<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 JUNE 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NO. 001-14953
---------------
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,
46,602,024 shares as of August 2, 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-June 30, 2000
(unaudited) and December 31, 1999 3
Consolidated condensed statements of income (loss)
(unaudited)-Three months ended June 30, 2000 and
1999 and six months ended June 30, 2000 and 1999 4
Consolidated statements of comprehensive income (loss)
(unaudited)-Three months ended June 30, 2000 and 1999
and six months ended June 30, 2000 and 1999 5
Consolidated condensed statements of cash flows
(unaudited)-Six months ended June 30, 2000 and 1999 6
Notes to consolidated condensed financial statements
(unaudited)-June 30, 2000 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 6. Exhibits and Reports on Form 8-K 40
SIGNATURES 41
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
ASSETS
Investments
Securities available for sale --
Fixed maturities, at fair value (cost:
2000--$837,863; 1999--$904,662) ............................ $ 795,185 $ 861,337
Equity securities, at fair value (cost:
2000--$24,254; 1999--$25,951) .............................. 20,068 23,079
Mortgage and collateral loans ................................. 5,480 6,324
Policy loans .................................................. 20,422 20,444
Investment in HealthAxis.com .................................. 12,776 --
Investment in other equity investees .......................... 41,505 47,696
Short-term investments ........................................ 104,057 79,608
----------- -----------
Total Investments ...................................... 999,493 1,038,488
Cash ............................................................ 22,753 74,091
Student loans ................................................... 1,177,176 1,326,050
Restricted cash ................................................. 209,874 489,720
Reinsurance receivables ......................................... 107,271 104,946
Due premiums and other receivables and assets ................... 46,568 58,800
Investment income due and accrued ............................... 70,840 51,751
Deferred acquisition costs ...................................... 77,430 80,188
Goodwill ........................................................ 131,233 152,668
Deferred income tax ............................................. 78,767 105,664
Property and equipment, net ..................................... 49,790 56,978
----------- -----------
$ 2,971,195 $ 3,539,344
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy and contract benefits ........................... $ 440,909 $ 452,776
Claims ........................................................ 335,719 335,943
Unearned premiums ............................................. 83,375 97,548
Other policy liabilities ...................................... 18,670 19,090
Other liabilities ............................................... 96,656 112,631
Collections payable ............................................. 96,852 113,057
Debt ............................................................ 102,628 120,637
Student loan credit facilities .................................. 1,327,675 1,730,348
Net liabilities of discontinued operations (includes reserve
for losses on disposal) ....................................... 57,780 149,880
----------- -----------
2,560,264 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 .................................... 174,472 173,585
Accumulated other comprehensive loss .......................... (30,634) (30,432)
Retained earnings ............................................. 271,355 268,544
Treasury stock, at cost ....................................... (4,729) (4,729)
----------- -----------
410,931 407,434
----------- -----------
$ 2,971,195 $ 3,539,344
=========== ===========
</TABLE>
NOTE: The balance sheet as of December 31, 1999 has been derived from the
audited financial statements at that date.
See notes to consolidated condensed financial statements.
3
<PAGE> 4
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Premiums:
Health ....................................................... $ 165,471 $ 176,307 $ 330,802 $ 350,786
Life premiums and other considerations ....................... 10,321 11,734 21,185 23,807
--------- --------- --------- ---------
175,792 188,041 351,987 374,593
Investment income ............................................... 21,543 20,686 45,811 41,902
Other interest income ........................................... 31,917 16,576 59,940 30,288
Other fee income ................................................ 32,966 25,803 62,357 55,501
Other income .................................................... 1,372 869 2,142 1,982
Gain on sale of HealthAxis.com shares ........................... -- -- 26,300 --
Gains (losses) on sale of other investments ..................... (395) (586) (1,358) 1,395
--------- --------- --------- ---------
263,195 251,389 547,179 505,661
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses ....................... 116,198 124,160 231,444 265,632
Underwriting, acquisition, and insurance expenses ............... 59,515 66,311 120,801 127,656
Other expenses .................................................. 36,648 23,461 67,657 43,904
Depreciation .................................................... 1,239 3,245 3,565 5,004
Interest expense ................................................ 3,251 1,207 6,528 2,215
Interest expense--student loan credit facilities ................ 24,876 13,343 49,858 23,868
Equity in operating loss from HealthAxis.com investment ......... 9,234 -- 15,154 --
--------- --------- --------- ---------
250,961 231,727 495,007 468,279
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE GOODWILL
AMORTIZATION AND INCOME TAXES .................................... 12,234 19,662 52,172 37,382
Goodwill amortization ............................................ 1,602 1,108 3,237 2,406
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ............. 10,632 18,554 48,935 34,976
Federal income taxes .............................................. 4,212 7,686 22,724 12,794
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS ................................. 6,420 10,868 26,211 22,182
DISCONTINUED OPERATION
(net of income tax benefit of $12,600, and $15,575, respectively,
for the six months ended June 30, 2000 and 1999, and $12,600, and
$20,754, respectively, for the three months ended June 30, 2000
and 1999) ....................................................... (23,400) (38,713) (23,400) (29,147)
--------- --------- --------- ---------
NET INCOME (LOSS) ................................................. $ (16,980) $ (27,845) $ 2,811 $ (6,965)
========= ========= ========= =========
Earnings (loss) per share:
Basic earnings (loss)
Income from continuing operations ............................ $ 0.14 $ 0.24 $ 0.57 $ 0.48
Loss from discontinued operations ............................ (0.50) (0.84) (0.50) (0.63)
--------- --------- --------- ---------
Net income (loss) ............................................ $ (0.36) $ (0.60) $ 0.07 $ (0.15)
========= ========= ========= =========
Diluted earnings (loss)
Income from continuing operations ............................ $ 0.13 $ 0.23 $ 0.55 $ 0.47
Loss from discontinued operations ............................ (0.49) (0.81) (0.49) (0.61)
--------- --------- --------- ---------
Net income (loss) ............................................ $ (0.36) $ (0.58) $ 0.06 $ (0.14)
========= ========= ========= =========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
UICI AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED) (In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) .......................................... $ (16,980) $ (27,845) $ 2,811 $ (6,965)
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period ................................................ (1,483) (20,994) 859 (40,631)
Reclassification adjustment for gains
included in net income (loss) ....................... (1,410) (350) (1,190) 1,036
--------- --------- --------- ---------
Other comprehensive losses, before tax
benefits ..................................... (2,893) (21,344) (331) (39,595)
Income tax benefit related to items of
other comprehensive income .......................... 1,026 7,459 129 13,843
--------- --------- --------- ---------
Other comprehensive losses, net of tax
benefits ..................................... (1,867) (13,885) (202) (25,752)
--------- --------- --------- ---------
Comprehensive income (loss) ................................ $ (18,847) $ (41,730) $ 2,609 $ (32,717)
========= ========= ========= =========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
--------- ----------
(NOTE)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ...................................................... $ 2,811 $ (6,965)
Adjustments to reconcile net income (loss) to
cash used in operating activities:
Decrease in policy liabilities ....................................... (11,087) (41,104)
Decrease in other liabilities ........................................ (12,158) (19,854)
Increase (decrease) in income taxes ................................. 27,690 (33,515)
Decrease in deferred acquisition costs ............................... 2,758 9,227
Increase in accrued investment income ................................ (19,089) (13,216)
Decrease in reinsurance and other receivables ........................ 11,759 21,566
Depreciation and amortization ........................................ 6,802 7,410
Decrease in collections payable ...................................... (16,205) --
Operating loss of HealthAxis.com ..................................... 15,154 --
Gains on sale of investments ......................................... (24,942) (1,395)
Amounts (contributed to) received from discontinued operations ...... (92,100) 78,255
Other items, net ..................................................... (1,990) (3,830)
--------- ---------
Cash Used in Operating Activities ................................ (110,597) (3,421)
--------- ---------
INVESTING ACTIVITIES
Decrease (increase) in student loans ................................... 148,874 (295,951)
Decrease in other investments ......................................... 49,946 3,428
Proceeds from sale of HealthAxis.com shares ............................ 30,000 --
Decrease (increase) in restricted cash ................................. 279,846 (53,001)
Increase in agents' receivables ........................................ (5,089) (4,006)
Purchase of subsidiary ................................................. (4,481) --
Increase in property and equipment ..................................... (4,482) (4,898)
--------- ---------
Cash Provided by (Used in) Investing Activities .................. 494,614 (354,428)
--------- ---------
FINANCING ACTIVITIES
Deposits from investment products ...................................... 8,425 8,353
Withdrawals from investment products ................................... (24,022) (16,521)
Proceeds from student loan borrowings .................................. 305,003 704,240
Repayment of student loan borrowings ................................... (707,676) (369,579)
Proceeds from debt ..................................................... 86,000 75,520
Repayment of debt ...................................................... (103,974) (44,523)
Other items, net ....................................................... 889 (4,575)
--------- ---------
Cash Provided by (Used in) Financing Activities .................. (435,355) 352,915
--------- ---------
Net Decrease in Cash ............................................. (51,338) (4,934)
Net Cash at Beginning of Period .................................. 74,091 16,900
--------- ---------
Cash at End of Period ............................................ $ 22,753 $ 11,966
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
Note: Certain 1999 amounts have been reclassified to conform to the 2000
financial statement presentation.
6
<PAGE> 7
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements for
UICI and its subsidiaries (the "Company" or "UICI") have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, such financial statements do not include all of the
information and 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 six-month period ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. For further
information, refer to the consolidated financial statements and 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.
NOTE B - DISCONTINUED OPERATION
The Company has classified its United CreditServ business unit (consisting
of United CreditServ, Inc. ("UCS") and its subsidiaries, including Specialized
Card Services, Inc., United Membership Marketing Group, Inc. ("UMMG") and United
Credit National Bank ("UCNB")) as a discontinued operation. 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. The
liability for loss on disposal established by the Company at December 31, 1999
represented the Company's then-current estimate of all additional losses
(including asset write-downs, the estimated loss on the sale of the business
and/or the assets and continuing operating losses through the date of sale) that
it then believed it would incur as part of any sale of the United CreditServ
unit. During the quarter and six-month periods ended June 30, 2000, the
discontinued operation incurred a loss from operations in the amount of
approximately $18.8 million and $33.4 million, respectively, which losses were
charged to the liability for loss on disposal.
On August 4, 2000, UICI executed a definitive agreement to sell
substantially all of the non-cash assets associated with its United CreditServ
credit card business, including its credit card receivables portfolios, for a
cash purchase price at closing of approximately $134.0 million. In addition to
the cash purchase price payable at closing, the definitive agreement for the
sale of the assets contemplates an incentive cash payment contingent upon the
post-closing performance of the ACE credit card portfolio over a one year
period. The sale is subject to several closing conditions, including bank
regulatory approval. UICI currently expects that the sale can be completed prior
to September 30, 2000, though there can be no assurance if or when the
transaction will in fact be completed.
In connection with the proposed sale, UICI will retain substantially all
liabilities associated with its credit card business, including liability for
payment of all certificates of deposit issued by United Credit National Bank,
merchant holdback liabilities, liabilities associated with pending litigation
and other contingencies. UICI will retain United CreditServ's building and real
estate in Sioux Falls, South Dakota, and will lease the facilities to the
purchaser pursuant to a long-term lease. UICI will also retain the right to
continue to collect approximately $250.0 million face amount of previously
charged off credit card receivables.
Reflecting the terms of the proposed sale of its United CreditServ business,
during the quarter ended June 30, 2000 the Company recorded an additional
pre-tax loss, and correspondingly increased the liability for loss on the
disposal of the discontinued operation, in the amount of $36.0 million ($23.4
million net of tax). The Company currently estimates that the remaining
liability for loss on disposal will be adequate to absorb all losses on
disposal,
7
<PAGE> 8
including asset write-downs, the estimated loss on the sale of the business
and/or the assets and continuing losses through date of sale. 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 July 29, 2000, UICI has contributed to United
CreditServ an aggregate of $176.6 million in cash, including $50.0 million
contributed over the thirty-day period ended July 29, 2000 pursuant to the UCNB
Capital Plan (see discussion below). UICI has funded these cash contributions
and other cash needs with the proceeds of sale of investment securities, a
borrowing from a third party in the amount of $24.0 million funded in July 2000,
approved sales of assets from the parent company to the Company's regulated
insurance company subsidiaries completed in June and July 2000 generating cash
proceeds in the aggregate amount of approximately $26.2 million, dividends in
the amount of $19.0 million paid during the six months ended June 30, 2000 from
The Chesapeake Life Insurance Company ("CLICO") (one of its regulated insurance
company subsidiaries), the sale to The MEGA Life and Health Insurance Company of
CLICO for $19.0 million in July 2000, cash proceeds in the amount of $21.8
million from the disposition of its National Motor Club unit completed in July
2000, and cash on hand.
On February 25, 2000, UCNB agreed to the issuance of a Consent Order by the
Office of the Comptroller of the Currency (the "OCC") (the "February Consent
Order"). The February 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 required 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 was further prohibited under the terms of the February 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 February Consent Order, UCNB
was 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.
In accordance with the terms of the February Consent Order issued by the
OCC, UCNB is currently prohibited from accessing the brokered deposit market and
from soliciting or accepting deposits over the Internet. At December 31, 1999
and June 30, 2000, UCNB had $290.0 million and $182.7 million, respectively, of
certificates of deposits outstanding, and UCNB held approximately $110.5 million
and $89.7 million, respectively, in cash, cash equivalents and short term U.S.
Treasury securities. Of the certificates of deposit outstanding at June 30,
2000, $48.1 million matured on or before July 31, 2000; $53.1 million mature
between August 1 and September 30, 2000; $64.5 million mature between October 1
and December 31, 2000; and $17.0 million mature thereafter.
On June 29, 2000, the OCC approved a definitive Capital Plan previously
submitted by the Company and UCNB as required by the February Consent Order (the
"UCNB Capital Plan"). The UCNB Capital Plan approved by the OCC requires the
orderly disposition on or before December 31, 2000 of the Company's ownership
interest in UCNB or the liquidation of UCNB, the payment of all of UCNB's
insured deposits and satisfaction of or provision for all other UCNB
liabilities, and the maintenance of minimum capital ratios during this period.
The UCNB Capital Plan requires (a) the Company through UCS to contribute an
aggregate of $50.0 million to the capital of UCNB in prescribed increments over
a thirty-day period ended July 29, 2000 (which $50.0 million was contributed as
required) and (b) UICI and Ronald L. Jensen (UICI's Chairman) to deliver
additional collateral to UCNB to further secure UCNB's obligations under the
Capital Plan (which collateral was delivered as of July 29, 2000, as required).
The UCNB Capital Plan as submitted to and approved by the OCC does not
contemplate that UCNB will need to issue any new certificates of deposit. The
UCNB Capital Plan contemplates that UCNB will have sufficient cash and cash
equivalents to fully discharge all insured deposits, regardless of the amount of
proceeds ultimately realized upon sale or disposition of UCNB's credit card
portfolio and other assets.
The Company, UCS and UCNB agreed to the issuance by the OCC on June 29, 2000
of separate Consent Orders (the "June Consent Orders") memorializing the terms
of the UCNB Capital Plan. The June Consent Orders
8
<PAGE> 9
required, among other things, (a) the Company through UCS to contribute
additional capital to UCNB in the amount of $50.0 million in prescribed
increments over a thirty-day period ended July 29, 2000; (b) UCNB to maintain
prescribed capital ratios throughout the plan period; (c) UCNB to adopt and
implement certain credit card administrative policies and procedures; and (d)
the Company, on or before December 31, 2000, to assume all of UCNB's remaining
contingent liabilities. The Company's obligations under the Capital Plan are
secured by (a) a pledge by the Company of a short-term promissory note in the
principal amount of $35.0 million issued to the Company and guaranteed by Mr.
Jensen in connection with the purchase by an investment group consisting of
Jensen family members (including Mr. Jensen) of the Company's National Motor
Club unit and (b) a pledge by Mr. Jensen of $7.1 million face amount of
investment securities owned by Mr. Jensen.
In the event that UCNB fails to comply with the terms of the February
Consent Order, or in the event that the Company, UCS or UCNB fail to comply with
the June Consent Orders, such failure could result in sanctions brought against
the Company, UCS, UCNB, and their respective officers and directors and UCNB's
"institution-related parties," including the assessment of civil money penalties
and enforcement of the Consent Orders in Federal District Court.
Effective June 30, 2000, UCS sold all of its outstanding shares of UMMG for
a purchase price in the amount of $25,000 in cash, with an additional amount of
up to $2.0 million payable over the next five years, contingent upon the
performance of the business. The purchaser is controlled by the former President
of UMMG. UMMG is a Lakewood, Colorado-based provider of marketing,
administrative and support services for the Company's credit card programs. In
addition, on July 31, 2000, UICI signed a credit agreement with the purchaser,
pursuant to which it has agreed to lend to the purchaser up to $1,000,000 on a
revolving basis.
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.
Set forth below is a summary of the operating results of the United
CreditServ business for the three and six-month periods ended June 30, 2000 and
1999, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUE
Net interest income ...................................... $ 5,886 $ 6,484 $ 10,452 $ 10,720
Credit card fees and other fee income .................... 44,116 45,614 94,601 100,192
--------- --------- --------- ---------
Total revenues ................................... 50,002 52,098 105,053 110,912
EXPENSES
Provision for loan losses ................................ 45,876 49,474 84,069 76,369
Operating expenses ....................................... 22,880 62,091 54,337 79,265
--------- --------- --------- ---------
Total expenses ................................... 68,756 111,565 138,406 155,634
--------- --------- --------- ---------
Loss from operations before federal income taxes ........... (18,754) (59,467) (33,353) (44,722)
Amount charged to allowance for loss on disposal ........... 18,754 -- 33,353 --
Loss from operations before income taxes ................... -- (59,467) -- (44,722)
Additional estimated loss on disposal ...................... (36,000) -- (36,000) --
Federal income tax benefit ................................. (12,600) (20,754) (12,600) (15,575)
--------- --------- --------- ---------
Loss from discontinued operations .......................... $ (23,400) $ (38,713) $ (23,400) $ (29,147)
========= ========= ========= =========
</TABLE>
9
<PAGE> 10
Assets and liabilities of the United CreditServ business to be disposed of
consisted of the following at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Assets
Cash ..................................................... $ 4,580 $ 18,469
Short term investments ................................... 85,105 92,070
Credit card receivables, net of allowance for losses....... 140,182 190,676
Other assets ............................................. 60,187 46,869
--------- ---------
Total assets ..................................... $ 290,054 $ 348,084
Liabilities
Time deposits ............................................ 182,709 290,023
Notes payable ............................................ 6,594 12,241
Other liabilities ........................................ 25,884 65,700
Reserve for loss on disposal ............................. 132,647 130,000
--------- ---------
Total liabilities ................................ 347,834 497,964
--------- ---------
Net liabilities to be disposed ............................. $ (57,780) $(149,880)
========= =========
</TABLE>
The following is a summary of the credit card loans as of June 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
AFCA credit card loans ............ $ 50,732 $ 38,467
ACE credit card loans ............. 136,127 236,855
Transferor's interest ............. 17,421 23,992
--------- ---------
Total credit card loans ....... $ 204,280 $ 299,314
========= =========
</TABLE>
The Company's allowance for losses on credit card loans is summarized below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
---------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year ...... $ 108,638 $ 66,811
Provision for loan losses ......... 84,069 211,747
Recoveries ........................ 29,999 40,091
Charge offs and other ............. (158,608) (210,011)
--------- ---------
Balance at end of period .......... $ 64,098 $ 108,638
========= =========
</TABLE>
The net credit card receivables of United CreditServ decreased from $190.7
million at December 31, 1999 to $140.2 million at June 30, 2000. The change
resulted from additions to credit card balances for new purchases, interest, and
fees of $274.0 million, less payments of $210.4 million, recoveries of
previously charged off balances of $30.0 million, and a provision for
uncollectible accounts of $84.1 million.
NOTE C - LIQUIDITY
Historically, the Company's primary sources of cash have been premium
revenues from policies issued, investment income, fees and other income,
deposits to fund the credit card receivables, and borrowings to fund student
loans. The primary uses of cash have been payments for benefits, claims and
commissions under those policies, operating expenses and the funding of credit
card receivables and student loans. In the six-month periods ended June 30, 2000
and 1999, net cash used in operations totaled approximately $110.6 million and
$3.4 million, respectively.
UICI is a holding company, the principal assets of which are its investments
in its separate operating subsidiaries, including its regulated insurance
subsidiaries. The holding company's ability to fund its cash requirements is
largely dependent upon its ability to access cash, by means of dividends or
other means, from its subsidiaries. The laws governing the Company's insurance
subsidiaries restrict dividends paid by the Company's domestic insurance
subsidiaries in any year. Inability to access cash from its subsidiaries could
have a material adverse effect upon the Company's liquidity and capital
resources.
10
<PAGE> 11
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 July 29, 2000, UICI has contributed to United
CreditServ an aggregate of $176.6 million in cash, including $50.0 million
contributed in the thirty-day period ended July 29, 2000 pursuant to the UCNB
Capital Plan. In addition, on June 28, 2000, the Company funded an $8.0 million
principal prepayment owing on its bank credit facility, on June 1, 2000 the
Company made a mandatory principal payment on its senior notes outstanding in
the amount of $3.95 million, and effective July 27, 2000 the Company prepaid
$6.0 million owing to an affiliated lender (see Note J to Notes to Consolidated
Condensed Financial Statements). UICI has funded these cash contributions and
other cash needs with the proceeds of sale of investment securities, a borrowing
from a third party in the amount of $24.0 million funded in July 2000, approved
sales of assets from the parent company to the Company's regulated insurance
company subsidiaries completed in June and July 2000 generating cash proceeds in
the aggregate amount of approximately $26.2 million, dividends in the amount of
$19.0 million paid during the six months ended June 30, 2000 from CLICO, the
sale to The MEGA Life and Health Insurance Company of CLICO for $19.0 million in
July 2000, cash proceeds in the amount of $21.8 million from the disposition of
its National Motor Club unit completed in July 2000, and cash on hand.
Based on projections as of August 1, 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 $29.7 million to fund future
operating losses of the credit card business. In addition, through December 31,
2000 the holding company will have additional cash requirements in the amount of
approximately $26.8 million. The Company currently anticipates that these cash
requirements at the holding company level will be funded by cash on hand ($34.8
million at August 7, 2000), cash received from interest income and tax sharing
reimbursements from subsidiaries (which will be partially offset by holding
company operating expenses), and scheduled principal payments on a $35.0 million
promissory note delivered to the Company in July 2000 in connection with the
sale of the Company's National Motor Club unit (see Note J - Related Party
Transactions).
UICI does not currently anticipate the need during 2000 to utilize the
proceeds of regular or special dividends from The MEGA Life and Health Insurance
Company or Mid West National Life Insurance Company of Tennessee (the Company's
principal regulated insurance company subsidiaries) to fund its cash commitments
under the UCNB Capital Plan or for other cash needs. However, it is likely that
the payment of dividends from its regulated insurance subsidiaries, if made,
would 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.
11
<PAGE> 12
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 June 30, 2000, the Company's carrying
value of its investment in HealthAxis.com was $12.8 million, representing its
carryover investment in Insurdata plus the Company's investment in shares of
HealthAxis.com acquired prior to the HealthAxis Merger, 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 six months ended June 30, 2000 in
the amount of $15.2 million.
On January 26, 2000, HAI and HealthAxis.com entered into an Agreement and
Plan of Merger (the "Merger Agreement"), pursuant to which HAI agreed to acquire
all of the outstanding shares of HealthAxis.com that HAI does not currently own
through the merger of HealthAxis.com with a wholly-owned subsidiary of HAI (the
"Proposed HAI Merger"). Upon consummation of the Proposed HAI Merger,
HealthAxis.com shareholders (including the Company) would receive 1.127 shares
of HAI common stock for each share of HealthAxis.com common stock outstanding.
The consummation of the Proposed HAI Merger is subject to various conditions,
including the approval of both HAI and HealthAxis.com shareholders, as well as
regulatory approval. If the Proposed HAI Merger proceeds in accordance with its
current terms, the Company will hold approximately 20.1 million shares
(representing 43.2%) of the issued and outstanding shares of HAI.
The Merger Agreement provides that either of HealthAxis.com or HAI has the
right to terminate the Merger Agreement if the Proposed HAI Merger was not
completed by July 31, 2000 for any reason other than a breach of the Merger
Agreement by the party giving notice. The Proposed HAI Merger had not been
completed as of such date. While neither party to the Merger Agreement has
tendered a formal notice of termination, the parties are reassessing the
advisability of proceeding with the Proposed HAI Merger in its current form and
under its current terms, in light of changed market conditions and other
factors.
Set forth below is summary condensed balance sheet and income statement data
for HealthAxis.com as of and for the three and six-month periods ended, June 30,
2000. This financial information has been adjusted to exclude the effects of
push-down accounting for the HealthAxis Merger.
<TABLE>
<CAPTION>
JUNE 30,
2000
--------------
(IN THOUSANDS)
<S> <C>
Assets
Cash ...................................... $ 31,231
Accounts receivable ....................... 10,031
Property and equipment .................... 7,825
Other assets .............................. 4,857
--------
Total assets ...................... $ 53,944
========
Liabilities
Accounts payable and accrued expenses ..... $ 9,594
Other liabilities ......................... 2,804
--------
Total liabilities ................. 12,398
Stockholders' equity ........................ 41,546
--------
Total liabilities and equity ................ $ 53,944
========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------------ ----------------
(IN THOUSANDS)
<S> <C> <C>
Revenue ........................... $ 10,737 $ 22,410
Operating expenses ................ (34,289) (59,813)
--------- ---------
Net loss ................ $ (23,552) $ (37,403)
========= =========
</TABLE>
NOTE E - LONG TERM DEBT
On July 19, 2000, the Company's offshore-domiciled insurance companies
incurred indebtedness with an institutional lender in the amount of $24.0
million. The indebtedness bears interest at the per annum rate of 11.0%, matures
on August 1, 2001, is secured by a pledge of all of the assets of the offshore
companies, and is guaranteed by the Company. The proceeds of the borrowing were
advanced to the parent company to fulfill liquidity needs at the parent company.
12
<PAGE> 13
Effective June 29, 2000, UICI executed and delivered an unsecured promissory
note payable to a systems vendor in the amount of $10,000,125, which note bears
interest at LIBOR plus 150 basis points (1.5%) (8.2787% at June 30, 2000), and
is payable as to principal in equal quarterly installments in the amount of
$500,006, commencing October 1, 2000, with a final maturity of June 30, 2005.
The note was delivered to discharge an account payable by UCS in the amount of
$10,000,000 owing to the systems vendor, which payable was reflected in the
consolidated balance sheet of the Company (included in net liabilities of
discontinued operations) at December 31, 1999 and March 31, 2000.
On March 14, 2000, a limited liability company controlled by the Company's
Chairman ("Lender LLC") loaned $70.0 million to a newly-formed subsidiary of the
Company (the "Lender LLC Loan"). The Lender LLC Loan bears interest at the
prevailing prime rate, was guaranteed by UICI, was due and payable in July 2001
and was secured by a pledge of investment securities and shares of the Company's
National Motor Club unit.
On March 14, 2000, UICI reduced indebtedness outstanding under its unsecured
credit facility with a group of banks from $100.0 million to $25.0 million,
utilizing $5.0 million of cash on hand and the proceeds of the Lender LLC Loan.
As part of the paydown, the bank credit facility was amended to provide, among
other things, that the $25.0 million balance outstanding would be due and
payable on July 10, 2000, amounts outstanding under the facility would be
secured by a pledge of investment securities and shares of Mid-West National
Life Insurance Company of Tennessee ("Mid-West"), and the restrictive covenants
formerly applicable to UICI and its restricted subsidiaries (primarily the
Company's insurance companies) were made applicable solely to Mid-West. Amounts
outstanding under the bank credit facility continued to bear interest at LIBOR
plus 100 basis points per annum.
On April 11, 2000 and June 28, 2000, the Company made principal payments of
$11.0 million and $8.0 million, respectively, under the bank credit facility,
and on June 30, 2000, Lender LLC, against payment to the banks of $6.0 million,
assumed 100% of the banks' remaining $6.0 million position in the bank credit
facility. As a result of these transactions, at June 30, 2000, the Company (or
its subsidiary) had indebtedness outstanding owing to Lender LLC in the
aggregate amount of $76.0 million, and all of the Company's indebtedness owing
to commercial banks under the bank credit facility had been paid in full.
Effective July 27, 2000, the Company and the Lender LLC completed the
restructuring of the terms of the Lender LLC Loan. As part of the restructuring,
the Company paid to Lender LLC principal owing on the Lender LLC Loan in the
amount of $6.0 million. Giving effect to the restructuring, Lender LLC holds
indebtedness in the aggregate principal amount of $70.0 million owing by the
Company, which indebtedness (the "Amended Lender LLC Loan") consists of a $32.0
million unsecured tranche and a $38.0 million tranche secured by a pledge of
100% of the capital stock of Mid-West. The unsecured tranche of the Amended
Lender LLC Loan is mandatorily prepayable by the Company upon and to the extent
of the Company's receipt of a tax refund currently expected to be received in
February 2001 in the amount of approximately $22.0 million. The Amended Lender
LLC Loan (a) matures on January 1, 2002, (b) continues to bear interest at the
prevailing prime rate from time to time, with interest accruing but not payable
until the earlier to occur of full prepayment of the Lender LLC Loan or January
1, 2002, and (c) is mandatorily prepayable monthly to the extent of 1% of the
outstanding principal balance of the Amended Lender LLC Loan. The security
interest in all remaining collateral previously pledged to secure payment of the
Lender LLC Loan and indebtedness outstanding under the bank credit facility
(including all investment securities and shares of the Company's National Motor
Club unit) was released in full.
NOTE F - INCOME TAXES
The Company's effective tax rate on continuing operations for each of the
three-month and six-month periods ended June 30, 2000 was approximately 40% and
46%, respectively. 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 for the three and six
months ended June 30, 2000 of $1.7 million and $11.2 million, respectively
(including amortization of goodwill).
13
<PAGE> 14
NOTE G - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income (loss) available to common shareholders:
Income from continuing operations available
to Common shareholders ................... $ 6,420 $ 10,868 $ 26,211 $ 22,182
Loss from discontinued operations ........... (23,400) (38,713) (23,400) (29,147)
---------- ---------- ---------- ----------
Net income (loss) ........................... $ (16,980) $ (27,845) $ 2,811 $ (6,965)
========== ========== ========== ==========
Weighted average shares outstanding
-- basic earnings (loss) per share .......... 46,427 46,231 46,405 46,292
Effect of dilutive securities:
Employee stock options and other shares ....... 1,561 1,379 1,206 1,324
---------- ---------- ---------- ----------
Weighted average shares outstanding--dilutive
earnings (loss) per share ................... 47,988 47,610 47,611 47,616
========== ========== ========== ==========
Basic earnings (loss) per share
From continuing operations .................. $ 0.14 $ 0.24 $ 0.57 $ 0.48
From discontinued operations ................ (0.50) (0.84) (0.50) (0.63)
---------- ---------- ---------- ----------
Net income (loss) ........................... $ (0.36) $ (0.60) $ 0.07 $ (0.15)
========== ========== ========== ==========
Diluted earnings (loss) per share
From continuing operations .................. $ 0.13 $ 0.23 $ 0.55 $ 0.47
From discontinued operations ................ (0.49) (0.81) (0.49) (0.61)
---------- ---------- ---------- ----------
Net income (loss) ........................... $ (0.36) $ (0.58) $ 0.06 $ (0.14)
========== ========== ========== ==========
</TABLE>
NOTE H - LEGAL PROCEEDINGS
The Company is a party to the following material legal proceedings:
SECURITIES CLASS ACTION LITIGATION
As previously disclosed, in December 1999 and February 2000, the Company and
certain of its executive officers were named as defendants in three securities
class action lawsuits alleging, among other things, that UICI's periodic filings
with the SEC contained untrue statements of material facts and/or failed to
disclose all material facts relating to the condition of UICI's credit card
business, in violation of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 thereunder. The three cases have been subsequently consolidated
as Herbert R. Silver, et al. v. UICI et al, which is pending in U.S. District
Court for the Northern District of Texas. Plaintiffs purport to represent a
class of persons who purchased UICI common stock from April 16, 1999 through
December 9, 1999. On June 12, 2000, plaintiffs filed a consolidated amended
class action complaint, amending, consolidating and supplementing the
allegations made in the original cases.
On August 4, 2000, UICI and the individual defendants filed a motion to
dismiss the case in its entirety, asserting that plaintiffs failed to properly
plead the elements of a Section 10(b) claim. The Court has not ruled on the
motion. The Company intends to continue to vigorously contest the allegations in
the cases.
SUN COMMUNICATIONS LITIGATION
As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are involved in litigation (Sun Communications, Inc. v. SunTech Processing
Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation") with a third
party concerning the distribution of the cash proceeds from the sale and
liquidation of SunTech Processing Systems, LLC ("STP") assets in February 1998.
The Dallas County, Texas District Court ruled in December 1998 that, as a matter
of law, a March 1997 agreement governing the distribution of such cash proceeds
should be read in the manner urged by Sun Communications, Inc. ("Sun") and
consistent with a court-appointed liquidator's previous ruling. The District
Court entered a judgment directing distribution of the sales proceeds in the
manner urged by Sun. The District Court also entered a finding that UICI
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.
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 did not,
14
<PAGE> 15
however, appeal the District Court's ruling with regard to the interpretation of
the March 1997 agreement. On September 10, 1999, Mr. Jensen filed his initial
brief in support of his appeal of, among other things, the trial court's
December 1998 finding in the Sun Litigation that Mr. Jensen was not entitled to
any of the proceeds from the sale of Sun. On October 4, 1999, Sun filed its
brief in opposition to the appeal.
Oral argument before the Dallas Court of Appeals on the appeal was held on
February 1, 2000. On August 1, 2000, the Court of Appeals for the Fifth District
of Texas at Dallas delivered its opinion on the appeal, reversing the trial
court's judgment as to UICI's liability for attorneys' fees and in its finding
that UICI violated Texas securities laws and breached a fiduciary duty. The
Appeals Court also reversed the trial court's judgment that directed
distribution of the STP sales proceeds in the manner urged by Sun. The case has
been remanded to the trial court for a new trial.
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). The
motion to lift the stay for the purpose of releasing the $7.55 million was
denied by the Appeals Court on May 30, 2000.
In the brief filed in his appeal of the District Court's December 1998
finding, Mr. Jensen reasserted that the March 1997 agreement requires that,
before STP can make a distribution to UICI and Sun, it must advance
approximately $10 million to Mr. Jensen in satisfaction of certain creditor and
preferred equity claims. If and to the extent that Mr. Jensen's interpretation
of the March 1997 agreement is ultimately adopted in the Sun Litigation after
all rights to appeal have been exhausted, the amount of such proceeds which UICI
may ultimately receive directly from STP may be reduced. However, in such event
and in accordance with an agreement reached with the Company in June 1998 (the
"Assurance Agreement"), Mr. Jensen has agreed that, if UICI receives less than
$15.149 million in the lawsuit, then Mr. Jensen will advance funds to UICI
sufficient to increase UICI's recovery to $15.149 million. The Assurance
Agreement also restricts the manner in which UICI can seek funds in satisfaction
of Mr. Jensen's previously unconditional guaranty of the value of UICI's initial
investment in a predecessor company to STP.
The Company cannot at this time predict how, when or in what fashion the Sun
Litigation will ultimately be resolved. However, for financial reporting
purposes, any cash ultimately received by the Company from Mr. Jensen pursuant
to the Assurance Agreement 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).
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.
15
<PAGE> 16
At the regular quarterly meeting of the Company's Board of Directors held on
August 4, 1999, George Lane III and Stuart D. Bilton (non-employee directors of
the Company) were appointed, in accordance with Texas and Delaware law, to serve
as a special committee 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 (which fees were
reimbursed by Mr. Jensen on July 5, 2000); (d) seek reimbursement of certain
legal fees awarded to Sun if and only if certain ongoing appeals prove
unsuccessful; and (e) implement certain heightened related-party transaction
controls. The Special Litigation Committee also recommended that UICI ratify the
Assurance Agreement, which allows UICI to recover up to $15.149 million from the
STP sale and which also requires UICI to look to the proceeds from the STP sale
to satisfy Mr. Jensen's 1996 guaranty of the value of UICI's initial investment
in a predecessor company to STP. The Company's Board of Directors affirmed the
Special Litigation Committee's findings and recommendations and directed
management to implement the specific recommendations as promptly as practicable.
On March 22, 2000, the Special Litigation Committee reported to the Court
its findings and recommendations with respect to the allegations in the original
complaint, and the Court granted plaintiff's motion to lift the statutory stay
in the proceedings for the purposes of evaluating the Special Litigation
Committee's decision on the 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 was held on May 16,
2000.
On April 26, 2000, the Special Litigation Committee filed a Motion to
Dismiss Certain Derivative Claims, contending that plaintiff's claims arising
from or relating to the Jensen guaranty claim were without merit and should be
dismissed from the lawsuit. On June 6, 2000, the Court heard arguments on the
Special Litigation Committee's Motion to Dismiss the guaranty claim, and on June
10, 2000, the Court granted the Motion to Dismiss. On April 30, 2000, UICI filed
a Motion to Disqualify Plaintiff and his counsel, alleging that they were not
fair and adequate representatives of UICI. On May 4, 2000, plaintiff filed a
Motion to Show Authority, alleging that UICI did not have the authority to file
the Motion to Disqualify. The Motion to Disqualify and the Motion to Show
Authority are still pending before the Court.
16
<PAGE> 17
The Special Litigation Committee continues to assess the allegations
contained in plaintiff's amended complaints.
ACE AND AFCA LITIGATION
As previously disclosed, the Company and UCNB are parties to separate
lawsuits filed in February 2000 by American Credit Educators, Inc. ("ACE") and
American Fair Credit Association, Inc. ("AFCA"), organizations through which
United CreditServ formerly marketed its credit card programs (American Credit
Educators, LLC v. United Credit National Bank and UICI and American Fair Credit
Association, Inc. v. United Credit National Bank and UICI, each pending in the
United States District Court for the District of Colorado). In the suits,
plaintiffs have alleged, among other things, that UCNB has breached its
agreements with ACE and AFCA and have claimed damages in an indeterminate
amount. ACE and AFCA are each controlled by Phillip A. Gray, the former head of
UICI's credit card operations.
On June 26, 2000, AFCA filed a first amended complaint seeking, among other
things, a declaratory judgement and injunctive relief and alleging breach of
contract and other causes of action.
On August 2, 2000, following a hearing held on July 28, 2000, the court
granted plaintiff's motion to disqualify the Company's designated counsel from
representing the Company and United Credit National Bank in the AFCA case, but
the court denied plaintiff's motion to disqualify the Company's designated
counsel from the ACE case. By agreement with plaintiffs' counsel, the due date
for the Company's responses to the complaints in these two cases has been
extended.
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' pending motions to compel arbitration and to narrow
the class definition are currently scheduled to be argued on August 18, 2000.
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.
On May 4, 2000, the court in the BankFirst case granted Bankfirst's motion
for summary judgment and entered a judgment terminating the case in favor of
Bankfirst and against plaintiff Mitchell. Plaintiff Mitchell subsequently filed
a notice of appeal to the United States Court of Appeals for the Ninth Circuit.
By order dated June 26, 2000, the State Court designated the AFCA case a
"complex case" within the meaning of California Code of Civil Procedure, Section
1800, et. seq., and the court set August 31, 2000 as the date for the
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<PAGE> 18
Initial Complex Case Management Conference. The previously entered stay of
litigation in the AFCA case remains in effect until the August 31, 2000 Initial
Case Management Conference.
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.
The parties in the Bullock County cases settled the cases at nominal cost to
UCNB, and the court formally dismissed the Bullock County cases in June 2000.
UCNB filed motions to dismiss and motions to compel arbitration in the Macon
County suits, and hearings on the defendants' motions to compel arbitration have
been postponed indefinitely at the request of plaintiffs' counsel. The Company
believes that it has meritorious defenses to the allegations in the Macon County
suits and intends to vigorously contest the 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.
In May 2000 the Company reached an agreement with respect to substantially
all monetary and non-monetary issues in the case. The trial court conducted a
preliminary approval hearing of the settlement terms on June 16, 2000, and the
final settlement approval hearing is currently scheduled for October 16, 2000.
GOTTSTEIN LITIGATION
As previously disclosed, UICI, Ronald L. Jensen, and UGA, Inc. are party
defendants in a purported class action lawsuit filed in November 1998
(Gottstein, et al. v. The National Association for the Self-Employed, et al.,
pending in the United States District Court for the District of Kansas). The
class representatives have alleged fraud, conspiracy to commit fraud, breach of
fiduciary duty, violation of the Kansas Consumer Protection Act, conspiracy to
commit RICO violations, and violation of RICO, all arising out of the concurrent
sales of individual health insurance policies underwritten and marketed by PFL
Life Insurance Company (PFL) and memberships in The National Association for the
Self-Employed (NASE).
On November 10, 1999, a tentative settlement was reached 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.
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<PAGE> 19
JACOLA LITIGATION
As previously disclosed, 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, and on June 9,
2000, the court approved the class settlement and settlement documents were
executed.
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 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.
On June 12, 2000, EFG filed and served its first amended complaint, in which
EFG recited the claims from the first complaint and added additional
breach-of-contract counts seeking recovery for a series of twenty-one promissory
notes. On July 7, 2000, the defendants filed their answer to the amended
complaint, asserting several affirmative defenses. Discovery in the case
continues.
STATE OF CONNECTICUT INVESTIGATION
On April 19, 2000, the Connecticut Attorney General's Office served upon
UCNB a Civil Investigative Demand, seeking information regarding UCNB's credit
card fees, disclosures, marketing practices, affinity relationships and the
handling of payments from consumers to UCNB. On May 26, 2000, UCNB submitted a
timely response to the information request.
UNITED CREDIT NATIONAL BANK
As previously disclosed, on February 25, 2000, the Board of Directors of
United Credit National Bank ("UCNB") consented to the issuance by the OCC of a
Consent Order (the "February Consent Order"). UCNB is a special purpose national
bank headquartered in Sioux Falls, South Dakota, and an indirect wholly owned
(except for directors' qualifying shares) subsidiary of the Company. The terms
of the February Consent Order will govern for the indefinite future the
capitalization, funding activities, growth and operations of UCNB.
Under the terms of the February Consent Order, UCNB is prohibited from
accessing the brokered deposit market and from soliciting or accepting deposits
over the Internet. The February Consent Order requires UCNB, until further
notice from the OCC, to cease all activities with American Credit Educators,
Inc. ("ACE") and American Fair Credit Association, Inc. ("AFCA"), independent
marketing associations through which UCNB has marketed its credit card programs
to customers with limited or impaired credit records. The February 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
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<PAGE> 20
immediate review of all agreements with all third parties to assess whether such
agreements are on terms fair and reasonable to UCNB.
UCNB is further prohibited under the terms of the February 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 February 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.
On June 29, 2000, the OCC approved a definitive Capital Plan previously
submitted by UCNB in accordance with the terms of the February Consent Order.
The Capital Plan approved by the OCC requires the orderly disposition on or
before December 31, 2000 of UICI's ownership interest in UCNB or the liquidation
of UCNB, the payment of all of UCNB's insured deposits and satisfaction of or
provision for all other UCNB liabilities, and the maintenance of minimum capital
ratios during this period. The Capital Plan further provides that (a) UICI
through United CreditServ, Inc. (UICI's wholly owned subsidiary and the direct
parent of UCNB) will contribute an aggregate of $50.0 million to the capital of
UCNB in prescribed increments over a thirty-day period ending July 29, 2000
(which capital has been contributed as required) and (b) UICI and Ronald L.
Jensen (UICI's Chairman) will deliver additional collateral to UCNB to further
secure UCNB's obligations under the Capital Plan (which collateral has been
deposited as required).
On June 29, 2000, UICI, UCS and UCNB agreed to the issuance by the OCC of
separate Consent Orders (the "June Consent Orders") memorializing the terms of
the Capital Plan. The June Consent Orders provide, among other things, that (a)
UICI through UCS will contribute additional capital to UCNB in the amount of
$50.0 million; (b) UCNB will maintain prescribed capital ratios throughout the
plan period; (c) UCNB will adopt and implement certain credit card
administrative policies and procedures; and (d) on or before December 31, 2000,
UICI will assume all of UCNB's remaining contingent liabilities. UCNB's
obligations under the Capital Plan are secured by a pledge by Mr. Jensen (the
Company's Chairman) of $7.1 million face amount of investment securities owned
by him and by a pledge by UICI of a short-term promissory note in the principal
amount of $35.0 million issued to UICI and guaranteed by Mr. Jensen in
connection with the purchase by an investment group consisting of Jensen family
members (including Mr. Jensen) of UICI's National Motor Club unit. See Note J of
Notes to Consolidated Condensed Financial Statements.
In the event that UCNB fails to comply with the terms of the February
Consent Order, or in the event that the Company, UCS or UCNB fail to comply with
the June Consent Orders, such failure could result in sanctions brought against
the Company, UCS, UCNB and their respective officers and directors and UCNB's
"institution-related parties," including the assessment of civil money penalties
and enforcement of the Consent Orders in Federal District Court.
OTHER MATTERS
The Company and its subsidiaries are parties to various other pending legal
proceedings arising in the ordinary course of business, including some asserting
significant damages arising from claims under insurance policies, disputes with
agents and other matters. Based in part upon the opinion of counsel as to the
ultimate disposition of such lawsuits and claims, management believes that the
liability, if any, resulting from the disposition of such proceedings will not
be material to the Company's financial condition or results of operations.
NOTE I - SEGMENT INFORMATION (CONTINUING OPERATIONS)
The Company's operating segments included in continuing operations are: (i)
Insurance, which includes the businesses of the Self Employed Agency Division,
the Student Insurance Division, the OKC Division, the Special Risk Division and
the National Motor Club Division; (ii) Financial Services, which includes the
businesses of Educational Finance Group, Inc. ("EFG"), 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
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by the Company on February 3, 2000)) and other business units, (iii) the
Company's investment in HealthAxis.com and (iv) Other Key Factors. Other Key
Factors include investment income not allocated to the other segments, interest
and general expenses relating to corporate operations, realized gains or losses
on sale of investments and the operations of the Company's AMLI subsidiary.
Allocations of investment income and certain general expenses are based on a
number of assumptions and estimates, and the business segments reported
operating results would change if different methods were applied. Certain assets
are not individually identifiable by segment and, accordingly, have been
allocated by formulas. Segment revenues include premiums and other policy
charges and considerations, net 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.
Revenues, income from continuing operations before federal income taxes, and
identifiable assets by operating segment are set forth in the tables below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Insurance:
Self Employed Agency ........................ $ 137,811 $ 143,338 $ 275,502 $ 290,018
Student Insurance ........................... 28,430 29,707 55,704 55,794
OKC Division ................................ 22,885 23,561 46,581 47,545
Special Risk ................................ 9,564 14,258 20,232 28,805
National Motor Club ......................... 9,120 7,644 18,357 14,342
--------- --------- --------- ---------
207,810 218,508 416,376 436,504
Financial Services:
Educational Finance Group ................... 44,754 22,649 80,988 46,022
UICI Administrators ......................... 5,635 11,620 9,357 22,835
Other Business Units ........................ 279 228 548 349
--------- --------- --------- ---------
50,668 34,497 90,893 69,206
Gain on sale of HealthAxis.com shares......... -- -- 26,300 --
Other Key Factors ............................. 7,107 7,023 16,135 17,340
Intersegment Eliminations ..................... (2,390) (8,639) (2,525) (17,389)
--------- --------- --------- ---------
Total Revenues from continuing operations ........ $ 263,195 $ 251,389 $ 547,179 $ 505,661
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income (loss) from continuing operations before federal
income taxes:
Insurance:
Self Employed Agency .................................. $ 17,683 $ 14,248 $ 35,817 $ 17,399
Student Insurance ..................................... 7 743 91 1,503
OKC Division .......................................... 2,272 4,927 6,405 10,445
Special Risk .......................................... 297 1,052 543 602
National Motor Club ................................... 1,319 1,156 2,408 2,255
-------- -------- -------- --------
21,578 22,126 45,264 32,204
Financial Services:
Educational Finance Group ............................. (791) (4,394) (9,252) (3,168)
UICI Administrators ................................... 126 331 (140) 1,155
-------- -------- -------- --------
(665) (4,063) (9,392) (2,013)
Gain on sale of HealthAxis.com shares ...................... -- -- 26,300 --
HealthAxis.com operating loss .............................. (9,234) -- (15,154) --
Other Key Factors .......................................... 555 1,599 5,154 7,191
-------- -------- -------- --------
Total income from continuing operations before federal income
Taxes and Goodwill amortization 12,234 19,662 52,172 37,382
-------- -------- -------- --------
Less Goodwill amortization ................................. 1,602 1,108 3,237 2,406
-------- -------- -------- --------
Total income from continuing operations before federal
income taxes ............................................. $ 10,632 $ 18,554 $ 48,935 $ 34,976
======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Identifiable Assets
Insurance:
Self Employed Agency ..................... $ 422,810 $ 423,142
Student Insurance ........................ 57,677 79,011
OKC Division ............................. 565,498 582,275
Special Risk ............................. 82,401 85,235
National Motor Club ...................... 24,549 20,713
----------- -----------
1,152,935 1,190,376
Financial Services:
Educational Finance Group ................ 1,453,430 1,883,666
UICI Administrators ...................... 7,536 22,931
Other business units ..................... 20,546 20,029
----------- -----------
1,481,512 1,926,626
Investment in HealthAxis.com ................ 12,776 --
Other Key Factors ........................... 323,972 422,342
----------- -----------
Total assets from continuing
operations ...................... $ 2,971,195 $ 3,539,344
=========== ===========
</TABLE>
NOTE J - RELATED PARTY TRANSACTIONS
INTRODUCTION
Historically, the Company and its subsidiaries have engaged from time to
time in transactions and joint investments with executive officers and entities
controlled by executive officers, particularly Ronald L. Jensen (the Company's
Chairman) and entities in which Mr. Jensen and his adult children have an
interest ("Jensen Affiliates").
On March 20, 2000, the Board of Directors accepted the recommendations of
the Special Litigation Committee to amend the Company's policy for related-party
transactions to require (1) prospective review and approval by a majority of the
"Disinterested Outside Directors", until March 20, 2001, of any contract or
transaction involving payments of $60,000 or more over the life of any contract,
and, after March 20, 2001, review and approval of any contract or transaction
involving payments of $250,000 or more in any twelve-month period or $1,000,000
over the life of the contract and (2) defining a "related-party" as a person or
entity that is an "affiliate" of the Company or any entity in which any officer
or director of the Company has a 5% or greater equity interest. A "Disinterested
Outside Director" is any director of UICI who is an employee of neither the
Company nor any affiliate of the Company and otherwise holds no interest in any
person or entity with which the Company proposes to enter into a transaction in
question. Formal amendments to the Company's related party transactions policies
and procedures, incorporating the Special Litigation Committee's
recommendations, were adopted and approved by the Board of Directors of UICI at
the Board's annual meeting held on June 8, 2000.
The Company believes that the terms of all such transactions with all
related parties, including all Jensen Affiliates, are and have been on terms no
less favorable to the Company than could have been obtained in arms' length
transactions with unrelated third parties.
Transactions between an insured bank (including UCNB, the Company's indirect
wholly owned subsidiary) and its affiliates are subject to, among other things,
the quantitative and qualitative restrictions of Section 23A of the Federal
Reserve Act, as well as safety and soundness considerations. The OCC has
expressed criticism with respect to certain of the transactions that have taken
place between UCNB and the Company and/or certain of its wholly owned
subsidiaries. The Company disagrees, but it cannot predict at this time what
action, if any, the OCC will ultimately take with respect to these transactions.
JUNE -- JULY 2000 TRANSACTIONS
In June and July 2000, the Company entered into a series of transactions
(the "July 2000 Transactions") with Ronald L. Jensen (the Company's Chairman)
and affiliates of Mr. Jensen, the proceeds of which were utilized, in
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<PAGE> 23
part, to fund the Company's cash and other obligations under the Consent Order,
dated June 29, 2000, issued by the OCC to memorialize the terms of the UCNB
Capital Plan approved by the OCC.
In accordance with the policies and procedures of the Board of Directors,
each of the July 2000 Transactions was approved by the disinterested outside
directors of the Company at a meeting of the Board of Directors held on July 21,
2000, as being fair to UICI and its shareholders. The Board's determination was
made, in part, in reliance upon the opinion of an independent financial advisor
that the July 2000 Transactions, in their totality, were fair to the public
shareholders (consisting of non-Jensen affiliated shareholders) from a financial
point of view.
Restructuring of Lender LLC Loan
On March 14, 2000, a limited liability company controlled by Mr. Jensen
("Lender LLC") loaned $70.0 million (the "Lender LLC Loan") to a newly-formed
subsidiary of the Company, the proceeds of which were utilized by the Company to
reduce indebtedness outstanding under the Company's unsecured bank credit
facility from $100.0 million to $25.0 million. The Lender LLC Loan bore interest
at the prevailing prime rate, was guaranteed by UICI, was due and payable in
July 2001 and was secured by a pledge of investment securities and shares of the
Company's National Motor Club unit.
As part of the March 2000 paydown of the Company's bank credit facility, the
facility was amended to provide, among other things, that the $25.0 million
balance outstanding would be due and payable on July 10, 2000, amounts
outstanding under the facility would be secured by a pledge of investment
securities and shares of Mid-West, and the restrictive covenants formerly
applicable to UICI and its restricted subsidiaries (primarily the Company's
insurance companies) would be applicable solely to Mid-West. Amounts outstanding
under the bank credit facility continued to bear interest at LIBOR plus 100
basis points per annum.
On April 11, 2000 and June 28, 2000, the Company made principal payments of
$11.0 million and $8.0 million, respectively, under the bank credit facility,
and on June 30, 2000, Lender LLC, against payment to the banks of $6.0 million,
accepted 100% of the banks' remaining $6.0 million position in the bank credit
facility. As a result of these transactions, at June 30, 2000, the Company (or
its subsidiary) had indebtedness outstanding owing to Lender LLC in the
aggregate amount of $76.0 million, and all of the Company's indebtedness owing
to commercial banks under the bank credit facility had been paid in full.
Effective July 27, 2000, the Company and the Lender LLC completed a
restructuring of the terms of the Lender LLC Loan. As part of the restructuring,
the Company paid to Lender LLC principal owing on the Lender LLC in the amount
of $6.0 million. Giving effect to the restructuring, Lender LLC holds
indebtedness in the aggregate principal amount of $70.0 million owing by the
Company, which indebtedness (the "Amended Lender LLC Loan") consists of a $32.0
million unsecured tranche and a $38.0 million tranche secured by a pledge of
100% of the capital stock of Mid-West. The unsecured tranche of the Amended
Lender LLC Loan is mandatorily prepayable by the Company upon and to the extent
of the Company's receipt of a tax refund currently expected to be received in
February 2001 in the amount of approximately $22.0 million. The Amended Lender
LLC Loan (a) matures on January 1, 2002, (b) continues to bear interest at the
per annum rate of prime fluctuating from time to time, with interest accruing
but not payable until the earlier to occur of full prepayment of the Lender LLC
Loan or January 1, 2002, and (c) is mandatorily prepayable monthly to the extent
of 1% of the outstanding principal balance of the Amended Lender LLC Loan. The
security interest in all remaining collateral previously pledged to secure
payment of the Lender LLC Loan and indebtedness outstanding under the bank
credit facility (including all investment securities and shares of the Company's
National Motor Club unit) was released in full.
Sale of NMC Holdings, Inc.
On July 27, 2000, the Company sold to an investor group consisting of Jensen
family members (including Mr. Jensen) (the "NMC Buyer") its 97% interest in NMC
Holdings, Inc. ("NMC"), the parent company of its National Motor Club of America
unit, for a purchase price of $56.8 million, representing 97% of the value of
NMC as determined by independent appraisal. The purchase price was paid at
closing in cash in the amount of $21.8 million and by delivery of a promissory
note (the "NMC Note") issued by the NMC Buyer in the principal amount of $35.0
million. The NMC Note is an unsecured, full recourse obligation of the NMC Buyer
and is unconditionally guaranteed by Mr. Jensen. The NMC Note bears interest at
the per annum rate of prime fluctuating from time to
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<PAGE> 24
time, with three equal installments of principal in the amount of $11.667
million due on each of October 1, November 1 and December 1, 2000, respectively.
In accordance with the terms of the June Consent Orders, the Company has
pledged the NMC Note to UCNB to secure, in part, the Company's obligations under
the Capital Plan.
UICI, NMC Buyer and NMC have entered into a Management Agreement, the terms
of which govern the provision by UICI to NMC of management and administrative
services, information technology services, telephone services and other services
currently provided to NMC by UICI. The Management Agreement is terminable (a) by
UICI at any time upon not less than 60 days' notice to NMC and the NMC Buyer,
and (b) by NMC at any time following the payment in full of the NMC Note upon
not less than 30 days' notice to UICI. Pursuant to the Management Agreement,
UICI has agreed to allow William Gedwed (Executive Vice President and a Director
of the Company and the holder of approximately 3% of the equity interest in NMC)
to serve as a consultant to NMC for the term of the Management Agreement.
Jensen Indemnity Agreement
To secure in part the Company's obligations under the Capital Plan,
effective June 29, 2000 Mr. Jensen pledged to UCNB $7.1 million face amount of
Series B Certificates created as part of the Company's securitizations of credit
card receivables issued in 1997 and 1998 generated by UICI's credit card
operations. As a condition to Mr. Jensen's pledge of the Series B Certificates,
on June 29, 2000 the Company executed and delivered an Indemnity Agreement,
pursuant to which the Company agreed, among other things, to indemnify and hold
Mr. Jensen harmless from and against (A) loss, cost, expense, or liability
incurred by Mr. Jensen arising from, in respect of or in connection with, a
default by the Company of its obligations under the June Consent Orders, the
UCNB Capital Plan or the Liquidity and Capital Assurances Agreement, and (B) any
and all losses, costs and expenses (including reasonable attorneys' fees and
expenses) incurred by Mr. Jensen in enforcing any rights under the Indemnity
Agreement.
Sale of UICI Shares to NMC
Pursuant to the terms of an agreement, dated July 13, 2000, between the
Company and NMC, on July 24, 2000, the Company issued to NMC 175,000 treasury
shares of common stock at a purchase price of $5.25 per share. It is anticipated
that the 175,000 shares will be used to fund incentive stock programs for the
benefit of NMC employees.
OTHER MATTERS
On June 5, 2000, the Board of Directors of the Company (including all of the
disinterested outside directors) approved the execution and delivery of a
Consulting Agreement with Mr. Jensen. Pursuant to the terms of the Consulting
Agreement, Mr. Jensen agreed to provide consulting and advisory services to the
Company as requested by the Company from time to time, for a term ending on
December 31, 2000, unless earlier terminated by either party upon not less than
30 days' prior written notice. The Consulting Agreement provides that Mr. Jensen
will be compensated for his services at the hourly rate of $400.
Mr. Jensen's five adult children hold in the aggregate 100% of the equity
interest in Onward & Upward, Inc. ("OUI"), which is the holder of approximately
6.69% of the Company's outstanding Common Stock. Effective September 15, 1999,
the Company and OUI entered into a Put/Call Agreement. Pursuant to the Put/Call
Agreement, for a thirty day period commencing on July 1 of each year (commencing
in 2000 through 2006), the Company has an option to purchase from OUI, and OUI
has a corresponding right to require the Company to purchase, up to 369,174
shares of Common Stock at an initial purchase price in 2000 of $28.50 per share.
The call/put price escalates over time in annual dollar increments to recognize
an increase in value of the underlying UICI stock based upon historical past
performance (an approximate 6.0% annual rate of appreciation). In July 2000, the
Company extended until October 31, 2000 the period during which OUI may exercise
its initial put right under the Put/Call Agreement.
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<PAGE> 25
NOTE L - SUBSEQUENT EVENT
On August 2, 2000, the Board of Directors of the Company authorized the
issuance of an aggregate of 3,785,000 shares of its common stock to its employee
stock ownership and savings plan and to its stock accumulation plans created for
the benefit of its independent agents. The 3,785,000 shares when issued will
represent approximately 7.5% of the issued and outstanding shares of UICI common
stock.
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 were conducted primarily through its wholly-owned subsidiaries
United Credit National Bank ("UCNB") (a special purpose national bank, based in
Sioux Falls, South Dakota, chartered solely to hold credit card receivables);
Specialized Card Services, Inc. (provider of account management and collections
services for all of the Company's credit card programs); United Membership
Marketing Group, Inc. ("UMMG") (a Lakewood, Colorado-based provider of
marketing, administrative and support services for the Company's credit card
programs); and UICI Receivables Funding Corporation ("RFC"), a single-purpose,
bankruptcy-remote entity through which certain credit card receivables have been
securitized.
Through 1999, United CreditServ marketed its credit card programs and access
to a credit card through the American Fair Credit Association LLC ("AFCA"), an
independent membership association that provided credit education programs and
other benefits, and American Credit Educators LLC ("ACE"), which marketed credit
education materials and had a marketing agreement with UCNB to solicit credit
card applications. AFCA applicants were required to meet certain requirements
(including payment of initiation and monthly membership fees) in order to become
members of AFCA, and, in order to obtain a credit card, to meet underwriting
criteria established by UCNB.
Several recent developments have affected the operations of the Company's
United CreditServ subsidiary and may materially and adversely affect the results
of operations and financial condition of the Company in the future.
Sale of United CreditServ Operations
In light of UICI's continuing difficulties with its United CreditServ unit,
in March 2000 the Board of Directors of UICI determined, after a thorough
assessment of the unit's prospects, that UICI 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. As a result, at December 31, 1999, the Company established a
liability for loss on the disposal of the discontinued operation in the amount
of $130 million (pre-tax), which liability was included in net liabilities of
discontinued operations. The liability for loss on disposal established by the
Company at December 31, 1999 represented the Company's then-current estimate of
all additional losses (including asset write-downs, the estimated loss on the
sale of the business and/or the assets and continuing operating losses through
the date of sale) that it then believed it would incur as part of any sale of
the United CreditServ unit. During the quarter and six-month periods ended June
30, 2000, the discontinued operation incurred a loss from operations in the
amount of approximately $18.8 million and $33.4 million, respectively, which
losses were charged to the liability for loss on disposal.
Effective June 30, 2000, UCS sold all of its outstanding shares of UMMG for a
purchase price in the amount of $25,000 in cash, with an additional amount of up
to $2.0 million payable over the next five years, contingent upon the
performance of the business. The purchaser is controlled by the former President
of UMMG. UMMG is a Lakewood, Colorado-based provider of marketing,
administrative and support services for the Company's credit card programs. In
addition, on July 31, 2000, UICI signed a credit agreement with the purchaser,
pursuant to which it has agreed to lend the purchaser up to $1.0 million on a
revolving basis.
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<PAGE> 26
On August 4, 2000, UICI executed a definitive agreement to sell
substantially all of the non-cash assets associated with its United CreditServ
credit card business, including its credit card receivables portfolios, for a
cash purchase price at closing of approximately $134.0 million. In addition to
the cash purchase price payable at closing, the definitive agreement for the
sale of the assets contemplates an incentive cash payment contingent upon the
post-closing performance of the ACE credit card portfolio over a one year
period. The sale is subject to several closing conditions, including bank
regulatory approval. UICI currently expects that the sale can be completed prior
to September 30, 2000, though there can be no assurance if or when the
transaction will in fact be completed.
In connection with the proposed sale, UICI will retain substantially all
liabilities associated with its credit card business, including liability for
payment of all certificates of deposit issued by UCNB, merchant holdback
liabilities, liabilities associated with pending litigation and other
contingencies. UICI will retain United CreditServ's building and real estate in
Sioux Falls, South Dakota, and will lease the facilities to the purchaser
pursuant to a long-term lease. UICI will also retain the right to continue to
collect approximately $250.0 million face amount of previously charged off
credit card receivables.
In connection with the proposed sale of its United CreditServ business,
during the quarter ended June 30, 2000 the Company recorded an additional
pre-tax loss, and correspondingly increased the liability for loss on the
disposal of the discontinued operation, in the amount of $36.0 million ($23.4
million net of tax). The Company currently estimates that the remaining
liability for loss on disposal will be adequate to absorb all 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. The loss
the Company will ultimately realize upon the disposal of the discontinued
operation could differ materially from the current estimate.
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 and six-month periods ended June 30, 2000, United
CreditServ incurred a loss from operations in the amount of approximately $18.8
million and $33.4 million, respectively, which losses were 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" above.
UCNB is currently subject to the terms of a February 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 and the sale of its UMMG operations. See "Sale of United
CreditServ Operations" above.
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 $176.6 million in cash, including additional
cash in the amount of $50.0 million contributed pursuant to the UCNB Capital
Plan (see discussion below) through July 27, 2000. UICI has funded these cash
contributions and
26
<PAGE> 27
other cash needs with the proceeds of sale of investment securities, a borrowing
from a third party in the amount of $24.0 million funded in July 2000, approved
sales of assets from the parent company to the Company's regulated insurance
company subsidiaries completed in June and July 2000 generating cash proceeds in
the aggregate amount of approximately $26.2 million, dividends in the amount of
$19.0 million paid during the six months ended June 30, 2000 from The Chesapeake
Life Insurance Company ("CLICO") (one of its regulated insurance company
subsidiaries), the sale to The MEGA Life and Health Insurance Company of CLICO
for $19.0 million in July 2000, cash proceeds in the amount of $21.8 million
from the disposition of its National Motor Club unit completed in July 2000, and
cash on hand. See "Liquidity and Capital Resources."
Comptroller of the Currency Consent Orders and UCNB Capital Plan
On February 25, 2000, UCNB agreed to the issuance of a Consent Order by the
OCC (the "February Consent Order"). The February Consent Order requires UCNB,
until further notice from the OCC, to cease all activities with ACE and AFCA
(UCNB's only marketing organizations). The February Consent Order further
required 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 is further prohibited
under the terms of the February 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 February 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.
In accordance with the terms of the February Consent Order issued by the
OCC, UCNB is currently prohibited from accessing the brokered deposit market and
from soliciting or accepting deposits over the Internet. At December 31, 1999
and June 30, 2000, UCNB had $290.0 million and $182.7 million, respectively, of
certificates of deposits outstanding, and UCNB held approximately $110.5 million
and $89.7 million, respectively, in cash, cash equivalents and short term U.S.
Treasury securities. Of the certificates of deposit outstanding at June 30,
2000, $48.1 million matured on or before July 31, 2000; $53.1 million mature
between August 1 and September 30, 2000; $64.5 million mature between October 1
and December 31, 2000; and $17.0 million mature thereafter.
On June 29, 2000, the OCC approved a definitive Capital Plan previously
submitted by the Company and UCNB as required by the February Consent Order (the
"UCNB Capital Plan"). The UCNB Capital Plan approved by the OCC requires the
orderly disposition on or before December 31, 2000 of the Company's ownership
interest in UCNB or the liquidation of UCNB, the payment of all of UCNB's
insured deposits and satisfaction of or provision for all other UCNB
liabilities, and the maintenance of minimum capital ratios during this period.
The UCNB Capital Plan requires (a) the Company through UCS (the Company's wholly
owned subsidiary and the direct parent of UCNB) to contribute an aggregate of
$50.0 million to the capital of UCNB in prescribed increments over a thirty-day
period ended July 29, 2000 (which $50.0 million was contributed as required) and
(b) UICI and Ronald L. Jensen (UICI's Chairman) to deliver additional collateral
to UCNB to further secure UCNB's obligations under the Capital Plan (which
collateral was delivered as of July 29, 2000, as required).
The UCNB Capital Plan as submitted to and approved by the OCC does not
contemplate that UCNB will need to issue any new certificates of deposit. The
UCNB Capital Plan contemplates that UCNB will have sufficient cash and cash
equivalents to fully discharge all insured deposits, regardless of the amount of
proceeds ultimately realized upon sale or disposition of UCNB's credit card
portfolio and other assets.
The Company, UCS and UCNB agreed to the issuance by the OCC on June 29, 2000
of separate Consent Orders (the "June Consent Orders") memorializing the terms
of the UCNB Capital Plan. The June Consent Orders required, among other things,
(a) the Company through UCS to contribute additional capital to UCNB in the
amount of $50.0 million in prescribed increments over a thirty-day period ended
July 29, 2000; (b) UCNB to maintain prescribed capital ratios throughout the
plan period; (c) UCNB to adopt and implement certain credit card administrative
policies and procedures; and (d) the Company, on or before December 31, 2000, to
assume all of UCNB's remaining contingent liabilities. The Company's obligations
under the Capital Plan are secured by (a) a pledge by the Company of a
short-term promissory note in the principal amount of $35.0 million issued to
the
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<PAGE> 28
Company and guaranteed by Mr. Jensen in connection with the purchase by an
investment group consisting of Jensen family members (including Mr. Jensen) of
the Company's National Motor Club unit and (b) a pledge by Mr. Jensen of $7.1
million face amount of investment securities owned by Mr. Jensen.
In the event that UCNB fails to comply with the terms of the February
Consent Order, or in the event that the Company, UCS or UCNB fail to comply with
the June Consent Orders, such failure could result in sanctions brought against
the Company, UCS, UCNB, and their respective officers and directors and UCNB's
"institution-related parties," including the assessment of civil money penalties
and enforcement of the Consent Orders in Federal District Court.
Transactions between an insured bank (including UCNB, the Company's indirect
wholly owned subsidiary) and the insured bank's affiliates are subject to, among
other things, the quantitative and qualitative restrictions of Section 23A of
the Federal Reserve Act, as well as safety and soundness considerations. The OCC
has expressed criticism with respect to certain of the transactions that have
taken place between UCNB and the Company and/or certain of 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.
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.
In the three-month and six-month periods ended June 30, 2000, Educational
Finance Group, Inc. ("EFG") incurred an operating loss in the amount of $791,000
and $9.3 million, respectively, compared to operating losses of $4.4 million and
$3.2 million in the corresponding 1999 periods. Included in operating results
for the three-month and six-month periods were pre-tax gains from the sale of
student loans in the amount of $9.9 million and $10.6 million, respectively. The
operating loss in the three and six month periods ended June 30, 2000 resulted
primarily from the factors described below.
During the six months ended June 30, 2000, EFG incurred charges in the
aggregate amount of approximately $4.5 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 three months and six months ended June 30, 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 June 30, 2000, EFG had an aggregate of
$270.0 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 six months of 2000). If
the interest rate yield exceeds the maximum allowable rate chargeable to the
borrower, the holder of PLUS loans is eligible for government subsidized,
special allowance payments for the year. The fixed interest rate yield in the
six months ended June 30, 2000 was below the maximum rate. The interest yield on
PLUS loans was reset on July 1, 2000 to 8.99%. For the twelve months beginning
July 1,
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<PAGE> 29
2000, the fixed rate will be below the maximum rate and a holder of PLUS loans
will not be entitled to special allowance payments. EFG finances the cost of
such loans at floating interest rates which are reset monthly and quarterly
through its structured finance facilities.
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 may
not be capitalized 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 three months and six months
ended June 30, 2000, EFG originated approximately $4.9 million and $96.5
million, respectively, of PLUS loans, and incurred approximately $2.3 million
and $4.7 million, respectively, of costs in connection with originating such
loans, of which $ 1.3 million was capitalized in each of the periods.
During the three months ended June 30, 2000, EFG's student loan servicing
operations realized operating income of $340,000, and during the six months
ended June 30, 2000 such operations incurred a loss of $318,000. EFG continues
to explore means to reduce ongoing operating costs and increase operating
efficiencies at this operation.
During the three months and six months ended June 30, 2000, EFG's Academic
Management Services, Inc. subsidiary reported operating income in the amount of
$372,000 and $548,000, respectively, including gain on sale of student loans of
$1.0 million and $2.3 million, respectively. Due to the seasonal nature of
Academic Management Services, Inc.'s tuition installment plan activities, a
significant portion of Academic Management Services, Inc.'s revenues and profits
have historically been generated during the second half of the fiscal year.
During the six months ended June 30, 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 PROPOSED HEALTHAXIS.COM 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 June 30, 2000, the Company's carrying
value of its investment in HealthAxis.com was $12.8 million, representing its
carryover investment in Insurdata plus the Company's investment in shares of
HealthAxis.com acquired prior to the HealthAxis Merger, 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 six months ended June 30, 2000 in
the amount of $15.2 million.
On January 26, 2000, HAI and HealthAxis.com entered into an Agreement and
Plan of Merger (the "Merger Agreement"), pursuant to which HAI agreed to acquire
all of the outstanding shares of HealthAxis.com that HAI does not currently own
through the merger of HealthAxis.com with a wholly-owned subsidiary of HAI (the
"Proposed HAI Merger"). Upon consummation of the Proposed HAI Merger,
HealthAxis.com shareholders
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(including the Company) would receive 1.127 shares of HAI common stock for each
share of HealthAxis.com common stock outstanding. The consummation of the
Proposed HAI Merger is subject to various conditions, including the approval of
both HAI and HealthAxis.com shareholders, as well as regulatory approval. If the
Proposed HAI Merger proceeds in accordance with its current terms, the Company
will hold approximately 20.1 million shares (representing 43.2%) of the issued
and outstanding shares of HAI.
The Merger Agreement provides that either of HealthAxis.com or HAI has the
right to terminate the Merger Agreement if the Proposed HAI Merger is not
completed by July 31, 2000 for any reason other than a breach of the Merger
Agreement by the party giving notice. The Proposed HAI Merger had not been
completed as of such date. While neither party to the Merger Agreement has
tendered a formal notice of termination, the parties are reassessing the
advisability of proceeding with the Proposed HAI Merger in its current form and
under its current terms, in light of changed market conditions and other
factors.
ISSUANCE OF COMMON STOCK TO EMPLOYEE AND AGENT PLANS
On August 2, 2000, the Board of Directors of the Company authorized the
issuance of an aggregate of 3,785,000 shares of its common stock to its employee
stock ownership and savings plan and to its stock accumulation plans created for
the benefit of its independent agents. The 3,785,000 shares when issued will
represent approximately 7.5% of the issued and outstanding shares of UICI common
stock.
In particular, UICI has agreed to issue to its employee stock ownership and
savings plan 1,610,000 shares of its common stock at a purchase price of $5.25
per share, or $8.45 million in the aggregate. The purchase price for the shares
will be paid by delivery to UICI of the plan's $8.45 million promissory note,
which will be secured by a pledge of the purchased shares. The note will be
repaid over a period of approximately two years by crediting UICI's mandatory
contribution obligations with respect to the plan against principal and interest
due on the note.
UICI also intends to issue an aggregate of 2,175,000 shares of its common
stock to its agent stock accumulation plans, such shares to be allocated among
the agent plans maintained for the benefit of its UGA - Association Field
Services, New United Agency, Cornerstone Marketing of America, CFLD Association
Field Services and CLD Agency agency field forces. For approximately the next
two years, the Company will grant "matching credits" to participating agents'
accounts in the stock accumulation plans based on the lesser of $5.25 per share
or fair market value, and the Company will satisfy its funding commitment by
issuing newly issued shares rather than by making cash contributions which would
otherwise be invested in UICI shares at market value.
RESULTS OF CONTINUING OPERATIONS
The Company's business segments included in continuing operations are: (i)
Insurance, which includes the businesses of the Self Employed Agency Division,
the Student Insurance Division, the OKC Division, the Special Risk Division and
the National Motor Club Division; (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, income from continuing operations before federal income taxes
("operating income") and income from continuing operations by business segment
are summarized in the tables below:
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Insurance:
Self Employed Agency ................... $ 137,811 $ 143,338 $ 275,502 $ 290,018
Student Insurance ...................... 28,430 29,707 55,704 55,794
OKC Division ........................... 22,885 23,561 46,581 47,545
Special Risk ........................... 9,564 14,258 20,232 28,805
National Motor Club .................... 9,120 7,644 18,357 14,342
--------- --------- --------- ---------
207,810 218,508 416,376 436,504
Financial Services:
Educational Finance Group ............. 44,754 22,649 80,988 46,022
UICI Administrators .................... 5,635 11,620 9,357 22,835
Other Business Units ................... 279 228 548 349
--------- --------- --------- ---------
50,668 34,497 90,893 69,206
Gain on sale of HealthAxis.com shares .... -- -- 26,300 --
Other Key Factors ........................ 7,107 7,023 16,135 17,340
Intersegment Eliminations ................ (2,390) (8,639) (2,525) (17,389)
--------- --------- --------- ---------
Total Revenues from continuing
operations ................................ $ 263,195 $ 251,389 $ 547,179 $ 505,661
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income (loss) from continuing operations before federal
income taxes:
Insurance:
Self Employed Agency .................................. $ 17,683 $ 14,248 $ 35,817 $ 17,399
Student Insurance ..................................... 7 743 91 1,503
OKC Division .......................................... 2,272 4,927 6,405 10,445
Special Risk .......................................... 297 1,052 543 602
National Motor Club ................................... 1,319 1,156 2,408 2,255
-------- -------- -------- --------
21,578 22,126 45,264 32,204
Financial Services:
Educational Finance Group ............................. (791) (4,394) (9,252) (3,168)
UICI Administrators ................................... 126 331 (140) 1,155
-------- -------- -------- --------
(665) (4,063) (9,392) (2,013)
Gain on sale of HealthAxis.com shares ...................... -- -- 26,300 --
HealthAxis.com operating loss .............................. (9,234) -- (15,154) --
Other Key Factors .......................................... 555 1,599 5,154 7,191
-------- -------- -------- --------
Total income from continuing operations before federal
income taxes and goodwill ................................. 12,234 19,662 52,172 37,382
-------- -------- -------- --------
Less Goodwill .............................................. 1,602 1,108 3,237 2,406
-------- -------- -------- --------
Total income from continuing operations before federal
income taxes .............................................. 10,632 18,554 48,935 34,976
Federal income taxes ....................................... 4,212 7,686 22,724 12,794
-------- -------- -------- --------
Income from continuing operations .......................... $ 6,420 $ 10,868 $ 26,211 $ 22,182
======== ======== ======== ========
</TABLE>
Three and Six Month Periods ended June 30, 2000 Compared to Three and Six-Month
Periods ended June 30, 1999
For the three months ended June 30, 2000, the Company generated revenues and
income from continuing operations of $263.2 million and $6.4 million ($0.13 per
diluted share), respectively, compared to revenues and income from continuing
operations of $251.4 million and $10.9 million ($0.23 per diluted share),
respectively, for the three months ended June 30, 1999. For the six months ended
June 30, 2000, the Company generated revenues and income from continuing
operations of $547.2 million and $26.2 million ($0.55 per diluted share),
respectively, compared to revenues and income from continuing operations of
$505.7 million and $22.2 million ($0.47 per diluted share), respectively, for
the six months ended June 30, 1999. Included in income from continuing
operations in the six month period ended June 30, 2000 was a one-time pre-tax
gain from the sale of HealthAxis.com shares in the amount of $26.3 million
($17.1 million net of tax, or $0.36 per diluted share) and the Company's equity
in losses on its HealthAxis.com investment in the amount of $15.2 million ($9.9
million net of tax benefit, or ($0.21 per diluted share). Excluding such items,
the Company's income from continuing operations for the six months ended June
30, 2000 was $19.0 million ($0.40 per diluted share).
During the three-month and six-month periods ended June 30, 2000, United
CreditServ incurred a loss from operations in the amount of approximately $18.8
million and $33.4 million, respectively, which losses were charged to the
liability for loss on disposal established in December 31, 1999 in connection
with the designation of United CreditServ as a discontinued operation for
financial reporting purposes. Based on the terms of its announced sale of
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its United CreditServ unit, during the three months ended June 30, 2000 the
Company recorded an additional pre-tax loss, and correspondingly increased the
liability for loss on the disposal of the discontinued operation, in the amount
of $36.0 million ($23.4 million net of tax, or $0.49 per diluted share).
Primarily as a result of the charge to the reserve for loss on disposal of
the discontinued operation, for the three and six months ended June 30, 2000,
UICI reported a net loss in the amount of $17.0 million ($0.36 per diluted
share) and net income of $2.8 million ($0.06 per diluted share), respectively,
compared to a net loss in the amount of $27.8 million ($0.58 per diluted share)
and $7.0 million ($0.14 per diluted share) in the corresponding 1999 periods.
Self-Employed Agency ("SEA") Division
Operating income for the three months ended June 30, 2000 for the SEA
Division increased to $17.7 million from $14.2 million for the comparable 1999
period, and for the six months ended June 30, 2000 operating income increased to
$35.8 million from $17.4 million for the comparable period in 1999. The increase
in operating income was due principally to improved loss ratios on its managed
care products. The SEA Division also has had continued success in directing a
larger portion of new sales to traditional indemnity products, with which the
Company has not experienced the pricing problems it has experienced with its
managed care products. Revenues for the three months ended June 30, 2000 for the
SEA Division decreased to $137.8 million from $143.3 million for the same period
in 1999, and for the six months ended June 30, 2000 revenues decreased to $275.5
million from $290.0 million for the same period in 1999. The SEA Division has
implemented necessary rate increases on its managed care products, which
increases resulted in decreased revenues as customers terminated their policies.
The trend in revenues in 2000 has shown slight improvement when compared to the
fourth quarter of 1999, and the Company expects this trend to continue in 2000.
New sales for the six months ended June 30, 2000 were 12% higher than new sales
for the comparable period of the prior year.
Student Insurance Division
The Company's Student Insurance Division generated operating income for the
three months and six months ended June 30, 2000 in the amount of $7,000 and
$91,000, respectively, compared to operating income of $743,000 and $1.5
million, respectively, for the comparable periods in the prior year. The
decrease in operating income continued 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
June 30, 2000 from the Student Insurance Division decreased to $28.4 million
from $29.7 million in the corresponding 1999 period, and for the six months
ended June 30, 2000, revenue decreased to $55.7 million from $55.8 million in
the corresponding 1999 period.
OKC Division
Operating income for the OKC Division for the three months ended June 30,
2000 decreased to $2.3 million from $4.9 million for the same period in 1999,
and for the six months ended June 30, 2000 operating income decreased to $6.4
million from $10.4 million for the same period in 1999. Revenues for the three
months ended June 30, 2000 for the OKC Division decreased to $22.9 million from
$23.6 million in the comparable 1999 period, and for the six months ended June
30, 2000 revenues decreased to $46.6 million from $47.5 million for the
comparable period in 1999.
The decrease in operating income was attributable to several factors. For
the three months and six months ended June 30, 2000, the OKC Division's life
insurance claim benefits increased by $391,000 and $1.3 million, respectively,
over claim benefits in the corresponding periods of the prior year. The Company
believes that the higher level of claims in the life business was due to normal
variations in the business for the closed life blocks. An additional loan
reserve of $671,000 was established during the three months ended June 30, 2000
for the student loans made by the College Fund Life unit on its life insurance
product. During the three months ended June 30, 2000, credit disability
insurance claim reserves were increased by $500,000 based on experience, and a
reserve for bad debts on premium receivables was established in the amount of
$325,000 during the three months ended June 30, 2000, with another $112,000 of
premium receivables written off. In the three and six months ended June 30,
2000, operating income for the workers compensation line of business decreased
by $657,000 and $671,000,
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respectively, from operating income in the corresponding periods of the prior
year. The decrease in operating income was the result of lower premium rates,
which has been occurring in this product line in Oklahoma for the past two
years.
Special Risk Division
Operating income for the three months ended June 30, 2000 for the Special
Risk Division (consisting of certain niche health-related products, including
"stop loss", marine crew accident, organ transplant and international travel
accident products) decreased to $297,000 from operating income of $1.1 million
in the comparable 1999 period. For the six-month period ended June 30, 2000,
operating income decreased to $543,000 from $602,000 for the same period in
1999. Revenue for the three months ended June 30, 2000 decreased to $9.6 million
from $14.3 million in the corresponding 1999 period, and for the six month
period ended June 30, 2000 revenue decreased to $20.2 million from $28.8 million
from the comparable period in 1999. The decrease in revenue in the 2000 periods
was attributable to (a) the elimination of unprofitable blocks of business and
implementation of necessary rate increases on stop-loss accounts and other lines
of business causing customers to terminate their policies and (b) the
implementation of Reinsurance and Specific Retrocession Agreements that
effectively permit the Company to transfer the insurance revenue and risk
portion of the Special Risk business managed by Excess, Inc. (one of the
Company's managing general underwriters) to a new insurance carrier. This
transfer was effective January 1, 2000, and will occur monthly as the business
renews over the life of the policies. In addition, the Company has entered into
an agreement to sell Excess, Inc. to the current management team. The
transaction will be effective May 1, 2000, and is scheduled to close prior to
September 1, 2000.
National Motor Club
Operating income for the three months ended June 30, 2000 for National Motor
Club increased to $1.3 million from $1.2 million for the comparable period in
1999, and for the six months ended June 30, 2000 operating income increased to
$2.4 million from $2.3 million for the same period in 1999. Revenues for the
three-month period ended June 30, 2000 increased to $9.1 million from $7.6
million for the same period in 1999, and for the six month period ended June 30,
2000, revenues increased to $18.4 million from $14.3 million for the comparable
period in 1999. The increase in revenues was due to revenues attributable to
CoachNet, which was acquired by National Motor Club in November 1999.
On July 27, 2000, the Company completed the sale of its 97% interest in NMC
Holdings, Inc. (the parent of National Motor Club of America, Inc.) to an
investor group consisting of members of the family of Ronald L. Jensen
(including Mr. Jensen). See Note J of Notes to the Consolidated Condensed
Financial Statements.
Educational Finance Group, Inc.
Revenues for the three months and six months ended June 30, 2000 for EFG
were $44.8 million and $81.0 million, respectively, compared to revenues of
$22.6 million and $46.0 million, respectively, for the comparable periods in the
prior year. The increase in revenue was attributable to the increased
origination and interest income derived from higher student loan volume.
In the three months ended June 30, 2000, EFG incurred an operating loss in
the amount of $791,000, compared to an operating loss of $4.4 million in the
three months ended June 30, 1999. Operating losses were $9.3 million for the six
months ended June 30, 2000 compared to a loss of $3.2 million for the comparable
period of 1999.
Student loan interest income, net of costs of directly associated
borrowings, was $7.6 million for the six months ended June 30, 2000, compared to
$4.9 million for the six months ended June 30, 1999. The increase in student
loan interest income was attributable to the higher balances of student loans
held ($1.161 billion at June 30, 2000 compared to $955 million at June 30,
1999). EFG realized gains on sales of student loans in the amount of $3.8
million for the six months ended June 30, 2000, compared to gains of $1.4
million in the comparable period of 1999.
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 may
not be capitalized for financial reporting purposes and must be expensed in the
period in which incurred.
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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 three and six months ended June 30, 2000, EFG
originated approximately $4.9 million and $96.5 million, respectively, of PLUS
loans, and incurred approximately $2.3 million and $4.7 million, respectively,
of costs in connection with originating such loans, of which $1.3 million was
capitalized in each of the periods.
During the three and six months ended June 30, 2000, EFG's Academic
Management Services, Inc. subsidiary reported net income in the amount of
$372,000 and $548,000, respectively, including gains on sale of student loans of
$1.0 million and $2.3 million in the three and six months ended June 30, 2000,
respectively. Academic Management Services, Inc. was acquired by EFG in July
1999 and provides tuition budgeting plans.
During the three months ended June 30, 2000, EFG's student loan servicing
operations realized operating income of $340,000, and during the six months
ended June 30, 2000 incurred a loss of approximately $318,000. EFG continues to
explore means to reduce ongoing operating costs and increase operating
efficiencies at this operation.
During the three and six months ended June 30, 2000, EFG incurred charges in
the aggregate amount of approximately $1.0 million and $4.5 million,
respectively, 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 six months ended June 30, 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, and at
June 30, 2000 had $270 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 six months ended June 30,
2000). If the interest rate yield exceeds the maximum allowable rate chargeable
to the borrower, the holder of PLUS loans is eligible for government subsidized,
special allowance payments for the year. The fixed interest rate yield in the
six months ended June 30, 2000 was 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 was
reset on July 1, 2000 to 8.99%. For the twelve months beginning July 1, 2000,
the fixed rate will be below the maximum rate and a holder of PLUS loans will
not be entitled to special allowance payments.
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 June 30, 2000 for UICI Administrators decreased to $126,000 from
$331,000 in the comparable 1999 period, and for the six months ended June 30,
2000, UICI Administrators incurred an operating loss of $140,000 compared to
operating income of $1.2 million in the corresponding 1999 period. Revenues for
the three months ended June 30, 2000 decreased to $5.6 million from $11.6
million in the corresponding 1999 period, and for the six month period ended
June 30, 2000 revenues decreased to $9.4 million from $22.8 million in the
corresponding period of the prior year.
The decrease in operating income and revenues at the Company's UICI
Administrators division was primarily attributable to the timing of the
contribution of substantially all of the operations of Insurdata Incorporated
(other
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than the operations of Insurdata Marketing Services, LLC) to HealthAxis.com in
connection with the Insurdata-HealthAxis.com merger, which was completed in
January 2000. The results of operations of Insurdata Incorporated had previously
been included in the results of operations of the UICI Administrators division.
Excluding the 1999 results of operations of Insurdata Incorporated transferred
to HealthAxis.com, for the three months and six months ended June 30, 1999,
revenues for the UICI Administrators division were $1.6 million and $2.8
million, respectively, and operating income for the division was $66,000 and
$226,000, respectively.
Investment in HealthAxis.com, Inc.
During 1999 the Company held substantially all of the capital stock of
Insurdata, a provider of Internet-enabled, integrated proprietary software
applications that address the workflow and processing inefficiencies embedded in
the healthcare insurance industry. On January 7, 2000, Insurdata merged with and
into HealthAxis.com, a web-based retailer of health insurance products and
related consumer services. Following the merger (the "HealthAxis Merger"), the
Company held approximately 44%, and HealthAxis, Inc. (formerly Provident
American Corporation) ("HAI") held approximately 28.1%, of the issued and
outstanding capital stock of HealthAxis.com, the surviving corporation in the
merger.
On March 14, 2000, the Company sold in a private sale to an institutional
purchaser 2,000,000 shares of HealthAxis.com common stock. In connection with
the sale of such shares, the Company recognized a gain in the amount of $26.3
million. Giving effect to such sale, the Company holds 39% of the issued and
outstanding shares of common stock of HealthAxis.com.
The Company accounts for its investment in HealthAxis.com utilizing the
equity method and, accordingly, recognizes its ratable share of HealthAxis.com's
income and loss (computed prior to amortization of goodwill recorded by
HealthAxis.com in connection with the HealthAxis Merger). The Company's equity
in the loss of HealthAxis.com in the three months and six months ended June 30,
2000 was $9.2 million and $15.2 million, respectively. HealthAxis.com continues
to incur operating losses attributable to significant marketing, development and
other start-up expenses. HealthAxis.com also incurred losses in the three months
ended June 30, 2000 in connection with the sale of its retail web site and
related assets. The Company's share of such losses ($4.2 million) is included in
the Company's equity in losses reflected above.
Other Key Factors
The Other Key Factors category includes investment income not allocated to
the other segments, interest expense on corporate debt, general expenses
relating to corporate operations, realized gains or losses on sale of
investments and the operations of the Company's AMLI subsidiary. Operating
income for the three months ended June 30, 2000 associated with this category
decreased to $555,000 from $1.6 million for the comparable period in 1999, and
for the six months ended June 30, 2000 operating income decreased to $5.2
million from $7.2 million in the same period in 1999. The decrease 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. In the six-month periods ended June 30, 2000
and 1999, net cash used in operations totaled approximately $110.6 million and
$3.4 million, respectively.
UICI is a holding company, the principal assets of which are its investments
in its separate operating subsidiaries, including its regulated insurance
subsidiaries. The holding company's ability to fund its cash requirements is
largely dependent upon its ability to access cash, by means of dividends or
other means, from its
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subsidiaries. The laws governing the Company's insurance subsidiaries restrict
dividends paid by the Company's domestic insurance subsidiaries in any year.
Inability to access cash from its subsidiaries could have a material adverse
effect upon the Company's liquidity and capital resources.
The operating losses at United CreditServ have had and will continue to have
a material adverse effect upon the liquidity and cash flow of the Company. Since
January 1, 2000 and through July 29, 2000, UICI has contributed to United
CreditServ an aggregate of $176.6 million in cash, including $50.0 million
contributed pursuant to the UCNB Capital Plan (see discussion below). In
addition, on June 28, 2000, the Company funded an $8.0 million principal
prepayment owing on its bank credit facility, on June 1, 2000 the Company made a
mandatory principal payment on its senior notes outstanding in the amount of
$3.95 million, and effective July 27, 2000 the Company prepaid $6.0 million
owing to an affiliated lender (see Note J to Notes to Consolidated Condensed
Financial Statements). UICI has funded these cash contributions and other cash
needs with the proceeds of sale of investment securities, a borrowing from a
third party in the amount of $24.0 million funded in July 2000, approved sales
of assets from the parent company to the Company's regulated insurance company
subsidiaries completed in June and July 2000 generating cash proceeds in the
aggregate amount of approximately $26.2 million, dividends in the amount of
$19.0 million paid during the six months ended June 30, 2000 from CLICO, the
sale to The MEGA Life and Health Insurance Company of CLICO for $19.0 million in
July 2000, cash proceeds in the amount of $21.8 million from the disposition of
its National Motor Club unit completed in July 2000, and cash on hand.
Based on projections as of August 1, 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 $29.7 million to fund future
operating losses of the credit card business. In addition, through December 31,
2000 the holding company will have additional cash requirements in the amount of
approximately $26.8 million. The Company currently anticipates that these cash
requirements at the holding company level will be funded by cash on hand ($34.8
million at August 7, 2000), cash received from interest income and tax sharing
reimbursements with subsidiaries (which will be partially offset by holding
company operating expenses) and scheduled principal payments on a $35.0 million
promissory note delivered to the Company in July 2000 in connection with the
sale of the Company's National Motor Club unit (see Note J -- Related Party
Transactions).
UICI does not currently anticipate the need during 2000 to utilize the
proceeds of regular or special dividends from The MEGA Life and Health Insurance
Company or Mid West National Life Insurance Company of Tennessee (the Company's
principal regulated insurance company subsidiaries) to fund its cash commitments
under the Capital Plan or for other cash needs. However, it is likely that the
payment of dividends from its regulated insurance subsidiaries, if made, would
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
In accordance with the terms of the February Consent Order issued by the
OCC, UCNB is currently prohibited from accessing the brokered deposit market and
from soliciting or accepting deposits over the Internet. At December 31, 1999
and June 30, 2000, UCNB had $290.0 million and $182.7 million, respectively, of
certificates of deposits outstanding, and UCNB held approximately $110.5 million
and $89.7 million, respectively, in cash, cash equivalents and short term U.S.
Treasury securities. Of the certificates of deposit outstanding at June 30,
2000, $48.1 million matured on or before July 31, 2000; $53.1 million mature
between August 1 and September 30, 2000; $64.5 million mature between October 1
and December 31, 2000; and $17.0 million mature thereafter.
The net credit card receivables of United CreditServ (including UCNB's
credit card receivables and securitized credit card receivables) decreased from
$190.7 million at December 31, 1999 to $140.2 million at June 30, 2000. The
change resulted from additions to credit card balances for new purchases,
interest, and fees of $274.0 million, less payments of $210.4 million,
recoveries of previously charged off balances of $30.0 million, and a provision
for uncollectible accounts of $84.1 million.
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On June 29, 2000, the OCC approved a definitive Capital Plan previously
submitted by the Company and UCNB (the "UCNB Capital Plan"). The UCNB Capital
Plan approved by the OCC contemplates the orderly disposition on or before
December 31, 2000 of the Company's ownership interest in UCNB or the liquidation
of UCNB, the payment of all of UCNB's insured deposits and satisfaction of or
provision for all other UCNB liabilities, and the maintenance of minimum capital
ratios during this period. The UCNB Capital Plan requires that (a) the Company
through United CreditServ (the Company's wholly owned subsidiary and the direct
parent of UCNB) will contribute an aggregate of $50.0 million to the capital of
UCNB in prescribed increments over a thirty-day period ended July 29, 2000
(which $50.0 million was contributed as required) and (b) UICI and Ronald L.
Jensen (UICI's Chairman) will deliver additional collateral to UCNB to further
secure UCNB's obligations under the Capital Plan (which collateral was delivered
as of July 29, 2000, as required).
The Capital Plan as submitted to and approved by the OCC does not
contemplate that UCNB will need to issue any new certificates of deposit. The
Capital Plan contemplates that UCNB will have sufficient cash and cash
equivalents to fully discharge all insured deposits, regardless of the amount of
proceeds ultimately realized upon sale or disposition of UCNB's credit card
portfolio and other assets.
The Company, United CreditServ and UCNB agreed to the issuance by the OCC on
June 29, 2000 of separate Consent Orders memorializing the terms of the Capital
Plan. The June Consent Orders require, among other things, (a) the Company
through United CreditServ to contribute additional capital to UCNB in the amount
of $50.0 million in prescribed increments over a thirty-day period ended July
29, 2000; (b) UCNB to maintain prescribed capital ratios throughout the plan
period; (c) UCNB to adopt and implement certain credit card administrative
policies and procedures; and (d) on or before December 31, 2000, the Company to
assume all of UCNB's remaining contingent liabilities. The Company's obligations
under the Capital Plan are secured by (a) a pledge by the Company of a
short-term promissory note in the principal amount of $35.0 million issued to
the Company and guaranteed by Mr. Jensen in connection with the purchase by an
investment group consisting of Jensen family members (including Mr. Jensen) of
the Company's National Motor Club unit and (b) a pledge by Mr. Jensen of $7.1
million face amount of investment securities owned by Mr. Jensen. See Note J of
Notes to Consolidated Financial Statements.
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.
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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%.
UCNB has commitments to fund the unused credit limits on issued credit card
accounts. At June 30, 2000 and December 31, 1999, the outstanding commitment was
$31.6 million and $33.8 million, respectively.
EDUCATIONAL FINANCE GROUP, INC.
EFG's student loan portfolio principal and interest receivable decreased to
$1.211 billion at June 30, 2000 from $1.330 billion at December 31, 1999. EFG's
student loan credit facilities had balances outstanding of $1.302 billion at
June 30, 2000. At June 30, 2000, EFG also held $89.3 million of restricted cash
in connection with its student loan portfolio. During the six months ended June
30, 2000, EFG originated $302 million of student loans that were financed with
new borrowings under EFG's student loan credit facilities. EFG repaid $697
million of borrowings from principal payments received on student loans, the
proceeds of loans sold during the six months ended June 30, 2000, and the
proceeds of loans sold in late December 1999 (which borrowings were repaid in
January 2000).
In March 1998, EFG 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 $3.4 million and $318.8 million at June 30, 2000 and
December 31, 1999, respectively, and bears interest at a variable annual rate of
LIBOR plus 75 basis points. The credit facility has a term of one year and is
secured by student loans originated under the Federal Family Education Loan
Program, which loans are guaranteed by the federal government or alternative
loans guaranteed by private guarantors. The financial institution may value the
loans at any time and require EFG to repay any amount by which the market value
of the loans is less than the amount required by the credit facility.
At June 30, 2000, EFG held $96.9 million of restricted cash representing
amounts collected under Academic Management Services, Inc.'s tuition installment
program and had 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 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
38
<PAGE> 39
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, Inc. business
could be adversely affected by changes in the Higher Education Act or other
relevant federal or state laws, rules and regulations and the programs
implemented thereunder may adversely impact the education credit market. In
addition, existing legislation and future measures by the federal government may
adversely affect the amount and nature of federal financial assistance available
with respect to loans made through the U.S. Department of Education. Finally the
level of competition currently in existence in the secondary market for loans
made under the Federal Loan Programs could be reduced, resulting in fewer
potential buyers of the Federal Loans and lower prices available in the
secondary market for those loans.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates
and prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded.
The primary market risk to the Company's investment portfolio is interest
rate risk associated with investments and the amount of interest that
policyholders expect to have credited to their policies. The interest rate risk
taken in the investment portfolio is managed relative to the duration of the
policy liabilities. The Company's investment portfolio consists mainly of high
quality, liquid securities that provide current investment returns. The Company
believes that the annuity and universal life-type policies are generally
competitive with those offered by other insurance companies of similar size. The
Company does not anticipate significant changes in the primary market risk
exposures or in how those exposures are managed in the future reporting periods
based upon what is known or expected to be in effect in future reporting
periods.
Profitability of the student loans is affected by the spreads between the
interest yield on the student loans and the cost of the funds borrowed under the
various credit facilities. Although the interest rates on the student loans and
the interest rate on the credit facilities are variable, the gross interest
earned by lenders on Stafford student loans uses the results of 91-day T-bill
auctions as the base rate, while the base rate on the credit facilities is
LIBOR. The effect of rising interest rates on earnings on Stafford loans is
generally small, as both revenues and costs adjust to new market levels. In
addition to Stafford loans, the Company holds PLUS loans on which the interest
rate yield is set annually beginning July 1 through June 30 by regulation at a
fixed rate. The Company had approximately $270.0 million principal amount of
PLUS loans outstanding at June 30, 2000. The fixed yield on PLUS loans was 7.72%
for the twelve months ended June 30, 2000 and has been reset to 8.99% for the
twelve months beginning July 1, 2000. These loans are financed with borrowings
whose rates are subject to reset, generally monthly. During the twelve months
beginning July 1, 2000, the cost of borrowings to finance this portion of the
student loan portfolio could rise or fall while the rate earned on the student
loans will remain fixed.
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 Note H of Notes to the Consolidated Condensed Financial
Statements included herein and in the Company's Annual Report on Form 10-K filed
for the year ended December 31, 1999 under the caption "Item 3 -- Legal
Proceedings." The Company and its subsidiaries are parties to various other
pending legal proceedings arising in the ordinary course of business,
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<PAGE> 40
including some asserting significant damages arising from claims under insurance
policies, disputes with agents and other matters. Based in part upon the opinion
of counsel as to the ultimate disposition of such lawsuits and claims,
management believes that the liability, if any, resulting from the disposition
of such proceedings will not be material to the Company's financial condition or
results of operations.
ITEM 4 -- Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on June 8, 2000.
The following members were elected to the Company's Board of Directors
to hold office for the ensuing year.
<TABLE>
<CAPTION>
Nominee In Favor Withheld
------- -------- --------
<S> <C> <C>
Ronald L. Jensen 39,523,548 1,883,305
Gregory T. Mutz 40,913,748 493,105
William J. Gedwed 40,960,504 446,349
Richard T. Mockler 41,056,491 350,362
Stuart D. Bilton 40,955,905 450,948
Patrick J. McLaughlin 41,071,338 335,515
George H. Lane, III 40,955,905 450,948
</TABLE>
The results of the voting on the appointment of auditors were as
follows:
Ratification of Appointment of Ernst & Young, LLP as the
Company's independent auditors for the fiscal year ending
December 31, 2000.
The votes of the stockholders on this item were as follows:
<TABLE>
<CAPTION>
In Favor Opposed Abstained
-------- ------- ---------
<S> <C> <C> <C>
41,128,004 19,772 259,077
</TABLE>
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description of Exhibit
10.43 Second Amended and Restated Loan Agreement, dated July 27,
2000, between UICI and LM Finance, LLC
10.44 Stock Purchase Agreement, dated July 27, 2000, between UICI
and C&J Investments, LLC
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 April 14, 2000, announcing that the
Company's previously announced acquisition of HealthPlan Services
Corporation was terminated by mutual agreement.
2. A Current Report on Form 8-K, dated June 29, 2000, disclosing approval
of United Credit National Bank Capital Plan and issuance by the Office
of the Comptroller of the Currency of Consent Orders applicable to
UICI, United CreditServ, Inc. and United Credit National Bank.
3. A Current Report on Form 8-K, dated August 2, 2000, disclosing
completion of certain previously announced transactions.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UICI
-----------------------------------------
(Registrant)
Date: August 11, 2000 /s/ Gregory T. Mutz
--------------------- -----------------------------------------
Gregory T. Mutz, President,
Chief Executive Officer, Principal
Financial Officer and Director
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<PAGE> 42
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------
<S> <C>
10.43 Second Amended and Restated Loan Agreement, dated July 27, 2000, between UICI and LM
Finance, LLC
10.44 Stock Purchase Agreement, dated July 27, 2000, between UICI and C&J Investments, LLC
27 Financial Data Schedule (filed only electronically with the SEC)
</TABLE>
