<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
</TABLE>
UICI
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
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paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
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<PAGE> 2
UICI
4001 MCEWEN DRIVE, SUITE 200
DALLAS, TEXAS 75244
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 8, 2000
The Annual Meeting of the Stockholders of UICI (the "Company"), a Delaware
corporation, will be held at The Harvey Hotel, 4545 West John Carpenter Freeway
(Highway 114), Irving, Texas, on Thursday, June 8, 2000 at 10:00 a.m., Central
Daylight Time, for the following purposes:
1. To elect seven (7) directors of the Company to hold office until
the next annual meeting of stockholders and until their respective
successors are chosen and qualified.
2. To ratify the appointment of Ernst & Young LLP as independent
public accountants to audit the accounts of the Company for the fiscal year
ending December 31, 2000.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed April 25, 2000 as the record date for the
meeting. Holders of the Company's Common Stock of record at the close of
business on such date will be entitled to notice of and to vote at such meeting
or any adjournment thereof. The stock transfer books will not be closed.
The Company will supply, upon written request and without charge, a copy of
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Requests for the report should be directed to Investor Relations,
UICI, 4001 McEwen Drive, Suite 200, Dallas, Texas 75244.
By order of the Board of Directors
/s/ PEGGY G. SIMPSON
------------------------------------
Peggy G. Simpson
Secretary
Date: May 5, 2000
---------------------
IMPORTANT
UNLESS YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE FILL IN, SIGN AND
MAIL THE ENCLOSED PROXY, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. YOUR PROMPT RESPONSE WILL ASSURE A QUORUM AT THE MEETING, SAVING YOUR
COMPANY THE EXPENSE OF FURTHER SOLICITATION OF PROXIES.
<PAGE> 3
UICI
4001 MCEWEN DRIVE, SUITE 200
DALLAS, TEXAS 75244
---------------------
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 8, 2000
---------------------
This proxy statement and the accompanying card are being furnished in
connection with the solicitation of proxies by the Board of Directors of UICI, a
Delaware corporation (the "Company") from holders of the Company's outstanding
shares of Common Stock, par value $0.01 per share (the "Common Stock"), for the
Annual Meeting of Stockholders to be held on Thursday, June 8, 2000 for the
purposes set forth in the accompanying notice (the "Annual Meeting"). The
Company will bear the costs of soliciting proxies from its stockholders. In
addition to soliciting proxies by mail, directors, officers and employees of the
Company, without receiving additional compensation therefor, may solicit proxies
by telephone, by telegram or in person. Arrangements also will be made with
brokerage firms and other custodians, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of Common Stock held of record
by such persons, and the Company will reimburse such brokerage firms,
custodians, nominees and fiduciaries for reasonable out-of-pocket expenses
incurred by them in connection therewith.
The Company's Common Stock trades on The New York Stock Exchange under the
symbol: UCI. This proxy statement is being mailed on or about May 5, 2000 to
stockholders of record at the close of business on April 25, 2000, who are the
only stockholders entitled to receive notice of and to vote at the meeting. At
April 25, 2000 the Company had outstanding 46,427,024 shares of common stock. A
quorum of stockholders is necessary to take action at the Annual Meeting. A
majority of the outstanding shares of Common Stock of the Company, represented
in person or by proxy, will constitute a quorum. Each share of the outstanding
common stock is entitled to one vote. A simple majority of the total shares
outstanding is required to elect directors and ratify or approve the other items
being voted on at this time. Abstentions will have the same effect as votes
against the proposals, although abstentions will count toward the presence of a
quorum.
A proxy may be revoked at any time before its exercise by (i) notifying
UICI in writing at 4001 McEwen Drive, Suite 200, Dallas, Texas 75244, attention;
Secretary; (ii) completing a later-dated proxy and returning it to UICI; or
(iii) appearing at the Annual Meeting in person and revoking the proxy orally by
notifying the Secretary before the vote takes place. Properly executed proxies
will, unless such proxies have been revoked, be voted in the manner specified in
the proxies. If no instructions are indicated, such shares will be voted FOR the
election of the seven directors and FOR the ratification of Ernst & Young, LLP
as independent public accountants for UICI for 2000.
1. ELECTION OF DIRECTORS
The Board of Directors (the "Board") has fixed the number of directors for
the ensuing year at seven (7). The Board has nominated Mr. Ronald L. Jensen, Mr.
Gregory T. Mutz, Mr. Richard T. Mockler, Mr. Stuart D. Bilton, Mr. George H.
Lane III, Mr. William J. Gedwed and Mr. Patrick J. McLaughlin for election as
Directors at the 2000 Annual Meeting of Stockholders. At the meeting, it is
intended that such number of directors will be elected to hold office until the
next Annual Meeting of Stockholders and until their respective successors are
chosen and qualified. It is intended that the proxies will be voted to elect as
directors the nominees listed above. All of the nominees except Mr. William J.
Gedwed are currently directors of the Company. Although the Board does not
anticipate that any of such nominees will be unable to serve as a director, in
the event of such occurrence, the proxy holders shall have the right to vote for
such substitute, if any, as the present Board may designate.
<PAGE> 4
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION AS DIRECTORS OF
EACH OF THE NOMINEES LISTED ABOVE.
NOMINEES FOR DIRECTOR
Set forth below is a biographical summary of the experience of each of the
nominees for Director:
Ronald L. Jensen (age 69) has served as Chairman of the Board of Directors
of the Company and its predecessor company since December 1983. Mr. Jensen
served as President and Chief Executive Officer ("CEO") of the Company in 1993
and 1994 and from September 1997 to January 1999. Mr. Jensen is a member of the
Executive and Compensation Committees of the Board of Directors.
Gregory T. Mutz (age 54) has served as a Director, President and CEO of the
Company since January 1999 and is a member of the Executive Committee of the
Board of Directors of the Company. Prior to joining the Company in January 1999,
Mr. Mutz served and continues to serve as Chairman of the Board of AMLI Realty
Co. (a subsidiary of the Company) since 1980, as Chairman of the Board of
Trustees of AMLI Residential Properties Trust (NYSE: AML) since 1994, and as
Chairman of AMLI Commercial Properties Trust since 1997. Mr. Mutz has been a
Director of the National Multifamily Housing Council since 1995 and a Director
of Alleghany/Chicago Trust since 1996. Mr. Mutz received a B.A. from DePauw
University in 1967 and a J.D. from the University of Michigan Law School in
1973. Mr. Mutz served as an infantry lieutenant in Vietnam from 1968 to 1969.
Richard T. Mockler (age 62) has served as a Director of the Company since
1991. Mr. Mockler is a member of the Audit and Stock Option Plan Committees of
the Board of Directors. Mr. Mockler retired as a partner with Ernst & Young, LLP
in 1989 after 27 years with the firm. Mr. Mockler has served as a member of the
Board of Directors of Georgetown Rail Equipment Company since 1994 and as
Treasurer since October 1996. Mr. Mockler served as a Director of Snead Research
Labs from 1995 until January 1998 and as Treasurer from October 1996 until
January 1998.
Patrick J. McLaughlin (age 42) has served as a Director of the Company
since May 1999. Mr. McLaughlin has served since April 1993 as a Managing
Director of Emerald Capital Group, Ltd., an insurance advisory and investment
banking firm. He has served as a director of Universal American Financial Corp.,
an insurance holding company, since January 1995. Mr. McLaughlin serves on the
Executive, Compensation and Nominating Committees of the Board.
Stuart D. Bilton (age 53) has served as a Director of the Company since May
1999. Mr. Bilton has been President and CEO of Chicago Trust Company since 1994.
He also has served as President of Alleghany Asset Management since January 1997
and as a Director since 1994. Mr. Bilton has served as a Director of Baldwin &
Lyons, Inc. since 1987 and as Chairman of Alleghany Funds since 1993. Mr. Bilton
serves on the Compensation, Nominating and Special Litigation Committees of the
Board of Directors.
George H. Lane III (age 51) has served as a Director of the Company since
May 1999 and as Chief Executive Officer of Lane Co. since June 1988. Mr. Lane
also serves as a Trustee of Westminster Schools, Atlanta, Georgia. Mr. Lane
serves on the Audit, Compensation, Stock Option Plan and Special Litigation
Committees of the Board.
William J. Gedwed (age 44) has served as a Vice President of the Company
since August 1999. He has also served as President and CEO of NMC Holdings, Inc.
and National Motor Club of America, Inc. (subsidiaries of the Company since the
acquisition of National Motor Club in 1997) since 1993 and as Chairman of the
Board of National Motor Club since 1997. Mr. Gedwed is also a Vice President and
Director of The MEGA Life and Health Insurance Company, Mid-West National Life
Insurance Company of Tennessee, The Chesapeake Life Insurance Company and
Fidelity First Insurance Company (subsidiaries of the Company).
2
<PAGE> 5
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
GENERAL INFORMATION
The Board has responsibility for establishing broad corporate policies and
for the overall performance of the Company, although it is not involved in
day-to-day operations. Members of the Board are kept informed of the Company's
businesses by various reports and documents sent to them, as well as by
operating and financial reports made at Board and committee meetings. Regular
meetings of the Board are held each quarter, and special meetings are held when
necessary. The annual organizational meeting follows immediately after the
Annual Meeting of Stockholders. During the fiscal year ended December 31, 1999,
the Board of Directors of the Company met eleven times and took action on other
occasions by unanimous consent of its members. Each member of the Board of
Directors who held such position in 1999 (other than Mr. Jensen) attended at
least 75% in the aggregate of all meetings of the Board and any committee on
which such Board Member served.
COMMITTEES OF THE BOARD
Various committees of the Board have been established to assist it in the
discharge of its responsibilities. Those committees are described below.
The Audit Committee recommends to the Board the engagement of the Company's
independent accountants, discusses with the independent accountants their audit
procedures, including the proposed scope of the audit, the audit results and the
related management letters and, in connection with determining their
independence, reviews the services performed by the independent accountants. The
Committee meets with management, the Company's independent accountants and
internal accounting staff to consider the adequacy of the Company's internal
controls and other financial reporting matters. The Audit Committee (of which
Richard T. Mockler and George H. Lane III are members) held two meetings during
1999.
The Executive Committee has all of the authority of the full Board of
Directors in the management of the business and affairs of the Company. The
Executive Committee (of which Ronald L. Jensen, Gregory T. Mutz and Patrick J.
McLaughlin are members) met one time during 1999 and took action on selected
occasions by unanimous consent of its members.
The Stock Option Plan Committee administers the various stock option plans
of the Company. The Committee (of which Richard T. Mockler has been a member
since January 1999 and George H. Lane III has been a member since May 1999) met
one time during 1999 and took action on other occasions by unanimous written
consent of its members.
The Nominating Committee of the Board of Directors was established February
3, 2000 and is generally responsible for making recommendations to the Board
regarding nominees for election as directors; structure, size and composition of
the Board; and organization and responsibilities of Board committees. The
Committee consists of Stuart D. Bilton and Patrick J. McLaughlin. During 1999,
the Director nominees were proposed by existing Board members and Company
management.
The Executive Compensation Committee of the Board of Directors was
established February 3, 2000 and is responsible for administering the Company's
compensation programs and remuneration arrangements for its highest-paid
executives, including the chief executive officer. The Committee consists of
Ronald L. Jensen, Stuart D. Bilton, George H. Lane III and Patrick J.
McLaughlin. The Committee's Report on Executive Compensation appears elsewhere
in this proxy statement.
The Special Litigation Committee of the Board of Directors was constituted
in August 1999 to investigate and assess on behalf of the Company the underlying
claims made in a purported 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 Mocklerand Robert
B. Vlach, which was filed and is pending in the District Court of Dallas County,
Texas. The Committee consists of George H. Lane III and Stuart D. Bilton.
3
<PAGE> 6
COMPENSATION OF DIRECTORS
Commencing May 5, 1999, the non-employee directors of the Company receive
an annual retainer of $3,000, plus $3,000 for each Board meeting attended. The
non-employee directors may elect to receive UICI stock, in whole or in part, in
lieu of cash, at a 15% discount to the market price. Each non-employee director
must elect either the stock or the cash option at the Board meeting following
the annual meeting of the shareholders. Any shares received by the director
under this stock purchase incentive program must be held for a period of two
years.
Commencing May 5, 1999, each non-employee director also became entitled to
participate in one of two incentive compensation programs. Each participating
non-employee director may elect either (a) to purchase shares of Common Stock
with a fair market value of up to $50,000 at a 15% discount and receive an
option to purchase a like number of UICI shares at market value, or (b) to
purchase shares of Common Stock with a fair market value of up to $50,000 at
full market price by paying $3.00 per share in cash and executing a five-year
note in favor of the Company for the balance of the purchase price, with
interest thereon equal to the greater of the Applicable Federal Rate or 5% per
annum, payable quarterly, and receive an option to purchase a like number of
UICI shares at market value. Mr. McLaughlin elected to purchase 2,094 shares of
Common Stock by delivering cash in the amount of $6,282 and a promissory note
payable to the Company in the amount of $43,712.25, of which, at April 25, 2000,
$43,868 was outstanding. In connection with this election, Mr. McLaughlin was
granted options to purchase 2,094 shares of Common Stock at an exercise price
per share of $23.94. Each of Messrs. Mockler, Bilton and Lane elected to
purchase 2,408 shares of Common Stock at fair market value less a 15% discount
and were granted options to purchase 2,408 shares of Common Stock at an exercise
price per share of $24.45, $23.75 and $23.75, respectively.
All options granted to directors were granted under and are governed by the
UICI 1987 Amended and Restated Stock Option Plan. The options become exercisable
in annual cumulative installments of 20%, commencing one year from the date of
grant, with full vesting occurring on the fifth anniversary of the date of
grant. Any shares received by the director under this stock purchase incentive
program must be held for a period of two years
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During 1999, Mr. Jensen served as a single member compensation committee,
and Mr. Jensen determined the base compensation of all of the senior executive
officers of the Company, including the Named Officers below (other than the
compensation of Mr. Benac and Mr. Reed, which was established by Mr. Mutz).
The Company's compensation objectives include attracting and retaining the
best possible executive talent, motivating executive officers to achieve the
Company's performance objectives, rewarding individual performance and
contributions, and linking to the extent possible executive and stockholder
interests through equity-based (stock option and restricted stock) plans. The
Company's executive compensation consists of four key components: annual base
salary, annual incentive bonus compensation, stock option grants and restricted
stock grants. Each component of compensation is designed to complement the other
components and, when considered together, to meet the Company's overall
compensation objectives.
In early 1999, Mr. Jensen reviewed and recommended annual base salaries for
each of the senior executive officers (other than Mr. Benac and Mr. Reed).
Recommended base salaries of executive officers, including Mr. Mutz, were based
in part upon reference to national survey data available regarding salaries of
those persons holding comparable positions at comparably-sized health and life
insurance companies.
Historically, executive officers have also been awarded annual cash
incentive bonus compensation, based upon achievement of annual and long-term
performance goals. The amount of the bonus for a particular year is typically
determined in January/February of the following year based upon Company and
individual achievement for the prior year.
4
<PAGE> 7
On February 3, 2000, the Board of Directors of the Company constituted an
Executive Compensation Committee (the "Committee"), composed of Ronald L.
Jensen, Stuart D. Bilton, George H. Lane, III and Patrick J. McLaughlin. The
Committee (other than Mr. Jensen) reviewed and approved incentive bonus
compensation for all Named Officers below and approximately 30 other officers
and key employees of the Company. In allocating annual incentive bonus
compensation for 1999 to officers other than Mr. Mutz, the Committee considered
the recommendations of Mr. Mutz and approved, subject to any modifications it
deemed appropriate, bonus awards to executive officers. With respect to cash
bonuses otherwise awarded for 1999 and in an effort to further align the
interests of the Company's executive officers with those of other stockholders,
executive officers were afforded the opportunity to forego all or a portion of
their cash incentive compensation for a package of stock options exercisable at
$6.625 per share and shares of restricted UICI Common Stock.
The Committee awarded an incentive cash bonus for 1999 to Mr. Mutz in the
amount of $250,000. Mr. Mutz elected to forego his entire cash bonus in 1999 and
received in lieu thereof options to purchase 235,000 shares of Common Stock at
$6.625 per share and 8,800 shares of restricted stock.
The Company's executive officers are also entitled to participate in the
Company's 1987 Amended and Restated Stock Option Plan. Under the 1987 Plan,
nonqualified options to purchase Common Stock of the Company may be granted at
exercise prices not less than the fair market value of the Common Stock at the
date of grant. Options granted under the 1987 Plan become exercisable in annual
cumulative installments of 20% of the number of options granted over a five-year
period. With respect to 1999 performance, the Committee determined to award an
aggregate of 172,500 options to executive officers under the 1987 Plan, which
options are exercisable at $6.625 per share (the fair market value of UICI
Common Stock on March 10, 2000, the date of grant). Mr. Mutz was awarded 75,000
of such options.
To provide an additional equity-based vehicle to incentivize officers and
other key employees, in February 2000 the Board of Directors of the Company
approved and adopted the UICI 2000 Restricted Stock Plan, pursuant to which the
Company may from time to time and subject to the terms thereof make awards of
restricted shares of the Company's Common Stock to eligible participants in the
Plan. Shares of Common Stock granted to eligible participants fully vest on the
second anniversary of the date of grant and are otherwise forfeitable if the
participant ceases to provide material services to the Company as an employee,
independent contractor, consultant, advisor, director or otherwise for any
reason other than death prior to vesting. Shares of restricted stock also vest
upon a Change of Control (as defined) or upon the death of the participant. The
Committee awarded an aggregate of 48,700 shares of restricted stock under the
Plan to executive officers. Mr. Mutz did not receive any such shares.
Compensation Committee:
Ronald L. Jensen
Stuart D. Bilton
George H. Lane III
Patrick J. McLaughlin
5
<PAGE> 8
SUMMARY COMPENSATION TABLE
The following table summarizes all compensation for services to the Company
and its subsidiaries for the fiscal years ended December 31, 1999, 1998 and
1997, earned by or awarded or paid to the persons who were the chief executive
officer and the five other most highly compensated executive officers of the
Company (the "Named Officers") during 1999.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------- -------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPENSATION STOCK AWARDS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(A) (B)($) (C)($) OPTIONS (D)($)
- --------------------------- ---- --------- ----------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald L. Jensen........ 1999 1 -- -- -- -- --
Chairman of the 1998 1 -- -- -- -- --
Board(e) 1997 1 -- -- -- -- --
Gregory T. Mutz......... 1999 225,469 -- -- 58,300 255,000(g) 11,600
CEO and 1998 179,674 25,000 -- -- 212,000 --
Director(e)(f) 1997 112,123 -- -- -- -- --
Richard J. Estell....... 1999 313,655 72,008 -- -- 10,000 11,600
Executive Vice 1998 300,962 161,533 -- -- 10,890 11,600
President and 1997 223,078 273,001 -- -- -- 12,012
Director(h)
Charles T. Prater....... 1999 158,269 164,622 -- 9,938 40,000(i) 10,925
Vice President 1998 148,385 105,594 -- -- 6,000 11,600
1997 119,995 199,323 -- -- -- 8,788
Glenn W. Reed........... 1999 170,964 75,000 -- 13,250 51,000(k) 4,846
Executive Vice 1998 -- -- -- -- -- --
President & General 1997 -- -- -- -- -- --
Counsel(j)
William P. Benac........ 1999 241,152 252,500 -- -- 10,000 7,033
Executive Vice 1998 -- -- -- -- -- --
President(l) 1997 -- -- -- -- -- --
William J. Gedwed....... 1999 200,000 62,500 -- 11,528 48,650(o) 9,231
Vice President(m)(n) 1998 200,000 75,000 -- -- 6,640 12,369
1997 193,000 50,000 -- -- -- 12,078
</TABLE>
- ---------------
(a) Pursuant to the Company's 1999 bonus plan, executive officers had the right
to elect to receive all or a portion of their 1999 bonus in the form of
restricted stock and stock options. For 1999, Messrs. Mutz, Prater, Reed,
Benac and Gedwed elected to forego receipt of $250,000, $50,000, $25,000,
$-0- and $62,500 of their cash bonuses, respectively, and in lieu thereof
received restricted stock and options to purchase Common Stock. The cash
bonus amounts foregone are not included in the bonus column for 1999, but
restricted shares and options awarded in lieu thereof are included in the
restricted stock award column and the securities underlying options column,
as appropriate.
(b) No named executive officer received perquisites or other personal benefits
in excess of $50,000 or 10% of the total of annual salary and bonus
reported for the named executive officer.
(c) Reflects the market value of restricted stock issued on March 10, 2000, in
lieu of a portion of cash bonus otherwise payable by the Company with
respect to 1999. Dividends are paid, if any, to holders with respect to
restricted stock at the same rate paid to all stockholders. The restricted
stock vests on the second anniversary of the date of issue.
(d) Amounts for 1999 include Company contributions to its Employee Stock
Ownership and Savings Plan in the amount of $9,600, $9,600, $8,925, $4,826
and $5,700 for the benefit of Messrs. Mutz, Estell, Prater, Reed and Benac,
respectively. Also includes contributions to the Company's Medical Savings
Account
6
<PAGE> 9
Health Insurance Plan in the amount of $2,000, $2,000, $2,000, $-0- and
$1,333 for the benefit of Messrs. Mutz, Estell, Prater, Reed and Benac,
respectively. Amounts for Mr. Gedwed reflect contributions to the National
Motor Club Retirement Savings Plan.
(e) Ronald L. Jensen resigned his positions as President and CEO effective
January 28, 1999. Mr. Mutz was elected to these positions effective January
28, 1999 to fill the vacancy created by Mr. Jensen's resignation.
(f) Annual compensation amounts shown for 1998 and 1997 reflect salary and
bonus paid by AMLI Realty Co. (a subsidiary of the Company), for which Mr.
Mutz served as Chairman.
(g) Includes 235,000 shares subject to options exercisable at $6.625 per share,
which were granted on March 10, 2000, in lieu of cash bonus otherwise
payable by the Company with respect to 1999.
(h) Richard J. Estell resigned his positions with the Company effective
November 2, 1999 and the salary shown in the compensation table is for the
period during which he was employed.
(i) Includes 32,500 shares subject to options exercisable at $6.625 per share,
which were granted on March 10, 2000, in lieu of a portion of cash bonus
otherwise payable by the Company with respect to 1999.
(j) Glenn W. Reed joined the Company effective July 6, 1999 and the salary
shown in the compensation table is for the period during which he was
employed.
(k) Includes 22,500 shares subject to options exercisable at $6.625 per share,
which were granted on March 10, 2000, in lieu of a portion of cash bonus
otherwise payable by the Company with respect to 1999.
(l) William P. Benac joined the Company effective May 10, 1999 and the salary
shown in the compensation table is for the period during which he was
employed.
(m) William J. Gedwed was elected a Vice President of the Company in August
1999.
(n) Includes for 1998 and 1997 salary and bonus paid by National Motor Club of
America, Inc. (a subsidiary of the Company), for which Mr. Gedwed served as
President and Chief Executive Officer.
(o) Includes 39,950 shares subject to options exercisable at $6.625 per share,
which were granted on March 10, 2000, in lieu of a portion of cash bonus
otherwise payable by the Company with respect to 1999.
7
<PAGE> 10
1999 STOCK OPTIONS
The following table summarizes options granted to the named executive
officers during 1999, along with the present value of such options on the date
they were granted, calculated as described in the footnote to the table.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED EXERCISE
UNDERLYING TO EMPLOYEES OR BASE GRANT DATE
OPTIONS IN FISCAL PRICE EXPIRATION PRESENT
NAME GRANTED(#) YEAR ($/SH) DATE VALUE(1)($)
- ---- ---------- ------------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Ronald L. Jensen................ 0 0 NA NA NA
Gregory T. Mutz................. 235,000(2) 6.625 04/09/2005 810,844
15,000 24.50 07/02/2004 152,258
5,000 38.64% 24.31 07/03/2004 52,901
Richard J. Estell............... 9,740 26.00 07/15/2004 106,023
260 1.52% 25.99 07/15/2004 2,830
Charles T. Prater............... 32,500(2) 6.625 04/09/2005 112,138
7,500 6.06% 24.13 07/02/2004 76,967
Glenn W. Reed................... 22,500(2) 6.625 04/09/2005 77,634
28,500 7.73% 23.87 07/01/2004 294,831
William J. Gedwed............... 39,950(2) 6.625 04/09/2005 137,843
8,700 7.37% 26.35 07/15/2004 93,761
William P. Benac................ 10,000 1.52% 23.38 06/25/2004 100,816
</TABLE>
- ---------------
(1) In accordance with the Securities and Exchange Commission rules, grant date
present value is determined using the Black-Scholes Model. The Black-Scholes
Model is a mathematical formula widely used to value exchange-traded
options. However, stock options granted by the Company are long-term,
non-transferable and subject to vesting in equal annual increments over a
five-year period, while exchange-traded options are short-term and can be
exercised or sold immediately in the liquid market. The Black-Scholes Model
relies on several key assumptions to estimate the present value of options,
including the volatility of, and dividend yield on, the security underlying
the option, the risk-free rate of return on the date of grant and the
estimated time period until exercise of the option. Based on the Black-
Scholes option valuation model with the actual option price, the key input
variables used in valuing the options were: risk free interest rate, 6.5950%
and 5.6762%; dividend yield, 0.00%; stock price volatility, 49.1084% and
41.7589%; option term, five years. The volatility variable reflected daily
stock price trading data from June 2, 1995 through March 9, 2000. An
adjustment was made for the risk of forfeiture during the vesting period.
The actual value, if any, that a grantee may realize will depend on the
excess of the stock price over the exercise price on the date the option is
exercised, so there is no assurance the value realized will be at or near
the value estimated by the Black-Scholes Model.
(2) Reflects shares subject to options that were granted on March 10, 2000, in
lieu of a portion of cash bonus otherwise payable by the Company with
respect to 1999.
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<PAGE> 11
The following table summarizes for each of the named executive officers the
total number of unexercised stock options held at December 31, 1999, and the
aggregate dollar value of in-the-money, unexercised stock options held at
December 31, 1999.
AGGREGATE STOCK OPTION EXERCISES
IN 1999 AND YEAR-END VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED STOCK IN-THE-MONEY STOCK
OPTIONS AT YEAR OPTIONS AT YEAR
END(#)(a) END($)(b)
--------------------------- ---------------------------
NAME SHARES EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ACQUIRED ON VALUE ----------- ------------- ----------- -------------
EXERCISE(#) REALIZED($)
----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ronald L. Jensen..... -- -- -- -- 0 0
Gregory T. Mutz...... 2,400 30,900 60,937 192,000 0 0
Richard J. Estell.... -- -- 2,178 18,712 0 0
Glenn W. Reed........ -- -- 0 28,500 0 0
William J. Gedwed.... -- -- 1,328 14,012 0 0
William P. Benac..... -- -- 0 10,000 0 0
Charles T. Prater.... -- -- 1,200 44,800 0 0
</TABLE>
- ---------------
(a) The number of exercisable and unexercisable options at year-end does not
include options granted to the named executive officers in March 2000 in
lieu of cash bonuses otherwise payable by the Company with respect to 1999.
(b) The closing stock price per share at December 31, 1999 was $10.5625.
9
<PAGE> 12
COMPARISON OF TOTAL SHAREHOLDER RETURN
The following graph compares the cumulative total stockholder return on
UICI Common Stock for the last five years with the cumulative return for the
same period of the S&P 600 Small Cap Market Index, the NASDAQ Stock Index, the
NASDAQ Insurance Index and the S&P Insurance Index. The graph assumes the
investment of $100 at the beginning of the period in the Company's Common Stock.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UICI 100 222 382 410 288 124
NASDAQ Stock Index 100 141 174 213 300 558
NASDAQ Insurance Index 100 142 162 238 211 164
S&P 600 Small Cap Market Index 100 129 154 192 188 210
S&P Insurance Index 100 140 170 246 252 258
</TABLE>
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<PAGE> 13
EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN
The Company has an Employee Stock Ownership and Savings Plan which permits
the Company to make contributions on behalf of eligible employees either in the
form of shares of the Company's Common Stock or in cash which is invested in
such shares of the Company's Common Stock. Shares contributed to the Plan or
purchased with the Company's contributions are allocated to the participant's
account on a monthly basis and forfeitures are allocated to employees who are
participants on the last day of the Plan Year based upon the ratio of each
participant's annual credited compensation (up to $40,000) to the total annual
credited compensation of all participants entitled to share in such
contributions for such Plan Year. Each participant's vested interest in the Plan
is at all times nonforfeitable and is distributable only upon hardship
withdrawal, death, or termination of employment.
OTHER MATTERS
The Company and Mr. Estell entered into an agreement, dated as of November
2, 1999, pursuant to which Mr. Estell agreed (a) to resign as a director and as
Executive Vice President of the Company, effective November 2, 1999, and (b) to
serve as a consultant to the Company for the period ending May 2, 2002, for
which Mr. Estell is entitled to a monthly consulting fee in the amount of
$12,000 for the term of the agreement. In accordance with the agreement, Mr.
Estell received a one-time severance payment in the amount of $120,000 and the
Company released Mr. Estell from liability under a promissory note in the
principal amount of $229,997, the proceeds of which were used to purchase shares
of Common Stock. The consulting arrangement is terminable prior to the end of
the term by the Company upon the occurrence of certain events, including the
death of Mr. Estell.
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<PAGE> 14
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth the number of shares of Common Stock
beneficially owned and the percentage of Common Stock so owned, as of April 25,
2000, by (a) each person known by management to own beneficially five percent or
more of the Company's Common Stock, (b) each director of the Company and each
executive officer of the Company named in the summary compensation table and (c)
all directors and executive officers as a group:
<TABLE>
<CAPTION>
COMMON SHARES PERCENT
BENEFICIALLY OF COMMON
NAME & ADDRESS OF BENEFICIAL OWNER OWNED STOCK
- ---------------------------------- ------------- ---------
<S> <C> <C>
Ronald L. Jensen........................................... 7,843,986(1) 16.90%
4001 McEwen Dr., Suite 200
Dallas, TX 75244
President and Fellows of Harvard College................... 5,153,700 11.10%
c/o Harvard Management Co.
600 Atlantic Avenue
Boston, MA 02210
FMR Corp................................................... 3,370,400 7.26%
82 Devonshire Street
Boston, MA 02109-3614
Wanger Asset Management, L.P. ............................. 3,069,700 6.61%
227 West Monroe Street, Suite 3000
Chicago, IL 60606
Onward and Upward, Inc. ................................... 3,103,657 6.69%
2121 Precinct Line Road
Hurst, TX 76054
Gregory T. Mutz............................................ 979,382(2)(5) 2.11%
Richard T. Mockler......................................... 15,224(3) (4)
Patrick J. McLaughlin...................................... 7,508(6) (4)
Stuart D. Bilton........................................... 3,884(7) (4)
George H. Lane III......................................... 3,884(7) (4)
William J. Gedwed.......................................... 18,508(8) (4)
Richard J. Estell.......................................... 41,952 (4)
Charles T. Prater.......................................... 120,024(9) (4)
Glenn W. Reed.............................................. 33,929(10) (4)
William P. Benac........................................... 12,266(11) (4)
All executive officers and directors (11 individuals) as a
group.................................................... 9,058,549 19.48%
</TABLE>
- ---------------
(1) Includes 4,100,000 shares held by Mr. Jensen's spouse. Does not include
shares held directly or indirectly by Mr. Jensen's five adult children, as
to which Mr. Jensen disclaims beneficial ownership. Mr. Jensen's adult
children directly hold in the aggregate approximately 5.66% of the
outstanding Common Stock. Mr. Jensen's adult children are also the
stockholders of Onward and Upward, Inc., which holds approximately 6.69% of
the outstanding Common Stock.
(2) Includes shares of Common Stock held as of March 21, 2000 by the Trustees
under the Company's Employee Stock Ownership and Savings Plan. The shares
of Common Stock held by the Trustee under the Plan that are purchased with
contributions made by the Company are subject to the vesting requirements
of the Plan.
(3) Includes 481 shares subject to options exercisable within 60 days granted
under the Company's 1987 Amended and Restated Stock Option Plan.
(4) Represents less than 1% of the outstanding common stock.
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<PAGE> 15
(5) Includes 42,195 shares held by a partnership in which Mr. Mutz has a 33.3%
ownership interest and 200 shares held by a partnership in which Mr. Mutz
has a 20% ownership interest; 9,437 shares held by Mr. Mutz as custodian
for his minor children; 669 shares held in IRAs for minor children; and
131,220 shares held by several family trusts of which Mr. Mutz serves
either as the Trustee or the Investment Advisor, and of which Mr. Mutz is a
beneficiary. Also includes 20,937 shares subject to options exercisable
within 60 days granted under the Company's 1996 Special Stock Option Plan,
and 44,000 shares subject to options exercisable within 60 days under the
Company's 1987 Amended and Restated Stock Option Plan.
(6) Includes 418 shares subject to options exercisable within 60 days under the
Company's 1987 Amended and Restated Stock Option Plan.
(7) Includes 481 shares subject options exercisable within 60 days under the
Company's 1987 Amended and Restated Stock Option Plan.
(8) Includes 1,740 shares subject to options exercisable within 60 days under
the Company's 1987 Amended and Restated Stock Option Plan and 1,328 shares
subject to options exercisable under the Company's 1998 Employee Stock
Option Plan.
(9) Includes 1,500 shares subject to options exercisable within 60 days granted
under the Company's 1987 Amended and Restated Stock Option Plan and 1,200
shares subject to options exercisable under the Company's 1998 Employee
Stock Option Plan.
(10) Includes 5,700 shares subject to options exercisable within 60 days granted
under the Company's 1987 Amended and Restated Stock Option Plan.
(11) Includes 2,000 shares subject to options exercisable within 60 days granted
under the Company's 1987 Amended and Restated Stock Option Plan.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors,
executive and certain officers, and any persons holding more than ten percent of
the Company's common stock are required to report their ownership of the
Company's common stock and any changes in that ownership to the Securities and
Exchange Commission (the "Commission") and, in the Company's case, The New York
Stock Exchange. Specific due dates for these reports have been established and
the Company is required to report in this proxy statement any failure to file by
these dates during 1999. Based solely upon a review of Reports on Forms 3, 4 and
5 and any amendments thereto furnished to the Company pursuant to Section 16 of
the Securities Exchange Act of 1934, as amended, and written representations
from the executive officers and directors that no other reports were required,
the Company believes that all of such reports were filed on a timely basis by
executive officers and directors during 1999, except that in January 2000
Gregory T. Mutz filed an amended Form 3 reporting beneficial ownership of two
derivative security positions which were inadvertently omitted from his initial
Form 3 filed in January 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INTRODUCTION
Historically, the Company and its subsidiaries have engaged from time to
time in transactions and joint investments with executive officers and entities
controlled by executive officers, particularly Ronald L. Jensen (the Company's
Chairman) and entities in which Mr. Jensen and his adult children have an
interest ("Jensen Affiliates"). As described above under the caption "Executive
Compensation Committee Report on Executive Compensation," during 1999 Mr. Jensen
functioned as the Company's compensation committee.
Under the Company's by-laws, any contract or other transaction between the
Company and any director (or company in which a director is interested) is valid
for all purposes if the interest of such director is disclosed or known and such
transaction is authorized by a majority of directors not interested in the
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<PAGE> 16
transaction. The Board of Directors has a current policy requiring that, where
Mr. Jensen is the interested director, a contract or transaction with Mr. Jensen
or other company in which Mr. Jensen has a substantial ownership interest (i.e.,
at least 30% of the outstanding equity of such company) be approved by a
majority of the directors of the Company who are not employees of the Company or
its subsidiaries. While the Company believes that during 1999 the Board of
Directors has been apprised of and has reviewed in advance all significant
transactions between all Jensen Affiliates and the Company, the formal Board
policy governing independent approval does not strictly apply to a contract or
transaction involving payments of less than $500,000 in any twelve month period
or less than $2.5 million over the life of such contract or transaction. Mr.
Jensen has never voted with respect to any matter in which he or his children
have or have had an interest.
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, requiring (1) prospective Board review, 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 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.
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 arm's length
transactions with unrelated third parties.
Transactions between an insured bank (including UCNB, the Company's
indirect wholly owned subsidiary) and an 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 it cannot predict at this time what
action, if any, the OCC will ultimately take with respect to these transactions.
TRANSACTIONS WITH MR. JENSEN AND JENSEN AFFILIATES
Special Investment Risks, Ltd.
From the Company's inception through 1996, Special Investment Risks, Ltd.
("SIR") (formerly United Group Association, Inc. ("UGA")) sold health insurance
policies that were issued by AEGON USA and coinsured by the Company or policies
issued directly by the Company. SIR is owned by Mr. Jensen. Effective January 1,
1997, the Company acquired the agency force of SIR and certain tangible assets
of SIR for a price equal to the net book value of the tangible assets acquired
and assumed certain agent commitments of $3.9 million. The tangible assets
acquired consisted primarily of agent debit balances, a building, and related
furniture and fixtures having a net book value of $13.1 million.
In accordance with the terms of the asset sale to the Company, SIR retained
the right to receive all renewal commissions on policies written prior to
January 1, 1997, including the policies previously issued by AEGON and coinsured
by the Company and the policies previously issued directly by the Company. The
renewal commissions paid to SIR on the coinsured policies issued by AEGON are
based on commission rates negotiated and agreed to by AEGON and SIR at the time
the policies were issued prior to 1997, and the commission rates paid on
policies issued directly by the Company are commensurate with the AEGON renewal
commission rates. The Company expenses its proportionate share of renewal
commissions payable to SIR on co-insured policies issued by AEGON. During 1997,
1998 and 1999, SIR received insurance renewal commissions of $20.4 million,
$20.9 million and $10.1 million, respectively, on the policies previously issued
by AEGON and coinsured by the Company. During 1997, 1998 and 1999, SIR received
renewal commissions of $9.2 million, $4.7 million and $3.3 million,
respectively, on policies issued directly by the Company.
In 1986 and 1996, respectively, SIR established, for the benefit of its
independent insurance agents, independent sales representatives and independent
organizations associated with SIR, the Agency Matching Total Ownership Plan I
and the Agency Matching Total Ownership Plan II (collectively, the "Plans"),
14
<PAGE> 17
entitling participants to purchase and receive Company Common Stock. In
connection with SIR's transfer to the Company of SIR's agency operations
effective January 1, 1997, SIR agreed to retain the liability to fund the Plans
to the extent of 922,587 shares of UICI Common Stock, representing the
corresponding number of unvested AMTOP Credits (as defined in the Plans) at
January 1, 1997. As of August 30, 1999, the liability of SIR to fund the Plans
remained undischarged to the extent of 369,174 shares of UICI Common Stock (the
"Unfunded Obligation").
Effective September 15, 1999, SIR and the Company entered into an
Assumption Agreement, pursuant to which UICI agreed to assume and discharge the
Unfunded Obligation, in consideration of a cash payment made by SIR to the
Company in the amount of $10,129,212, representing the dollar value of 369,174
shares of UICI Common Stock at $27.4375 per share (the closing price of UICI
common stock at September 15). On October 29, 1999, SIR funded the cash payment.
To ensure that the dollar value of the Unfunded Obligation will not exceed
the dollar proceeds received from SIR plus a reasonable allowance for the cost
of funds, effective September 15, 1999, the Company and OUI entered into a
Put/Call Agreement. Pursuant to the Put/Call Agreement, for a thirty day period
commencing on July 1 of each year (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).
During 1995, the Company and SIR entered into a three-year agreement
entitling the Company to receive a 20% interest in the profits or losses
relating to certain lead generation activities of SIR. In accordance with this
arrangement, SIR paid to the Company $600,000 and $1.1 million in 1998 and 1997,
respectively.
During 1999, 1998 and 1997, the Company received $163,000, $13,000 and
$-0-, respectively, from SIR as reimbursement of office supply and occupancy
expenses.
Richland State Bank
Richland State Bank ("RSB") is a state-chartered bank in which Mr. Jensen
holds a 100% equity interest. Prior to the chartering of United Credit National
Bank in February 1997, the Company's United CreditServ subsidiary (formerly the
Company's Credit Services division) utilized RSB to issue credit cards, for
which the Company paid origination fees in the amount of $107,500, $187,700 and
$83,300 in 1999, 1998 and 1997, respectively. During 1997, the Company purchased
$6.3 million of the Credit Services Division credit card receivables from RSB.
RSB has also originated student loans for Educational Finance Group, Inc.
("EFG") and resold originated loans to EFG at par less an origination fee of 31
basis points (0.31%). In 1998, RSB originated $21.6 million in student loans for
EFG and received $66,960 in origination fees. During 1999, RSB originated $59.8
million aggregate principal amount of student loans for EFG, for which it
received $176,000 in origination fees.
During 1997, the Company also borrowed $666,000 from RSB, of which $497,000
was outstanding at December 31, 1998, bearing interest at annual rates ranging
from 9% to 9.25%. The loans were paid in full in August 1999.
The Company's United CreditServ unit processes and services credit cards
issued by RSB. The Company received $1.5 million, $647,000 and $1.1 million from
RSB for services performed in connection with processing of credit cards in
1999, 1998 and 1997, respectively.
RSB has also historically provided student loan origination services for
the Company's College Fund Life Division. On June 12, 1999, RSB and UICI Funding
Corporation ("Funding") (a wholly owned subsidiary of UICI), executed a Loan
Origination and Purchase Agreement, pursuant to which RSB continues to originate
student loans for Funding. Originated student loans are resold to Funding at par
(plus accrued interest) less an origination fee of 31 basis points (0.31%).
Funding, in turn, resells the loans to the College Fund Life Division
15
<PAGE> 18
of The MEGA Life and Health Insurance Company (a wholly-owned subsidiary of
UICI) ("MEGA") and to the College Fund Life Division of Mid-West National Life
Insurance Company of Tennessee (a wholly-owned subsidiary of UICI) ("Mid-West").
During 1999, RSB originated $15.3 million aggregate principal amount of student
loans for MEGA and Mid-West, for which it received origination fees in the
amount of $47,430.
During 1999, RSB collected on behalf of, and paid to, Funding guarantee
fees in the amount of $1.6 million, which fees were paid by student borrowers in
connection with the origination of student loans.
In June 1999, RSB entered into a service agreement with the College Fund
Life Division of MEGA and Mid-West pursuant to which MEGA and Mid-West provide
underwriting services to permit RSB to approve prospective student loans. During
1999, RSB paid to MEGA and Mid-West administrative fees for such services in the
amounts of $165,000 and $300,000, respectively.
During 1999, the Company received from RSB interest income in the amount of
$5,400 on certificates of deposit issued by RSB.
Specialized Association Services, Inc.
Pursuant to an agreement entered into in July 1998, Specialized Association
Services, Inc. ("SAS") (which is owned by Mr. Jensen's adult children) regularly
pays MEGA for certain benefits (e.g., National Motor Club memberships) provided
to association members. MEGA, in turn, purchases such benefits from third
parties (including, in some cases, the Company). The Company believes that the
fees earned by MEGA as a percentage of MEGA's cost of benefits is approximately
23%, which is prior to any allocation of overhead. During 1999 and 1998, SAS
paid to MEGA $6.0 million and $900,000, respectively, pursuant to this
arrangement.
During 1999, 1998 and 1997, the Company paid to SAS $151,000, $-0- and
$-0-, respectively, for telemarketing services. During 1999, 1998 and 1997, the
Company paid to SAS $166,000, $214,000 and $-0-, respectively, for various
services and reimbursement of expenses. The Company received from SAS $32,000,
$95,000 and $-0- during 1999, 1998 and 1997, respectively, for reimbursement of
expenses. During 1999, 1998 and 1997, SAS paid to MEGA $325,000, $114,000 and
$-0-, respectively, for leased office facilities.
Healthcare Management Administrators, Inc.
In 1997, pursuant to the terms of a Sale and Administration Agreement, the
Company sold certain tangible assets associated with its third party
administrator business to Healthcare Management Administrators, Inc. ("HMA")
(which is owned by Mr. Jensen) and also agreed to assign associated rights and
benefits of licenses of third party administrator business. The purchase price
received by the Company was $641,000, which approximated book value of the net
assets sold.
During 1999, 1998 and 1997, the Company provided to HMA leased facilities
and data processing, accounting, management and administrative services. The
Company received fees of $3.5 million, $9.2 million and $4.5 million in 1999,
1998 and 1997, respectively, and the Company paid HMA $273,000, $69,000 and
$28,000 in 1999, 1998 and 1997, respectively, for certain claims processing
services performed by HMA. During 1998, the Company loaned HMA $910,000, which
loan was repaid in full in 1998 with interest at prime plus two percent.
During 1999, 1998 and 1997 Insurdata Marketing Services received
commissions from HMA in the amount of $630,000, $-0- and $-0-, respectively.
In accordance with the terms of a Management and Option Agreement, dated as
of April 1, 1999, HMA and Mr. Jensen granted to the Company an option to
purchase certain assets, subject to certain corresponding liabilities,
associated with the third party administration business of HMA. The option was
exercisable on or before January 30, 2000 at an option price equal to the book
value of the net tangible assets of HMA to be purchased plus assumption of an
obligation to pay WinterBrook VSO, LLC (a company controlled by Mr. Jensen)
certain commissions payable over a five year term in an amount not to exceed
$4.2 million. The
16
<PAGE> 19
Company delivered notice of exercise of the option on January 25, 2000, and the
Company completed the purchase of the assets associated with HMA's third party
administration business on February 3, 2000, at a renegotiated purchase price
equal to $3,980,500 (representing the recorded net book value of the assets
purchased) plus $500,000, representing repayment to Mr. Jensen of cash advances
made to HMA subsequent to December 31, 1999.
NetLojix Communications, Inc. (formerly AvTel Communications, Inc.)
Netlojix provides voice telecommunications services to the Company,
pursuant to an agreement originally executed in 1998, renegotiated effective
August 1, 1999 and expiring on October 31, 2001. Mr. Jensen and his adult
children own beneficially in the aggregate approximately 59% of the issued
capital stock of Netlojix. The Company paid Netlojix $4.4 million, $2.4 million
and $2.1 million in 1999, 1998 and 1997, respectively, for telecommunications
services, and in 1999, 1998 and 1997 the Company received reimbursement payments
of $192,000, $113,670 and $-0-, respectively, in connection with such services.
Excell Global Services, Inc.
Excell Global Services, Inc. ("Excell Global") (in which Mr. Jensen, Mr.
Mutz, President and Chief Executive Officer of the Company, and an officer of
United CreditServ serve as directors and in which Mr. Jensen and Mr. Mutz are
beneficial holders of 57.28% and 14.6%, respectively, of the outstanding equity)
is a holding company, the principal subsidiary of which is Excell Agent
Services, LLC ("Excell"). Excell Global and members of management of Excell
Global hold, in the aggregate, 99% of the equity interest in Excell, and Mr.
Jensen holds the remaining 1% equity interest. Excell provides telephone
directory assistance services. During 1999, Excell and MEGA entered into a
consulting arrangement, pursuant to which Excell was engaged on a project basis
to provide advisory and consulting services to MEGA with regard to call center
matters. During 1999, MEGA paid to Excell the amount of $48,000 for such
services.
In November 1994, UICI extended a $10.0 million line of credit to Excell.
The terms of the line of credit were renegotiated in 1997 to provide for
additional collateral, to decrease the interest rate to prime from prime plus 4%
and to extend the maturity of the loan to December 31, 1998 from September 30,
1998. The line of credit was secured by a pledge of securities owned by Mr.
Jensen. Excell repaid $2.5 million in 1997 and the remaining balance of $7.5
million was repaid in May 1998.
In January 1999, the Company sold to Excell a stop loss policy issued by
MEGA. During 1999, Excell paid to the Company total premiums on such policy in
the amount of $153,000.
Onward and Upward, Inc. and Other Entities Owned by the Jensen Adult Children
Mr. Jensen's five adult children hold in the aggregate 100% of the equity
interest in Onward & Upward, Inc. ("OUI"), the holder of approximately 6.69% of
the Company's outstanding Common Stock.
During 1998, the Company acquired from OUI a 15.9% interest in the
Company's subsidiary, The Chesapeake Life Insurance Company, for a purchase
price of $4.5 million. The purchase price was based on a predetermined formula
that approximated GAAP book value. OUI also holds a 21% equity interest in U.S.
Managers Life Insurance Company, Ltd., a subsidiary of the Company. The Company
has a right-of-first-offer to purchase from OUI, and OUI has a corresponding put
right to sell to the Company, OUI's 21% equity interest in U.S. Managers Life
Insurance Company, Ltd. at a price equal to 21% of the book value of U.S.
Managers Life Insurance Company, Ltd. (determined in accordance with generally
accepted accounting principles) at the date of purchase.
For the six-month period ended July 1, 1998, Core Marketing, Ltd. (in which
the Jensen adult children held 100% of the equity interest) generated sales
leads for the agents of the Company. The Company paid $7.5 million for the leads
in 1998. In 1998, the Company purchased certain assets of Core Marketing, Ltd.
for a purchase price of $2.8 million.
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<PAGE> 20
In 1999, 1998 and 1997, the Company paid $147,000, $1,600 and $37,000,
respectively, to Small Business Ink (a division of Specialized Association
Services, in which the adult children of Mr. Jensen own 98.8%) for printing
services.
Tesia Corporation (formerly Paperless Adjudication Ltd.)
During 1993, Mr. Jensen and the Company agreed to jointly invest in Tesia
Corporation ("Tesia"), which seeks to develop a paperless system for insurance
claims administration and adjudication. Mr. Jensen holds a 29.67% and Mr.
Jensen's five adult children hold in the aggregate a 12.17% equity interest in
Tesia. At December 31, 1998, the Company had written off its aggregate
investment of $6.1 million made prior to 1999. In September 1999, the Company
invested an additional $119,000 in Tesia in exercise of its preemptive rights as
part of a private placement offering of equity interests by Tesia. After
recognizing its share of Tesia's operating losses, at December 31, 1999, the
Company's carrying value of its investment in Tesia was $-0-.
In 1999, 1998 and 1997, the Company received $8,400, $-0- and $-0-,
respectively, from Paperless Adjudication, Ltd. for commissions and
reimbursement of expenses.
Impact Productions, Inc.
In 1998, the Company acquired a 90% interest in Impact Productions, Inc.
("Impact") from one of Mr. Jensen's adult children for a total price of
$236,000, which approximated the net book value of the assets as of the purchase
date. The adult child of Mr. Jensen retains a 10% equity interest in Impact.
During 1999, 1998 and 1997, the Company paid to Impact $111,000, $319,000 and
$119,000, respectively, for promotional services.
During 1999, 1998 and 1997, Impact paid the Company $13,000, $17,000 and
$-0-, respectively, for reimbursement of expenses.
Interactive Media Works, Inc.
During 1999 and 1998, United Membership Marketing Group, LLC (an indirect
wholly-owned subsidiary of the Company) paid Interactive Media Works, LLC (in
which Mr. Jensen held a 72.5% equity interest) the amount of $-0- and
$1,435,441, respectively, for voice activation services related to its credit
card operation.
Small Business Showcase, Inc. ("SBS")
Cornerstone Marketing of America (a division of Mid-West) paid to Small
Business Showcase, Inc. ("SBS") (which is owned by one of Mr. Jensen's adult
children) $11,000, $-0- and $-0- in 1999, 1998 and 1997, respectively, for lead
generation services.
In 1999 and 1998, SBS paid to subsidiaries of the Company $659,000 and
$-0-, respectively, for generating Internet leads.
WinterBrook VSO, LLC
During 1999 and 1998, Insurdata Imaging Services, LLC (an indirect
wholly-owned subsidiary of the Company) paid WinterBrook VSO, LLC (in which Mr.
Jensen holds a controlling interest) $258,000 and
$-0-, respectively, representing run-off commissions relating to the marketing
and sale of satellite imaging systems.
Purchase of Series B Certificates
On December 31, 1999, the Company sold to Mr. Jensen for an aggregate of
$10,000,000 in cash (representing 100% of the principal amount thereof) (a) a
Class B 8.25% Asset Backed Certificate, Series 1998-1, in the outstanding
principal amount of $4,100,000; (b) a Class B 10.00% Asset Backed Certificate,
Series 1997-1, in the outstanding principal amount of $3,000,000; and (c) a
Class B 10.00% Asset
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<PAGE> 21
Backed Certificate, Series 1996-1, in the outstanding principal amount of
$2,900,000 (collectively the "Series B Certificates"). The Series B Certificates
were created as part of the Company's securitizations of credit card receivables
issued in 1996, 1997 and 1998 generated by the Company's credit card operations.
Sale of SunTech Processing Systems, LLC
In 1996, the Company invested $4 million in exchange for a 100% Class A and
a 40% Class B membership interest in Cash Delivery Systems, LLC ("CDS"),
formerly known as Sun Network Technologies. The remaining 60% Class B membership
interest was held by Sun Communications, Inc. ("Sun"). At the time of the
Company's investment, CDS was engaged in the business of owning and placing
automated teller machines ("ATMs") and processing ATM transactions. In
connection with the Company's investment in CDS, Mr. Jensen executed an
agreement pursuant to which Mr. Jensen agreed to indemnify the Company for any
loss or reduction in value of the Company's Class A membership contribution and
granted an option to the Company to put the Class A membership interest to Mr.
Jensen for $4 million. CDS and Mr. Jensen then invested $80,000 and $20,000 in
Sun Tech Processing Systems, LLC ("STP") in exchange for an 80% and 20%
membership interest, respectively. In addition, Mr. Jensen agreed to loan up to
$6 million to STP, secured by all property acquired with the funds advanced. No
funds were drawn down on this commitment.
In accordance with an Agreement dated March 1997 and effective December 31,
1996 (the "March 1997 Agreement"), the Company, Mr. Jensen, Sun, CDS, and STP
restructured these investments as follows:
- CDS and Mr. Jensen withdrew their membership contributions from STP and
the agreement to advance up to $6 million to CDS was canceled.
- STP issued to the Company and Sun a new 80% and 20% Class B membership
interest for $800 and $200, respectively.
- The Company invested an additional $2.0 million in STP in exchange for a
100% Class A membership interest.
- The Company sold its entire Class A and Class B membership interests in
CDS to Mr. Jensen for $854,000, which represented the net book value of
the Company's interest in CDS before the transfer of the ATM transaction
processing business to STP. In addition, Sun transferred a 40% interest
in CDS to Mr. Jensen. Giving effect to these transactions, Mr. Jensen and
Sun owned 80% and 20% of the Class B membership interests of CDS,
respectively, and Mr. Jensen owned 100% of the Class A membership
interests of CDS.
- Mr. Jensen agreed to provide financing to CDS in the total amount of
approximately $12 million to pay off outstanding CDS indebtedness,
approximately $2 million of which was to be unsecured. As of March 1997,
Mr. Jensen had paid on behalf of CDS approximately $10.3 million.
In connection with the sale of UICI's interests in CDS to Mr. Jensen, CDS
distributed processing assets with approximately $1.3 million in book value to
Mr. Jensen and Sun, which at the time owned 80% and 20% of the Class B
membership interests in CDS, respectively. Sun contributed its share of those
processing assets to STP, and Mr. Jensen contributed his $1.1 million share of
the book value of those processing assets to STP on behalf of UICI.
The March 1997 Agreement also provides, in part, that (i) there will be no
distributions to Class B members of STP or CDS until all Class A preferred
interests in both STP and CDS have been paid or redeemed in full and (ii) if
funds are available to any parties from either STP or CDS, such funds will be
loaned to the other company until the preferred interests are retired. The
agreements governing the organization and governance of STP and CDS both
require, upon liquidation, the payment of the respective outstanding debt of
each company before the equity holders of that company receive a distribution.
After the sale of CDS's ATMs and use of the proceeds to repay these loans in
part, approximately $6.2 million of Mr. Jensen's loans to CDS remained
outstanding as of December 31, 1999. These loans bear interest at an annual rate
of 2.5% plus the prime rate, payable monthly, and have a maturity date of July
1, 2001.
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In February 1998, the assets of STP were sold to an unrelated party for
$17.5 million, and in 1998 the Company recognized a gain in the total amount of
$9.7 million on the sale. As discussed below, the ultimate outcome of the
appeals in the Sun Litigation may have an impact on this recorded gain.
Consistent with its understanding of the March 1997 Agreement, in the first
quarter of 1998 the Company recorded a gain of $2.3 million (representing the
distribution due to its Class A and Class B interests in STP assuming funds were
advanced to CDS to retire Mr. Jensen's debt and redeem his Class A interest in
CDS). In April 1998, Sun filed certain claims in District Court in Dallas
County, Texas concerning the distribution of the proceeds from the sale of the
STP assets. The core issue of the suit was whether the provisions of the March
1997 Agreement would require that STP make a loan or advance to CDS out of the
proceeds of the STP sale so that CDS could repay the loans made by Mr. Jensen to
CDS and redeem Mr. Jensen's Class A preferred membership interest in CDS. The
liquidator appointed to rule on the proper distribution ruled that the proceeds
should be distributed in a manner different than had previously been applied by
the Company in the first quarter of 1998.
The net effect of any loan or advance to CDS would be to reduce the funds
available for STP to distribute to the Company and Sun. In accordance with an
agreement effective June 30, 1998 (the "Assurance Agreement"), Mr. Jensen agreed
that, if UICI receives less than the $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 Dallas County, Texas District Court ruled in December 1998 that, as a
matter of law, the March 1997 agreement governing the distribution of the cash
proceeds of the STP sale should be read in the manner urged by Sun and
consistent with the 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 to Sun for allegedly selling STP for less than its
true market value. On September 10, 1999 the Company filed its initial briefs in
support of its appeal of the District Court's decision as to those issues. The
Company has not, however, appealed the District Court's ruling with regard to
the interpretation of the March 1997 agreement. On September 10, 1999, Mr.
Jensen filed his initial brief in support of his appeal of, among other things,
the trial court's December 1998 finding in the Sun Litigation that CDS was not
entitled to any of the proceeds from the sale of STP's assets. On October 4,
1999, Sun filed its brief in opposition to the appeal.
In the brief filed in his appeal of the District Court's December 1998
finding, Mr. Jensen 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 CDS to allow CDS to satisfy certain creditor and
preferred equity claims, owed primarily to Mr. Jensen. 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 the Assurance Agreement,
the Company anticipates that it will receive no less than $15,149,000 from the
STP sale.
Oral argument before the Dallas Court of Appeals on the appeal was held on
February 1, 2000, though no decision on the appeal has been rendered. As
previously disclosed, 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 Company's
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).
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<PAGE> 23
March 2000 Loan
On March 14, 2000, a limited liability company controlled by the Company's
Chairman (the "Lender LLC") extended to a newly-formed subsidiary of UICI a loan
in the amount of $70.0 million, the proceeds of which, together with $5.0
million of cash on hand, were used to reduce indebtedness outstanding under the
Company's bank credit facility from $100.0 million to $25.0 million. The loan
bears interest at the prevailing prime rate, is guaranteed by UICI, is due and
payable in July 2001 and is secured by a pledge of investment securities and
shares of the Company's National Motor Club unit. No principal outstanding under
the loan from Lender LLC can be paid unless all amounts outstanding under the
bank credit facility are paid in full.
Other Transactions
Effective July 1, 1998, the Company sold to IPN Acquisitions, Inc. (in
which Mr. Jensen holds a 100% equity interest) its equity interest in IPN, LLC
(a healthcare solutions company) for cash in the amount of $3.5 million. The
purchase price represented the net book value of the net assets of IPN, LLC. IPN
Acquisitions, Inc. granted the Company an option to purchase the net assets of
IPN, LLC at book value.
Effective July 1, 1998, the Company sold to HAI Acquisitions, Inc. (in
which Mr. Jensen holds a 100% equity interest) its equity interest in HealthCare
Automation, Inc. (a healthcare solutions company) for cash in the amount of $1.9
million. The purchase price represented the net book value of the net assets of
Healthcare Automation, Inc. HAI Acquisition, Inc. granted the Company an option
to purchase the net assets of HealthCare Automation, Inc. at book value.
During 1997, the Company sold to Mr. Jensen its equity interest in Televere
Systems, LLC, B. T. Systems Integrators, LLC and WinterBrook VSO, LLC and
certain assets of UICI Administrators, Inc. for cash in the aggregate amount of
$1.2 million. The purchase price represented the net book value of the net
assets of the companies.
In 1999, 1998 and 1997, the Company paid $28,000, $79,000 and $1,900,
respectively, to United Group Service Center, Inc. (in which Mr. Jensen held a
100% equity interest) for reimbursement of expenses. In 1999, 1998 and 1997, the
Company received $43,000, $14,000 and $14,000, respectively, from United Group
Service Center, Inc., which amounts represent premiums on a stop loss policy
issued by MEGA and reimbursement of office expenses.
EDUCATIONAL FINANCE GROUP, INC.
The Company's Educational Finance Group, Inc. subsidiary formerly leased
office space from a partnership in which Stephen J. Galvin (former President and
Chief Executive Officer of EFG) is a partner. During 1999, 1998 and 1997, EFG
paid $149,000, $-0- and $-0-, respectively, under the terms of the lease. EFG
terminated the lease on January 13, 2000. EFG also paid $3,200 and $2,300 in
1999 and 1998, respectively, for facilities services to a property management
company, the sole shareholders of which included members of Mr. Galvin's family.
EFG also utilized the services of a travel agency owned by Mr. Galvin and
members of his family. During 1999, 1998 and 1997, EFG incurred for the benefit
of the travel agency the cost of space and salary and benefits for one agency
employee in the amount of $28,000, $14,000 and $-0-, respectively.
In 1998 Mr. Galvin contributed a $9.0 million note payable to him by EFG as
equity to EFG. This note payable had a balance of $10.5 million at December 31,
1997.
As president and chief executive officer of EFG, Mr. Galvin received
compensation from EFG in the amount of $239,000, $200,000 and $66,000 in 1999,
1998 and 1997, respectively.
Mr. Galvin and an employee of EFG together hold 66% of the equity interest
in a company to which EFG paid $66,000 in 1998 for web-site development
services.
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TRANSACTIONS WITH PHILLIP A. GRAY
During 1997, 1998 and the period ended on April 23, 1999, Phillip A. Gray
served as head of the Company's Credit Services division and held a minority
interest in United Membership Marketing Group, Ltd. (a majority owned subsidiary
of the Company) ("UMMG"). During 1999, 1998 and 1997, the Company engaged in
several transactions with Mr. Gray and business entities controlled by Mr. Gray.
American Credit Educators, LLC
Mr. Gray is the controlling member of American Credit Educators, LLC
("ACE"), an independent membership association that provides credit education
programs and other benefits and through which United CreditServ has historically
marketed its credit support services and "ACE" credit cards. During 1999, 1998
and 1997, UCNB made payments to ACE totaling $79.6 million, $52.6 million, and
$-0-, respectively, pursuant to the terms of a Credit Card Merchant Agreement.
These payments were for educational materials that were sold by ACE and charged
to credit cards issued by UCNB. In addition, during 1998 and 1999, UCNB paid to
ACE cash in the amount of $12.8 million and $6.0 million, respectively, in
satisfaction of certain merchant holdback liabilities, and in 1999 ACE purchased
from UCNB certain credit card receivables in the amount of $13.8 million,
representing the unpaid balance of the accounts purchased.
In 1999, 1998 and 1997, ACE paid to UMMG the amount of $16.3 million, $21.0
million and $-0-, respectively, for fulfillment services and marketing
materials.
American Fair Credit Association, LLC
Mr. Gray is the controlling member of American Fair Credit Association, LLC
("AFCA"), an independent membership association that provides credit education
programs and other benefits and through which United CreditServ has historically
marketed its credit support services and "AFCA" credit cards.
In 1999, 1998 and 1997, AFCA paid to UMMG cash in the amount of $15.3
million, $24.5 million and $20.8 million, respectively, for fulfillment services
and marketing materials. In 1999, 1998 and 1997, AFCA paid to United CreditServ
$300,000, $900,000 and $2.4 million for processing fees.
United Membership Marketing Group, LLC
UMMG was initially organized by the Company in 1993 to serve as the
marketing and fulfillment organization for the Company's Credit Services
division. At inception, the Company and Mr. Gray held an 80% and 20% equity
interest, respectively, in UMMG. In 1994, the Company increased its equity
interest in UMMG to 85%. During 1998 and 1999, the Company entered into two
transactions, pursuant to which the Company purchased from Mr. Gray and the
other minority owners additional equity interests in UMMG. On January 1, 1998,
the Company purchased from Mr. Gray a 3% equity interest in UMMG (thereby
increasing the Company's equity interest in UMMG from 85% to 88%), for which Mr.
Gray received $6.0 million. In April 1999, the Company purchased from Mr. Gray a
8.25% interest in UMMG for $22.7 million, and the Company purchased the
remaining 3.75% equity interest in UMMG from another officer of UMMG and the
remaining minority owners for $7.5 million and $2.1 million, respectively (the
"April 1999 Buyout").
In connection with the Company's initial acquisition in 1992 of an 80%
interest in the predecessor of the Credit Services division, Mr. Jensen loaned
an aggregate of $2,000,000 to the prior owners (the "Gray Group"), including
$1,600,000 to Mr. Gray and $160,000 to another officer of UMMG. The loans from
Mr. Jensen were paid in full on April 23, 1999.
As the holders of equity interests in UMMG, in 1999, 1998 and 1997 Mr. Gray
received cash dividend distributions in the amount of $6.5 million, $1.2 million
and $1.2 million, another officer of UMMG received $646,364, $454,636 and
$311,291, respectively, and the remaining minority holders of equity interests
received $536,532, $113,659 and $77,823, respectively.
Mr. Gray received additional compensation from UMMG in the amount of
$291,000, $931,000 and $849,000 in 1999, 1998 and 1997, respectively.
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In 1997, UMMG advanced to Mr. Gray a loan in the amount of $2.0 million, of
which $1,776,000 and $1,792,000 was outstanding at December 31, 1998 and 1997,
respectively. The loan bore interest at the annual rate of 7.97%. The loan was
repaid in 1999.
Financial Services Reinsurance, Ltd.
The Company, Mr. Gray, another officer of UMMG and other individuals
(collectively Mr. Gray, the other officer and the other individuals constitute
the "Gray Group") hold a 79%, 16.8%, 1.68% and 2.52% equity interest,
respectively, in Financial Services Reinsurance. Ltd., an offshore re-insurer
("FSR"). In 1992, the Gray Group acquired its collective 21% interest in FSR
from OUI for a purchase price of $21,000. As part of the initial acquisition of
the Gray Group's 21% interest in FSR, all shareholders of FSR, including the
Company and Mr. Gray, contributed additional capital to FSR in an aggregate
amount of $900,000, of which Mr. Gray contributed $151,200, the other officer
contributed $15,120 and the remaining individuals contributed $22,680. Mr.
Gray's and the other officer's capital contributions to FSR were funded by non-
recourse loans from the Company to Mr. Gray and the other officer in the amount
of $151,200 and $15,120, respectively (the "FSR Capital Loans"), which bore
interest at the rate of 6% per annum. Since 1992 and through December 31, 1999,
FSR has paid an aggregate of $1,294,440 in dividends to the members of the Gray
Group, including $1,058,400 to Mr. Gray and $105,840 to the other officer.
During 1999, 1998 and 1997, FSR distributed cash dividends to Mr. Gray in the
amount of $285,600, $168,000 and $336,000, respectively. During 1999, 1998 and
1997, FSR distributed cash dividends to the other officer in the amount of
$28,560, $16,800 and $33,600, respectively. During 1999, 1998 and 1997, FSR
distributed cash dividends to the remaining members of the Gray Group in the
amount of $14,280, $25,200 and $50,400, respectively.
At the closing of the April 1999 Buyout, the Company loaned Mr. Gray and
the other officer the additional amounts of $859,025 (the "Gray Note") and
$251,499 (the "Other Officer Note"), respectively, which loans were added to
indebtedness owing to the Company under the FSR Capital Loans. Accordingly, at
December 31, 1999, Mr. Gray had total indebtedness owing to the Company in the
amount of $1,010,225, and the other officer had total indebtedness outstanding
in the amount of $266,619, which indebtedness in each case bears interest at
5%--6% per annum, with principal and all accrued interest due and payable on
January 1, 2002.
The Company has the right, exercisable on January 1, 2002, to purchase from
Mr. Gray and the other officer their respective interests in FSR for a purchase
price equal to the outstanding balance plus accrued interest on the Gray Note
and the Other Officer Note, respectively.
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 (See Note M).
OTHER TRANSACTIONS WITH CERTAIN MEMBERS OF MANAGEMENT
Transactions with Mr. Mutz
In January 1999, Gregory T. Mutz was elected President and Chief Executive
Officer of the Company. During 1999, Mr. Mutz continued to serve as Chairman of
the Board of AMLI Residential Properties Trust, a publicly-traded real estate
investment trust ("AMLI"). At December 31, 1999, the Company held a 14% fully
diluted interest in AMLI. As Chairman of the Board of AMLI, Mr. Mutz received
certain compensation and participated in various option and deferred
compensation programs, all of which are described in the AMLI proxy statement.
In addition, as of December 31, 1999, AMLI had loaned Mr. Mutz $2.1 million on a
recourse and secured basis, the proceeds of which were used to purchase 112,413
shares of AMLI beneficial interest.
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<PAGE> 26
Mr. Mutz also serves as chairman of the board of AMLI Commercial Properties
Trust ("ACPT"), a private real estate investment trust in which the Company
holds a 20% equity interest. Mr. Mutz is the beneficial holder of less than one
percent of the issued and outstanding shares of beneficial interest of ACPT. At
December 31, 1999, ACPT had an outstanding loan owing from Mr. Mutz in the
amount of $600,000, the proceeds of which were used to purchase stock in ACPT.
In December 1998, the Company extended a loan to Mr. Mutz in the amount of
$3,300,000, the proceeds of which were used to purchase 200,000 shares of Common
Stock in the Company at a purchase price of $19.50 per share. The amount
outstanding under the loan at December 31, 1999, including accrued interest, was
$3,341,589. The loan bears interest at the rate of 5% per annum, payable
quarterly, has a six-year term, and is full recourse to Mr. Mutz. On March 10,
2000, Mr. Mutz made a $534,875 principal payment.
In June 1999, the Company extended a loan to Mr. Mutz in the amount of
$429,063, the proceeds of which were used to purchase 20,000 shares of Company
Common Stock. The loan bears interest at 5.37%, is payable quarterly, has a
six-year term, and is full recourse to Mr. Mutz. At December 31, 1999, the
amount outstanding on the loan was $433,481, including accrued interest. The
loan was paid off on March 10, 2000.
On August 4, 1999, the Company entered into an indemnification agreement
with Mr. Mutz, pursuant to which the Company agreed to indemnify Mr. Mutz to the
fullest extent permitted by Delaware law from certain liabilities and expenses
incurred in his capacity as an officer of the Company and/or as an officer
and/or director of the Company's subsidiaries.
Other Loans to Management
During 1999 the Company extended loans to Messrs. Reed, Gedwed, Prater,
Estell, and Benac, all executive officers of the Company, in the amounts of
$417,332, $203,155, $158,438, $229,997 and $203,750, respectively, the proceeds
of which were used to purchase Company Common Stock. The loans to Messrs. Benac
and Prater bear interest at 5.22% per annum and the loans to Messrs. Reed and
Gedwed bear interest at 5.37% per annum. The six-year term loans require
quarterly interest payments, have a six-year term, are full recourse to the
borrower and are payable in full upon the occurrence of certain events,
including the termination of employment. In connection with a separation and
consulting arrangement entered into between the Company and Mr. Estell in
November 1999, the Company released Mr. Estell from liability under his note and
the note balance was written off. At December 31, 1999, Messrs. Reed, Gedwed,
Prater, and Benac had outstanding loans payable to the Company under the program
in the amounts of $422,981, $203,155, $160,582, and $203,750, respectively,
including accrued interest.
OTHER TRANSACTIONS
On September 1, 1999, the Company entered into separate indemnification
agreements with each of Messrs. Reed, Gedwed, Prater, Estell, and Benac,
pursuant to which the Company agreed to indemnify such officers to the fullest
extent permitted by Delaware law from certain liabilities and expenses incurred
in their respective capacities as officers of the Company and/or officers and
directors of the Company's subsidiaries.
The Company receives investment management services from investment
advisory firms affiliated with two of its directors. During 1999, 1998 and 1997,
the Company paid advisory fees in the amount of $366,400, $373,400 and $362,400
to Emerald Capital Group, Ltd., for which Patrick J. McLaughlin (a Director of
the Company) serves as a managing director and owner. During 1999, 1998 and
1997, the Company paid investment advisory fees in the amount of $140,000,
$127,100 and $58,700 to The Chicago Trust Company, for which Stuart Bilton (a
Director of the Company) serves as President and Chief Executive Officer.
From time to time the Company has also retained Emerald Capital Group, Ltd.
to perform investment banking and insurance advisory services. In accordance
with the terms of a Consulting Agreement dated September 14, 1999, the Company
formally retained the services of Emerald Capital Group, Ltd. for an annual fee
of $400,000, payable in monthly installments. During 1999, the Company paid an
aggregate of $188,116 in fees and expenses to Emerald Capital Group, Ltd. for
investment banking and insurance advisory services. Effective March 10, 2000,
Mr. McLaughlin elected to forego $100,000 of cash payments otherwise
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<PAGE> 27
due and owing under the Consulting Agreement in exchange for options to purchase
50,000 shares of Company Common Stock at $6.625 per share.
During 1999 the Company extended a loan to Mr. McLaughlin in the amount of
$43,712, the proceeds of which were used to purchase Company Common Stock. The
loan bears interest at 5.22% per annum. The loan has a six-year term, requires
quarterly interest payments, is full recourse to the borrower, and is payable in
full upon the occurrence of certain events.
2. RATIFICATION OF APPOINTMENT OF AUDITORS
Subject to ratification by the stockholders, the Board of Directors
reappointed the firm of Ernst & Young LLP as the Company's independent auditors
to audit the financial statements of the Company for the fiscal year ending
December 31, 2000. In recommending ratification by the stockholders of the
appointment of Ernst & Young LLP, the Board of Directors has satisfied itself as
to that firm's professional competence and standing. Representatives of Ernst &
Young LLP are not expected to be present at the Annual Meeting.
THE AUDIT COMMITTEE AND THE BOARD OF DIRECTORS RECOMMEND THE STOCKHOLDERS
VOTE "FOR" THIS RATIFICATION.
3. OTHER MATTERS
As of the date of this proxy statement, the Board of Directors is not
informed of any matters, other than those stated above, that will be brought
before the meeting. However, if any matter not known is presented at the
meeting, it is the intention of the persons named in the accompanying form of
proxy to vote with respect to any such matters in accordance with their best
judgment.
STOCKHOLDER PROPOSALS
Under SEC rules, a stockholder who intends to present a proposal at the
next annual meeting of stockholders and who wishes the proposal to be included
in the proxy statement for that meeting must submit the proposal in writing to
the Secretary of the Company. The proposal must be received at the Company's
principal executive offices no later than January 5, 2001.
A stockholder who intends to present a proposal at UICI's 2001 Annual
Meeting of Stockholders, but who does not want the proposal included in the
proxy statement for that meeting, may submit a proposal after the January 8,
2001 deadline noted above. However, for any such proposal submitted to the
Company after March 20, 2001, the Company may exercise discretionary voting
authority over the proxies submitted, without referring to or identifying the
proposal in the 2001 proxy statement.
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OTHER BUSINESS
The Board of Directors does not know of any business to be brought before
the Annual Meeting other than the matters described in the Notice of Annual
Meeting. However, if any other matters are properly presented for action, it is
the intention of each person named in the accompanying proxy to vote said proxy
in accordance with his judgment on such matters.
By Order of the Board of Directors
/s/ PEGGY G. SIMPSON
------------------------------------
Peggy G. Simpson, Secretary
Date: May 5, 2000
---------------------
IT IS URGED THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, STOCKHOLDERS ARE
URGED TO FILL IN, SIGN AND RETURN THE ACCOMPANYING FORM OF PROXY.
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<PAGE> 29
UICI
PROXY
4001 McEwen Drive, Suite 200, Dallas, Texas 75244
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Glenn W. Reed and Connie Palacios as
Proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote as designated below, all the shares of
common stock of UICI held of record by the undersigned on April 25, 2000 at the
annual meeting of stockholders to be held on June 8, 2000 or any adjournment
thereof.
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed below (except as marked to the contrary
below)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name in the list below.)
Ronald L. Jensen Gregory T. Mutz Stuart D. Bilton
Richard T. Mockler Patrick J. McLaughlin George H. Lane, III
William J. Gedwed
2. PROPOSAL TO APPROVE THE APPOINTMENT OF ERNST & YOUNG LLP as the independent
public accountants for the Company:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued on other side)
<PAGE> 30
(Continued from other side)
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This Proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this Proxy will be
voted for Proposals 1 and 2. Please sign exactly as name appears on the label
below. When shares are held by joint tenants, both should sign. When signing as
attorney, as executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name by President
or other authorized officer. If a partnership, please sign in partnership name
by authorized person.
Dated: , 2000
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Signature
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Signature
PLEASE MARK, SIGN, DATE AND RETURN PROXY CARD
PROMPTLY.
<PAGE> 31
UICI
PROXY
4001 MCEWEN DRIVE, SUITE 200, DALLAS, TEXAS 75244
VOTING INSTRUCTIONS TO ESOSP TRUSTEES
The undersigned participant in the UICI Employee Stock Ownership and
Savings Plan (the "ESOSP") hereby instructs the Trustees of the ESOSP to vote as
directed herein all shares of common stock of UICI held of record on April 25,
2000 by the Trustees for the undersigned participant's account under the ESOSP.
Such shares are to be voted in person or by proxy by the Trustees at the annual
meeting of stockholders to be held on June 8, 2000 or any adjournment thereof.
The substance of the proxy solicited on behalf of the Board of Directors is set
forth below.
1. ELECTION OF DIRECTORS [ ] FOR all nominees listed below (except as marked
to the contrary below)
[ ] WITHHOLD AUTHORITY to vote for all nominees
listed below
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE STRIKE A
LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.
Ronald L. Jensen, Gregory T. Mutz, Richard T. Mockler, Patrick J. McLaughlin,
Stuart D. Bilton, George H. Lane, III and William J. Gedwed.
2. PROPOSAL TO APPROVE THE APPOINTMENT OF ERNST & YOUNG LLP as the independent
public accountants for the Company:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued on other side)
<PAGE> 32
(Continued from other side)
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This Proxy when properly executed will direct the Trustees of the Employee
Stock Ownership and Savings Plan to vote in the manner directed herein. If no
direction is made by an ESOSP participant, the shares so held by the ESOSP for
such participant will be voted by the Trustees in the ratio of the results of
the Instructions received by the Trustees.
Please sign exactly as name appears on the label below.
Dated , 2000
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(Signature)
PLEASE MARK, SIGN, DATE AND RETURN
PROXY CARD PROMPTLY.
