<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
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 MARCH 31, 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
---------------
UICI
(Exact name of registrant as specified in its charter)
Delaware 75-2044750
- ------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 McEwen, Suite 200, Dallas, Texas 75244
- --------------------------------------- ------------
(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
46,427,024 shares as of May 1, 2000.
<PAGE> 2
INDEX
UICI AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated condensed balance sheets-March 31, 2000
(unaudited) and December 31, 1999 3
Consolidated condensed statements of income
(unaudited)-Three months ended March 31, 2000 and 1999 4
Consolidated statements of comprehensive income
(unaudited)-Three months ended March 31, 2000 and 1999 5
Consolidated condensed statements of cash flows
(unaudited)-Three months ended March 31, 2000 and 1999 6
Notes to consolidated condensed financial statements
(unaudited)-March 31, 2000 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
</TABLE>
<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>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
-----------
<S> <C> <C>
ASSETS
Investments
Securities available for sale --
Fixed maturities, at fair value (cost:
2000-- $877,968; 1999-- $904,662) .......................... $ 837,453 $ 861,337
Equity securities, at fair value (cost:
2000-- $25,041; 1999-- $25,951) ............................ 21,919 23,079
Mortgage and collateral loans ................................. 5,017 6,324
Policy loans .................................................. 21,899 20,444
Investment in HealthAxis.com .................................. 22,010 --
Investment in other equity investees .......................... 43,231 47,696
Short-term investments ........................................ 122,946 79,608
----------- -----------
Total Investments ...................................... 1,074,475 1,038,488
Cash ............................................................ 11,003 74,091
Student loans ................................................... 1,492,744 1,326,050
Restricted cash ................................................. 188,981 489,720
Reinsurance receivables ......................................... 101,618 104,946
Due premiums and other receivables and assets ................... 45,393 58,800
Investment income due and accrued ............................... 66,985 51,751
Deferred acquisition costs ...................................... 80,422 80,188
Goodwill ........................................................ 135,359 152,668
Deferred income tax ............................................. 78,028 105,664
Property and equipment, net ..................................... 49,986 56,978
----------- -----------
$ 3,324,994 $ 3,539,344
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy and contract benefits ........................... $ 448,250 $ 452,776
Claims ........................................................ 334,643 335,943
Unearned premiums ............................................. 100,931 97,548
Other policy liabilities ...................................... 19,230 19,090
Other liabilities ............................................... 112,127 112,631
Collections payable ............................................. 57,811 113,057
Debt ............................................................ 115,590 120,637
Student loan credit facilities .................................. 1,620,682 1,730,348
Net liabilities of discontinued operations (includes reserve
for losses on disposal) ....................................... 85,881 149,880
----------- -----------
2,895,145 3,131,910
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $0.01 per share .................... -- --
Common Stock, par value $0.01 per share ....................... 467 466
Additional paid-in capital .................................... 174,544 173,585
Accumulated other comprehensive loss .......................... (28,768) (30,432)
Retained earnings ............................................. 288,335 268,544
Treasury stock, at cost ....................................... (4,729) (4,729)
----------- -----------
429,849 407,434
----------- -----------
$ 3,324,994 $ 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 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
REVENUE
Premiums:
Health ................................................ $ 165,331 $ 174,479
Life premiums and other considerations ................ 10,864 12,073
--------- ---------
176,195 186,552
Investment income ........................................ 24,268 21,216
Other interest income .................................... 28,023 13,712
Other fee income ......................................... 29,391 29,698
Other income ............................................. 770 1,113
Gain on sale of HealthAxis.com shares .................... 26,300 --
Gains (losses) on sale of other investments .............. (963) 1,981
--------- ---------
283,984 254,272
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses ................ 115,246 141,472
Underwriting, acquisition, and insurance expenses ........ 61,286 61,345
Other expenses ........................................... 31,009 20,518
Depreciation and amortization ............................ 3,961 2,982
Interest expense ......................................... 3,277 1,008
Interest expense-- student loan credit facility .......... 24,982 10,525
Equity in operating loss from HealthAxis.com investment .. 5,920 --
--------- ---------
245,681 237,850
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ...... 38,303 16,422
Federal income taxes ....................................... 18,512 5,108
--------- ---------
INCOME FROM CONTINUING OPERATIONS .......................... 19,791 11,314
DISCONTINUED OPERATION:
Income from operations, (net of income tax expense of
$0, and $5,179 in 2000 and 1999, respectively) ........... -- 9,566
--------- ---------
NET INCOME ................................................. $ 19,791 $ 20,880
========= =========
Earnings per share:
Basic earnings
Income from continuing operations ..................... $ 0.43 $ 0.24
Income from discontinued operations ................... -- 0.21
--------- ---------
Net income ............................................ $ 0.43 $ 0.45
========= =========
Diluted earnings
Income from continuing operations ..................... $ 0.42 $ 0.24
Income from discontinued operations ................... -- 0.20
--------- ---------
Net income ............................................ $ 0.42 $ 0.44
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Net income ...................................................... $ 19,791 $ 20,880
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period .... 2,342 (19,637)
Reclassification adjustment for gains
included in net income ................................... 220 1,386
-------- --------
Other comprehensive gains (losses),
before tax ......................................... 2,562 (18,251)
Income tax (expense) benefit related to items of
other comprehensive income ............................... (898) 6,384
-------- --------
Other comprehensive gains (losses), net of tax ....... 1,664 (11,867)
-------- --------
Comprehensive income ............................................ $ 21,455 $ 9,013
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------- ---------
2000 1999
--------- ---------
(Note)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ....................................................................... $ 19,791 $ 20,880
Adjustments to reconcile net income to
cash provided by (used in) operating activities:
Increase (decrease) in policy liabilities ...................................... 1,641 (1,817)
Increase (decrease) in other liabilities ....................................... 3,054 (16,153)
Increase (decrease) in federal income taxes payable ............................ 26,983 (10,314)
Decrease (increase) in deferred acquisition costs .............................. (234) 1,939
Increase in accrued investment income .......................................... (15,234) (8,454)
Decrease in reinsurance and other receivables .................................. 8,758 11,011
Depreciation and amortization .................................................. 4,015 2,982
Decrease in collections payable ................................................ (55,246) --
Operating loss of HealthAxis.com ............................................... 5,920 --
Gains on sale of investments ................................................... (25,337) (1,981)
Cash and other items (contributed to) received from discontinued operations .... (63,999) 3,774
Other items, net ............................................................... 3,917 (1,228)
--------- ---------
Cash Provided by (Used in) Operating Activities ............................ (85,971) 639
--------- ---------
INVESTING ACTIVITIES
Increase in student loans ........................................................ (166,694) (117,629)
Decrease (increase) in other investments ......................................... (12,409) 34,116
Proceeds from sale of 2 million shares of HealthAxis.com ......................... 30,000 --
Decrease in restricted cash ...................................................... 300,739 3,851
Increase in agents' receivables .................................................. (3,188) (1,525)
Purchase of subsidiary ........................................................... (4,481) --
Increase in property and equipment ............................................... (3,422) (1,852)
--------- ---------
Cash Provided by (Used in) Investing Activities ............................ 140,545 (83,039)
--------- ---------
FINANCING ACTIVITIES
Deposits from investment products ................................................ 4,106 4,139
Withdrawals from investment products ............................................. (8,050) (7,732)
Proceeds from student loan borrowings ............................................ 280,696 296,330
Repayment of student loan borrowings ............................................. (390,362) (226,631)
Proceeds from debt ............................................................... 70,000 15,224
Repayment of debt ................................................................ (75,012) (448)
Other items ...................................................................... 960 (4,575)
--------- ---------
Cash Provided by (Used in) Financing Activities ............................ (117,662) 76,307
--------- ---------
Net Decrease in Cash ....................................................... (63,088) (6,093)
Net Cash at Beginning of Period ............................................ 74,091 16,900
--------- ---------
Cash at End of Period ...................................................... $ 11,003 $ 10,807
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
6
Note: Certain amounts have been reclassified to conform to the 2000 financial
statement presentation.
<PAGE> 7
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements for
UICI and its subsidiaries (the "Company") 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 footnotes 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 three-month period ended March 31, 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
footnotes 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.
7
<PAGE> 8
NOTE B - DISCONTINUED OPERATION
The Company has classified its United CreditServ business unit as a
discontinued operation. The Company currently expects to complete the sale of
the United CreditServ unit during the year 2000, after which it will no longer
engage in the sub-prime credit card business. Accordingly, the assets,
liabilities, and results of operations for this business unit have been
reflected as discontinued operations for all periods presented.
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.
During the first quarter of 2000, the discontinued operation incurred a loss
from operations in the amount of approximately $14.6 million, which was charged
to the liability for loss on disposal. The Company currently estimates that the
remaining liability of $115.4 million will be adequate to absorb losses on
disposal, including asset write-downs, the estimated loss on the sale of the
business and/or the assets and continuing losses through date of sale.
Accordingly, no gain or additional loss from discontinued operations was
recognized in the first quarter. The loss the Company will ultimately realize
upon the disposal of the discontinued operation could differ materially from the
current estimate.
The operating losses at United CreditServ have had and will continue to
have a material adverse effect upon the liquidity and cash flow of the Company.
Since January 1, 2000 and through May 12, 2000, UICI has contributed to United
CreditServ an aggregate of $79 million in cash. UICI has funded these cash
contributions with the proceeds of sale of investment securities, cash dividends
from its insurance company subsidiaries and cash on hand.
The unsecuritized net credit card receivables of United Credit National
Bank ("UCNB") decreased from $190.7 million at December 31, 1999 to $162.9
million at March 31, 2000. Time deposits at UCNB increased from $290 million at
December 31, 1999 to $296 million at March 31, 2000. In accordance with the
terms of a Consent Order issued February 25, 2000 by the Office of the
Comptroller of the Currency (the "OCC"), UCNB is currently prohibited from
accessing the brokered deposit market and from soliciting or accepting deposits
over the Internet. The maturity schedule for certificates of deposit outstanding
at March 31, 2000 is as follows: $113.4 million by June 30, 2000; $101.1 million
between July 1 and September 30, 2000; $64.5 million between October 1 and
December 31, 2000; and $17 million between January 1, 2001 and August 31, 2002.
At May 12, 2000, UCNB had $255.2 million of certificates of deposits
outstanding, and UCNB had approximately $137.5 million in cash, cash equivalents
and short term U.S. Treasury securities.
In accordance with the terms of the Consent Order, on March 29, 2000, UCNB
submitted to the OCC for its review and approval a capital plan (the "Proposed
Capital Plan"). The Proposed Capital Plan contemplates the orderly disposition
of United CreditServ's ownership interest in UCNB or the liquidation of UCNB,
the payment of all of UCNB's insured deposits and satisfaction of all other UCNB
liabilities, and the maintenance of minimum capital ratios. The Proposed Capital
Plan provides that, on or before December 31, 2000 (the "Plan Period"), United
CreditServ will dispose of its interest in UCNB or, alternatively, UCNB will
dispose of all of its assets. To support its implementation, the Proposed
Capital Plan further contemplates that (a) UICI, United CreditServ and UICI's
principal shareholder will provide financial support to UCNB and deliver
collateral to UCNB to secure its obligations to provide such financial support
and (b) UCNB will be able to access the brokered deposit market on a limited
basis. The Proposed Capital Plan contemplated that UICI would be required to
contribute an additional $25.0 million to the capital of UCNB during the Plan
Period, of which $11.55 million was contributed on April 28, 2000.
The Proposed Capital Plan is expressly subject to the review and approval
of the OCC and the FDIC, and discussions are ongoing among the OCC, FDIC, UCNB
and the Company concerning the Proposed Capital Plan. There can be no assurance
that the OCC or the FDIC will approve the Proposed Capital Plan in its current
form. If the OCC and/or FDIC fails to approve the Proposed Capital Plan or some
mutually acceptable alternative plan, UCNB could be required to liquidate its
assets on a short term basis and the Company could be required to fund the
resulting losses immediately. Such a requirement would have a material adverse
effect upon the Company's liquidity, results of operations and financial
condition.
In addition, in the event that the OCC determines that the Proposed Capital
Plan does not comply with the terms of the Consent Order, the OCC may take a
number of actions, including directing that a new capital plan be
8
<PAGE> 9
submitted, seeking an order from a Federal District Court directing compliance
with the Consent Order, and/or seeking the assessment of civil money penalties.
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 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.
Set forth below is a summary of the operating results of the United
CreditServ business for the three months ended March 31, 2000 and 1999,
respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUE
Net interest income ........................................ $ 4,566 $ 4,236
Credit card fees and other fee income ...................... 50,485 54,578
-------- --------
Total revenues ..................................... 55,051 58,814
EXPENSES
Provision for loan losses .................................. 38,193 26,895
Operating expenses ......................................... 31,457 17,174
-------- --------
Total expenses ..................................... 69,650 44,069
Income (loss) from operations before federal income taxes .... (14,599) 14,745
Amount charged to allowance for loss on disposal ............. 14,599 --
Federal income taxes ......................................... -- 5,179
-------- --------
Income from discontinued operations .......................... $ -- $ 9,566
======== ========
</TABLE>
Assets and liabilities of the United CreditServ business to be disposed of
consisted of the following at March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Assets
Cash ........................................................ $ 3,933 $ 18,469
Short term investments ...................................... 160,176 92,070
Credit card receivables, net of allowance for losses ....... 162,878 190,676
Other assets ................................................ 52,191 46,869
--------- ---------
Total assets ........................................ $ 379,178 $ 348,084
Liabilities
Time deposits ............................................... 296,042 290,023
Notes payable ............................................... 6,928 12,241
Other liabilities ........................................... 46,688 65,700
Reserve for loss on disposal ................................ 115,401 130,000
--------- ---------
Total liabilities ................................... 465,059 497,964
--------- ---------
Net liabilities to be disposed ................................ $ (85,881) $(149,880)
========= =========
</TABLE>
The following is a summary of the credit card loans as of March 31, 2000
and December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
AFCA credit card loans ................. $ 46,350 $ 38,467
ACE credit card loans .................. 168,060 236,855
Transferor's interest .................. 19,173 23,992
-------- --------
Total credit card loans ...... $233,583 $299,314
======== ========
</TABLE>
9
<PAGE> 10
The Company's allowance for losses on credit card loans is summarized
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year ........... $ 108,638 $ 66,811
Provision for loan losses .............. 38,193 211,747
Recoveries ............................. 8,368 40,091
Charge offs and other .................. (84,494) (210,011)
--------- ---------
Balance at end of period ..... $ 70,705 $ 108,638
========= =========
</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.
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. Dividends paid by the Company's
domestic insurance subsidiaries in any year are restricted by the laws of the
state of such subsidiaries' domicile. 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 and will continue to
have a material adverse effect upon the liquidity and cash flow of the Company
(see Note B - Discontinued Operation).
Based on projections as of May 10, 2000, the Company believes that its exit
from the credit card business will require the holding company to generate
additional cash in the amount of approximately $65.0 million to fund future
operating losses of the credit card business, including approximately $13
million which will be required to be contributed as additional capital to UCNB
pursuant to the Proposed Capital Plan. In addition, through December 31, 2000
the holding company will have additional cash requirements in the amount of
approximately $26 million, of which $14.0 million represents a mandatory
principal payment owing on its bank credit facility in July 2000.
The Company currently anticipates that these cash requirements at the
holding company level will be funded by cash on hand ($23.0 million at May 8,
2000), possible sales of certain of its operating subsidiaries, sales of
investment securities, proceeds from refinancing of indebtedness, proceeds from
the issuance by the holding company of debt and/or equity securities, or regular
dividends from its regulated insurance subsidiaries, if required. It is likely
that the payment of dividends from its regulated insurance subsidiaries will
adversely affect the insurance subsidiaries' claims paying and AM Best ratings.
Nonetheless, the Company's domestic insurance subsidiaries, without prior
approval of the state regulatory authorities, could currently pay aggregate
dividends to the holding company in the amount of approximately $30.7 million
and an additional $16.0 million after December 22, 2000.
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 MERGER
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 March 31, 2000, the Company's
carrying value of its investment in HealthAxis.com was $22.0 million,
representing its carryover investment in Insurdata plus the Company's investment
in shares of HealthAxis.com acquired prior to the HealthAxis Merger, 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 quarter ended March 31,
2000.
On January 26, 2000, HAI and HealthAxis.com entered into an Agreement and
Plan of Merger, pursuant to which HAI will 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. Upon consummation of the
reorganization transactions, HealthAxis.com shareholders (including the Company)
will receive 1.127 shares of HAI common stock for each share of HealthAxis.com
common stock outstanding. Under the terms of the transaction, HAI will issue new
shares to acquire all of the outstanding HealthAxis.com shares that HAI does not
already own. The consummation of the merger is subject to various conditions,
including the approval of both HAI and HealthAxis.com shareholders, as well as
regulatory approval. The closing of the merger is currently anticipated to occur
during the second quarter of 2000. It is anticipated that, following the merger,
the Company will hold approximately 20.1 million shares (representing 43.2%) of
the issued and outstanding shares of HAI, of which 10.0 million shares
(representing 21.6%) will be subject to the terms of a Voting Trust Agreement,
pursuant to which trustees unaffiliated with the Company will have the right to
vote such shares. At May 11, 2000, the closing price of HAI common stock on the
Nasdaq National Market was $5.1875 per share.
10
<PAGE> 11
Set forth below is summary condensed balance sheet and income statement data for
HealthAxis.com as of, and for the three-month period ended, March 31, 2000. This
financial information has been adjusted to exclude the effects of push-down
accounting for the HealthAxis Merger.
<TABLE>
<CAPTION>
MARCH 31,
2000
---------
(IN THOUSANDS)
<S> <C>
Assets
Cash .................................. $44,196
Accounts receivable ................... 7,455
Property and equipment ................ 9,070
Other assets .......................... 7,963
-------
Total assets .................. $68,684
=======
Liabilities
Accounts payable and accrued expenses.. $ 7,983
Other liabilities ..................... 3,813
-------
Total liabilities ............. 11,796
Stockholders' equity .................... 56,888
-------
Total liabilities and equity ............ $68,684
=======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000
------------------
(IN THOUSANDS)
<S> <C>
Revenue ................. $ 11,673
Operating expenses ...... (25,524)
--------
Net loss ...... $(13,851)
========
</TABLE>
NOTE E - DEBT RESTRUCTURING
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 a $70.0
million loan from a limited liability company controlled by the Company's
Chairman ("Lender LLC"). As part of the paydown, the bank credit facility was
amended to provide, among other things, that the $25.0 million balance
outstanding will be due and payable on July 10, 2000, amounts outstanding under
the facility are secured by a pledge of investment securities and shares of
Mid-West National Life Insurance Company of Tennessee, and the restrictive
covenants formerly applicable to UICI and its restricted subsidiaries (primarily
the Company's insurance companies) will now be applicable solely to Mid-West.
Amounts outstanding under the bank credit facility will continue to bear
interest at LIBOR plus 100 basis points per annum. On April 11, 2000 the
Company made an $11 million principal payment on the bank indebtedness, which
reduced the balance outstanding to $14 million.
Lender LLC loaned $70.0 million to a newly-formed subsidiary of the
Company. The loan bears interest at the prevailing prime rate, is guaranteed by
UICI, is due and payable in July 2001 and is secured by a pledge of investment
securities and shares of the Company's National Motor Club unit. No principal
outstanding under the loan from Lender LLC can be paid unless all amounts
outstanding under the bank credit facility are paid in full.
NOTE F - INCOME TAXES
The Company's effective tax rate for the three months ended March 31, 2000
was approximately 48%. The Company records its equity in the income or loss of
HealthAxis.com net of taxes provided by HealthAxis.com. The Company's share of
HealthAxis.com loss for the period was $5.9 million on which no tax benefit was
provided. Educational Finance Group, Inc. ("EFG") is 75% owned by the Company,
and files a separate federal income tax return. Operating losses at EFG are not
eligible for utilization in the Company's consolidated income tax return, and no
tax benefit was provided on EFG's loss of $9.4 million (including amortization
of goodwill).
NOTE G - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
11
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Income available to common shareholders:
Income from continuing operations available to
Common shareholders .............................. $ 19,791 $ 11,314
Income from discontinued operations ................. -- 9,566
---------- ----------
Net income .......................................... $ 19,791 $ 20,880
========== ==========
Weighted average shares outstanding
-- basic earnings per share ......................... 46,388 46,337
Effect of dilutive securities:
Employee stock options and other shares ............... 807 1,299
---------- ----------
Weighted average shares outstanding-- dilutive
earnings per share .................................. 47,195 47,636
========== ==========
Basic earnings per share
From continuing operations .......................... $ 0.43 $ 0.24
From discontinued operations ........................ -- 0.21
---------- ----------
Net income .......................................... $ 0.43 $ 0.45
========== ==========
Diluted earnings per share
From continuing operations .......................... $ 0.42 $ 0.24
From discontinued operations ........................ -- 0.20
---------- ----------
Net income .......................................... $ 0.42 $ 0.44
========== ==========
</TABLE>
NOTE H - LEGAL PROCEEDINGS
The Company is a party to the following material legal proceedings:
Securities Class Action Litigation
In December 1999 and February 2000, the Company and certain of its
executive officers were named as defendants in three securities class action
lawsuits (Silver v. UICI, Gregory Mutz and Vernon Woelke; Rinderknecht v. UICI,
Ronald L. Jensen, Gregory T. Mutz, Richard Estell, Warren Idsal, Vernon Woelke
and William Benac; and Uzelac v. UICI, Gregory Mutz and Vernon Woelke, all
pending in U.S. District Court for the Northern District of Texas) 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 Rinderknecht case has been consolidated with the Silver case and the
Rinderknecht case was closed. On March 27, 2000, the court ordered the
appointment of a group of five lead plaintiffs in the consolidated Silver case.
Based upon the court's previous order and the agreement of the parties, the lead
plaintiffs have until June 10, 2000 to file an amended consolidated complaint.
The Uzelac case was filed on February 11, 2000. On April 18, 2000, the
court ordered the Uzelac case transferred to the district judge presiding over
the consolidated Silver case in anticipation of consolidation.
The Company intends 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
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.
12
<PAGE> 13
UICI believes that the District Court was incorrect in the awarding of
attorneys' fees and in its finding that UICI violated Texas securities laws and
breached a fiduciary duty, and on September 10, 1999 the Company filed its
initial briefs in support of its appeal of the District Court's decision as to
those issues. The Company has not, however, appealed 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
October 4, 1999, Sun filed its brief in opposition to the appeal.
In the brief filed in his appeal of the District Court's December 1998
finding, Mr. Jensen has 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.
Oral argument before the Dallas Court of Appeals on the appeal was held on
February 1, 2000. The Company cannot at this time predict how, when or in what
fashion the appellate court will dispose of the various claims of the Company
and Mr. Jensen on appeal. The appellate court may affirm the District Court's
judgment, may return the case to the District Court for trial, or may reverse
the District Court's decision and render a judgment. In addition, there can be
no assurances as to the time period during which the appeals filed by Mr. Jensen
or the Company in the Sun Litigation may be heard and a final judgment rendered
which affords no party in the Sun Litigation the right to further appeal.
However, for financial reporting purposes, any cash ultimately received by the
Company from Mr. Jensen pursuant to the Assurance Agreement would 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).
The Special Litigation Committee constituted to review and assess the
allegations in the Schappel Shareholder Derivative Litigation (see discussion
below) recommended that the Company seek the release to the Company of
approximately $7.55 million of proceeds from the STP sale held in the District
Court's registry. In accordance with that recommendation, on May 4, 2000 the
Company filed a motion with the appeals court to partially lift the stay it had
imposed of the trial court's order of distribution, for the sole purpose of
distributing to UICI $7.55 million from the registry of the trial court (which
amount represents UICI's uncontested portion of the STP sales proceeds).
Schappel 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' duty to UICI. The
plaintiff in the Shareholder Derivative Litigation is also the private
third-party plaintiff in the Sun Communications Litigation, and the 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
13
<PAGE> 14
Delaware law, to serve as a special 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 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 a so-called "diminished value claim" in
the Sun Communications litigation. The second amended complaint added reference
to the consent order issued by the OCC; attempted to quantify damages alleged to
have resulted from related party transactions; 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 Mr. Jensen's June
25, 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; (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 (see discussion below). The Company's Board
of Directors accepted and adopted the Special Litigation Committee's findings
and recommendations and directed management to implement the specific
recommendations as promptly as practicable. The Special Litigation Committee is
now in the process of assessing the allegations contained in plaintiff's amended
complaints.
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 guaranty extended by Mr. Jensen (and the derivative
plaintiff's motion for summary judgment on the guaranty) and releasing the $7.55
million of uncontested funds to the Company. That hearing has been set for May
16, 2000. In addition, the court lifted the stay to allow the Company to file a
motion to dismiss the derivative claims, based upon the Special Litigation
Committee's recommendations, and to file a motion to disqualify the derivative
plaintiff and counsel. These motions were filed on April 26, 2000 and May 1,
2000, respectively, and will also be heard on May 16, 2000.
ACE and AFCA Litigation
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
14
<PAGE> 15
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.
Plaintiff has filed a motion to disqualify the Company's counsel from
representing the Company and UCNB in the cases. Defendants' brief in opposition
to the motion to disqualify is due on May 15, 2000. By agreement with
plaintiffs' counsel, the due date for the Company's responses to the complaints
in these two cases was extended to a date after the motion to disqualify counsel
has been resolved.
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 and one of its subsidiaries are 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"). The Company marketed credit cards through AFCA through
February 2000. 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.
The California state court in the Mitchell case has certified a class of
all California residents who entered into a membership contract with AFCA
through April 12, 1999. Defendants' motions to compel arbitration and to narrow
the class definition are pending before the court.
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, have called into question whether
consummation of the tentative settlement is possible or practicable.
Accordingly, the parties advised the courts that the settlement was unlikely to
occur, and the courts lifted the informal stays that had been in effect since
the tentative settlement. On May 4, 2000, the court in the BankFirst case
granted the Company's motion for summary judgment.
Alabama Litigation
As previously disclosed, during the quarter ended September 30, 1999,
United Credit National Bank ("UCNB") (an indirect wholly-owned subsidiary of the
Company) was named as a 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) and
two lawsuits in Bullock County, Alabama (Mandy B. Shell v. UCNB, ACE, Charles P.
Ostrowski and unnamed defendants and Ruby N. Cunningham v. UCNB, ACE, Charles P.
Ostrowski 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 all four
lawsuits, and hearings on the defendants' motions to compel arbitration in the
two Bullock County, Alabama cases were held on February 22, 2000. Hearings on
the defendants' motions to compel arbitration in the two Macon County cases have
been postponed indefinitely at the request of plaintiffs' counsel.
The parties in the Bullock County suits have agreed to settle the cases at
nominal cost to UCNB. It is currently anticipated that the formal settlement
documentation will be complete and executed on or before June 1, 2000.
15
<PAGE> 16
The Company believes that it has meritorious defenses to the allegations in
the Macon County suits and intends to vigorously contest the case. The
telemarketing activities in question were conducted for UCNB by a third party on
an outsourced basis, and the Company believes that UCNB is entitled to
indemnification by the third party in connection with the cases. In addition, a
review of transcripts of recordings of the conversations confirms that, contrary
to the allegations in the complaints, the charges for the ACE credit education
materials were disclosed to all plaintiffs in this case.
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.
The Company believes that plaintiffs and defendants reached a tentative
settlement of the suit. The respective parties' counsel are presently
negotiating the terms of a release and settlement agreement. The Company has
agreed to reimburse plaintiffs' class counsel $847,500 in attorneys' fees and
costs. The total value of the settlement remains unresolved pending the
finalization of the class claims filing process, evaluation by the class claims
committee and approval by the trial court of the class settlement.
Gottstein Litigation
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 for $2 million
plus the cost of administration of the settlement, 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.
Jacola Litigation
MEGA is a party defendant in a purported class action suit filed in May
1995 (Michael D. Jacola, et al. v. The MEGA Life and Health Insurance Company,
et al., pending in the Circuit Court of Saline County, Arkansas), in which the
named plaintiffs have alleged, among other things, fraud, negligence, deceit,
misrepresentation and violations of the Arkansas Deceptive Trade Practices Act
and the Arkansas Insurance Code. On February 16, 2000, the parties reached a
tentative settlement in mediation for $750,000. 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 court
approval.
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 Educational Finance Group, Inc. ("EFG") for $5.7 million. The former
owners further
16
<PAGE> 17
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 EFG (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, EFG filed a declaratory judgment action in U.S. District
Court in Boston (EFG, Inc. v. Marcus Katz, et al) seeking a finding that no
option existed since there had been no agreement on essential terms. 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. The
parties have begun formal discovery, with certain depositions currently
scheduled to be completed during June 2000.
In re United Credit National Bank
UCNB is currently subject to the terms of a Consent Order issued by the
U.S. Comptroller of the Currency. (See Note C). The terms of the Consent Order
will govern for the indefinite future the capitalization, funding activities,
growth and operations of UCNB, a special purpose national bank headquartered in
Sioux Falls, South Dakota. UCNB's failure to comply with the terms of the
Consent Order could result in sanctions brought against UCNB, its officers and
directors and UCNB's "institution-related parties," including the assessment of
civil money penalties and enforcement of the Consent Order in Federal District
Court.
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
The Company's operating segments 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 Educational
Finance Group, Inc., 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, amortization of goodwill, 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 of 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.
17
<PAGE> 18
Revenues, income before federal income taxes, and identifiable assets by
operating segment are set forth in the tables below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues
Insurance:
Self Employed Agency ................... $ 138,791 $ 146,680
Student Insurance ...................... 27,274 26,087
OKC Division ........................... 23,696 23,984
Special Risk ........................... 10,668 14,547
National Motor Club .................... 9,237 6,698
--------- ---------
209,666 217,996
Financial Services:
Educational Finance Group .............. 36,234 23,373
UICI Administrators .................... 3,722 11,215
Other Business Units ................... 269 121
--------- ---------
40,225 34,709
Gain on sale of HealthAxis.com shares .... 26,300 --
Other Key Factors ........................ 9,028 10,317
Intersegment Eliminations ................ (1,235) (8,750)
--------- ---------
Total Revenues from continuing operations ... $ 283,984 $ 254,272
========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Income before federal income taxes Insurance:
Self Employed Agency .............................................. $ 18,134 $ 3,151
Student Insurance ................................................. 84 760
OKC Division ...................................................... 4,133 5,518
Special Risk ...................................................... 246 (450)
National Motor Club ............................................... 1,089 1,099
-------- --------
23,686 10,078
Financial Services:
Educational Finance Group ......................................... (8,461) 1,226
UICI Administrators ............................................... (266) 824
-------- --------
(8,727) 2,050
Gain on sale of HealthAxis.com shares net of
HealthAxis.com operating loss ...................................... 20,380 --
Other Key Factors .................................................... 2,964 4,294
-------- --------
Total income from continuing operations before federal income tax .... $ 38,303 $ 16,422
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Identifiable Assets
Insurance:
Self Employed Agency ............................ $ 411,482 $ 423,142
Student Insurance ............................... 80,261 79,011
OKC Division .................................... 575,981 582,275
Special Risk .................................... 79,654 85,235
National Motor Club ............................. 21,665 20,713
---------- ----------
1,169,043 1,190,376
Financial Services:
Educational Finance Group ....................... 1,718,329 1,883,666
UICI Administrators ............................. 7,698 22,931
Other business units ............................ 20,288 20,029
---------- ----------
1,746,315 1,926,626
Investment in HealthAxis.com ....................... 22,010 --
Other Key Factors .................................. 387,626 422,342
---------- ----------
Total assets from continuing operations ... $3,324,994 $3,539,344
========== ==========
</TABLE>
18
<PAGE> 19
NOTE J - RELATED PARTY TRANSACTIONS
In accordance with the terms of a Management and Option Agreement, dated as
of April 1, 1999, Healthcare Management Administrators, Inc. (a company
controlled by Ronald L. Jensen, the Company's Chairman) ("HMA") and Mr. Jensen
granted to the Company an option to purchase certain assets, subject to certain
corresponding liabilities, associated with the third party administration
business of HMA. The option was exercisable on or before January 30, 2000 at an
option price equal to the book value of the net tangible assets of HMA to be
purchased plus assumption of an obligation to pay a company controlled by Mr.
Jensen certain commissions payable over a five year term in an amount not to
exceed $4.2 million. The Company delivered notice of exercise of the option on
January 25, 2000, and the Company completed the purchase of the assets
associated with HMA's third party administration business on February 3, 2000,
at a renegotiated purchase price equal to $3,980,500 plus $500,000, representing
repayment to Mr. Jensen of cash advances made to HMA subsequent to December 31,
1999.
On March 14, 2000, a limited liability company controlled by Mr. Jensen
(the "Lender LLC") extended to a newly-formed subsidiary of UICI a loan in the
amount of $70.0 million, the proceeds of which, together with $5.0 million of
cash on hand, were used to reduce indebtedness outstanding under the Company's
bank credit facility from $100.0 million to $25.0 million. The loan bears
interest at the prevailing prime rate, is guaranteed by UICI, is due and payable
in July 2001 and is secured by a pledge of investment securities and shares of
the Company's National Motor Club unit. No principal outstanding under the loan
from Lender LLC can be paid unless all amounts outstanding under the bank credit
facility are paid in full.
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 historically 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 have been 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
support 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 support services 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 recent developments have affected the operations of the Company's
United CreditServ subsidiary and will materially and adversely affect the
results of operations and financial condition of the Company in the future.
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<PAGE> 20
Significant Operating Losses
During the year ended December 31, 1999, United CreditServ incurred a pre-tax
operating loss in the amount of approximately $145.3 million, primarily
attributable to significant increases to credit card loan loss reserves
associated with the non-performance of its ACE credit card product. The Company
believes that such losses were due primarily to inadequate attention to ACE
collections, inefficiencies associated with administrative and operating systems
conversions during a period of significant increases in card issuance volumes,
mis-pricing of the ACE product, and the failure of the AFCA credit card
portfolio performance to be sufficiently predictive of the performance of the
ACE credit card loan portfolio.
During the three months ended March 31, 2000, United CreditServ incurred a
loss from operations in the amount of approximately $14.6 million, which loss
was charged to the liability for loss on disposal established at December 31,
1999 in connection with the designation of United CreditServ as a discontinued
operation for financial reporting purposes. See "Sale of United CreditServ
Operations" below).
UCNB is currently subject to the terms of a Consent Order issued by the
U.S. Office of the Comptroller of the Currency (the "OCC") (see discussion
below). In accordance with the terms of the Consent Order, UCNB has ceased all
activities with ACE and AFCA (UCNB's only marketing organizations), and UCNB is
further prohibited under the terms of the Consent Order from introducing new
products or services without approval by the OCC. Accordingly, for the
indefinite future United CreditServ's Specialized Card Services' unit will be
unable to generate sufficient revenue to cover its operating costs, and, as a
result, the Company expects that Specialized Card Services, Inc. will continue
to incur operating losses. The Company has taken immediate steps to reduce costs
associated with its credit card operations, including significant staff
reductions at its UMMG operations.
Significant Cash Infusions to UCNB
The 1999 and continuing operating losses at United CreditServ have had and
will continue to have 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 $116.65 million in cash, including additional
cash in the amount of $11.55 million contributed on April 28, 2000. UICI has
funded these cash contributions with the proceeds of sale of investment
securities, cash dividends from its insurance company subsidiaries and cash on
hand. The Company continues to explore means to achieve increased liquidity,
including through the issuance of additional UICI securities and/or selected
sales of investment securities and other assets. See "Liquidity and Capital
Resources."
Comptroller of the Currency Consent Order
On February 25, 2000, UCNB agreed to the issuance of a Consent Order by the
OCC. Under the terms of the Consent Order, UCNB is prohibited from accessing the
brokered deposit market and from soliciting or accepting deposits over the
Internet. At March 31, 2000, UCNB had $296.0 million of certificates of brokered
deposits outstanding. The maturity schedule for certificates of deposit
outstanding at March 31, 2000 is as follows: $113.4 million by June 30, 2000;
$101.1 million between July 1 and September 30, 2000; $64.5 million between
October 1 and December 31, 2000; and $17 million between January 1, 2001 and
August 31, 2002. At March 31, 2000, UCNB had approximately $158.5 million in
cash, cash equivalents and short term U.S. Treasury securities.
The Consent Order requires UCNB, until further notice from the OCC, to
cease all activities with ACE and AFCA (UCNB's only marketing organizations).
The Consent Order further requires UCNB, until further notice from the OCC, to
cease all transactions with affiliated parties (including UICI but excluding
Specialized Card Services, Inc., the servicer of UCNB's credit card accounts),
and to conduct an immediate review of all agreements with all third parties to
assess whether such agreements are on terms fair and reasonable to UCNB. UCNB
engaged PricewaterhouseCoopers LLP to independently review the terms of all
agreements between UCNB and Specialized Card Services, Inc. (an indirect wholly
owned subsidiary of UICI and the servicer of UCNB's credit card accounts). On
March 27, 2000, UCNB submitted to the OCC its review of third party agreements
and PricewaterhouseCoopers LLP's review of agreements between UCNB and
Specialized Card Services, Inc.
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<PAGE> 21
UCNB is further prohibited under the terms of the Consent Order 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. Under the terms of the Consent Order, UCNB is generally
prohibited from increasing its assets in the future unless the OCC has approved
a capital plan submitted by UCNB and UCNB is in compliance with the capital
plan.
UCNB's failure to comply with the terms of the Consent Order could result
in sanctions brought against UCNB, its officers and directors and UCNB's
"institution-related parties," including the assessment of civil money penalties
and enforcement of the Consent Order 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 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.
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.
Sale of United CreditServ Operations
In light of UICI's continuing difficulties with its United CreditServ unit,
the Board of Directors of UICI determined, after a thorough assessment of the
unit's prospects, that it will 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. The Company currently
expects to complete the sale of the United CreditServ unit during the year 2000.
UICI recorded in 1999 its estimate of additional loss that it believes it will
incur as part of any sale of the United CreditServ unit. The Company estimated
that its loss on disposal of the discontinued operation will be $130.0 million.
During the first quarter of 2000, the discontinued operation incurred a loss
from operations in the amount of approximately $14.6 million, which was charged
to the liability for loss on disposal. The Company currently estimates that the
remaining liability of $115.4 million will be adequate to absorb losses on
disposal, including asset write-downs, the estimated loss on the sale of the
business and/or the assets and continuing losses through date of sale.
Accordingly, no gain or additional loss from discontinued operations was
recognized in the first quarter. The loss the Company will ultimately realize
upon disposal of the discontinued operation could differ materially from the
current estimate.
Proposed UCNB Capital Plan
In accordance with the terms of the Consent Order, on March 29, 2000, the
Board of Directors of UCNB submitted to the OCC for its review and approval a
capital plan (the "Proposed Capital Plan"). The Proposed Capital Plan
contemplates the orderly disposition of United CreditServ's ownership interest
in UCNB or the liquidation of UCNB, the payment of all of UCNB's insured
deposits and satisfaction of all other UCNB liabilities, and the maintenance of
minimum capital ratios. The Proposed Capital Plan provides that United
CreditServ will dispose of its interest in UCNB or UCNB will dispose of all of
its assets on or before December 31, 2000 (the "Plan Period"). To support its
implementation, the Proposed Capital Plan further contemplates that (a) UICI,
United CreditServ and UICI's principal shareholder will provide financial
support to UCNB and deliver collateral to UCNB to secure its obligations to
provide such financial support and (b) UCNB will be able to access the brokered
deposit market on a limited basis. The Proposed Capital Plan contemplated that
UICI would be required to contribute an additional $25.0 million to the capital
of UCNB during the Plan Period, of which $11.55 million was contributed on April
28, 2000. See " Liquidity and Capital Resources."
The Proposed Capital Plan is expressly subject to the review and approval
of the OCC and the FDIC, and discussions are ongoing among the OCC, FDIC, UCNB
and the Company concerning the Proposed Capital Plan.
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<PAGE> 22
There can be no assurance that the OCC or the FDIC will approve the Proposed
Capital Plan in its current form. If the OCC and/or FDIC fails to approve the
Proposed Capital Plan or some mutually acceptable alternative plan, UCNB could
be required to liquidate its assets on a short term basis and the Company could
be required to fund the resulting losses immediately. Such a requirement could
have a material adverse effect upon the Company's liquidity, results of
operations and financial condition.
In addition, in the event that the OCC determines that the Proposed Capital
Plan does not comply with the terms of the Consent Order, the OCC may take a
number of actions, including directing that a new capital plan be submitted,
seeking an order from a Federal District Court directing compliance with the
Consent Order, or seeking the assessment of civil money penalties.
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.
Educational Finance Group, Inc. - Continuing Losses
In the three months ended March 31, 2000, EFG incurred an operating loss in
the amount of $8.5 million, compared to operating income of $1.2 million in the
three months ended March 31, 1999. The significant operating loss in the first
quarter of 2000 resulted primarily from the factors described below.
During the first quarter of 2000, EFG incurred charges in the aggregate
amount of approximately $3.5 million, which charges were associated with the
management transition effected in January 2000, the relocation of EFG'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 EFG's Internet strategy and other
business initiatives undertaken by prior management.
During the first quarter of 2000, an increase in prevailing interest rates
had a negative effect on the cost of financing EFG's student loan portfolio. In
addition, EFG incurred a significantly reduced interest rate spread on its
portfolio of supplemental loans to parents of dependent students ("PLUS loans").
At March 31, 2000, EFG had an aggregate of $371 million principal amount of PLUS
loans outstanding. The interest rate yield on PLUS loans is set annually
beginning July 1 through June 30 by regulation at a fixed rate (7.72% throughout
the first quarter). 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 current
fixed interest rate yield is below the maximum rate. EFG finances the cost of
such loans at floating interest rates which are reset monthly and quarterly
through its structured finance facilities. The interest yield on PLUS loans is
subject to reset on June 30, 2000; if reset as of May 12, 2000, the interest
yield would be 9.0% and a holder of PLUS loans would be subject to special
allowance payments bringing the total yield to 9.26%.
EFG incurs significant costs in connection with the self-origination of
student loans. While the Company believes that such costs increase the future
value of EFG's student loan portfolio, a significant portion of such costs is
not eligible for capitalization for financial reporting purposes and must be
expensed in the period in which incurred. Through its Education Loan
Administrators Group, EFG markets PLUS loans through direct mail and
telemarketing programs directly to prospective student and parent borrowers.
During the first quarter of 2000, EFG originated approximately $91.2 million of
PLUS loans, and incurred approximately $3.0 million of costs in connection with
originating such loans, substantially all of which was charged to expense in the
period.
During the first quarter of 2000, EFG's student loan servicing operations
incurred a loss of approximately $670,000. EFG continues to explore means to
reduce ongoing operating costs and increase operating efficiencies at this
operation. During the first quarter, EFG's Academic Management Services, Inc.
subsidiary reported net income in the amount of $175,000, including gain on sale
of student loans of $1.3 million. Due to the seasonal nature of
22
<PAGE> 23
AMS' tuition installment plan activities, a significant portion of AMS' revenues
and profits have historically been generated during the second quarter of the
fiscal year.
During the first quarter of 2000, EFG 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 EFG 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%.
Completion of Insurdata - HealthAxis.com, Inc. Merger
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.
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 March 31, 2000, the Company's
carrying value of its investment in HealthAxis.com was $22.0 million,
representing its carryover investment in Insurdata plus the Company's investment
in shares of HealthAxis.com acquired prior to the HealthAxis Merger, 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 quarter ended March 31,
2000.
On January 26, 2000, HAI and HealthAxis.com entered into an Agreement and
Plan of Merger, pursuant to which HAI will 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. Upon consummation of the
reorganization transactions, HealthAxis.com shareholders (including the Company)
will receive 1.127 shares of HAI common stock for each share of HealthAxis.com
common stock outstanding. Under the terms of the transaction, HAI will issue new
shares to acquire all of the outstanding HealthAxis.com shares that HAI does not
already own. The consummation of the merger is subject to various conditions,
including the approval of both HAI and HealthAxis.com shareholders, as well as
regulatory approval. The closing of the merger is currently anticipated to occur
during the second quarter of 2000. It is anticipated that, following the merger,
the Company will hold approximately 20.1 million shares (representing 43.2%) of
the issued and outstanding shares of HAI, of which 10.0 million shares
(representing 21.6%) will be subject to the terms of a Voting Trust Agreement,
pursuant to which trustees unaffiliated with the Company will have the right to
vote such shares.
Acquisition of Healthcare Management Administrators, Inc.
On February 3, 2000, the Company completed the purchase of the assets
associated with the third party administration business of Healthcare Management
Administrators, Inc. (a company controlled by Ronald L. Jensen, the Company's
Chairman) for a purchase price equal to $3,980,500 plus $500,000, representing
repayment to Mr. Jensen of cash advances made to Healthcare Management
Administrators, Inc, subsequent to December 31, 1999. The assets and results of
operations of HMA have been classified in the Company's UICI Administrators
business division.
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<PAGE> 24
HealthPlan Services Acquisition Terminated
On April 14, 2000, UICI announced that its previously-announced acquisition
of HealthPlan Services Corporation ("HPS") was terminated by mutual agreement.
On February 18, 2000, UICI and HPS entered into an amended merger agreement,
which contemplated the acquisition by UICI of all outstanding common stock of
HPS for convertible preferred securities valued at $8.75 per HPS share, or
approximately $120 million in the aggregate. Completion of the acquisition was
subject to several conditions, including UICI's obtaining the consent of HPS'
lenders. UICI was unable to obtain the required consents, and as a result UICI
and HPS mutually agreed to terminate the transaction.
RESULTS OF OPERATIONS
The Company's business segments 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 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 and income before federal income taxes by business segment are
summarized in the tables below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues
Insurance:
Self Employed Agency ................... $ 138,791 $ 146,680
Student Insurance ...................... 27,274 26,087
OKC Division ........................... 23,696 23,984
Special Risk ........................... 10,668 14,547
National Motor Club .................... 9,237 6,698
--------- ---------
209,666 217,996
Financial Services:
Educational Finance Group .............. 36,234 23,373
UICI Administrators .................... 3,722 11,215
Other Business Units ................... 269 121
--------- ---------
40,225 34,709
Gain on sale of HealthAxis.com shares .... 26,300 --
Other Key Factors ........................ 9,028 10,317
Intersegment Eliminations ................ (1,235) (8,750)
--------- ---------
Total Revenues from continuing operations ... $ 283,984 $ 254,272
========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Income before federal income taxes Insurance:
Self Employed Agency .............................................. $ 18,134 $ 3,151
Student Insurance ................................................. 84 760
OKC Division ...................................................... 4,133 5,518
Special Risk ...................................................... 246 (450)
National Motor Club ............................................... 1,089 1,099
-------- --------
23,686 10,078
Financial Services:
Educational Finance Group ......................................... (8,461) 1,226
UICI Administrators ............................................... (266) 824
-------- --------
(8,727) 2,050
Gain on sale of HealthAxis.com shares net of
HealthAxis.com operating loss ..................................... 20,380 --
Other Key Factors .................................................... 2,964 4,294
-------- --------
Total income from continuing operations before federal income tax .... $ 38,303 $ 16,422
======== ========
</TABLE>
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<PAGE> 25
Three Month Period ended March 31, 2000 Compared to Three Month Period ended
March 31, 1999
For the three months ended March 31, 2000, the Company generated revenues
and net income from continuing operations of $284.0 million and $19.8 million
($0.43 per basic share), respectively, compared to revenues and net income from
continuing operations of $254.3 million and $11.3 million ($0.24 per basic
share), respectively, for the three months ended March 31, 1999. Included in net
income from continuing operations in the three month period ended March 31, 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 $0.37 per basic share). Also
included in net income from continuing operations were losses from the sale of
other investments of $0.01 per share and gains of $0.03 per share for the
three-month periods ended March 31, 2000 and March 31, 1999, respectively.
Self-Employed Agency Division ("SEA")
Operating income for the three months ended March 31, 2000 for the SEA
Division increased to $18.1 million from $3.2 million in the comparable 1999
period, an increase of $14.9 million. The Division implemented significant rate
increases on its managed care products in 1998, which have resulted in decreases
in revenues (as customers terminated their policies) but improvements in product
profitability due principally to improved loss ratios on its managed care
products. Revenue for the three months ended March 31, 2000 for the SEA Division
decreased to $138.8 million from $146.7 million for the same period in 1999. The
decrease in revenues was primarily attributable to managed care product rate
increases. Revenues for the three months ended March 31, 2000 were slightly
higher than revenues realized in the three months ended December 31, 1999. The
Company expects this trend to continue. New sales for the three months ended
March 31, 2000 were 11% higher than for the comparable period of the prior year.
Student Insurance Division
Operating income for the three months ended March 31, 2000 for the Student
Insurance Division decreased to $84,000 from $760,000 for the same period in
1999. The decrease in operating income continues to reflect lower margins
resulting from increased loss ratios on the 1998-1999 policy year and increased
expenses associated with new system implementations. Revenue for the three
months ended March 31, 2000 from the Student Insurance Division increased to
$27.3 million from $26.1 million in the corresponding 1999 period.
OKC Division
Operating income for the OKC Division for the three months ended March 31,
2000 decreased to $4.1 million from $5.5 million for the same period in 1999.
Revenues for the three months ended March 31, 2000 for the OKC Division
decreased to $23.7 million from $24.0 million in the comparable 1999 period. The
Division's life insurance claim benefits increased $880,000 for the three-month
period ended March 31, 2000 in comparison to the same period for the prior year.
Accident claim benefits increased $230,000 for the three-month period ended
March 31, 2000 in comparison to the comparable period for the prior year. The
Company believes that the higher level of claims in the life business were due
to normal variations in the business for the closed life blocks. The increase in
accident benefits was due to the settlement of a pending lawsuit. Operating
income for the workers compensation line of business, which is an ongoing
product line, decreased $360,000 for the three months ended March 31, 2000 in
comparison to the comparable period for the prior year. The decrease in
operating income was the result of lower premium rates which has been occurring
in this product line for the past two years. During the quarter ended March 31,
2000, workers compensation premium rates stabilized and began to increase. The
Division presently has
25
<PAGE> 26
workers compensation policies in force representing approximately $24 million in
annual gross premium, of which the Company retains approximately $14 million
after reinsurance.
Special Risk Division
Operating income for the three months ended March 31, 2000 for the Special
Risk Division increased to $246,000 from a loss of $450,000 in the comparable
1999 period. Revenue for the three months ended March 31, 2000 decreased to
$10.7 million from $14.5 million in the corresponding 1999 period. The decrease
in revenue in the 2000 period was primarily due to 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.
National Motor Club
Operating income for the three months ended March 31, 2000 for National
Motor Club remained comparable to operating income in the same period in 1999.
Revenues for the three-month 2000 period increased to $9.2 million compared to
$6.7 million for the same period in 1999. The increase in revenues is due to the
acquisition of Coachnet in November 1999.
Educational Finance Group ("EFG")
Revenues for the three months ended March 31, 2000 for EFG increased to
$36.2 million from $23.4 million in the corresponding 1999 period. The increase
in revenue was attributable to the increased origination and interest income
derived from higher student loan volume.
In the three months ended March 31, 2000, EFG incurred an operating loss in
the amount of $8.5 million, compared to operating income of $1.2 million in the
three months ended March 31, 1999. The significant operating loss in the first
quarter of 2000 resulted primarily from the factors described below.
During the first quarter of 2000, EFG incurred charges in the aggregate
amount of approximately $3.5 million, which charges were associated with the
management transition effected in January 2000, the relocation of EFG'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 EFG's Internet strategy and other
business initiatives undertaken by prior management
During the first quarter of 2000, an increase in prevailing interest rates
had a negative effect on the cost of financing EFG's student loan portfolio. In
addition, EFG incurred a significantly reduced interest rate spread on its
portfolio of supplemental loans to parents of dependent students ("PLUS loans").
At March 31, 2000, EFG had an aggregate of $371 million principal amount of PLUS
loans outstanding. The interest rate yield on PLUS loans is set annually
beginning July 1 through June 30 by regulation at a fixed rate (7.72% throughout
the first quarter). 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 current
fixed interest rate yield is below the maximum rate. EFG finances the cost of
such loans at floating interest rates which are reset monthly and quarterly
through its structured finance facilities. The interest yield on PLUS loans is
subject to reset on June 30, 2000; if reset as of May 12, 2000, the interest
yield would be 9.0% and a holder of PLUS loans would be subject to special
allowance payments bringing the total yield to 9.26%.
EFG incurs significant costs in connection with the self-origination of
student loans. While the Company believes that such costs increase the future
value of EFG's student loan portfolio, a significant portion of such costs is
not eligible for capitalization for financial reporting purposes and must be
expensed in the period in which incurred. Through its Education Loan
Administrators Group, EFG markets PLUS loans through direct mail and
telemarketing programs directly to prospective student and parent borrowers.
During the first quarter of 2000, EFG originated approximately $91.2 million of
PLUS loans, and incurred approximately $3.0 million of costs in connection with
originating such loans, substantially all of which was charged to expense in the
period.
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<PAGE> 27
During the first quarter of 2000, EFG's student loan servicing operations
incurred a loss of approximately $670,000. EFG continues to explore means to
reduce ongoing operating costs and increase operating efficiencies at this
operation. During the first quarter, EFG's Academic Management Services, Inc.
subsidiary reported net income in the amount of $175,000, including gain on sale
of student loans of $1.3 million. Due to the seasonal nature of AMS' tuition
installment plan activities, a significant portion of AMS' revenues and profits
have historically been generated during the second quarter of the fiscal year.
During the first quarter of 2000, EFG 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 EFG 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. Operating income for the three
months ended March 31, 2000 for this division decreased to a loss of $266,000
from a profit of $824,000 in the comparable 1999 period. Revenues in the three
months ended March 31, 2000 decreased to $3.7 million from $11.2 million in the
corresponding 1999 period. The decrease in operating income and revenues is
primarily due to the contribution of Insurdata to HealthAxis.com in connection
with the Insurdata-HealthAxis.com merger, which was completed in January 2000.
Excluding the operations of Insurdata, revenues and operating income for
Insurdata Marketing Services, LLC and UICI Administrators were $1.2 million and
$160,000, respectively, for the three months ended March 31, 1999.
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 incurred in the three months ended March 31, 2000
was $5.9 million. HealthAxis.com continues to incur operating losses
attributable to significant marketing, development and other start-up expenses.
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, amortization of goodwill, realized gains or
losses on sale of investments and the operations of the Company's AMLI
subsidiary. Operating income for
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<PAGE> 28
the three months ended March 31, 2000 associated with this category decreased to
$2.9 million from $4.3 million in the three months ended March 31, 1999. The
decrease in operating income in the three month periods was primarily due to a
decrease in realized gains on sale of investments and an increase in interest on
corporate borrowings, which were partially offset by an increase in investment
income not allocated to the other segments.
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. Net cash used in operations totaled
approximately $86.0 million in the three months ended March 31, 2000. Net cash
provided by operations totaled $639,000 in the three months ended March 31,
1999.
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. Dividends paid by the Company's
domestic insurance subsidiaries in any year are restricted by the laws of the
state of such subsidiaries' domicile. 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 and will continue to
have a material adverse effect upon the liquidity and cash flow of the Company.
Since January 1, 2000 and through May 12, 2000, UICI has contributed to United
CreditServ an aggregate of $79 million in cash. UICI has funded these cash
contributions with the proceeds of sale of investment securities, regular cash
dividends from its insurance company subsidiaries and cash on hand.
Based on projections as of May 10, 2000, the Company believes that its exit
from the credit card business will require the holding company to generate
additional cash in the amount of approximately $65.0 million to fund future
operating losses of the credit card business, including approximately $13
million which will be required to be contributed as additional capital to UCNB
pursuant to the capital plan. In addition, through December 31, 2000 the holding
company will have additional cash requirements in the amount of approximately
$26 million, of which $14.0 million represents a mandatory principal payment
owing on its bank credit facility in July 2000.
The Company currently anticipates that these cash requirements at the
holding company level will be funded by cash on hand ($23.0 million at May 8,
2000), possible sales of certain of its operating subsidiaries, sales of
investment securities, proceeds from refinancing of indebtedness, proceeds from
the issuance by the holding company of debt and/or equity securities, or regular
dividends from its regulated insurance subsidiaries, if required. It is likely
that the payment of dividends from its regulated insurance subsidiaries will
adversely affect the insurance subsidiaries' claims paying and AM Best ratings.
Nonetheless, the Company's domestic insurance subsidiaries, without prior
approval of the state regulatory authorities, could currently pay aggregate
dividends to the holding company in the amount of approximately $30.7 million
and an additional $16.0 million after December 22, 2000.
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
Time deposits at UCNB increased from $290 million at December 31, 1999 to
$296 million at March 31, 2000. In accordance with the terms of a Consent Order
issued February 25, 2000 by the OCC, UCNB is currently prohibited from accessing
the brokered deposit market and from soliciting or accepting deposits over the
Internet. The maturity schedule for certificates of deposit outstanding at March
31, 2000 is as follows: $113.4 million by June 30, 2000; $101.1 million between
July 1 and September 30, 2000; $64.5 million between October 1
28
<PAGE> 29
and December 31, 2000; and $17 million between January 1, 2001 and August 31,
2002. At May 12, 2000, UCNB had $255 million of certificates of deposits
outstanding, and UCNB had approximately $137 million in cash, cash equivalents
and short term U.S. Treasury securities.
UCNB's unsecuritized net credit card receivables decreased from $190.7
million at December 31, 1999 to $162.9 million at March 31, 2000. The change
resulted from additions to credit card balances for new purchases, interest, and
fees of $136.9 million, less payments of $118.1 million, recoveries of
previously charged off balances of $8.4 million, and a provision for
uncollectible accounts of $38.2 million.
UCNB is subject to risk-based capital guidelines adopted by the OCC.
Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet commitments to several weighted categories, with higher levels
of capital being required for the categories perceived as representing greater
risk. Under current guidelines, in order to be considered "adequately
capitalized," institutions are required to maintain a minimum total risk-based
capital ratio (total Tier 1 and Tier 2 capital to risk-weighted assets) of 8%,
and a Tier 1 risk-based capital ratio (Tier 1 capital to risk-weighted assets)
of 4%. The OCC has also established guidelines prescribing a minimum "leverage
ratio" (Tier 1 capital to adjusted total assets as specified in the guidelines)
of 3% for institutions that meet certain criteria, including the requirement
that they have the highest regulatory rating, and a minimum of 4% for
institutions that do not meet the criteria. The OCC may, however, set higher
capital requirements when an institution's particular circumstances warrant.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") expanded the powers of federal bank regulatory authorities to take
corrective action with respect to banks that do not meet minimum capital
requirements. For these purposes, FDICIA established five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Under regulations adopted by
the OCC, an institution is generally considered to be "well capitalized" if it
has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based
capital ratio of 6% or greater, and a leverage ratio of 5% or greater;
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, a Tier 1 risk-based capital ratio of 4% or greater and, generally, a
leverage ratio of 4% or greater; and "undercapitalized" if it does not meet any
of the "adequately capitalized" tests. An institution is deemed to be
"significantly undercapitalized" if it has a total risk-based capital ratio
under 3% and "critically undercapitalized" if it has a ratio of tangible equity
(as defined in the regulations) to total assets that is equal to or less than
2%. An "adequately capitalized" institution is permitted to accept brokered
deposits only if it receives a waiver from the FDIC and pays interest on
deposits at a rate that is not more than 75 basis points higher than the
prevailing rate in its market. Undercapitalized institutions cannot accept
brokered deposits, are subject to growth limitations and must submit a capital
restoration plan. "Significantly undercapitalized" institutions may be subject
to a number of additional requirements and restrictions. "Critically
undercapitalized" institutions are subject to appointment of a receiver or
conservator.
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%.
In accordance with the terms of the Consent Order, on March 29, 2000, UCNB
submitted to the OCC for its review and approval a capital plan (the "Proposed
Capital Plan"). The Proposed Capital Plan contemplates the orderly disposition
of United CreditServ's ownership interest in UCNB or the liquidation of UCNB,
the payment of all of UCNB's insured deposits and satisfaction of all other UCNB
liabilities, and the maintenance of minimum capital ratios. The Proposed Capital
Plan provides that United CreditServ will dispose of its interest in UCNB or
UCNB will dispose of all of its assets on or before December 31, 2000 (the "Plan
Period"). To support its implementation, the Proposed Capital Plan further
contemplates that (a) UICI, United CreditServ and UICI's principal shareholder
will provide financial support to UCNB and deliver collateral to UCNB to secure
its obligations to provide such financial support and (b) UCNB will be able to
access the brokered deposit market on a limited basis. The Proposed Capital Plan
contemplated that UICI would be required to contribute an additional $25.0
million to the capital of UCNB during the Plan Period, of which $11.55 million
was contributed on April 28, 2000.
29
<PAGE> 30
The Proposed Capital Plan is expressly subject to the review and approval
of the OCC and the FDIC, and discussions are ongoing among the OCC, FDIC, UCNB
and the Company concerning the Proposed Capital Plan. There can be no assurance
that the OCC or the FDIC will approve the Proposed Capital Plan in its current
form. If the OCC and/or FDIC fails to approve the Proposed Capital Plan or some
mutually acceptable alternative plan, UCNB could be required to liquidate its
assets on a short term basis and the Company could be required to fund the
resulting losses immediately. Such a requirement would have a material adverse
effect upon the Company's liquidity, results of operations and financial
condition.
In addition, in the event that the OCC determines that the Proposed Capital
Plan does not comply with the terms of the Consent Order, the OCC may take a
number of actions, including directing that a new capital plan be submitted,
seeking an order from a Federal District Court directing compliance with the
Consent Order, or seeking the assessment of civil money penalties.
UCNB has commitments to fund the unused credit limits on issued credit card
accounts. At March 31, 2000 and December 31, 1999, the outstanding commitment
was $34.4 million and $33.8 million, respectively.
Educational Finance Group, Inc.
EFG's student loan portfolio increased to $1.493 billion at March 31, 2000
from $1.326 billion at December 31, 1999. This growth was funded utilizing the
proceeds from EFG's student loan credit facilities (which had balances
outstanding of $221 million at March 31, 2000).
In March 1998, Educational Finance Group, Inc. 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 EFG
on the last day of each month. EFG, 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 $220.8
million and $318.8 million at March 31, 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 EFG to repay any amount by which the market value of the loans is
less than the amount required by the credit facility.
In connection with its AMS business, at March 31, 2000, the Company had $63
million of restricted cash representing amounts collected under the tuition plan
program and a corresponding liability due to the various educational
institutions.
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.
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
30
<PAGE> 31
and effectively manage claims related to health care costs; and reliance on key
management and adequacy of claim liabilities. The Company's and its United
CreditServ unit's future results also could be adversely affected by the
inability to fully reserve for anticipated future credit card charge-offs and
losses; the inability of the Company to generate cash from operations, from
sales of assets and/or from the proceeds of debt and/or equity financings in an
amount sufficient to fund in a timely manner future capital requirements at
United Credit National Bank and operating losses at Specialized Card Services,
Inc.; the inability of United Credit National Bank to issue certificates of
deposit on a timely basis to refinance outstanding certificates of deposit as
they mature; and the possibility of future economic downturns causing an
increase in credit losses or changes in regulations for credit cards or credit
card national banks. The Company's Educational Finance Group 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
liabilities. The Company's investment portfolio consists mainly of high quality,
liquid securities that provide current investment returns. The Company believes
that the annuity and universal life-type policies are generally competitive with
those offered by other insurance companies of similar size. The Company does not
anticipate significant changes in the primary market risk exposures or in how
those exposures are managed in the future reporting periods based upon what is
known or expected to be in effect in future reporting periods.
Profitability of the student loans is affected by the spreads between the
interest yield on the student loans and the cost of the funds borrowed under the
various credit facilities. Although the interest rates on the student loans and
the interest rate on the credit facilities are variable, the interest earned on
the student loans uses the 91-day T-bill as the base rate while the base rate on
the credit facilities is LIBOR. The effect of rising interest rates is generally
small as both revenues and costs adjust to new market levels.
The Company's United CreditServ subsidiary's operations are subject to risk
resulting from interest rate fluctuations to the extent that there is a
difference between the amount of interest earned on the credit cards and the
amount of the interest paid on the time deposits. The maturity of the time
deposits is less than one year. The principal objective of the Company's
asset/liability management activities is to provide maximum levels of net
interest income while maintaining acceptable levels of interest rate and
liquidity risk and facilitating the funding needs of the Company.
PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company is a party to various material legal proceedings, all of which
are described 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.
31
<PAGE> 32
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 February 10, 2000 regarding
delay of fourth quarter and full year operating results.
2. A current report on Form 8-K dated February 18, 2000 regarding
announcement of execution of amended and restated Agreement and
Plan of Merger with HealthPlan Services Corporation.
3. A current report on Form 8-K dated February 28, 2000 announcing
that United Credit National Bank had agreed to the issuance by
the Office of Comptroller of the Currency of a Consent Order.
4. A current report on Form 8-K dated March 23, 2000 announcing
additional fourth quarter pre-tax operating losses at United
CreditServ and debt restructuring.
5. A current report on Form 8-K dated April 14, 2000, announcing
that the Company's previously announced acquisition of HealthPlan
Services Corporation was terminated by mutual agreement.
32
<PAGE> 33
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: May 15, 2000 /s/ Gregory T. Mutz
---------------- -----------------------------------
Gregory T. Mutz, President,
Chief Executive Officer, Principal
Financial Officer and Director
33
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule (filed only electronically with the SEC)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 837,453
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 21,919
<MORTGAGE> 5,017
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,074,475
<CASH> 11,003
<RECOVER-REINSURE> 101,618
<DEFERRED-ACQUISITION> 80,422
<TOTAL-ASSETS> 3,324,994
<POLICY-LOSSES> 782,893
<UNEARNED-PREMIUMS> 100,931
<POLICY-OTHER> 19,230
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,736,272
0
0
<COMMON> 467
<OTHER-SE> 429,382
<TOTAL-LIABILITY-AND-EQUITY> 3,324,994
176,195
<INVESTMENT-INCOME> 24,268
<INVESTMENT-GAINS> 25,337
<OTHER-INCOME> 770
<BENEFITS> 115,246
<UNDERWRITING-AMORTIZATION> (163)
<UNDERWRITING-OTHER> 61,449
<INCOME-PRETAX> 38,303
<INCOME-TAX> 18,512
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,791
<EPS-BASIC> 0.43
<EPS-DILUTED> 0.42
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
