finance
Group, Inc.) ("AMS"), UICI Administrators (consisting of the operations of UICI
Administrators (a company engaged in the business of providing third party
benefits administration, including eligibility and billing reconciliation),
Insurdata Marketing Services, LLC (a subsidiary of the Company engaged in the
business of marketing third party benefits administration services) and
Healthcare Management Administrators, Inc. (acquired by the Company on February
3, 2000)) and other business units, (iii) the Company's investment in
HealthAxis.com and (iv) Other Key Factors. Other Key Factors include investment
income not allocated to the other segments, interest and general expenses
relating to corporate operations, realized gains or losses on sale of
investments and the operations of the Company's AMLI subsidiary. Allocations of
investment income and certain general expenses are based on a number of
assumptions and estimates, and the business segments reported operating results
would change if different methods were applied. Certain assets are not
individually identifiable by segment and, accordingly, have been allocated by
formulas. Segment revenues include premiums and other policy charges and
considerations, net investment income, and fees and other income. Operations
that do not constitute reportable operating segments have been combined with
Other Key Factors. Depreciation expense and capital expenditures are not
considered material. Management does not allocate income taxes to segments.
Transactions between reportable operating segments are accounted for under
respective agreements, which provide for transactions generally at cost.
Revenues, income from continuing operations before federal income taxes, and
identifiable assets by operating segment are set forth in the tables below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Insurance:
Self Employed Agency ........................ $ 141,043 $ 139,717 $ 416,545 $ 429,735
Student Insurance ........................... 19,050 24,668 74,754 80,462
OKC Division ................................ 23,175 23,844 69,756 71,389
Special Risk ................................ 13,774 14,139 34,006 42,944
National Motor Club ......................... 3,340 7,619 21,697 21,961
---------- ---------- ---------- ----------
200,382 209,987 616,758 646,491
Financial Services:
Academic Management Services ................ 40,408 27,934 121,396 73,956
UICI Administrators ......................... 5,347 12,175 14,704 35,010
Other Business Units ........................ 309 238 857 587
---------- ---------- ---------- ----------
46,064 40,347 136,957 109,553
Gain on sale of HealthAxis.com shares ......... -- -- 26,300 --
Other Key Factors ............................. 9,874 8,847 26,009 26,187
Intersegment Eliminations ..................... (1,079) (8,258) (3,604) (25,647)
---------- ---------- ---------- ----------
Total Revenues from continuing operations ........ $ 255,241 $ 250,923 $ 802,420 $ 756,584
========== ========== ========== ==========
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income (loss) from continuing operations before federal income taxes:
Insurance:
Self Employed Agency .............................................. $ 17,536 $ 18,507 $ 53,353 $ 35,906
Student Insurance ................................................. (979) 279 (888) 1,782
OKC Division ...................................................... 3,700 3,807 10,105 14,252
Special Risk ...................................................... (135) (471) 408 131
National Motor Club ............................................... 63 1,422 2,471 3,677
---------- ---------- ---------- ----------
20,185 23,544 65,449 55,748
Financial Services:
Academic Management Services ...................................... (3,022) 123 (12,274) (3,045)
UICI Administrators ............................................... (600) 1,128 (740) 2,283
---------- ---------- ---------- ----------
(3,622) 1,251 (13,014) (762)
Gain on sale of HealthAxis.com shares ............................... -- -- 26,300 --
HealthAxis.com operating loss ....................................... (1,115) -- (16,269) --
Other Key Factors ................................................... 2,371 (696) 7,525 6,495
---------- ---------- ---------- ----------
Total income from continuing operations before federal
income taxes and goodwill amortization ............................... 17,819 24,099 69,991 61,481
---------- ---------- ---------- ----------
Less goodwill amortization ............................................. 1,333 2,203 4,570 4,609
---------- ---------- ---------- ----------
Total income from continuing operations before federal income taxes .... $ 16,486 $ 21,896 $ 65,421 $ 56,872
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Identifiable Assets
Insurance:
Self Employed Agency ........................... $ 424,993 $ 423,142
Student Insurance .............................. 68,232 79,011
OKC Division ................................... 555,731 582,275
Special Risk ................................... 106,856 85,235
National Motor Club ............................ -- 20,713
------------ ------------
1,155,812 1,190,376
Financial Services:
Academic Management Services ................... 1,517,548 1,883,666
UICI Administrators ............................ 7,658 22,931
Other Business Units ........................... 20,846 20,029
------------ ------------
1,546,052 1,926,626
Investment in HealthAxis.com ...................... 12,827 --
Other Key Factors ................................. 326,176 422,342
------------ ------------
Total assets from continuing operations .. $ 3,040,867 $ 3,539,344
============ ============
</TABLE>
NOTE J - RELATED PARTY TRANSACTIONS
INTRODUCTION
Historically, the Company and its subsidiaries have engaged from time to
time in transactions and joint investments with executive officers and entities
controlled by executive officers, particularly Ronald L. Jensen (the Company's
Chairman) and entities in which Mr. Jensen and his adult children have an
interest ("Jensen Affiliates").
On March 20, 2000, the Board of Directors accepted the recommendations of
the Special Litigation Committee to amend the Company's policy for related-party
transactions to require (1) prospective review and approval by a majority of the
"Disinterested Outside Directors", until March 20, 2001, of any contract or
transaction involving payments of $60,000 or more over the life of any contract,
and, after March 20, 2001, review and approval of any contract or transaction
involving payments of $250,000 or more in any twelve-month period or $1,000,000
over the life of the contract and (2) defining a "related-party" as 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. A "Disinterested
Outside Director" is any director of UICI who is an employee of neither the
Company nor any affiliate of the Company and
21
<PAGE> 22
otherwise holds no interest in any person or entity with which the Company
proposes to enter into a transaction in question. Formal amendments to the
Company's related party transactions policies and procedures, incorporating the
Special Litigation Committee's recommendations, were adopted and approved by the
Board of Directors of UICI at the Board's annual meeting held on June 8, 2000.
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.
Transactions between an insured bank (including UCNB, the Company's indirect
wholly owned subsidiary) and its affiliates are subject to, among other things,
the quantitative and qualitative restrictions of Section 23A of the Federal
Reserve Act, as well as safety and soundness considerations. The OCC has
expressed criticism with respect to certain of the transactions that have taken
place between UCNB and the Company and/or certain of its wholly owned
subsidiaries. The Company disagrees, but it cannot predict at this time what
action, if any, the OCC will ultimately take with respect to these transactions.
JUNE - JULY 2000 TRANSACTIONS
In June and July 2000, the Company entered into a series of transactions
(the "July 2000 Transactions") with Ronald L. Jensen (the Company's Chairman)
and affiliates of Mr. Jensen, the proceeds of which were utilized, in part, to
fund the Company's cash and other obligations under the Consent Order, dated
June 29, 2000, issued by the OCC to memorialize the terms of the UCNB Capital
Plan approved by the OCC.
In accordance with the policies and procedures of the Board of Directors,
each of the July 2000 Transactions was approved by the disinterested outside
directors of the Company at a meeting of the Board of Directors held on July 21,
2000, as being fair to UICI and its shareholders. The Board's determination was
made, in part, in reliance upon the opinion of an independent financial advisor
that the July 2000 Transactions, in their totality, were fair to the public
shareholders (consisting of non-Jensen affiliated shareholders) from a financial
point of view.
Restructuring of Lender LLC Loan
On March 14, 2000, a limited liability company controlled by Mr. Jensen
("Lender LLC") loaned $70.0 million (the "Lender LLC Loan") to a newly-formed
subsidiary of the Company, the proceeds of which were utilized by the Company to
reduce indebtedness outstanding under the Company's unsecured bank credit
facility from $100.0 million to $25.0 million. The Lender LLC Loan bore interest
at the prevailing prime rate, was guaranteed by UICI, was due and payable in
July 2001 and was secured by a pledge of investment securities and shares of the
Company's National Motor Club unit.
As part of the March 2000 paydown of the Company's bank credit facility, the
facility was amended to provide, among other things, that the $25.0 million
balance outstanding would be due and payable on July 10, 2000, amounts
outstanding under the facility would be secured by a pledge of investment
securities and shares of Mid-West, and the restrictive covenants formerly
applicable to UICI and its restricted subsidiaries (primarily the Company's
insurance companies) would be applicable solely to Mid-West. Amounts outstanding
under the bank credit facility continued to bear interest at LIBOR plus 100
basis points per annum.
On April 11, 2000 and June 28, 2000, the Company made principal payments of
$11.0 million and $8.0 million, respectively, under the bank credit facility,
and on June 30, 2000, Lender LLC, against payment to the banks of $6.0 million,
accepted 100% of the banks' remaining $6.0 million position in the bank credit
facility. As a result of these transactions, at June 30, 2000, the Company (or
its subsidiary) had indebtedness outstanding owing to Lender LLC in the
aggregate amount of $76.0 million, and all of the Company's indebtedness owing
to commercial banks under the bank credit facility had been paid in full.
Effective July 27, 2000, the Company and the Lender LLC completed a
restructuring of the terms of the Lender LLC Loan. As part of the restructuring,
the Company paid to Lender LLC principal owing on the Lender LLC in the amount
of $6.0 million. Giving effect to the restructuring, at September 30, 2000
Lender LLC held indebtedness in the aggregate principal amount of $70.0 million
owing by the Company, which indebtedness (the "Amended
22
<PAGE> 23
Lender LLC Loan") consisted of a $32.0 million unsecured tranche and a $38.0
million tranche secured by a pledge of 100% of the capital stock of Mid-West.
The Amended Lender LLC Loan (a) matures on January 1, 2002, (b) continues to
bear interest at the per annum rate of prime fluctuating from time to time, with
interest accruing but not payable until the earlier to occur of full prepayment
of the Lender LLC Loan or January 1, 2002, and (c) is mandatorily prepayable
monthly to the extent of 1% of the outstanding principal balance of the Amended
Lender LLC Loan. The security interest in all remaining collateral previously
pledged to secure payment of the Lender LLC Loan and indebtedness outstanding
under the bank credit facility (including all investment securities and shares
of the Company's National Motor Club unit) was released in full.
The unsecured tranche of the Amended Lender LLC Loan is mandatorily
prepayable by the Company upon and to the extent of the Company's receipt of an
anticipated tax refund, which is estimated to be in the amount of approximately
$22.0 million. On October 20, 2000, the Company prepaid the unsecured tranche of
the Amended Lender LLC Loan in the amount of $12.5 million, representing the
initial installment of the anticipated tax refund. In addition, on November 2,
2000, the Company prepaid an additional $17.4 million of the unsecured tranche
and $17.6 million of the secured tranche. At November 2, 2000, the Company had
no indebtedness outstanding under the unsecured tranche and $20.4 million
outstanding under the secured tranche of the Amended Lender LLC Loan.
Sale of NMC Holdings, Inc.
On July 27, 2000, the Company sold to an investor group consisting of Jensen
family members (including Mr. Jensen) (the "NMC Buyer") its 97% interest in NMC
Holdings, Inc. ("NMC"), the parent company of its National Motor Club of America
unit, for a purchase price of $56.8 million, representing 97% of the value of
NMC as determined by independent appraisal. The purchase price was paid at
closing in cash in the amount of $21.8 million and by delivery of a promissory
note (the "NMC Note") issued by the NMC Buyer in the principal amount of $35.0
million. The NMC Note is an unsecured, full recourse obligation of the NMC Buyer
and is unconditionally guaranteed by Mr. Jensen. The NMC Note bears interest at
the per annum rate of prime fluctuating from time to time, and was initially
payable in three equal installments of principal in the amount of $11.667
million due on each of October 1, November 1 and December 1, 2000, respectively.
Effective October 1, 2000, the NMC Note was amended to provide for three equal
installments of principal in the amount of $11.667 million due on each of
November 1 and December 1, 2000 and January 1, 2001, respectively. In accordance
with the terms of the June Consent Orders, the Company pledged the NMC Note to
UCNB to secure, in part, the Company's obligations under the Capital Plan. On
October 31, 2000, the OCC consented to the release by UCNB of its security
interest in the NMC Note. On November 2, 2000, the NMC Buyer prepaid the NMC
Note in its entirety.
UICI, NMC Buyer and NMC have entered into a Management Agreement, the terms
of which govern the provision by UICI to NMC of management and administrative
services, information technology services, telephone services and other services
currently provided to NMC by UICI. The Management Agreement is terminable (a) by
UICI at any time upon not less than 60 days' notice to NMC and the NMC Buyer,
and (b) by NMC at any time following the payment in full of the NMC Note upon
not less than 30 days' notice to UICI. Pursuant to the Management Agreement,
UICI has agreed to allow William Gedwed (Executive Vice President and a Director
of the Company and the holder of approximately 3% of the equity interest in NMC)
to serve as a consultant to NMC for the term of the Management Agreement. The
$7.6 million, net of tax, received in excess of the net book value of NMC was
reflected in additional paid in capital.
Jensen Indemnity Agreement
To secure in part the Company's obligations under the Capital Plan,
effective June 29, 2000 Mr. Jensen pledged to UCNB $7.1 million face amount of
Series B Certificates created as part of the Company's securitizations of credit
card receivables issued in 1997 and 1998 generated by UICI's credit card
operations. As a condition to Mr. Jensen's pledge of the Series B Certificates,
on June 29, 2000 the Company executed and delivered an Indemnity Agreement,
pursuant to which the Company agreed, among other things, to indemnify and hold
Mr. Jensen harmless from and against (A) loss, cost, expense, or liability
incurred by Mr. Jensen arising from, in respect of or in connection with, a
default by the Company of its obligations under the June Consent Orders, the
UCNB Capital Plan or the Liquidity and Capital Assurances Agreement, and (B) any
and all losses, costs and expenses (including reasonable attorneys' fees and
expenses) incurred by Mr. Jensen in enforcing any rights under the Indemnity
Agreement.
23
<PAGE> 24
Sale of UICI Shares to NMC
Pursuant to the terms of an agreement, dated July 13, 2000, between the
Company and NMC, on July 24, 2000, the Company issued to NMC 175,000 treasury
shares of common stock at a purchase price of $5.25 per share. It is anticipated
that the 175,000 shares will be used to fund incentive stock programs for the
benefit of NMC employees.
OTHER MATTERS
Proposed Resolution of Sun Litigation
By letter dated July 7, 2000, Mr. Jensen submitted a formal proposal to
purchase the Company's 80% interest in SunTech Processing LLC ("STP") for $15.6
million ("Proposal A") or, alternatively, to purchase for $15.1 million the
Company's rights and claim of rights to receive funds held in the registry of
the Court in the Sun Litigation ("Proposal B"). See Note H of Notes to
Consolidated Condensed financial Statements. As part of either proposal, the
Company would agree to terminate and release Mr. Jensen from any and all
obligations arising under the Jensen 1996 Guaranty and the Assurance Agreement.
As part of Mr. Jensen's proposals, Mr. Jensen has offered to indemnify and hold
the Company harmless from and against, among other things, (a) the breach of
fiduciary duty claim asserted by Sun against the Company and Sun's related claim
for attorneys' fees, (b) Sun's claim for attorneys' fees arising out of the
distribution issue in the Sun Litigation, and (c) any and all other claims of
any nature asserted by Sun against the Company in the Sun Litigation arising out
of or relating directly to the March 1997 agreement governing the distribution
of cash proceeds from the sale and liquidation of STP.
Mr. Jensen's proposal to purchase UICI's 80% interest in STP contemplated by
Proposal A may be subject to the consent of Sun. The Company solicited the
consent of Sun to the transfer so that it might accept Proposal A, but Sun was
unwilling to grant such consent and objected to Proposal B, claiming that Sun's
consent is required to consummate either Proposal. Following approval of the
disinterested outside directors of UICI in accordance with the related party
transactions policies and procedures adopted by the UICI Board, on July 21,
2000, the Company formally accepted Proposal A and, in the alternative, Proposal
B. On October 6, 2000, the Company filed a motion to join Sun in the Shareholder
Derivative Litigation described below, seeking, among other things, a
declaratory judgment that Sun's consent is not required or that, in the
alternative, Sun waived its rights to consent. The court in the Shareholder
Derivative Litigation has yet to rule on the Company's motion.
Amendment of Put/Call Agreement
Mr. Jensen's five adult children hold in the aggregate 100% of the equity
interest in Onward & Upward, Inc. ("OUI"), which is the holder of approximately
6.69% of the Company's outstanding Common Stock. 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 (commencing
in 2000 through 2006), the Company has an option to purchase from OUI, and OUI
has a corresponding right to require the Company to purchase, up to 369,174
shares of Common Stock at an initial purchase price in 2000 of $28.50 per share.
The call/put price escalates over time in annual dollar increments to recognize
an increase in value of the underlying UICI stock based upon historical past
performance (an approximate 6.0% annual rate of appreciation). In July 2000, the
Company extended until October 31, 2000 the period during which OUI may exercise
its initial put right under the Put/Call Agreement. In October 2000, the Company
extended until December 31, 2000 the period during which OUI may exercise its
initial put right under the Put/Call Agreement.
Agreement with NetLojix Communications, Inc.
In September 2000, the Company executed an extension of its agreement with
NetLojix Communications, Inc. ("NetLojix"), which provides voice
telecommunications services to the Company. The Company's agreement with
NetLojix, as extended, expires on October 1, 2002. Mr. Jensen and his adult
children own beneficially in the aggregate approximately 59% of the issued
capital stock of NetLojix.
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<PAGE> 25
NOTE K - EMPLOYEE AND AGENT STOCK ACCUMULATION PLANS
UICI EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN
The Company maintains for the benefit of its and its subsidiaries' employees
the UICI Employee Stock Ownership and Savings Plan (the "Employee Plan"). The
Employee Plan through its 401(k) feature enables eligible employees to make
pre-tax contributions to the Employee Plan in an amount not in excess of 15% of
compensation (subject to overall limitations) and to direct the investment of
such contributions among several investment options, including UICI common
stock. A second feature of the Employee Plan constitutes an employee stock
ownership plan (the "ESOP"), contributions to which are invested primarily in
shares of UICI common stock. The ESOP feature allows participants to receive
from UICI and its subsidiaries discretionary matching contributions and to share
in certain supplemental contributions made by UICI and its subsidiaries.
Contributions by UICI and its subsidiaries to the Employee Plan under the ESOP
feature currently vest in prescribed increments over a seven-year period.
On August 11, 2000, the Company issued to the Employee Plan 1,610,000 shares
of UICI common stock at a purchase price of $5.25 per share, or $8.45 million in
the aggregate. The purchase price for the shares was paid by delivery to UICI of
the Employee Plan's $8.45 million promissory note (the "Plan Note"), which
matures in three years and is secured by a pledge of the purchased shares. The
shares of UICI common stock purchased with the Plan Note are held in a suspense
account for allocation among participants as and when the Company's matching and
supplemental contributions to the ESOP are made. It is expected that the Plan
Note will be extinguished over a period of approximately two years by crediting
UICI's matching and supplemental contribution obligations under the ESOP feature
of the Employee Plan against principal and interest due on the Plan Note.
As and when UICI makes matching and supplemental contributions to the ESOP
by allocating to participants' accounts the shares held in the suspense account,
the Company will record additional compensation expense equal to the excess, if
any, between the fair value of the shares allocated and $5.25 per share. The
allocated shares are considered outstanding for purposes of the computation of
earnings per share. The Company recognized additional compensation expense
related to the internal leverage feature of the ESOP in the amount of $278,000
in the three and nine months ended September 30, 2000, which expense is included
as stock appreciation expense on the Company's consolidated condensed statement
of income.
The fair value of the 1.4 million unallocated ESOP shares totaled $9.7
million at September 30, 2000.
AGENT STOCK ACCUMULATION PLANS
The Company sponsors a series of stock accumulation plans (the "Agent
Plans") for the benefit of the independent insurance agents and independent
sales representatives associated with UGA - Association Field Services, New
United Agency, Cornerstone Marketing of America, CLD Agency and CFLD Association
Field Services agency field forces.
The Agent Plans generally combine an agent-contribution feature and a
Company-match feature. The agent-contribution feature generally provides that
eligible participants are permitted to allocate a portion (subject to prescribed
limits) of their commissions or other compensation earned on a monthly basis to
purchase shares of UICI common stock at the fair market value of such shares at
the time of purchase. Under the Company-match feature of the Agent Plans,
participants are eligible to have posted to their respective Agent Plan accounts
book credits in the form of equivalent shares generally equal to a number of
shares of UICI common stock purchased by the participant under the
agent-contribution feature of the Agent Plans. The "matching credits" vest over
time (generally in prescribed increments over a ten-year period, commencing the
plan year following the plan year during which contributions are first made
under the agent-contribution feature), and vested matching credits in a
participant's plan account on a prescribed date of each year are converted from
book credits to an equivalent number of shares of UICI common stock purchased by
the administrator of the Agent Plans. Matching credits forfeited by participants
no longer eligible to participate in the Agent Plans are reallocated each year
among eligible participants and credited to eligible participants' Agent Plan
accounts.
The Agent Plans do not constitute qualified plans under Section 401(a) of
the Internal Revenue Code of 1986 or
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<PAGE> 26
employee benefit plans under the Employee Retirement Income Security Act of
1974, and the Agent Plans are not subject to the vesting, funding,
nondiscrimination and other requirements imposed on such plans by the Internal
Revenue Code and ERISA.
Effective July 1, 2000, the Company agreed to issue an aggregate of
2,175,000 newly-issued shares of its common stock to its Agent Plans from time
to time over the next two years, at a purchase price of $5.25 per share, or
$11.4 million in the aggregate. In lieu of purchasing UICI shares in the open
market, the Company will utilize these newly issued shares to satisfy its
commitment under the Company-match feature of the Agent Plans. In addition, for
approximately the next two years, the Company has agreed to grant matching
credits to participating agents' accounts in the Agent Plans based on the lesser
of $5.25 per share or fair market value.
For so long as the Company utilizes these newly-issued shares to satisfy its
commitment under the Company-match feature of the Agent Plans, for financial
reporting purposes the Company will recognize additional compensation expense in
any period in an amount equal to the change in fair value of the shares of UICI
common stock. In the three and nine months ended September 30, 2000, the Company
recognized additional compensation expense associated with this feature of the
Agent Plans in the amount of $232,000, which expense is included as stock
appreciation expense on the Company's consolidated condensed statement of
income. Shares purchased by the administrator to fund vested matching credits
are considered outstanding for purposes of the computation of earnings per
share.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
UNITED CREDITSERV - DISCONTINUED OPERATION
Through the Company's United CreditServ, Inc. subsidiary ("United
CreditServ"), the Company marketed credit support services to individuals with
no, or troubled, credit experience and assisted such individuals in obtaining a
nationally recognized credit card. The activities of United CreditServ were
conducted primarily through its wholly-owned subsidiaries United Credit National
Bank ("UCNB") (a special purpose national bank, based in Sioux Falls, South
Dakota, chartered solely to hold credit card receivables); Specialized Card
Services, Inc. (provider of account management and collections services for all
of the Company's credit card programs); United Membership Marketing Group, Inc.
("UMMG") (a Lakewood, Colorado-based provider of marketing, administrative and
support services for the Company's credit card programs); and UICI Receivables
Funding Corporation ("RFC"), a single-purpose, bankruptcy-remote entity through
which certain credit card receivables have been securitized.
Through 1999, United CreditServ marketed its credit card programs and access
to a credit card through the American Fair Credit Association LLC ("AFCA"), an
independent membership association that provided credit education programs and
other benefits, and American Credit Educators LLC ("ACE"), which marketed credit
education materials and had a marketing agreement with UCNB to solicit credit
card applications. AFCA applicants were required to meet certain requirements
(including payment of initiation and monthly membership fees) in order to become
members of AFCA, and, in order to obtain a credit card, to meet underwriting
criteria established by UCNB.
Several developments during 2000 have materially affected the operations of
the Company's United CreditServ subsidiary.
Sale of United CreditServ Operations
On September 29, 2000, the Company completed the sale of substantially all
of the non-cash assets associated with its United CreditServ credit card unit,
including its credit card receivables portfolios and its Sioux Falls, South
Dakota servicing operations, for a cash sales price of approximately $124.0
million. In addition to the cash sales price received at closing, the
transaction contemplates an incentive cash payment contingent upon the
post-closing performance of the ACE credit card portfolio over a one-year
period. The Company has retained United CreditServ's Texas collections facility,
and UICI continues to hold United CreditServ's building and real estate in
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<PAGE> 27
Sioux Falls, South Dakota. The Company has leased the Sioux Falls facilities to
the purchaser of the credit card assets pursuant to a long-term lease. UICI also
retained the right to collect approximately $250 million face amount of
previously written off credit card receivables. In connection with the sale,
UICI or certain of its subsidiaries retained substantially all liabilities
associated with its credit card business, including liability for payment of all
certificates of deposit issued by UCNB, merchant holdback liabilities,
liabilities associated with pending litigation and other contingencies.
In light of UICI's continuing difficulties with its United CreditServ unit,
in March 2000 the Board of Directors of UICI determined, after a thorough
assessment of the unit's prospects, that UICI would exit from its United
CreditServ sub-prime credit card business and, as a result, the United
CreditServ unit has been reflected as a discontinued operation for financial
reporting purposes. At December 31, 1999, the Company established a liability
for loss on the disposal of the discontinued operation in the amount of $130
million (pre-tax), which liability was included in net liabilities of
discontinued operations. The liability for loss on disposal established by the
Company at December 31, 1999 represented the Company's then-current estimate of
all additional losses (including asset write-downs, the estimated loss on the
sale of the business and/or the assets and continuing operating losses through
the date of sale) that it then believed it would incur as part of any sale of
the United CreditServ unit. Reflecting the terms of the Company's then-pending
sale of its United CreditServ business, during the quarter ended June 30, 2000
the Company recorded an additional pre-tax loss, and correspondingly increased
the liability for loss on the disposal of the discontinued operation, in the
amount of $36.0 million ($23.4 million net of tax). During the quarter and
nine-month periods ended September 30, 2000, the discontinued operation incurred
a loss from operations in the amount of approximately $95.6 million and $129.0
million, respectively, which losses were charged to the liability for loss on
disposal. The Company currently estimates that the remaining liability for loss
on disposal will be adequate to absorb all remaining costs of disposal,
including all continuing costs associated with the Company's Texas collections
facility.
At December 31, 1999 and September 30, 2000, UCNB had $290.0 million and
$78.9 million, respectively, of certificates of deposits outstanding, and UCNB
held approximately $110.5 million and $98.2 million, respectively, in cash, cash
equivalents and short term U.S. Treasury securities. Following the sale of the
Company's United CreditServ unit, UCNB initiated a program to prepay all of its
outstanding certificates of deposit, and all such deposit liabilities were
discharged as of October 23, 2000. Following the prepayment of all deposit
liabilities of UCNB, at October 24, 2000 UCNB held cash, cash equivalents and
U.S. Treasury securities in the amount of $29.4 million.
On October 10, 2000, the shareholders of UCNB approved a formal voluntary
plan of liquidation to be filed with and approved by the Office of the
Comptroller of the Currency, and UICI currently anticipates that the voluntary
liquidation of UCNB, including the provision for all remaining liabilities and
distribution to UICI of all residual cash, will be completed on or before
December 31, 2000. As part of the plan of liquidation, and in accordance with
the terms of the June Consent Orders, UICI agreed to assume and indemnify UCNB
from and against (a) any and all remaining residual liabilities resulting from
any of the receivables portfolios of UCNB, (including any contingent reserves
for unfunded commitments and any merchant holdback accounts, and any accrued
amounts payable to any third party for customer kits, holdbacks or other
payables), and (b) any and all remaining contingent liabilities of UCNB,
including liability associated with pending and future litigation.
Effective July 31, 2000, UCS sold all of its outstanding shares of UMMG for
a purchase price in the amount of $25,000 in cash, with an additional amount of
up to $2.0 million payable over the next five years, contingent upon the
performance of the business. The purchaser is controlled by the former President
of UMMG. UMMG is a Lakewood, Colorado-based provider of marketing,
administrative and support services for the Company's credit card programs. In
addition, on July 31, 2000, UICI signed a credit agreement with the purchaser,
pursuant to which it has agreed to lend the purchaser up to $1.0 million on a
revolving basis. As of October 24, 2000, $800,000 had been advanced under the
credit agreement.
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<PAGE> 28
Significant Cash Infusions to UCNB
The 1999 and continuing operating losses at United CreditServ have had a
material adverse effect upon the liquidity and cash flows of the Company. Since
the Company first announced losses at its United CreditServ unit in December
1999, UICI through United CreditServ has contributed to UCNB as capital an
aggregate of $165.9 million in cash. UICI has funded these cash contributions
and other cash needs with the proceeds of sale of investment securities, a
borrowing from a third party in the amount of $24.0 million funded in July 2000,
approved sales of assets from the parent company to the Company's regulated
insurance company subsidiaries completed in June and July 2000 generating cash
proceeds in the aggregate amount of approximately $26.2 million, dividends in
the amount of $19.0 million paid during the six months ended June 30, 2000 from
The Chesapeake Life Insurance Company ("CLICO") (one of its regulated insurance
company subsidiaries), the sale to The MEGA Life and Health Insurance Company of
CLICO for $19.0 million in July 2000, cash proceeds in the amount of $21.8
million from the disposition of its National Motor Club unit completed in July
2000, and cash on hand. See "Liquidity and Capital Resources."
Comptroller of the Currency Consent Orders and UCNB Capital Plan
UCNB agreed to the issuance of and is subject to the terms of Consent Orders
issued by the OCC in February and June, 2000. In addition, the Company and UCS
agreed to the issuance of and are subject to the terms of separate Consent
Orders issued by the OCC in June 2000. See Note B of Notes to Consolidated
Condensed Financial Statements.
ACE and AFCA Litigation
In February 2000, ACE and AFCA filed suit against UICI and UCNB (American
Credit Educators, LLC v. United Credit National Bank and UICI and American Fair
Credit Association, Inc. v. United Credit National Bank and UICI, each pending
in the United States District Court for the District of Colorado) alleging,
among other things, that UCNB has breached its agreements with ACE and AFCA and
claiming damages in an indeterminate amount. ACE and AFCA are each controlled by
Phillip A. Gray, the former head of UICI's credit card operations. The Company
believes that it has meritorious defenses to the suits and intends to defend the
cases vigorously. See Note H of Notes to Consolidated Condensed Financial
Statements.
ACADEMIC MANAGEMENT SERVICES CORP. (FORMERLY EDUCATIONAL FINANCE GROUP, INC.)
The operating loss in the three and nine month periods ended September 30,
2000 resulted primarily from the factors described in the results of continuing
operations. In the three-month and nine-month periods ended September 30, 2000,
Academic Management Services Corp. (formerly Educational Finance Group, Inc.)
("AMS") incurred an operating loss in the amount of $3.0 million and $12.3
million, respectively, compared to operating income of $123,000 for the three
months ended September 30, 1999 and an operating loss of $3.0 million for the
nine months ended September 30, 1999. Included in operating results for the
three-month and nine-month periods ended September 30, 2000 were pre-tax gains
from the sale of student loans in the amount of $2.3 million and $6.1 million,
respectively.
AMS has engaged Lehman Brothers Inc. and Bank of America Securities Inc. to
assist AMS in evaluating various strategic alternatives.
HEALTHAXIS.COM INVESTMENT
Throughout 1999 the Company held substantially all of the capital stock of
Insurdata Incorporated ("Insurdata"), a provider of Internet-enabled, integrated
proprietary software applications that address the workflow and processing
inefficiencies embedded in the healthcare insurance industry. On January 7,
2000, Insurdata merged with and into HealthAxis.com, Inc. ("HealthAxis.com"), a
web-based retailer of health insurance products and related consumer services.
Following the merger (the "HealthAxis Merger"), the Company held approximately
44%, and HealthAxis, Inc. (formerly Provident American Corporation) ("HAI") held
approximately 28.1%, of the issued and outstanding capital stock of
HealthAxis.com, the surviving corporation in the merger.
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<PAGE> 29
On March 14, 2000, the Company sold in a private sale to an institutional
purchaser 2,000,000 shares of HealthAxis.com common stock. In connection with
the sale of such shares, the Company recognized a gain in the amount of $26.3
million. Giving effect to such sale, the Company holds 39% of the issued and
outstanding shares of common stock of HealthAxis.com.
The Company accounts for its investment in HealthAxis.com utilizing the
equity method and recognizes its ratable share of HealthAxis.com's income and
loss (computed prior to amortization of goodwill recorded by HealthAxis.com in
connection with the HealthAxis Merger). At September 30, 2000, the Company's
carrying value of its investment in HealthAxis.com was $12.8 million,
representing its carryover investment in Insurdata plus the Company's investment
in shares of HealthAxis.com acquired prior to the HealthAxis Merger and its
investment in the HAI convertible subordinated debentures, reduced by the
Company's cost of the shares of HealthAxis.com sold in March 2000 and by the
Company's equity in the losses of HealthAxis.com for the nine months ended
September 30, 2000 in the amount of $16.3 million. The Company has an additional
$5.0 million in preferred stock of HealthAxis.com which is reflected in equity
securities in the balance sheet.
On January 26, 2000, HAI and HealthAxis.com entered into an Agreement and
Plan of Merger (as amended as of September 29, 2000, the "Merger Agreement"),
pursuant to which HAI has agreed to acquire all of the outstanding shares of
HealthAxis.com that HAI does not currently own through the merger of
HealthAxis.com with a wholly-owned subsidiary of HAI (the "Proposed HAI
Merger"). Upon consummation of the Proposed HAI Merger, HealthAxis.com
shareholders (including the Company) would receive 1.334 shares of HAI common
stock for each share of HealthAxis.com common stock outstanding. The
consummation of the Proposed HAI Merger is subject to various conditions,
including the approval of both HAI and HealthAxis.com shareholders, as well as
regulatory approval.
On September 29, 2000, UICI purchased from a third party $1.667 million
principal amount of HAI 2% convertible subordinated debentures and a warrant to
purchase 12,291 shares of HAI common stock at an exercise price of $3.01 per
share. The debentures mature in September 2005 and are convertible into 185,185
shares of HAI common stock.
If the Proposed HAI Merger proceeds in accordance with its current terms,
the Company will hold approximately 23.9 million shares of HAI common stock
(including the 185,185 shares issuable upon conversion of the HAI convertible
subordinated debentures), representing approximately 45.4% of the issued and
outstanding shares of HAI.
Effective June 30, 2000, HealthAxis.com sold to Digital Insurance, Inc.
("Digital") certain assets used in connection with HealthAxis.com's retail
website, including the retail website user interface, all existing in-force
insurance policies, certain physical assets, and rights under certain
agreements, including, but not limited to portal marketing agreements and
agreements related to HealthAxis.com's affiliate partner program. Among other
consideration received by HealthAxis.com in the transaction, Digital issued to
HealthAxis.com 11% of the outstanding shares of common stock of Digital (on a
fully diluted basis).
ISSUANCE OF COMMON STOCK TO EMPLOYEE AND AGENT PLANS
In August 2000, the Company issued 1,610,000 shares of UICI common stock to
its employee stock ownership and savings plan at a purchase price of $5.25 per
share, or $8.45 million in the aggregate. Effective July 1, 2000, the Company
also agreed to issue an aggregate of 2,175,000 newly-issued shares of its common
stock from time to time over the next two years, at a purchase price of $5.25
per share, or $11.4 million in the aggregate, to its stock accumulation plans
created for the benefit of its independent agents. The aggregate of 3,785,000
shares when issued will represent approximately 7.5% of the issued and
outstanding shares of UICI common stock. See Note K of Notes to Consolidated
Condensed Financial Statements.
RESULTS OF CONTINUING OPERATIONS
The Company's business segments included in continuing operations are: (i)
Insurance, which includes the businesses of the Self Employed Agency Division,
the Student Insurance Division, the OKC Division, the Special Risk Division and
the National Motor Club Division (which the Company sold July 27, 2000); (ii)
Financial
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<PAGE> 30
Services, which includes the businesses of Academic Management Services Corp.
(formerly Educational Finance Group, Inc.) and the Company's UICI Administrators
operations (consisting of the operations of UICI Administrators (a company
engaged in the business of providing third party benefits administration,
including eligibility and billing reconciliation), Insurdata Marketing Services,
LLC (a subsidiary of the Company engaged in the business of marketing third
party benefits administration services) and Healthcare Management
Administrators, Inc. (which the Company acquired on February 3, 2000)) and other
business units, (iii) the Company's investment in HealthAxis.com, Inc. and (iv)
Other Key Factors. Allocation of investment income is based on a number of
assumptions and estimates and the business segments reported operating results
would change if different methods were applied. Segment revenues include
premiums and other policy charges and considerations, net investment income, and
fees and other income.
Revenues, income from continuing operations before federal income taxes
("operating income") and income from continuing operations by business segment
are summarized in the tables below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues
Insurance:
Self Employed Agency .................... $ 141,043 $ 139,717 $ 416,545 $ 429,735
Student Insurance ....................... 19,050 24,668 74,754 80,462
OKC Division ............................ 23,175 23,844 69,756 71,389
Special Risk ............................ 13,774 14,139 34,006 42,944
National Motor Club ..................... 3,340 7,619 21,697 21,961
------------- ------------- ------------- -------------
200,382 209,987 616,758 646,491
Financial Services:
Academic Management Services ............ 40,408 27,934 121,396 73,956
UICI Administrators ..................... 5,347 12,175 14,704 35,010
Other Business Units .................... 309 238 857 587
------------- ------------- ------------- -------------
46,064 40,347 136,957 109,553
Gain on sale of HealthAxis.com shares ..... -- -- 26,300 --
Other Key Factors ......................... 9,874 8,847 26,009 26,187
Intersegment Eliminations ................. (1,079) (8,258) (3,604) (25,647)
------------- ------------- ------------- -------------
Total Revenues from continuing operations .... $ 255,241 $ 250,923 $ 802,420 $ 756,584
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Income (loss) from continuing operations before federal income taxes:
Insurance:
Self Employed Agency ............................................... $ 17,536 $ 18,507 $ 53,353 $ 35,906
Student Insurance .................................................. (979) 279 (888) 1,782
OKC Division ....................................................... 3,700 3,807 10,105 14,252
Special Risk ....................................................... (135) (471) 408 131
National Motor Club ................................................ 63 1,422 2,471 3,677
---------- ---------- ---------- ----------
20,185 23,544 65,449 55,748
Financial Services:
Academic Management Services ....................................... (3,022) 123 (12,274) (3,045)
UICI Administrators ................................................ (600) 1,128 (740) 2,283
---------- ---------- ---------- ----------
(3,622) 1,251 (13,014) (762)
Gain on sale of HealthAxis.com shares ................................ -- -- 26,300 --
HealthAxis.com operating loss ........................................ (1,115) -- (16,269) --
Other Key Factors .................................................... 2,371 (696) 7,525 6,495
---------- ---------- ---------- ----------
Total income from continuing operations before federal income
taxes and Goodwill amortization ...................................... 17,819 24,099 69,991 61,481
---------- ---------- ---------- ----------
Less Goodwill amortization .............................................. 1,333 2,203 4,570 4,609
---------- ---------- ---------- ----------
Total income from continuing operations before federal
income taxes ......................................................... $ 16,486 $ 21,896 $ 65,421 $ 56,872
========== ========== ========== ==========
</TABLE>
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<PAGE> 31
Three and Nine Month Periods ended September 30, 2000 Compared to Three and Nine
Month Periods ended September 30, 1999
For the three months ended September 30, 2000, the Company generated
revenues and income from continuing operations of $255.2 million and $9.0
million ($0.19 per diluted share), respectively, compared to revenues and income
from continuing operations of $250.9 million and $15.3 million ($0.32 per
diluted share), respectively, for the three months ended September 30, 1999. For
the nine months ended September 30, 2000, the Company generated revenues and
income from continuing operations of $802.4 million and $35.2 million ($0.74 per
diluted share), respectively, compared to revenues and income from continuing
operations of $756.6 million and $37.4 million ($0.79 per diluted share),
respectively, for the nine months ended September 30, 1999. Included in income
from continuing operations in the nine month period ended September 30, 2000 was
a one-time pre-tax gain from the sale of HealthAxis.com shares in the amount of
$26.3 million ($17.1 million net of tax, or $0.36 per diluted share) and the
Company's equity in losses on its HealthAxis.com investment in the amount of
$16.3 million ($10.6 million net of tax benefit, or ($0.22) per diluted share.
Excluding such items, the Company's income from continuing operations for the
nine months ended September 30, 2000 was $28.7 million ($0.60 per diluted
share).
During the three-month and nine-month periods ended September 30, 2000,
United CreditServ incurred a loss from operations in the amount of approximately
$95.6 million and $129.0 million, respectively, which losses were charged to the
liability for loss on disposal established in December 31, 1999 in connection
with the designation of United CreditServ as a discontinued operation for
financial reporting purposes. Based on the terms of its then-pending sale of its
United CreditServ unit, during the three months ended June 30, 2000 the Company
recorded an additional pre-tax loss, and correspondingly increased the liability
for loss on the disposal of the discontinued operation, in the amount of $36.0
million ($23.4 million net of tax, or $0.49 per diluted share).
For the three months and nine months ended September 30, 2000, UICI reported
net income of $9.0 million ($0.19 per diluted share) and $11.8 million ($0.25
per diluted share), respectively, compared to a net loss in the amount of $13.8
million ($0.29 per diluted share) and $20.8 million ($0.43 per diluted share) in
the corresponding 1999 periods.
Self-Employed Agency ("SEA") Division
Operating income for the three months ended September 30, 2000 for the SEA
Division decreased to $17.5 million from $18.5 million for the comparable 1999
period, and for the nine months ended September 30, 2000 operating income
increased to $53.4 million from $35.9 million for the comparable period in 1999.
The decrease in operating income for the three months ended September 30, 2000
was due principally to additional costs incurred to enhance the SEA Division's
technology information gathering process. The significant increase in operating
income for the nine months ended September 30, 2000 compared to the
corresponding 1999 period was principally due to improved loss ratios on the
Company's managed care products and continued success in directing a larger
portion of new sales to traditional, higher margin, indemnity products, with
which the Company has not experienced the pricing problems it has experienced
with its managed care products. Revenues for the three months ended September
30, 2000 for the SEA Division increased to $141.0 million from $139.7 million
for the same period in 1999, and for the nine months ended September 30, 2000
revenues decreased to $416.5 million from $429.7 million for the same period in
1999. The improvement in revenues during the three months ended September 30,
2000 when compared to the same period in 1999 was the result of the continued
success in the increase in new business sales.
Student Insurance Division
The Company's Student Insurance Division incurred an operating loss for the
three months and nine months ended September 30, 2000 in the amount of $979,000
and $888,000, respectively, compared to operating income of $279,000 and $1.8
million, respectively, for the comparable periods in the prior year. The
decrease in operating income continued to reflect increased expenses associated
with new system implementations and lower margins resulting from increased loss
ratios on the 1998-1999 policy year. Revenue for the three months ended
September 30, 2000 from the Student Insurance Division decreased to $19.1
million from $24.7 million in the corresponding 1999 period, and for the nine
months ended September 30, 2000, revenue decreased to $74.8 million from $80.4
million in the corresponding 1999 period.
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OKC Division
Operating income for the OKC Division for the three months ended September
30, 2000 decreased to $3.7 million from $3.8 million for the same period in
1999, and for the nine months ended September 30, 2000 operating income
decreased to $10.1 million from $14.3 million for the same period in 1999.
Revenues for the three months ended September 30, 2000 for the OKC Division
decreased to $23.2 million from $23.8 million in the comparable 1999 period, and
for the nine months ended September 30, 2000 revenues decreased to $69.8 million
from $71.4 million for the comparable period in 1999.
The decrease in operating income for the nine months ended September 30,
2000 compared to the same period in 1999 was attributable to several factors.
The OKC Division's life insurance claim benefits increased over claim benefits
in the corresponding period of the prior year. The Company believes that the
higher level of claims in the life business was due to normal variations in the
business for the closed life blocks. An additional loan reserve was established
for the student loans made by the College Fund Life unit on its life insurance
product. Credit disability insurance claim reserves were increased based on
claims experience, and a reserve for bad debts on premium receivables was
established. Operating income for the workers compensation line of business
decreased as a result of lower premium rates, which has been occurring in this
product line in Oklahoma for the past two years.
Special Risk Division
Operating losses for the three months ended September 30, 2000 for the
Special Risk Division (consisting of certain niche health-related products,
including "stop loss", marine crew accident, organ transplant and international
travel accident products) were $135,000 compared to an operating loss of
$471,000 in the comparable 1999 period. For the nine-month period ended
September 30, 2000, operating income increased to $408,000 from $131,000 for the
same period in 1999. Revenue for the three months ended September 30, 2000
decreased to $13.8 million from $14.1 million in the corresponding 1999 period,
and for the nine month period ended September 30, 2000 revenue decreased to
$34.0 million from $42.9 million from the comparable period in 1999. The
decrease in revenue in the 2000 periods was attributable to (a) the elimination
of unprofitable blocks of business and implementation of necessary rate
increases on stop-loss accounts and other lines of business causing customers to
terminate their policies and (b) the implementation of Reinsurance and Specific
Retrocession Agreements that effectively permit the Company to transfer the
insurance revenue and risk portion of the Special Risk business managed by
Excess, Inc. (one of the Company's managing general underwriters) to a new
insurance carrier. This transfer was effective January 1, 2000, and will occur
monthly as the business renews over the life of the policies. In addition, the
Company completed the sale of Excess, Inc. to the Excess management team. The
Company recognized a gain in the three months ended September 30, 2000 in the
amount of $161,000 (pre-tax) in connection with this sale.
National Motor Club
On July 27, 2000, the Company completed the sale of its 97% interest in NMC
Holdings, Inc. (the parent of National Motor Club of America, Inc.) to an
investor group consisting of members of the family of Ronald L. Jensen
(including Mr. Jensen). See Note J of Notes to the Consolidated Condensed
Financial Statements.
Operating income for the three months ended September 30, 2000 for National
Motor Club decreased to $63,000 from $1.4 million for the comparable period in
1999, and for the nine months ended September 30, 2000 operating income
decreased to $2.5 million from $3.7 million for the same period in 1999.
Revenues for the three-month period ended September 30, 2000 decreased to $3.3
million from $7.6 million for the same period in 1999, and for the nine month
period ended September 30, 2000, revenues decreased to $21.7 million from $22.0
million for the comparable period in 1999. The decrease in operating income and
revenues reflects the sale of National Motor Club in July 2000.
Academic Management Services Corp. (formerly Educational Finance Group,
Inc.)
In the three months ended September 30, 2000, AMS incurred an operating loss
in the amount of $3.0 million, compared to operating income of $123,000 in the
three months ended September 30, 1999. Operating losses were
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$12.3 million for the nine months ended September 30, 2000, compared to an
operating loss of $3.0 million for the comparable period of 1999.
Revenues for the three months and nine months ended September 30, 2000 for
AMS were $40.4 million and $121.4 million, respectively, compared to revenues of
$27.9 million and $74.0 million, respectively, for the comparable periods in the
prior year. The increase in revenue was attributable to the increased
origination and interest income derived from higher student loan volume, and fee
income from the tuition budgeting line of business that was acquired in July
1999. Revenues from tuition budgeting for the three months and nine months ended
September 30, 2000 were $7.9 million and $17.2 million, respectively, compared
to $3.7 million for both the comparable three month and nine month periods in
the prior year.
Student loan interest income, net of costs of directly associated
borrowings, was $9.6 million for the nine months ended September 30, 2000,
compared to $9.5 million for the nine months ended September 30, 1999. New loans
aggregating $519 million were originated during the nine months ended September
30, 2000 compared to $479 million for the comparable period of 1999. AMS sold
student loans with an aggregate principal amount of $575 million during the nine
months ended September 30, 2000. Realized gains on sales of loans were $6.1
million during the nine months ended September 30, 2000, compared to gains of
$3.5 million realized in the comparable period of 1999.
AMS markets PLUS loans through direct mail and telemarketing programs
directly to prospective student and parent borrowers. Until September 2000,
these marketing activities were conducted primarily through the Company's San
Diego, California marketing unit. On September 17, 2000, AMS announced that the
California facility would be closed and the PLUS loan marketing activities would
be consolidated into AMS's Swansea, Massachusetts headquarters. Management
believes that these changes will result in a more cost-effective marketing
effort. In the three months ended September 30, 2000, AMS recorded a charge to
income in the amount of $1.5 million representing expenses incurred in
connection with the exit from its San Diego unit. These costs included
termination benefits for substantially all of the unit's 90 employees and the
cost of certain contractual obligations of the unit. During the three and nine
months ended September 30, 2000, AMS originated approximately $79.6 million and
$201.6 million, respectively, of PLUS loans, and incurred approximately $2.0
million and $5.1 million, respectively, of costs (excluding exit costs) in
connection with originating such loans, of which $796,000 and $2.1 million was
capitalized in the three and nine month periods, respectively.
During the three and nine months ended September 30, 2000, AMS's Academic
Management Services, Inc. subsidiary, acquired in July 1999, reported net income
in the amount of $1.4 million and $2.0 million, respectively, including gains on
sale of student loans of $60,000 and $2.3 million in the three and nine months
ended September 30, 2000, respectively. Academic Management Services, Inc.
provides tuition budgeting plans.
During the three month and nine month periods ended September 30, 2000,
AMS's student loan servicing operations realized operating income of $352,000
and $374,000. AMS continues to explore means to reduce ongoing operating costs
and increase operating efficiencies at this unit.
During the nine months ended September 30, 2000, AMS incurred charges in the
aggregate amount of approximately $4.5 million associated with the management
transition effected in January 2000, the relocation of AMS's headquarters from
South Yarmouth, Massachusetts to Swansea, Massachusetts, the write-off of
facilities development costs and the write-off of previously capitalized costs
incurred in connection with AMS's Internet strategy and other business
initiatives undertaken by prior management. All of these costs were incurred in
the six months ended June 30, 2000.
During the nine months ended September 30, 2000, an increase in prevailing
interest rates had a negative effect on the cost of financing AMS's student loan
portfolio. In addition, AMS incurred a significantly reduced interest rate
spread on its portfolio of supplemental loans to parents of dependent students
("PLUS loans"). At March 31, June 30 and September 30, 2000, AMS held PLUS loans
in the aggregate principal amount of $371 million, $270 million and $253
million, respectively. The interest rate yield on PLUS loans is set annually
beginning July 1 by regulation at a fixed rate. The rate was 7.72% from January
1 to June 30, 2000 and was reset to 8.99% beginning July 1, 2000. If the
interest rate yield exceeds the maximum allowable rate chargeable to the
borrower, the holder of PLUS loans is eligible for government subsidized,
special allowance payments for the year. The fixed interest rate
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yield in the nine months ended September 30, 2000 was below the maximum rate.
For the twelve months beginning July 1, 2000, the fixed rate will be below the
maximum rate and a holder of PLUS loans will not be entitled to special
allowance payments. AMS finances the cost of such loans at floating interest
rates which are reset monthly and quarterly through its structured finance
facilities.
During the first quarter of 2000, AMS incurred additional expenses in
connection with a sale of student loans in December 1999. The $280 million
proceeds of this sale, which were received in late December 1999, were invested
by AMS at short term rates until January 15, 2000, at which time the borrowings
associated with the sold student loan assets could, in accordance with their
terms, be paid down. These borrowings bore interest at rates in excess of
short-term investment rates of approximately 2.5%.
UICI Administrators
The Company has classified the operations of UICI Administrators, Inc. (a
company engaged in the business of providing third party benefits
administration, including eligibility and billing reconciliation), Insurdata
Marketing Services, LLC (a subsidiary of the Company engaged in the business of
marketing third party benefits administration services) and Healthcare
Management Administrators, Inc. (which the Company acquired on February 3, 2000)
as its UICI Administrators business division. In the three months ended
September 30, 2000 UICI Administrators incurred an operating loss of $600,000
compared to operating income of $1.1 million in the comparable 1999 period, and
for the nine months ended September 30, 2000, UICI Administrators incurred an
operating loss of $740,000 compared to operating income of $2.3 million in the
corresponding 1999 period. Revenues for the three months ended September 30,
2000 decreased to $5.3 million from $12.2 million in the corresponding 1999
period, and for the nine month period ended September 30, 2000 revenues
decreased to $14.7 million from $35.0 million in the corresponding period of the
prior year.
The decrease in operating income and revenues at the Company's UICI
Administrators division was primarily attributable to the timing of the
contribution of substantially all of the operations of Insurdata Incorporated
(other than the operations of Insurdata Marketing Services, LLC) to
HealthAxis.com in connection with the Insurdata-HealthAxis.com merger, which was
completed in January 2000. The results of operations of Insurdata Incorporated
had previously been included in the results of operations of the UICI
Administrators division. Excluding the 1999 results of operations of Insurdata
Incorporated transferred to HealthAxis.com, for the three months and nine months
ended September 30, 1999, revenues for the UICI Administrators division were
$1.3 million and $4.1 million, respectively, and operating income for the
division was $184,000 and $410,000, respectively.
Investment in HealthAxis.com, Inc.
During 1999 the Company held substantially all of the capital stock of
Insurdata, a provider of Internet-enabled, integrated proprietary software
applications that address the workflow and processing inefficiencies embedded in
the healthcare insurance industry. On January 7, 2000, Insurdata merged with and
into HealthAxis.com, a web-based retailer of health insurance products and
related consumer services. Following the merger (the "HealthAxis Merger"), the
Company held approximately 44%, and HealthAxis, Inc. (formerly Provident
American Corporation) ("HAI") held approximately 28.1%, of the issued and
outstanding capital stock of HealthAxis.com, the surviving corporation in the
merger.
On March 14, 2000, the Company sold in a private sale to an institutional
purchaser 2,000,000 shares of HealthAxis.com common stock. In connection with
the sale of such shares, the Company recognized a gain in the amount of $26.3
million. Giving effect to such sale, the Company holds 39% of the issued and
outstanding shares of common stock of HealthAxis.com.
The Company accounts for its investment in HealthAxis.com utilizing the
equity method and, accordingly, recognizes its ratable share of HealthAxis.com's
income and loss (computed prior to amortization of goodwill recorded by
HealthAxis.com in connection with the HealthAxis Merger). The Company's equity
in the loss of HealthAxis.com in the three months and nine months ended
September 30, 2000 was $1.1 million and $16.3 million, respectively.
HealthAxis.com continues to incur operating losses attributable to significant
marketing, development and other start-up expenses. HealthAxis.com also incurred
losses in the nine months ended September 30, 2000 in
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connection with the sale of its retail web site and related assets. The
Company's share of such losses ($4.2 million) is included in the Company's
equity in losses for the nine months ended September 30, 2000.
On September 29, 2000, UICI purchased from a third party $1.667 million
principal amount of HAI 2% convertible subordinated debentures and a warrant to
purchase 12,291 shares of HAI common stock at an exercise price of $3.01 per
share. The debentures mature in September 2005 and are convertible into 185,185
shares of HAI common stock.
Other Key Factors
The Other Key Factors category includes investment income not allocated to
the other segments, interest expense on corporate debt, general expenses
relating to corporate operations, realized gains or losses on sale of
investments and the operations of the Company's AMLI subsidiary. Operating
income for the three months ended September 30, 2000 associated with this
category increased to $2.4 million from an operating loss of $696,000 for the
comparable period in 1999, and for the nine months ended September 30, 2000
operating income increased to $7.5 million from $6.5 million in the same period
in 1999. The increase was primarily due to an increase in realized gains on sale
of investments which were partially offset by an increase in investment income
not allocated to the other segments and an increase in interest on corporate
borrowings.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Historically, the Company's primary sources of cash have been premium
revenues from policies issued, investment income, fees and other income,
deposits to fund the credit card receivables, and borrowings to fund student
loans. The primary uses of cash have been payments for benefits, claims and
commissions under those policies, operating expenses and the funding of credit
card receivables and student loans. In the nine-month periods ended September
30, 2000 and 1999, net cash used in and provided by operations totaled
approximately $135.3 million and $182.7 million, respectively.
UICI is a holding company, the principal assets of which are its investments
in its separate operating subsidiaries, including its regulated insurance
subsidiaries. The holding company's ability to fund its cash requirements is
largely dependent upon its ability to access cash, by means of dividends or
other means, from its subsidiaries. The laws governing the Company's insurance
subsidiaries restrict dividends paid by the Company's domestic insurance
subsidiaries in any year. Inability to access cash from its subsidiaries could
have a material adverse effect upon the Company's liquidity and capital
resources.
The operating losses at United CreditServ have had a material adverse effect
upon the liquidity and cash flow of the Company. Since January 1, 2000, UICI has
contributed to United CreditServ an aggregate of $165.9 million in cash,
including $50.0 million contributed pursuant to the UCNB Capital Plan (see
discussion below). In addition, on June 28, 2000, the Company funded an $8.0
million principal prepayment owing on its bank credit facility, on June 1, 2000
the Company made a mandatory principal payment on its senior notes outstanding
in the amount of $3.95 million, and effective July 27, 2000 the Company prepaid
$6.0 million owing to an affiliated lender (see Note J to Notes to Consolidated
Condensed Financial Statements). UICI has funded these cash contributions and
other cash needs with the proceeds of sale of investment securities, a borrowing
from a third party in the amount of $24.0 million funded in July 2000, approved
sales of assets from the parent company to the Company's regulated insurance
company subsidiaries completed in June and July 2000 generating cash proceeds in
the aggregate amount of approximately $26.2 million, dividends in the amount of
$19.0 million paid during the six months ended June 30, 2000 from CLICO, the
sale to The MEGA Life and Health Insurance Company of CLICO for $19.0 million in
July 2000, cash proceeds in the amount of $21.8 million from the disposition of
its National Motor Club unit completed in July 2000, and cash on hand.
Based on projections as of November 3, 2000, the Company believes that its
exit from the credit card business will not require the holding company to
generate additional cash. Following the sale of its credit card assets (which
was completed on September 29, 2000), and the prepayment of all deposit
liabilities of UCNB (which was completed on October 23, 2000), at October 24,
2000 UCNB held cash, cash equivalents and U.S. Treasury
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securities in the amount of $29.4 million. Through December 31, 2000
the holding company will have additional operating cash requirements in the
amount of approximately $15.0 million. The Company currently anticipates that
these cash requirements at the holding company level will be funded by cash on
hand ($22.0 million at November 3, 2000), cash received from interest income,
residual cash to be received in connection with the liquidation of UCNB and tax
sharing reimbursements from subsidiaries (which will be partially offset by
holding company operating expenses).
There can be no assurance that the cash requirements at the holding company
level will not exceed current estimates, or that the holding company will be
able to raise sufficient cash to fund cash requirements on a timely basis.
UNITED CREDITSERV
The net credit card receivables of United CreditServ decreased from $190.7
million at December 31, 1999 to $0 at September 30, 2000, reflecting the sale of
the credit card portfolios completed on September 29, 2000.
On October 10, 2000, the shareholders of UCNB approved a formal voluntary
plan of liquidation to be filed with and approved by the Office of the
Comptroller of the Currency, and UICI currently anticipates that the voluntary
liquidation of UCNB, including the provision for all remaining liabilities and
distribution to UICI of all residual cash, will be completed on or before
December 31, 2000. As part of the plan of liquidation, and in accordance with
the terms of the June Consent Orders, UICI agreed to assume and indemnify UCNB
from and against (a) any and all remaining residual liabilities resulting from
any of the receivables portfolios of UCNB, (including any contingent reserves
for unfunded commitments and any merchant holdback accounts, and any accrued
amounts payable to any third party for customer kits, holdbacks or other
payables), and (b) any and all remaining contingent liabilities of UCNB,
including liability associated with pending and future litigation.
A liquidity and capital assurances agreement, dated May 15, 1998, between
UICI and UCNB provides that, upon demand by UCNB, UICI will purchase
certificates of deposit issued by UCNB to assure sufficient liquidity to meet
UCNB's funding demands and will contribute capital to UCNB sufficient for UCNB
to comply with its stated policy of maintaining a total (Tier I and Tier II)
risk-based capital ratio of at least 12%.
ACADEMIC MANAGEMENT SERVICES CORP.
AMS's student loan portfolio principal and interest receivable decreased to
$1.197 billion at September 30, 2000 from $1.330 billion at December 31, 1999.
AMS's student loan credit facilities had balances outstanding of $1.331 billion
at September 30, 2000. At September 30, 2000, AMS also held $133.9 million of
restricted cash in connection with its student loan portfolio. During the nine
months ended September 30, 2000, AMS originated $576 million of student loans
that were financed with new borrowings under AMS's student loan credit
facilities. AMS repaid $925 million of borrowings from principal payments
received on student loans, the proceeds of loans sold during the nine months
ended September 30, 2000, and the proceeds of loans sold in late December 1999
(which borrowings were repaid in January 2000).
In March 1998, AMS entered into a master repurchase agreement and credit
facility with a financial institution, the obligations under which are partially
guaranteed by the Company. The repurchase agreement provides for the purchase of
student loans by the financial institution, and the financial institution may
put the student loans back to AMS on the last day of each month. AMS, in turn,
has the right to require the financial institution to repurchase the student
loans on such date, with the interest rate on the credit facility reset on such
date. The credit facility provides for up to $150 million of financing and may
be increased subject to monthly confirmations. The credit facility had an
outstanding balance of $62.1 million and $318.8 million at September 30, 2000
and December 31, 1999, respectively, and bears interest at a variable annual
rate of LIBOR plus 75 basis points. The credit facility has a term of one year
and is secured by student loans originated under the Federal Family Education
Loan Program, which loans are guaranteed by the federal government or
alternative loans guaranteed by private guarantors. The financial institution
may value the loans at any time and require AMS to repay any amount by which the
market value of the loans is less than the amount required by the credit
facility.
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At September 30, 2000, AMS held $133.3 million of restricted cash
representing amounts collected under Academic Management Services, Corp.'s
tuition installment program and had a corresponding liability due to the various
educational institutions.
Effective October 1, 2000, AMS amended the terms of its unsecured term loan
facility (under which, at September 30, 2000, $21.250 million of indebtedness
was outstanding) to eliminate all financial covenants. In connection with the
amendment of the facility, the Company agreed to unconditionally guarantee the
payment when due of such indebtedness.
YEAR 2000 ISSUES
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
In June 1998, FAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued, and as amended, is required to be adopted in years
beginning after December 31, 2000. This Statement requires all derivatives to be
recorded on the balance sheet at fair value. This results in the offsetting
changes in fair values or cash flows of both the hedged item being recognized in
earnings in the same period. Changes in fair values of derivatives not meeting
the Statement's hedge criteria are included in income. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings or the financial
position of the Company.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements set forth herein or incorporated by reference herein from
the Company's filings that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
Actual results may differ materially from those included in the forward-looking
statements. These forward-looking statements involve risks and uncertainties
including, but not limited to, the following: changes in general economic
conditions, including the performance of financial markets, and interest rates;
competitive, regulatory or tax changes that affect the cost of or demand for the
Company's products; health care reform; the ability to predict and effectively
manage claims related to health care costs; and reliance on key management and
adequacy of claim liabilities. The Company's Academic Management Services Corp.
business could be adversely affected by changes in the Higher Education Act or
other relevant federal or state laws, rules and regulations and the programs
implemented thereunder may adversely impact the education credit market. In
addition, existing legislation and future measures by the federal government may
adversely affect the amount and nature of federal financial assistance available
with respect to loans made through the U.S. Department of Education. Finally the
level of competition currently in existence in the secondary market for loans
made under the Federal Loan Programs could be reduced, resulting in fewer
potential buyers of the Federal Loans and lower prices available in the
secondary market for those loans.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates
and prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded.
The primary market risk to the Company's investment portfolio is interest
rate risk associated with investments and the amount of interest that
policyholders expect to have credited to their policies. The interest rate risk
taken in the investment portfolio is managed relative to the duration of the
policy liabilities. The Company's investment portfolio consists mainly of high
quality, liquid securities that provide current investment returns. The Company
believes that the annuity and universal life-type policies are generally
competitive with those offered by other insurance companies of similar size. The
Company does not anticipate significant changes in the primary market risk
exposures or in how those exposures are managed in the future reporting periods
based upon what is known or expected to be in effect in future reporting
periods.
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Profitability of the student loans is affected by the spreads between the
interest yield on the student loans and the cost of the funds borrowed under the
various credit facilities. Although the interest rates on the student loans and
the interest rate on the credit facilities are variable, the gross interest
earned by lenders on Stafford student loans uses the results of 91-day T-bill
auctions as the base rate, while the base rate on the credit facilities is
LIBOR. The effect of rising interest rates on earnings on Stafford loans is
generally small, as both revenues and costs adjust to new market levels. In
addition to Stafford loans, the Company holds PLUS loans on which the interest
rate yield is set annually beginning July 1 through June 30 by regulation at a
fixed rate. The Company had approximately $253 million principal amount of PLUS
loans outstanding at September 30, 2000. The fixed yield on PLUS loans was 7.72%
for the twelve months ended June 30, 2000 and has been reset to 8.99% for the
twelve months beginning July 1, 2000. These loans are financed with borrowings
whose rates are subject to reset, generally monthly. During the twelve months
beginning July 1, 2000, the cost of borrowings to finance this portion of the
student loan portfolio could rise or fall while the rate earned on the student
loans will remain fixed.
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PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company is a party to various material legal proceedings, all of which
are described in Note H of Notes to the Consolidated Condensed Financial
Statements included herein and in the Company's Annual Report on Form 10-K filed
for the year ended December 31, 1999 under the caption "Item 3 - Legal
Proceedings." The Company and its subsidiaries are parties to various other
pending legal proceedings arising in the ordinary course of business, including
some asserting significant damages arising from claims under insurance policies,
disputes with agents and other matters. Based in part upon the opinion of
counsel as to the ultimate disposition of such lawsuits and claims, management
believes that the liability, if any, resulting from the disposition of such
proceedings will not be material to the Company's financial condition or results
of operations.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description of Exhibit
27 Financial Data Schedule (filed only electronically with the SEC)
(b) Reports on Form 8-K.
1. A Current Report on Form 8-K, dated August 2, 2000, disclosing completion
of certain previously announced transactions.
2. A Current Report on Form 8-K, dated September 29, 2000, disclosing
completion of sale of United CreditServ credit card operations.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UICI
----------------------------------------
(Registrant)
Date: November 8, 2000 /s/ Gregory T. Mutz
-------------------------- ----------------------------------------
Gregory T. Mutz, President,
Chief Executive Officer and Director
Date: November 8, 2000 /s/ Matthew R. Cassell
-------------------------- ----------------------------------------
Matthew R. Cassell, Vice President and
Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule (filed only electronically with the SEC)
</TABLE>
