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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 001-14953
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UICI
(Exact name of registrant as specified in its charter)
DELAWARE 75-2044750
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
4001 MCEWEN DRIVE, SUITE 200
DALLAS, TEXAS 75244
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (972) 392-6700
Securities Registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.01 par value New York Stock Exchange
Securities registered Pursuant to Section 12(g) of the Act: NONE
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 15, 2001 was $289.9 million.
The number of shares outstanding of $0.01 par value Common Stock, as of
March 15, 2001 was 47,580,468.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement for the annual meeting of
stockholders are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
General
UICI (together with its subsidiaries, "UICI" or the "Company") offers
insurance (primarily health and life) and selected financial services to niche
consumer and institutional markets.
The Company issues health insurance policies, covering individuals and
families, to the self-employed, association group and student markets. The
Company offers a broad range of health insurance products for self-employed
individuals and individuals who work for small businesses. The Company's
catastrophic hospital and basic hospital-medical expense plans are designed to
accommodate individual needs and include both traditional fee-for-service
indemnity (choice of doctor) plans and managed care options, such as a preferred
provider organization ("PPO") plan as well as other supplemental types of
coverage. The Company markets these higher deductible products through
"dedicated" agency sales forces comprised of independent contractor agents that
primarily sell the Company's products. For the student market, UICI offers
tailored health insurance programs that generally provide single school year
coverage to individual students at colleges and universities. The Company also
provides an accident policy for students at public and private schools in
kindergarten through grade 12. In the student market, the Company sells its
products through in-house account executives that focus on colleges and
universities on a national basis. The Company believes that it provides student
insurance plans to more universities than any other single insurer. During 2000,
1999 and 1998, health insurance premiums were approximately $668.0 million,
$690.0 million and $747.0 million, respectively, representing 64%, 68% and 71%,
respectively, of UICI's total revenues in such periods.
UICI also issues life and annuity insurance products to selected niche
markets, and UICI acquires blocks of life insurance and annuity policies from
other insurers on an opportunistic basis. The life and annuity insurance
policies issued by UICI are marketed through a dedicated agency sales force.
During 2000, 1999 and 1998, total revenues (including premiums and allocated
investment income) from the Company's life and annuity business were
approximately $92.4 million, $94.1 million and $98.8 million, respectively,
representing 9% of total revenue in each such year.
UICI also provides underwriting, claims management and claims
administrative services to third party insurance carriers (primarily to AEGON
USA, Inc. related to products coinsured by UICI), third party administrators,
Blue Cross/Blue Shield organizations and self-administered employer health care
plans.
The Company conducts the business of the Self-Employed Agency Division,
Student Insurance Division and the Life Insurance and Annuity Division through
its wholly owned insurance company subsidiaries, The MEGA Life and Health
Insurance Company ("MEGA"), Mid-West National Life Insurance Company of
Tennessee ("Mid-West"), and The Chesapeake Life Insurance Company
("Chesapeake"). MEGA is an insurance company domiciled in Oklahoma and is
licensed to issue health, life and annuity insurance policies in all states
except New York. Mid-West is an insurance company domiciled in Tennessee and is
licensed to issue health, life and annuity insurance policies in Puerto Rico and
all states except Maine, New Hampshire, New York, and Vermont. Chesapeake is an
insurance company domiciled in Oklahoma and is licensed to issue health and life
insurance policies in all states except New Jersey, New York and Vermont. MEGA
is currently rated "A- (Excellent)," Mid-West is currently rated "A-
(Excellent)," and Chesapeake is currently rated "B++ (Very Good)" by A.M. Best.
A.M. Best's ratings currently range from "A++ (Superior)" to "F (Liquidation)."
A.M. Best's ratings are based upon factors relevant to policyholders, agents,
insurance brokers and intermediaries and are not directed to the protection of
investors.
At December 31, 2000, Fitch, Inc. had assigned an insurer financial
strength rating of "A- (Strong)" to each of MEGA and Mid-West. Fitch's ratings
provide an overall assessment of an insurance company's financial strength and
security, and the ratings are used to support insurance carrier selection and
placement decisions. Fitch's ratings range from "AAA (Exceptionally Strong)" to
"D (Distressed)."
Academic Management Services Corp. (formerly Educational Finance Group,
Inc.) (in which UICI holds a 75% interest) ("AMS"), markets, originates, funds
and services primarily federally guaranteed
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student loans and is a leading provider of student tuition installment plans.
AMS seeks to provide solutions for college and graduate school students, their
parents and the educational institutions they attend. At December 31, 2000, UICI
through AMS had approximately $1.1 billion aggregate principal amount of student
loans outstanding, of which approximately 87% were federally guaranteed.
UICI holds an interest (approximately 45.3% of the issued and outstanding
shares at February 5, 2001) in HealthAxis, Inc. ("HealthAxis"), a publicly
traded corporation (Nasdaq: HAXS) providing proprietary, Internet-enabled and
integrated software applications that address the workflow and processing
inefficiencies embedded in the healthcare insurance industry.
Until February 2000, UICI marketed credit support services to individuals
with no, or troubled, credit experience and assisted them in obtaining a
nationally recognized credit card. These services were marketed through a sales
force of independent contractors and through direct mail and in-bound and
outbound telemarketing. The credit cards were issued by United Credit National
Bank, an indirect wholly-owned subsidiary of UICI ("UCNB"). During 1999 and
1998, revenues from credit support services were approximately $227.4 million
and $123.2 million, respectively, representing 18% and 10% of UICI's total
revenues in such years. Effective December 31, 1999, the Company's United
CreditServ credit card operations were classified as a discontinued operation
for financial reporting purposes, and in September 2000 the Company completed
the sale of substantially all of the non-cash assets associated with its United
CreditServ credit card unit, including its credit card receivable portfolios and
its Sioux Falls, South Dakota servicing operations, for a cash sales price of
approximately $124.0 million. On January 29, 2001, UICI completed the voluntary
liquidation of UCNB in accordance with the terms of a voluntary plan of
liquidation approved by the United States Office of the Comptroller of the
Currency (the "OCC"). See Note B of Notes to Consolidated Financial Statements
and Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Until July 2000 UICI marketed and provided through its National Motor Club
("NMC") unit approximately 500,000 members with benefits such as road and towing
assistance, trip routing, emergency travel assistance, and accident related
indemnity benefits. On July 27, 2000, the Company sold to an investor group
consisting of members of the family of Ronald L. Jensen (the Company's Chairman)
its 97% interest in NMC Holdings, Inc., the parent company of its National Motor
Club of America unit, for a purchase price of $56.8 million. See Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The Company's operating segments include (a) the Insurance segment, which
includes the businesses of the Company's Self-Employed Agency Division, the
Student Insurance Division, the OKC Division, the Special Risk Division, and the
National Motor Club Division (until sold on July 27, 2000); (b) the Financial
Services segment, which includes the businesses of Academic Management Services
Corp., the Company's investment in HealthAxis, Inc. (formerly HealthAxis.com,
Inc.), the business of the Company's UICI Administrators unit and certain other
business units; and (c) Other Key Factors, which include investment income not
otherwise allocated to the other segments, interest and general expenses
relating to corporate operations and other unallocated items. The business of
United CreditServ, Inc. was separately classified as a discontinued operation
for financial reporting purposes effective December 31, 1999.
The Company's principal executive offices are located at 4001 McEwen Drive,
Suite 200, Dallas, Texas 75244. The Company's telephone number is (972)
392-6700. The Company maintains a website at www.uici.net.
Insurance Segment
SELF-EMPLOYED AGENCY DIVISION
Market. According to the Bureau of Labor Statistics, there were
approximately 10.1 million self-employed individuals in the United States at the
end of 2000. The Company has currently in force approximately 200,000 basic
health policies issued or coinsured by the Company. UICI believes that there is
significant opportunity to increase its penetration in this market.
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Products. UICI's basic health insurance plan offerings include the
following:
- UICI's Group Catastrophic Hospital Expense Plan provides a lifetime
maximum benefit for each injury or sickness ranging from $500,000 to
$1,000,000. Covered expenses are subject to a deductible and are then
reimbursed at a benefit payment rate ranging from 50% to 100% as
determined by the policy. After a pre-selected dollar amount of covered
expenses has been reached, the remaining expenses are reimbursed at 100%
for the remainder of the period of confinement. The benefits for this
plan tend to increase as hospital care expenses increase and therefore
the premiums for these policies are subject to increase as overall
hospital care expenses rise.
- UICI's Group Basic Hospital-Medical Expense Plan has a $1.0 million
lifetime maximum benefit and $500,000 lifetime maximum benefit for each
injury or sickness. Covered expenses are subject to a deductible. Covered
hospital room and board charges are reimbursed at 100% up to a
pre-selected daily maximum. Covered expenses for inpatient hospital
miscellaneous charges, same-day surgery facility, surgery, assistant
surgeon, anesthesia, second surgical opinion, doctor visits, and
ambulance services are reimbursed at 80% to 100% up to a scheduled
maximum. This type of health insurance policy is of a "scheduled benefit"
nature, and as such, provides benefits equal to the lesser of the actual
cost incurred for covered expenses or the maximum benefit stated in the
policy. These limitations allow for more certainty in predicting future
claims experience and thus future premium increases for this policy are
expected to be less than on the catastrophic policy.
- UICI's Group Preferred Provider Plan incorporates managed care features
of a PPO, which are designed to control health care costs through
negotiating discounts with a PPO network. Benefits are structured to
encourage the use of providers with which the Company has negotiated
lower fees for the services to be provided. The savings from these
negotiated fees are passed on to the individual policyholders. The
policies that provide for the use of a PPO impose a higher deductible and
co-payment if the policyholder uses providers outside of the PPO network.
Each of the policies is available with options providing for some
modification of coverage so that the insurance may be tailored to meet the needs
of the individual policyholder.
The Self-Employed Agency Division generated revenues of $566.4 million,
$566.8 million, and $610.1 million (54%, 56% and 58% of total revenue) in 2000,
1999 and 1998, respectively.
Marketing and Sales. The Company's marketing strategy in the self-employed
market is to remain closely aligned with dedicated agent sales forces.
Substantially all of the health insurance products issued by the Company are
sold through dedicated independent contractor agents associated with the
Company.
The Company's agents are independent contractors, and all compensation that
agents receive from the Company is based upon agents' levels of sales
production. UGA -- Association Field Services ("UGA") and Cornerstone Marketing
of America ("CMA") (the Company's wholly-owned marketing divisions) are each
organized into geographical regions, with each geographical region having a
regional director, two additional levels of field leaders and writing agents
(i.e., the agents that are not involved in management).
UGA and CMA are each responsible for the recruitment and training of their
field leaders and writing agents. UGA and CMA generally seek persons with
previous sales experience. The process of recruiting agents is extremely
competitive. The Company believes that the primary factors in successfully
recruiting and retaining effective agents and field leaders are the policies
regarding advances on commissions, the quality of the leads provided, the
availability and accessibility of equity ownership plans, the quality of the
products offered, proper training, and agent incentives and support. Classroom
and field training is made available to the agents under the direction of the
field leaders.
The health insurance products issued by the Company are primarily issued to
members of various independent membership associations that endorse the products
and act as the master policyholder for such products. Two principal membership
associations in the self-employed market for which the Company underwrites
insurance are the National Association for the Self-Employed ("NASE") and the
Alliance for Affordable Services ("AAS"). The associations provide their
membership with a number of endorsed
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products, including health insurance underwritten by the Company. Individuals
generally may not obtain insurance under the associations' master policies
unless they are members of the associations. UGA agents and CMA agents also act
as enrollers of new members for the associations. Although the Company has no
formal agreements with these associations requiring the associations to continue
as the master policyholder and endorse the Company's insurance products to their
respective members, the Company believes it is in good standing with these
associations.
Leads for the agents of UGA and CMA are generated through the efforts of a
direct mail team and approximately 250 telephone operators. From various sources
of data, a pool of approximately 7.0 million names has been developed.
Individuals in this pool are contacted by telephone or by mail to determine
their interest in obtaining the benefits of association membership, including
health insurance. The names of persons expressing an interest are provided as
leads to agents, which the Company believes results in a higher "close" rate
than would be the case if the agents made unsolicited calls on prospective
customers.
Policy Design and Claims Management. The Company's traditional indemnity
health insurance products are principally designed to limit coverages to the
occurrence of significant events that require hospitalization. This policy
design, which includes high deductibles, reduces the number of covered claims
requiring processing, thereby controlling administrative expenses. The Company
seeks to price its products in a manner that accurately reflects its
underwriting assumptions and targeted margins, and it relies on the marketing
capabilities of its dedicated agency sales forces to sell these products at
prices consistent with these objectives.
The Company maintains administrative centers with full underwriting, claims
management and administrative capabilities. The Company believes that by
processing its own claims it can better assure that claims are properly
processed and can utilize the claims information to periodically modify the
benefits and coverages afforded under its policies.
Preferred Provider Products. In order to further control health care
costs, in 1995 the Company placed additional emphasis on incorporating into its
health plans managed care features of a PPO. These health plans incorporate
managed care features of a PPO through negotiated discounts with a PPO network.
The health plans that provide the PPO option generally provide a greater level
of benefits for services performed within the PPO network in the form of lower
deductibles and co-payments compared to out-of-network services. The network
discount is in turn passed on to the policyholder in the form of lower rates and
discounts on covered charges.
Coinsurance Arrangements. Prior to 1996, a substantial portion of the
health insurance policies sold by UGA agents were issued by AEGON USA, Inc. and
coinsured by the Company. Effective April 1, 1996, the Company acquired the
underwriting, claims management and administrative capabilities of AEGON USA,
Inc. related to products coinsured by the Company. Following this transaction,
the agents of UGA began to market health insurance products directly for the
Company rather than through the coinsurance arrangement. The Company retains
100% of the premiums and pays all of the costs of such new policies. Under the
terms of its coinsurance agreement, AEGON has agreed to cede (i.e., transfer),
and the Company has agreed to coinsure, 60% of the health insurance sold by UGA
agents and issued by AEGON. The Company receives 60% of premiums collected and
is liable for 60% of commission expenses, administrative costs, claims payments,
premium taxes, legal expenses, extra-contractual charges and other payments. The
Company and AEGON agreed to maintain the coinsurance agreement for policies
issued by AEGON prior to April 1, 1996 and during the transition period ended in
1997. The Company's coinsurance percentage is 60% until May 2001, at which time
the Company will assume all of the remaining policies from AEGON as state
regulatory approvals are received. Following the assumption, the Company will
coinsure 40% of the health insurance business to AEGON until December 31, 2002,
at which time the Company will acquire the remaining 40% of the coinsured
business from AEGON based upon a mutually agreed-upon prescribed price.
Acquisition of Health Blocks. From time to time, the Company has acquired
and may continue to acquire blocks of health insurance policies or companies
that own such blocks. These opportunities are pursued on a case-by-case basis,
and revenues from such blocks have generally not represented a material
percentage of Self-Employed Agency Division revenue.
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STUDENT INSURANCE DIVISION
Market. The student market consists primarily of students attending
colleges and universities in the United States and Puerto Rico and, to a lesser
extent, those attending public and private schools in grades kindergarten
through grade 12. Generally, the marketing strategy of the Company has been to
focus on college students whose circumstances are such that health insurance may
not otherwise be available through their parents. In particular, older
undergraduates, graduate and international students often have a need to obtain
insurance as "first-time buyers." According to industry sources, there are
approximately 2,200 four-year universities and colleges in the United States,
which have a combined enrollment of approximately 8.7 million students.
Typically, a carrier must be approved and endorsed by the educational
institution as a preferred vendor of health insurance coverage to the
institution's students. The Company believes that it has been authorized to
provide student health insurance plans by more universities than any other
single insurer.
Products. The insurance programs sold in the student market are designed
to meet the requirements of each individual school. The programs generally
provide coverage for one school year and the maximum benefits available to any
individual student enrolled in the program range from $10,000 to $1,000,000,
depending on the coverage level desired by the school.
The Student Insurance Division had revenues of $111.5 million, $108.0
million and $111.0 million in 2000, 1999 and 1998, respectively, representing
approximately 11% of total revenues in each such year.
Marketing and Sales. The Company markets to colleges and universities on a
national basis through in-house account executives whose compensation is based
primarily on commissions. Account executives make presentations to the
appropriate school officials and the Company, if selected, is endorsed as the
provider of health insurance for students attending that school.
The kindergarten through grade 12 business is marketed primarily in
Washington, Florida, Arizona, Louisiana, Oklahoma and Texas.
SPECIAL RISK DIVISION
The Company's Special Risk Division formerly specialized in certain niche
health-related products (including "stop loss," marine crew accident, organ
transplant and international travel accident products). Prior to 1997, the
Company had a small penetration in Special Risk markets and offered only
Employer Stop Loss and Provider Excess of Loss coverages. The Special Risk
Division's offerings were expanded in 1997, with the acquisition of Excess, Inc.
("Excess"), a managing general underwriter of special health-related coverages.
The Excess acquisition led to the purchase of a block of special risk coverages
with net collected premiums in the amount of $20.7 million, $48.9 million and
$50.2 million in 2000, 1999 and 1998, respectively.
Effective January 1, 2000, the Company entered into reinsurance and
specific retrocession agreements with an unaffiliated insurance carrier with
respect to the Special Risk business managed by Excess. These agreements
effectively permitted the Company to transfer to the unaffiliated insurance
carrier the insurance revenue and risk portion of that business as the business
renews over the life of the policies. In addition, in July 2000 the Company
completed the sale of Excess to the Excess management team. The Company
recognized a gain in the quarter ended September 30, 2000 in the amount of
$161,000 (pre-tax) in connection with this sale.
Effective July 1, 2000, the Company sold the assets of WinterBrook
HealthCare Management, LLC (a company engaged in repricing of insurance claims)
to an unrelated party for a sales price of $1.9 million. The Company recognized
a pre-tax gain of $1.5 million in the quarter ended September 30, 2000 in
connection with this sale.
OKC DIVISION
Through the Company's OKC Division, the Company offers life insurance and
annuity products to individuals through its dedicated field force and employee
group accident and workers compensation insurance
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marketed by brokers to employers and their employees. The OKC Division also
actively pursues the acquisition of life and annuity blocks of insurance
business. At December 31, 2000, the OKC Division had over $3.5 billion of life
insurance in force and approximately 350,000 individual policyholders. The
Division has grown primarily through acquisitions of blocks of life insurance
and annuity policies and through its marketing efforts.
In 2000, 1999, and 1998, the OKC Division had revenues of $92.4 million,
$94.1 million and $98.8 million, respectively, representing 9% of total revenue
in each such year.
Direct Business. The Company offers an interest-sensitive whole life
insurance product generally with an annuity rider and a child term rider. The
child term rider includes a special provision under which the Company commits to
provide private student loans to help fund the named child's higher education if
certain restrictions and qualifications are satisfied. Currently, student loans
are available in amounts up to $30,000 for undergraduate school and up to
$30,000 for graduate school. Loans with a Fair Isaac credit score of 570 and
above are made under this rider and are not funded or supported by the federal
government but are guaranteed as to principal and interest by an independent
guarantee agency. As a part of the program, MEGA and Mid-West are qualified
lenders under the applicable Department of Education regulations and make
available, outside of the Company's insurance subsidiaries' commitment under the
rider, student loans under federal Family Education Loan Programs.
Marketing and Sales. Life insurance products are marketed and sold through
the Company's network of dedicated agents. This marketing organization covered
five states when acquired by the Company in 1993, and has since been expanded to
cover 42 states.
Acquired Blocks. Historically, the Company grew through opportunistic
acquisitions of blocks of life insurance and annuities. In an acquisition of a
block of business, the Company assumes policy liabilities and receives assets
(net of the purchase price) sufficient, based on actuarial assumptions, to cover
such estimated future liabilities. The profitability of a particular block of
business depends on the amount of investment income from the assets and the
amount of premiums received less the amount of benefits and expenses actually
paid. The Company believes that its success in profitably acquiring and
servicing blocks has been principally due to its experience and expertise in
analyzing the characteristics of the policies in the blocks and its ability to
cost-effectively administer the policies.
The Company acquired its last block of life insurance and annuities in
1994. Although the Company believes that it can continue to exploit acquisition
opportunities and continues to analyze potential transactions, the Company
believes that the current climate for acquisitions of blocks of life insurance
and annuities has become very competitive, making it more difficult to
successfully complete acquisitions that meet the Company's acquisition rate of
return criteria.
In 1991, the Company entered into an agreement pursuant to which it
services a block of policies with life insurance and annuity reserves for an
unrelated company. At December 31, 2000, total life insurance and annuity
reserves for this block were $73.9 million. The Company receives a fee for
servicing the policies and in 1997 also began to participate in 50% of the
profits or losses on this business. The Company's Consolidated Financial
Statements reflect the servicing fee currently earned and $1.9 million of profit
participation in 2000, $2.4 million of profit participation in 1999 and $2.3
million of profit participation in 1998.
In August 1994, the Company entered into a similar transaction, pursuant to
which the Company acquired a block of life insurance and annuity policies. At
December 31, 2000, total life insurance and annuity reserves for this block were
$22.9 million. In conjunction with this acquisition, the Company ceded through a
coinsurance agreement 100% of the policy liabilities to an unrelated reinsurer.
The acquisition required no financial investment by the Company. The Company
administers the life insurance and annuity policies and receives a servicing fee
from the unrelated reinsurer. In addition, after the reinsurer recovers its
investment in this block, the coinsurance agreement will be terminated and the
Company at no cost will recapture all remaining policies. The reinsurer's
unrecovered investment in the block of policies at December 31, 2000 was
$277,000.
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Financial Services Segment
ACADEMIC MANAGEMENT SERVICES CORP.
The Company holds a 75% equity interest in Academic Management Services
Corp. (formerly Educational Finance Group, Inc.) ("AMS"). AMS markets,
originates, funds and services primarily federally guaranteed student loans and
is a leading provider of student tuition installment plans. AMS (which is based
in Swansea, Massachusetts) seeks to provide financing solutions for college and
graduate school students, their parents and the educational institutions they
attend. At December 31, 2000, UICI through AMS had approximately $1.1 billion
aggregate principal amount of student loans outstanding, of which approximately
87% were federally guaranteed.
AMS primarily acquires and originates federally guaranteed loans to
students and parents made under the Federal Family Education Loan Program
("FFELP Loans"). Four types of loans are currently available under the FFELP
Loan program: (i) loans to students with respect to which the federal government
makes interest payments available to reduce student interest cost during periods
of enrollment ("Stafford Loans"); (ii) loans to students with respect to which
the federal government does not make such interest payments ("Unsubsidized
Stafford Loans"); (iii) supplemental loans to parents of dependent students
("PLUS Loans"); and (iv) loans to fund payments and consolidation of certain
obligations of the borrower ("Consolidation Loans"). These loan types vary as to
eligibility requirements, interest rates, repayment periods, loan limits and
eligibility for interest subsidies.
Stafford Loans are the primary loans extended under the FFELP Loan program.
Students who are not eligible for Stafford Loans based on their economic
circumstance may be able to obtain Unsubsidized Stafford Loans. Parents of
students may be able to obtain PLUS Loans. Consolidation Loans are available to
borrowers with existing loans made under the FFELP Loan program and certain
other federal programs to consolidate repayment of such existing loans.
In addition to the various federally guaranteed loan programs, AMS offers
alternative student loans guaranteed by private insurers (which during 2000
aggregated approximately 9% of AMS's loan originations) and uninsured
alternative loans (which during 2000 aggregated approximately 1% of loan
originations). AMS also services loans under the Perkins Loan Program on behalf
of participating colleges and universities. The Perkins Loan program provides
low-interest loans to assist needy students in financing the costs of post-
secondary education. Students can receive Perkins Loans at any one of
approximately 2,000 participating post-secondary institutions.
AMS has funded its loan origination business primarily with secured lines
of credit extended by various financial institutions. After loans are
originated, AMS typically sells or refinances the loans using a variety of
capital markets financing facilities. During 2000, AMS originated approximately
$776.1 million in new loans and sold approximately $779.8 million of loans.
During 1999 AMS added approximately $1.3 billion of long term funding facilities
in three separate transactions. These transactions used special purpose
financing entities, which issued securities in the capital markets and used the
proceeds to buy pools of student loans from AMS. AMS's 1999 financing
transactions included the following:
- Issuance of $319.5 million Auction Rate Student Loan-Backed Notes (which
bear interest at variable rates established pursuant to an auction
conducted, generally, every thirty-five days).
- Issuance of $650.0 million Asset Backed Commercial Paper Notes (which
bear interest at variable rates established by calculating the total
costs of the commercial paper program and which have maturities of one to
270 days).
- Issuance of $229.0 million Floating Rate Student Loan-Backed Notes (which
bear interest at variable rates equal to 0.42% over three month LIBOR,
reset every quarter in January, April, July, and October) and $115.0
million Auction Rate Student Loan Backed Notes.
In July 1999, AMS acquired AMS Investment Group, Inc. (the parent of
Academic Management Services, Inc.) ("AMS Inc."), based in Swansea,
Massachusetts. The Company believes that AMS Inc. is
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the leading provider of tuition installment plans for undergraduate students,
serving as the designated provider of tuition installment plans at over 1,200
colleges, universities and independent schools.
AMS provides loan servicing and administrative services for federal Perkins
loans and privately insured loans. EFG Technologies, Inc. is based in
Winston-Salem, North Carolina, and is a loan servicer for approximately 600
colleges, universities and private lenders with 1.0 million active accounts and
loan balances aggregating $2.6 billion. During 2000, AMS closed and relocated to
Swansea, Massachusetts its San Diego, California based direct mail and
telemarketing operations, through which it markets PLUS Loans and other
educational finance services. During 2000, AMS generated approximately $241.7
million of PLUS loans through its direct mail and telemarketing operations.
AMS incurred significant operating losses in 2000, 1999 and 1998. See Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations.
INVESTMENT IN HEALTHAXIS, INC. (FORMERLY HEALTHAXIS.COM, INC.)
During 2000 the Company held a significant investment interest in
HealthAxis.com, Inc. ("HealthAxis.com"), a provider of Internet-enabled,
integrated proprietary software applications that address the workflow and
processing inefficiencies embedded in the healthcare insurance industry.
HealthAxis.com, through its proprietary web-enabled enrollment and plan
administration applications, provides Internet enrollment and online access to
claims data. These software applications increase the efficiency of a client's
interaction with other participants by eliminating paper-based processes and
improving the client's ability to share data with plan members and other
industry participants. HealthAxis.com's clients include large insurance
carriers, Blue Cross and Blue Shield organizations, third party administrators,
self-funded employers, and other industry participants. HealthAxis.com also
provides systems integration, technology management and data capture services to
its clients.
The Company's interest in HealthAxis.com is derived from the January 7,
2000 merger (the "Insurdata Merger") of Insurdata Incorporated (formerly a
wholly owned subsidiary of UICI) with and into HealthAxis.com, the sole
operating subsidiary of HealthAxis, Inc. (formerly Provident American
Corporation) ("HAI") (HAXS:Nasdaq). HealthAxis.com formerly was a web-based
retailer of health insurance products and related consumer services. The Company
recognized no gain on the non-monetary exchange of stock in the Insurdata Merger
due to the uncertainty of realization of the gain. Effective June 30, 2000,
HealthAxis.com sold to Digital Insurance, Inc. ("Digital") certain assets used
in connection with HealthAxis.com's retail website, including the retail website
user interface, all existing in-force insurance policies, certain physical
assets, and rights under certain agreements, including, but not limited to
portal marketing agreements and agreements related to HealthAxis.com's affiliate
partner program. Among other consideration received by HealthAxis.com in the
transaction, Digital issued to HealthAxis.com 11% of the outstanding shares of
common stock of Digital (on a fully diluted basis).
Following the Insurdata Merger, the Company held approximately 43.6%, and
HAI held approximately 28.1%, of the issued and outstanding capital stock of
HealthAxis.com, the surviving corporation in the Insurdata Merger. On January
26, 2001, HAI acquired all of the outstanding shares of HealthAxis.com that HAI
did not then own in a stock-for-stock merger of HealthAxis.com with a wholly
owned subsidiary of HAI (the "HAI Merger"). In the HAI Merger, HealthAxis.com
shareholders (including the Company) received 1.334 shares of HAI common stock
for each share of HealthAxis.com common stock outstanding. Following the HAI
Merger, the Company beneficially holds 23,944,030 shares of HAI common stock,
representing approximately 45.3% of the issued and outstanding shares of HAI. Of
such 23,944,030 shares beneficially held by UICI, 8,581,714 shares (representing
16.2% of HAI's total issued and outstanding shares) are subject to the terms of
a Voting Trust Agreement, pursuant to which trustees unaffiliated with the
Company have the right to vote such shares. Gregory T. Mutz and Patrick J.
McLaughlin, President and a director of UICI, respectively, serve on the Board
of Directors of HAI. See Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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HealthAxis.com generated revenues of $43.7 million, $46.2 million and $41.2
million in 2000, 1999 and 1998, respectively, of which 63%, 58% and 58% were
derived from information systems and software development services provided to
the Company and its insurance company affiliates.
UICI ADMINISTRATORS
The Company provides claims and benefits administration services to third
parties. The Company has classified the operations of UICI Administrators, Inc.
(a company engaged in the business of providing third party benefits
administration, including eligibility and billing reconciliation), Insurdata
Marketing Services, LLC (a subsidiary of the Company engaged in the business of
marketing third party benefits administration services) and Healthcare
Management Administrators, Inc. (which the Company acquired on February 3, 2000)
as its UICI Administrators business division. UICI Administrators incurred an
operating loss of $(1.7) million in 2000 compared to operating income of $2.3
million in 1999. Revenues for UICI Administrators decreased to $18.5 million in
2000 from $46.2 million in 1999.
Discontinued Operation -- United CreditServ, Inc.
Through the Company's United CreditServ, Inc. subsidiary ("United
CreditServ"), prior to 2000 the Company marketed credit support services to
individuals with no, or troubled, credit experience and assisted such
individuals in obtaining a nationally recognized credit card. The activities of
United CreditServ were conducted primarily through its wholly-owned subsidiaries
United Credit National Bank ("UCNB") (a special purpose national bank, based in
Sioux Falls, South Dakota, chartered solely to hold credit card receivables);
Specialized Card Services, Inc. (provider of account management and collections
services for all of the Company's credit card programs); United Membership
Marketing Group, Inc. ("UMMG") (a Lakewood, Colorado-based provider of
marketing, administrative and support services for the Company's credit card
programs); and UICI Receivables Funding Corporation ("RFC"), a single-purpose,
bankruptcy-remote entity through which certain credit card receivables were
securitized.
Through 1999, United CreditServ marketed its credit card programs and
access to a credit card through the American Fair Credit Association LLC
("AFCA"), an independent membership association that provided credit education
programs and other benefits, and American Credit Educators LLC ("ACE"), which
marketed credit education materials and had a marketing agreement with UCNB to
solicit credit card applications. AFCA applicants were required to meet certain
requirements (including payment of initiation and monthly membership fees) in
order to become members of AFCA, and, in order to obtain a credit card, to meet
underwriting criteria established by UCNB.
During the year ended December 31, 1999, United CreditServ incurred a
pre-tax operating loss in the amount of approximately $145.3 million (inclusive
of the write off of the $35.9 million purchase price of UMMG), primarily
attributable to significant increases to credit card loan loss reserves
associated with the non-performance of its ACE credit card product. The Company
believes that such losses were due primarily to inadequate attention to ACE
collections, inefficiencies associated with administrative and operating systems
conversions during a period of significant increases in card issuance volumes,
mis-pricing of the ACE product, and the failure of the AFCA credit card
portfolio performance to be sufficiently predictive of the performance of the
ACE credit card loan portfolio.
In March 2000, the Board of Directors of UICI determined, after a thorough
assessment of the unit's prospects, that UICI would exit from its United
CreditServ sub-prime credit card business and, as a result, the United
CreditServ unit was reflected as a discontinued operation for financial
reporting purposes effective December 31, 1999. At December 31, 1999, the
Company established a liability for loss on the disposal of the discontinued
operation in the amount of $130 million (pre-tax), which liability was included
in net liabilities of discontinued operations. The liability for loss on
disposal established by the Company at December 31, 1999 represented the
Company's then-current estimate of all additional losses (including asset
write-downs, the estimated loss on the sale of the business and/or the assets
and continuing operating losses through the date of sale) that it then believed
it would incur as part of any sale of the United CreditServ unit. Reflecting the
terms of the Company's then-pending sale of its United CreditServ business,
during the quarter ended
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June 30, 2000 the Company recorded an additional pre-tax loss, and
correspondingly increased the liability for loss on the disposal of the
discontinued operation, in the amount of $36.0 million ($23.4 million net of
tax).
During the year ended December 31, 2000, the discontinued operation
incurred a loss from operations in the amount of approximately $131.9 million,
which loss was charged to the liability for loss on disposal. At December 31,
2000, the remaining assets of the discontinued operations in the amount of $54.3
million (consisting of cash and short-term investments in the amount of $27.8
million and other assets in the amount of $26.5 million) were reclassified to
cash and other assets, respectively, on the Company's consolidated balance
sheet, and the remaining liabilities of the discontinued operations in the
amount of $53.0 million (consisting of notes payable in the amount of $4.3
million and other liabilities in the amount of $48.6 million) were reclassified
to notes payable and other liabilities, respectively, on the Company's
consolidated balance sheet.
On September 29, 2000, the Company completed the sale of substantially all
of the non-cash assets associated with its United CreditServ credit card unit,
including its credit card receivables portfolios and its Sioux Falls, South
Dakota servicing operations, for a cash sales price of approximately $124.0
million, and on January 29, 2001, the Company completed the voluntary
liquidation of UCNB, in accordance with the terms of a plan of voluntary
liquidation approved by the OCC. See Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Reinsurance
The Company's insurance subsidiaries reinsure portions of the coverages
provided by their insurance products with other insurance companies on both an
excess of loss and coinsurance basis. The maximum retention by the Company on
one individual in the case of life insurance is $150,000. The Company uses
reinsurance for its health insurance business only for limited purposes. The
Company does not reinsure any health insurance issued in the self-employed
market.
Reinsurance agreements are intended to limit an insurer's maximum loss. The
ceding of reinsurance does not discharge the primary liability of the original
insurer to the insured. Although the Company, through coinsurance, assumes risks
under policies issued by AEGON, and has occasionally used assumption reinsurance
to acquire blocks of insurance from other insurers, it does not regularly assume
risks of other insurance companies. See "Business -- Health
Insurance-Coinsurance Arrangements."
Competition
INSURANCE
The Company operates in highly competitive markets. The Company's insurance
subsidiaries compete with large national insurers, regional insurers and
specialty insurers, many of which are larger and have substantially greater
financial resources or greater claims paying ability ratings than the Company.
In addition to claims paying ability ratings, insurers compete on the basis of
price, breadth and flexibility of coverage, ability to attract and retain agents
and the quality and level of agent and policyholder services provided. In its
other lines of insurance-related business, the Company competes with financial
services companies, managed care consultants, and third party administrators,
among others. Many of the competitors may have greater financial resources,
broader product lines or greater experience in particular lines of business.
STUDENT LOANS
The student loan industry is highly competitive. The Company competes with
over 2,000 other lenders. Despite the large number of lenders, the top 100
lenders account for approximately 87% of new loan volume. The Company believes
that the volume of new loans originated in 2000 would make it one of the top 10
student loan lenders in 2000. The Company competes by designing and offering an
integrated package of government guaranteed and privately guaranteed loan
products.
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Regulatory and Legislative Matters
HEALTH CARE REFORM; PRIVACY INITIATIVES
The health care industry, as one of the largest industries in the United
States, continues to attract much legislative interest and public attention. In
recent years, an increasing number of legislative proposals have been introduced
or proposed in Congress and in some state legislatures that would effect major
changes in the health care system, either nationally or at the state level.
Proposals that have been considered include cost controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, patients' bills of rights and requirements that all
businesses offer health insurance coverage to their employees. There can be no
assurance that future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have a material adverse effect on the business, financial condition or results
of operations of the Company.
Recently-adopted legislation and regulations governing the use and security
of individuals' nonpublic personal data by financial institutions, including
insurance companies, may have a significant impact on the Company's business and
future results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Privacy Initiatives."
INSURANCE REGULATION
The Company's insurance subsidiaries are subject to extensive regulation in
their states of domicile and the other states in which they do business under
statutes which typically delegate broad regulatory, supervisory and
administrative powers to insurance departments. The method of regulation varies,
but the subject matter of such regulation covers, among other things: the amount
of dividends and other distributions that can be paid by the Company's insurance
subsidiaries without prior approval or notification; the granting and revoking
of licenses to transact business; trade practices, including with respect to the
protection of consumers; disclosure requirements; privacy standards; minimum
loss ratios; premium rate regulation; underwriting standards; approval of policy
forms; claims payment; licensing of insurance agents and the regulation of their
conduct; the amount and type of investments that the Company's subsidiaries may
hold, minimum reserve and surplus requirements; risk-based capital requirements;
and compelled participation in, and assessments in connection with, risk sharing
pools and guaranty funds. Such regulation is intended to protect policyholders
rather than investors.
Many states have also enacted insurance holding company laws that require
registration and periodic reporting by insurance companies controlled by other
corporations. Such laws vary from state to state, but typically require periodic
disclosure concerning the corporation which controls the controlled insurer and
prior notice to, or approval by, the applicable regulator of inter-corporate
transfers of assets and other transactions (including payments of dividends in
excess of specified amounts by the controlled insurer) within the holding
company system. Such laws often also require the prior approval for the
acquisition of a significant ownership interest (e.g., 10% or more) in the
insurance holding company. The Company's insurance subsidiaries are subject to
such laws, and the Company believes that such subsidiaries are in compliance in
all material respects with all applicable insurance holding company laws and
regulations.
Under the risk-based capital initiatives adopted in 1992 by the National
Association of Insurance Commissioners ("NAIC"), insurance companies must
calculate and report information under a risk-based capital formula. Risk-based
capital formulas are intended to evaluate risks associated with: asset quality;
adverse insurance experience; loss from asset and liability mismatching; and
general business hazards. This information is intended to permit regulators to
identify and require remedial action for inadequately capitalized insurance
companies but is not designed to rank adequately capitalized companies. Based on
year-end 2000 calculations, the Company's insurance subsidiaries were
significantly above required capital levels.
The Company's insurance subsidiaries' statutory-basis financial statements
are prepared in accordance with accounting practices prescribed or permitted by
the Oklahoma, Tennessee, or Texas Insurance Departments. Currently, "prescribed"
statutory accounting practices are interspersed throughout state insurance laws
and regulations, the NAIC's Accounting Practices and Procedures Manual and a
variety of
11
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other NAIC publications. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future.
The NAIC revised the Accounting Practices and Procedures Manual in a
process referred to as Codification. The revised manual was effective January 1,
2001. The domiciled states of the Company's insurance subsidiaries (Oklahoma,
Tennessee and Texas) have adopted the provisions of the revised manual. The
revised manual has changed, to some extent, prescribed statutory accounting
practices and will result in changes to the accounting practices that the
Company's insurance subsidiaries use to prepare its statutory-basis financial
statements. The cumulative effect of changes in accounting principles adopted to
conform to the revised Accounting Practices and Procedures Manual will be
reported as an adjustment to surplus as of January 1, 2001. The impact of these
changes does not result in a reduction in the Company's statutory-basis capital
and surplus as of adoption.
The states in which the Company is licensed have the authority to change
the minimum mandated statutory loss ratios to which the Company is subject, the
manner in which these ratios are computed and the manner in which compliance
with these ratios is measured and enforced. Loss ratios are commonly defined as
incurred claims divided by earned premiums. Most states in which the Company
writes insurance have adopted the loss ratios recommended by the NAIC but
frequently the loss ratio regulations do not apply to the types of health
insurance issued by the Company. The Company is unable to predict the impact of
(i) any changes in the mandatory statutory loss ratios for individual or group
policies to which the Company may become subject, or (ii) any change in the
manner in which these minimums are computed or enforced in the future. Such
changes could result in a narrowing of profit margins and have a material
adverse effect upon the Company. The Company has not been informed by any state
that it does not meet mandated minimum ratios, and the Company believes that it
is in compliance with all such minimum ratios. In the event the Company is not
in compliance with minimum statutory loss ratios mandated by regulatory
authorities with respect to certain policies, the Company may be required to
reduce or refund premiums, which could have a material adverse effect upon the
Company.
The NAIC and state insurance departments are continually reexamining
existing laws and regulations, including those related to reducing the risk of
insolvency and related accreditation standards. To date, the increase in
solvency-related oversight has not had a significant impact on the Company's
insurance business.
STUDENT LOAN OPERATIONS
A significant portion of the student loans originated by the Company are
made under the Federal Family Education Loan Program (the "FFELP program"),
which is subject to periodic legislative reauthorization and interim revision by
legislation and regulation. The Higher Education Act, which authorizes most
federal aid programs, went through its regular reauthorization process in 1998.
The loans made under the FFELP program include Federal Stafford loans for
students and PLUS Loans to parents.
Compliance with legal or regulatory restrictions may limit the ability of
the Company's subsidiaries to conduct their operations. A failure to comply may
subject the affected subsidiary to a loss or suspension of a right to engage in
certain businesses or business practices, criminal or civil fines, an obligation
to make restitution or pay refunds or other sanctions, which could adversely
affect the manner in which the Company's subsidiaries conduct their business and
the Company's results of operations.
State and federal regulation is continually changing and the Company is
unable to predict whether or when any such changes will be adopted. It is
possible, however, that the adoption of such changes could adversely affect the
manner in which the Company's subsidiaries conduct their business and the
Company's financial condition or results of operations.
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Employees
The Company had approximately 2,300 employees at February 28, 2001. The
Company considers its employee relations to be good. Agents associated with the
Company's UGA and CMA field forces constitute independent contractors and are
not employees of the Company.
ITEM 2. PROPERTIES
The Company owns three office buildings in Tarrant County, Texas,
comprising in the aggregate approximately 200,000 square feet of office space.
The Company's United CreditServ subsidiary owns one building in Sioux Falls,
South Dakota, with approximately 106,000 square feet, which is leased to an
unaffiliated third party. AMS owns two office buildings in Swansea,
Massachusetts, comprising approximately 60,000 square feet of office space. In
addition, the Company and its subsidiaries lease office space at various
locations, including its principal executive office located at 4001 McEwen
Drive, Dallas, Texas.
ITEM 3. LEGAL PROCEEDINGS
See Note N of Notes to Consolidated Financial Statements, the terms of
which are incorporated by reference herein.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Company
The Chairman of the Company is elected, and all other executive officers
listed below are appointed by the Board of Directors of the Company at its
Annual Meeting each year or by the Executive Committee of the Board of Directors
to hold office until the next Annual Meeting or until their successors are
elected or appointed. None of these officers have family relationships with any
other executive officer or director.
BUSINESS EXPERIENCE
NAME OF OFFICER PRINCIPAL POSITION AGE DURING PAST FIVE YEARS
--------------- ------------------------ --- -----------------------------------------
Ronald L. Jensen.... Chairman of the Board 70 Mr. Jensen has served as Chairman since
December 1983. In the last five years,
Mr. Jensen also served as President of
the Company from October 1997 until
January 1999.
Gregory T. Mutz..... President and Chief 55 Mr. Mutz was elected President and Chief
Executive Officer Executive Officer in January 1999 and
served as Chief Financial Officer from
March 2000 to November 2000. Prior to
January 1999, Mr. Mutz served as Chairman
and Chief Executive Officer of AMLI
Realty Co. (a real estate investment
management firm), which the Company
acquired in 1996.
Glenn W. Reed....... Executive Vice President 48 Mr. Reed has served in his current
and General Counsel position since July 1999. Prior to
joining UICI, Mr. Reed was a partner with
the Chicago, Illinois law firm of
Gardner, Carton & Douglas.
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BUSINESS EXPERIENCE
NAME OF OFFICER PRINCIPAL POSITION AGE DURING PAST FIVE YEARS
--------------- ------------------------ --- -----------------------------------------
Matthew R. Vice President and Chief 37 Mr. Cassell was elected Vice President
Cassell........... Financial Officer and Chief Financial Officer on November
1, 2000. He formerly served as the
Company's Vice President -- Strategic
Planning commencing in January 2000.
Prior to joining UICI, Mr. Cassell served
as Director-Finance of Insurdata
Incorporated (formerly a wholly owned
subsidiary of the Company) from 1997 to
1999.
William J. Gedwed... Executive Vice President 45 Through December 31, 2000, Mr. Gedwed
oversaw the Company's insurance
operations. Since 1993 Mr. Gedwed served
(and continues to serve) as Chairman and
Chief Executive Officer of NMC Holdings,
Inc. (the parent company of National
Motor Club of America), which the Company
acquired in 1997 and subsequently sold in
2000). Mr. Gedwed resigned from his
executive positions with UICI and its
affiliates effective December 31, 2000,
though he continues to serve as a
Director of UICI.
Charles T. Prater... Vice President and Chief 49 Mr. Prater has served as a Vice President
Operating of the Company since 1993 and as a
Officer -- OKC Director of the Company during the period
Division March 1996 -- May 1999. Mr. Prater has
been Chief Operating Officer of the OKC
Division since 1998. Mr. Prater resigned
from his positions with UICI and its
affiliates effective February 1, 2001.
Steven K. Arnold.... Vice President 53 Mr. Arnold joined the Company in October
1998 as a consultant. In March 1999, Mr.
Arnold became Chief Executive Officer of
the Student Insurance Division and
Special Risk Group of the Company. In
August 1999, Mr. Arnold was elected a
Vice President of the Company. For the
five years prior to joining the Company,
Mr. Arnold held various positions as a
consultant and officer in the health care
and systems industries.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On April 30, 1999, trading of the Company's shares commenced on the New
York Stock Exchange ("NYSE") under the symbol "UCI." Prior to April 30, 1999,
shares of the Company's Common Stock were quoted on the Nasdaq National Market
automatic quotation system. The table below sets forth on a per share basis, for
the period indicated, the high and low closing sales prices of the Common Stock
on NYSE and the Nasdaq National Market, as the case may be.
HIGH LOW
-------- --------
Fiscal Year Ended December 31, 1999
1st Quarter............................................... $23.8125 $ 20
2nd Quarter............................................... 27.6875 22.8125
3rd Quarter............................................... 28.875 25.5625
4th Quarter............................................... 27.125 9.75
Fiscal Year Ended December 31, 2000
1st Quarter............................................... $11.5625 $ 6.625
2nd Quarter............................................... 7.25 3.9375
3rd Quarter............................................... 8.5625 6.25
4th Quarter............................................... 7.5625 5.4375
As of March 5, 2001, there were approximately 11,500 holders of record of
Common Stock.
The Company has not paid cash dividends on its Common Stock to date. The
Company currently intends to retain all future earnings to finance continued
expansion and operation of its business and subsidiaries. Any decision as to the
payment of dividends to the stockholders of the Company will be made by the
Company's Board of Directors and will depend upon the Company's future results
of operations, financial condition, capital requirements and such other factors
as the Board of Directors considers appropriate.
In addition, dividends paid by the domestic insurance subsidiaries of the
Company to the Company out of earned surplus in any year without prior approval
of state regulatory authorities are limited by the laws and regulations of the
state of domicile. Prior approval by state regulatory authorities is required
for the payment of dividends by domestic insurance companies, which exceed the
limits set by the laws of the state of domicile. See Note L of the Notes to
Consolidated Financial Statements included herein.
During the year ended December 31, 2000, the Company issued 56,459 shares
of unregistered common stock pursuant to its 2000 Restricted Stock Plan. In July
2000, the Company issued to NMC 175,000 shares of unregistered common stock at a
purchase price in cash of $918,750 or $5.25 per share. The proceeds of such sale
were used for general corporate purposes.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for each of
the five years in the period ended December 31, 2000 have been derived from the
audited Consolidated Financial Statements of the Company. The following data
should be read in conjunction with the Consolidated Financial Statements and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included herein.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING RATIOS)
Income Statement Data:
Revenues from continuing operations..... $1,051,356 $1,013,183 $1,056,751 $ 905,562 $ 690,935
Income from continuing operations before
income taxes.......................... 62,877 50,852 47,262 111,814 90,247
Income from continuing operations....... 29,133 33,250 31,523 75,608 61,780
Income (loss) from discontinued
operations............................ (23,400) (179,132) 27,246 10,896 7,467
Net income (loss)....................... 5,733 (145,882) 58,769 86,504 69,247
Earnings per share from continuing
operations:
Basic earnings per Common share....... $ 0.62 $ 0.72 $ 0.68 $ 1.67 $ 1.48
Diluted earnings per Common share..... $ 0.61 $ 0.70 $ 0.67 $ 1.67 $ 1.48
Earnings (loss) per share from
discontinued operations:
Basic earnings (loss) per Common
share.............................. $ (0.50) $ (3.87) $ 0.59 $ 0.24 $ 0.18
Diluted earnings (loss) per Common
share.............................. $ (0.49) $ (3.75) $ 0.59 $ 0.24 $ 0.18
Earnings (loss) per share:
Basic earnings (loss) per Common
share.............................. $ 0.12 $ (3.15) $ 1.27 $ 1.91 $ 1.66
Diluted earnings (loss) per Common
share.............................. $ 0.12 $ (3.05) $ 1.26 $ 1.91 $ 1.66
Operating Ratios:
Health Ratios:
Loss ratio(1)......................... 63% 68% 75% 63% 58%
Expense ratio(2)...................... 33% 30% 30% 30% 33%
---------- ---------- ---------- ---------- ----------
Combined health ratio................. 96% 98% 105% 93% 91%
========== ========== ========== ========== ==========
Balance Sheet Data:
Total investments and cash(3)........... $1,151,109 $1,112,579 $1,148,074 $1,071,838 $1,055,587
Total assets............................ 3,048,034 3,539,344 2,349,634 1,552,478 1,316,494
Total policy liabilities................ 903,693 905,357 916,754 871,292 807,324
Total debt.............................. 66,782 120,637 50,328 50,270 30,943
Student loan credit facility............ 1,358,056 1,730,348 669,026 -- --
Stockholders' equity.................... 450,763 407,434 594,791 536,290 432,918
Stockholders' equity per share(4)....... $ 9.82 $ 9.44 $ 12.52 $ 11.29 $ 9.55
---------------
See Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes to Consolidated Financial Statements.
(1) The health loss ratio represents benefits, claims and settlement expenses
related to health insurance policies stated as a percentage of health
premiums.
(2) The health expense ratio represents underwriting, acquisition and insurance
expenses related to health insurance policies stated as a percentage of
health premiums. Expenses relating to providing administrative services are
not included.
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(3) Does not include restricted cash. See Note A of Notes to Consolidated
Financial Statements.
(4) Excludes the unrealized gains (losses) on available for sale securities,
which are reported in accumulated other comprehensive income as a separate
component of stockholders' equity.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995
Certain statements set forth herein or incorporated by reference herein
from the Company's filings that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
Actual results may differ materially from those included in the forward-looking
statements. These forward-looking statements involve risks and uncertainties
including, but not limited to, the following: changes in general economic
conditions, including the performance of financial markets, and interest rates;
competitive, regulatory or tax changes that affect the cost of or demand for the
Company's products; health care reform; the ability to predict and effectively
manage claims related to health care costs; and reliance on key management and
adequacy of claim liabilities.
The Company's future results will depend in large part on accurately
predicting health care costs incurred on existing business and upon the
Company's ability to control future health care costs through product and
benefit design, underwriting criteria, utilization management and negotiation of
favorable provider contracts. Changes in mandated benefits, utilization rates,
demographic characteristics, health care practices, provider consolidation,
inflation, new pharmaceuticals/technologies, clusters of high-cost cases, the
regulatory environment and numerous other factors are beyond the control of any
health plan provider and may adversely affect the Company's ability to predict
and control health care costs and claims, as well as the Company's financial
condition, results of operations or cash flows. Periodic renegotiations of
hospital and other provider contracts coupled with continued consolidation of
physician, hospital and other provider groups may result in increased health
care costs and limit the Company's ability to negotiate favorable rates.
Recently, large physician practice management companies have experienced extreme
financial difficulties, including bankruptcy, which may subject the Company to
increased credit risk related to provider groups and cause the Company to incur
duplicative claims expense. In addition, the Company faces competitive pressure
to contain premium prices. Fiscal concerns regarding the continued viability of
government-sponsored programs such as Medicare and Medicaid may cause decreasing
reimbursement rates for these programs. Any limitation on the Company's ability
to increase or maintain its premium levels, design products, implement
underwriting criteria or negotiate competitive provider contracts may adversely
affect the Company's financial condition or results of operations.
The Company's Academic Management Services Corp. business could be
adversely affected by changes in the Higher Education Act or other relevant
federal or state laws, rules and regulations and the programs implemented
thereunder may adversely impact the education credit market. In addition,
existing legislation and future measures by the federal government may adversely
affect the amount and nature of federal financial assistance available with
respect to loans made through the U.S. Department of Education. Finally the
level of competition currently in existence in the secondary market for loans
made under the Federal Loan Programs could be reduced, resulting in fewer
potential buyers of the Federal Loans and lower prices available in the
secondary market for those loans.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's historical results of operations
and of its liquidity and capital resources should be read in conjunction with
the Selected Financial Data and the Consolidated Financial Statements of the
Company and related notes thereto included herein.
The Company's operating segments are: (i) Insurance, which includes the
businesses of the Self-Employed Agency Division; the Student Insurance Division;
the OKC Division; the Special Risk Division; and the National Motor Club
Division (until sold on July 27, 2000); (ii) Financial Services, which includes
the businesses of Academic Management Services Corp., the Company's investment
in HealthAxis, Inc., the business of the Company's UICI Administrators unit and
certain other business units and (iii) Other Key Factors, which includes
investment income not allocated to the other segments, interest expense, general
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expenses relating to corporate operations, goodwill amortization, realized gains
or losses on sale of investments and the AMLI operations. Net investment income
is allocated to the Insurance segment based on policy liabilities. The interest
rate for the allocation is based on a high credit quality investment portfolio
with a duration consistent with the duration of the segment's policy
liabilities.
On March 17, 2000 the Board of Directors of UICI determined, after a
thorough assessment of the unit's prospects, that the Company would exit from
its United CreditServ sub-prime credit card business. In September 2000, the
Company completed the sale of substantially all of United CreditServ's non-cash
assets, and in January 2001 the Company completed the voluntary liquidation of
UCNB, in accordance with the terms of a plan of voluntary liquidation approved
by the OCC. Accordingly, the United CreditServ unit has been reflected as a
discontinued operation for financial reporting purposes for all periods
presented.
Discontinued Operation -- United CreditServ, Inc.
Through the Company's United CreditServ, Inc. subsidiary ("United
CreditServ"), prior to 2000 the Company marketed credit support services to
individuals with no, or troubled, credit experience and assisted such
individuals in obtaining a nationally recognized credit card. The activities of
United CreditServ were conducted primarily through its wholly-owned subsidiaries
United Credit National Bank ("UCNB") (a special purpose national bank, based in
Sioux Falls, South Dakota, chartered solely to hold credit card receivables);
Specialized Card Services, Inc. (provider of account management and collections
services for all of the Company's credit card programs); United Membership
Marketing Group, Inc. ("UMMG") (a Lakewood, Colorado-based provider of
marketing, administrative and support services for the Company's credit card
programs); and UICI Receivables Funding Corporation ("RFC"), a single-purpose,
bankruptcy-remote entity through which certain credit card receivables were
securitized.
Through 1999, United CreditServ marketed its credit card programs and
access to a credit card through the American Fair Credit Association LLC
("AFCA"), an independent membership association that provided credit education
programs and other benefits, and American Credit Educators LLC ("ACE"), which
marketed credit education materials and had a marketing agreement with UCNB to
solicit credit card applications. AFCA applicants were required to meet certain
requirements (including payment of initiation and monthly membership fees) in
order to become members of AFCA, and, in order to obtain a credit card, to meet
underwriting criteria established by UCNB.
Several significant developments during 1999 and 2000 at United CreditServ
materially and adversely affected the operations of the Company:
SIGNIFICANT LOSSES
During the year ended December 31, 1999, United CreditServ incurred a
pre-tax operating loss in the amount of approximately $145.3 million (inclusive
of the write off of the $35.9 million purchase price of UMMG), primarily
attributable to significant increases to credit card loan loss reserves
associated with the non-performance of its ACE credit card product. The Company
believes that such losses were due primarily to inadequate attention to ACE
collections, inefficiencies associated with administrative and operating systems
conversions during a period of significant increases in card issuance volumes,
mis-pricing of the ACE product, and the failure of the AFCA credit card
portfolio performance to be sufficiently predictive of the performance of the
ACE credit card loan portfolio.
In March 2000, the Board of Directors of UICI determined, after a thorough
assessment of the unit's prospects, that UICI would exit from its United
CreditServ sub-prime credit card business and, as a result, the United
CreditServ unit was reflected as a discontinued operation for financial
reporting purposes effective December 31, 1999. At December 31, 1999, the
Company established a liability for loss on the disposal of the discontinued
operation in the amount of $130.0 million (pre-tax), which liability was
included in net liabilities of discontinued operations. The liability for loss
on disposal established by the Company at December 31, 1999 represented the
Company's then-current estimate of all additional losses (including asset
write-downs, the estimated loss on the sale of the business and/or the assets
and continuing operating losses through the date of sale) that it then believed
it would incur as part of any sale of the United CreditServ unit.
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Reflecting the terms of the Company's then-pending sale of its United
CreditServ business, during the quarter ended June 30, 2000 the Company recorded
an additional pre-tax loss, and correspondingly increased the liability for loss
on the disposal of the discontinued operation, in the amount of $36.0 million
($23.4 million net of tax). Accordingly, for the full year 2000, the Company
reported a loss from discontinued operations in the amount of $36.0 million
pre-tax ($23.4 million net of tax).
During the year ended December 31, 2000, the discontinued operation
incurred a loss from operations in the amount of approximately $131.9 million,
which loss was charged to the liability for loss on disposal. At December 31,
2000, the remaining assets of the discontinued operations in the amount of $54.3
million (consisting of cash and short-term investments in the amount of $27.8
million and other assets in the amount of $26.5 million) were reclassified to
cash and other assets, respectively, on the Company's consolidated balance
sheet, and the remaining liabilities of the discontinued operations in the
amount of $53.0 million (consisting of notes payable in the amount of $4.3
million and other liabilities in the amount of $48.6 million) were reclassified
to notes payable and other liabilities, respectively, on the Company's
consolidated balance sheet.
COMPTROLLER OF THE CURRENCY CONSENT ORDERS
UCNB agreed to the issuance of separate Consent Orders issued by the OCC in
February and June, 2000, which Orders were subsequently terminated by the OCC in
January 2001. In addition, the Company and United CreditServ ("UCS") agreed to
the issuance of separate Consent Orders issued by the OCC in June 2000. In
January 2001, the UCS Order was terminated by the OCC and the UICI Order was
substantially modified. See Notes B and N of Notes to Consolidated Financial
Statements.
SALE OF CREDIT CARD PORTFOLIOS
On September 29, 2000, the Company completed the sale of substantially all
of the non-cash assets associated with its United CreditServ credit card unit,
including its credit card receivables portfolios and its Sioux Falls, South
Dakota servicing operations, for a cash sales price of approximately $124.0
million. In addition to the cash sales price received at closing, the
transaction contemplates an incentive cash payment contingent upon the
post-closing performance of the ACE credit card portfolio over a one-year
period. The Company retained United CreditServ's Texas collections facility, and
UICI continues to hold United CreditServ's building and real estate in Sioux
Falls, South Dakota. The Company has leased the Sioux Falls facilities to the
purchaser of the credit card assets pursuant to a long-term lease. UICI also
retained the right to collect approximately $250.0 million face amount of
previously written off credit card receivables. In connection with the sale,
UICI or certain of its subsidiaries retained substantially all liabilities and
contingencies associated with its credit card business, including liability for
payment of all certificates of deposit issued by UCNB, loans payable and
liabilities associated with pending litigation and other claims.
PAYMENT OF ALL UCNB DEPOSIT LIABILITIES
At December 31, 1999, UCNB had $290.0 million of certificates of deposits
outstanding, and UCNB held approximately $110.5 million in cash, cash
equivalents and short term U.S. Treasury securities. Following the sale of the
Company's United CreditServ unit in September 2000, UCNB prepaid all of its
remaining certificates of deposit then-outstanding in the amount of
approximately $79.0 million, and all such deposit liabilities were discharged as
of October 23, 2000. Following the prepayment of all deposit liabilities of
UCNB, at December 31, 2000 UCNB held cash, cash equivalents and U.S. Treasury
securities in the amount of $26.0 million.
SALE OF UMMG
Effective July 31, 2000, a wholly-owned subsidiary of the Company sold all
of its outstanding shares of UMMG for a purchase price in the amount of $25,000
in cash, with an additional amount of up to $2.0 million payable over the next
five years, contingent upon the performance of the business. The purchaser is an
entity controlled by the former President of UMMG. UMMG formerly provided
marketing, administrative and
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support services for the Company's credit card programs. In addition, on July
31, 2000, UICI signed a credit agreement with the purchaser, pursuant to which
it has agreed to lend to the purchaser up to $1.0 million on a revolving basis.
As of December 31, 2000, the Company had advanced to UMMG $1.0 million under the
credit agreement.
SIGNIFICANT CASH INFUSIONS TO UCNB
The 1999 and 2000 operating losses at United CreditServ had a material
adverse effect upon the liquidity and cash flows of the Company. Since the
Company first announced losses at its United CreditServ unit in December 1999,
UICI through United CreditServ contributed to UCNB as capital an aggregate of
$176.6 million in cash. UICI at the parent company level funded these cash
contributions and other cash needs with the proceeds of sale of investment
securities; a borrowing from a third party in the amount of $24.0 million funded
in July 2000; approved sales of assets from the parent company to the Company's
regulated insurance company subsidiaries completed in June and July 2000
generating cash proceeds in the aggregate amount of approximately $26.2 million;
dividends in the amount of $19.0 million paid during the six months ended June
30, 2000 from The Chesapeake Life Insurance Company ("CLICO") (one of its
regulated insurance company subsidiaries); the sale to The MEGA Life and Health
Insurance Company of CLICO for $19.0 million in July 2000; cash proceeds in the
amount of $21.8 million from the disposition of its National Motor Club unit
completed in July 2000; and cash on hand. See "Liquidity and Capital Resources."
JANUARY 2001 VOLUNTARY LIQUIDATION OF UCNB
On January 29, 2001, UCNB surrendered to the OCC its national bank charter
and distributed to a wholly-owned subsidiary of UICI the residual assets of
UCNB, including available cash and cash equivalents in the amount of
approximately $26.0 million.
As part of the plan of liquidation, and in accordance with the terms of the
June 2000 Consent Order issued by the OCC against UICI, UICI expressly assumed
all liabilities of UCNB, including contingent liabilities associated with
pending and future litigation. In addition, on January 29, 2001, the OCC
terminated the Consent Orders issued against UCNB in February 2000 and June 2000
and the June 2000 Consent Order issued against UICI's United CreditServ
subsidiary. The OCC substantially modified the June 2000 Consent Order issued
with respect to UICI to eliminate all restrictive provisions except a
reconfirmation of UICI's obligation to assume all liabilities of UCNB. Finally,
the OCC formally acknowledged the termination by UICI of the liquidity and
capital assurances agreement, which formerly provided that, upon demand by UCNB,
UICI would assure the liquidity and capital adequacy of UCNB.
Investment in HealthAxis, Inc. (formerly HealthAxis.com, Inc.)
During 2000 the Company held a significant investment interest in
HealthAxis.com, Inc. ("HealthAxis.com"), a provider of Internet-enabled,
integrated proprietary software applications that address the workflow and
processing inefficiencies embedded in the healthcare insurance industry.
HealthAxis.com, through its proprietary web-enabled enrollment and plan
administration applications, provides Internet enrollment and online access to
claims data. These software applications increase the efficiency of a client's
interaction with other participants by eliminating paper-based processes and
improving the client's ability to share data with plan members and other
industry participants. HealthAxis.com's clients include large insurance
carriers, Blue Cross and Blue Shield organizations, third party administrators,
self-funded employers, and other industry participants. HealthAxis.com also
provides systems integration, technology management and data capture services to
its clients.
The Company's interest in HealthAxis.com was derived from the January 7,
2000 merger (the "Insurdata Merger") of Insurdata Incorporated (formerly a
wholly-owned subsidiary of UICI) with and into HealthAxis.com, the sole
operating subsidiary of HealthAxis, Inc. (formerly Provident American
Corporation) ("HAI") (HAXS:Nasdaq). HealthAxis.com formerly was a web-based
retailer of health insurance products and related consumer services. During 1999
and in advance of the Insurdata Merger, Insurdata transferred to UICI the net
assets of Insurdata Administrators (a division of Insurdata engaged in the
business
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of providing third party benefits administration, including eligibility and
billing reconciliation) and its member interest in Insurdata Marketing Services,
LLC (a subsidiary of Insurdata engaged in the business of marketing third party
benefits administration services) for cash in the amount of $858,000,
representing the aggregate book value of the net assets and member interest so
transferred. The Company recognized no gain on the non-monetary exchange of
stock in the Insurdata Merger due to uncertainty of realization of the gain.
Following the Insurdata Merger, the Company held approximately 43.6%, and
HAI held approximately 28.1%, of the issued and outstanding capital stock of
HealthAxis.com, the surviving corporation in the Insurdata Merger. On March 14,
2000, the Company sold in a private sale to an institutional purchaser 2,000,000
shares of HealthAxis.com common stock and, giving effect to such sale, the
Company held 39.2% of the issued and outstanding shares of common stock of
HealthAxis.com.
On September 29, 2000, UICI purchased from a third party $1.7 million
principal amount of HAI 2% convertible subordinated debentures and a warrant to
purchase 12,291 shares of HAI common stock at an exercise price of $3.01 per
share, for a total purchase price of $1.2 million. The debentures mature in
September 2005 and are convertible into 185,185 shares of HAI common stock.
On January 26, 2001, HAI acquired all of the outstanding shares of
HealthAxis.com that HAI did not then own in a stock-for-stock merger of
HealthAxis.com with a wholly-owned subsidiary of HAI (the "HAI Merger"). In the
HAI Merger, HealthAxis.com shareholders (including the Company) received 1.334
shares of HAI common stock for each share of HealthAxis.com common stock
outstanding. Following the HAI Merger, the Company beneficially holds 23,944,030
shares of HAI common stock (including the 185,185 shares issuable upon
conversion of the HAI convertible subordinated debentures), representing
approximately 45.3% of the issued and outstanding shares of HAI. Of such
23,944,030 shares beneficially held by UICI, 8,581,714 shares (representing
16.2% of HAI's total issued and outstanding shares) are subject to the terms of
a Voting Trust Agreement, pursuant to which trustees unaffiliated with the
Company have the right to vote such shares. Gregory T. Mutz and Patrick J.
McLaughlin, President and a director of UICI, respectively, serve on the Board
of Directors of HAI.
The Company has accounted for its investment in HealthAxis.com (and intends
to account for its investment in HAI) utilizing the equity method and has
recognized its ratable share of HealthAxis.com's income and loss (computed prior
to amortization of goodwill recorded by HealthAxis.com in connection with the
Insurdata Merger). At December 31, 2000, the Company's carrying value of its
investment in HealthAxis.com was $18.4 million, representing its carryover
investment in Insurdata plus the Company's investment in shares of
HealthAxis.com acquired prior to the Insurdata Merger ($5.0 million of preferred
stock) and its investment in the HAI convertible subordinated debentures, all as
reduced by the Company's cost of the shares of HealthAxis.com sold in March 2000
and by the Company's equity in the losses of HealthAxis.com for the year ended
December 31, 2000 in the amount of $15.6 million.
Effective June 30, 2000, HealthAxis.com sold to Digital Insurance, Inc.
("Digital") certain assets used in connection with HealthAxis.com's retail
website, including the retail website user interface, all existing in-force
insurance policies, certain physical assets, and rights under certain
agreements, including, but not limited to portal marketing agreements and
agreements related to HealthAxis.com's affiliate partner program. As part of the
consideration received by HealthAxis.com in the transaction, Digital issued to
HealthAxis.com 11% of the outstanding shares of common stock of Digital (on a
fully diluted basis).
HealthAxis.com generated revenues of $43.7 million, $46.2 million and $41.2
million in 2000, 1999 and 1998, respectively, of which 63%, 58% and 58% were
derived from information systems and software development services provided to
UICI and its insurance company affiliates.
Academic Management Services Corp. -- Significant Losses
AMS has continued to incur significant operating losses. In the years ended
December 31, 2000 and 1999, AMS incurred operating losses in the amount of $24.6
million and $19.9 million, respectively. Included in operating results for the
years ended December 31, 2000 and 1999 were pre-tax gains from the sale of
student loans in the amount of $7.8 million and $7.4 million, respectively.
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Included in AMS's operating loss for 2000 was a net decrease in deferred
loan origination costs of $13.1 million. In 1999 and 1998, AMS purchased loans
in the secondary market at costs which approximated the fair value of the loans,
resulting in a reduced yield on the loans while they were held and little or no
net gain on a subsequent sale. Premiums paid on loans purchased in the secondary
market were $-0- in 2000, $12.4 million in 1999 and $7.5 million in 1998. In
addition, deferred costs associated with the origination of PLUS loans at AMS's
San Diego operations (which was closed in the fourth quarter of 2000), resulted
in loans with reduced yields and lower gains than if such loans had been
originated in a lower cost environment. Management believes that AMS will be
able to originate PLUS loans at a reduced cost after consolidating its
origination activities into AMS's Swansea, Massachusetts operations. Capitalized
costs associated with the San Diego facility were $2.2 million in 2000, $7.0
million in 1999, and $7.4 million in 1998. At December 31, 2000, AMS had $17.2
million in remaining deferred loan origination costs that will result in charges
to income in future years as such costs are amortized over the life of loans
held in the portfolio and/or charged off when loans are sold.
AMS's 2000 operating results also reflected approximately $5.7 million of
expenses associated with the management transition effected in January 2000,
significant expenses associated with the relocation of AMS's headquarters from
South Yarmouth, Massachusetts to Swansea, Massachusetts, the write-off of
facilities development costs and the write-off of previously capitalized costs
incurred in connection with AMS's Internet strategy and other business
initiatives undertaken by prior management. AMS also incurred approximately $1.2
million in consulting expenses in connection with analysis of operating
strategies and approximately $900,000 of expenses associated with the transfer
of AMS's non-campus based association marketing business to UICI's Student
Resources Division.
Earnings from AMS's student loan portfolio in 2000 and 1999 were not
sufficient to cover costs associated with the origination and acquisition of
such loans. In order to achieve profitability in the future, management believes
that the size of the student loan portfolio must be increased and/or associated
costs must be decreased. While management believes that the closure of the San
Diego facility and transfer of loan origination activities to Swansea is an
important step to achieve profitability, additional measures to increase volume
or decrease costs are required before AMS's student loan portfolio activities
will be profitable.
AMS has engaged Lehman Brothers Inc. and Bank of America Securities Inc. to
assist AMS in evaluating various strategic alternatives, including a possible
sale of AMS.
Issuance of Common Stock to Employee and Agent Plans
In August 2000, the Company issued 1,610,000 shares of UICI common stock to
its employee stock ownership and savings plan at a purchase price of $5.25 per
share, or $8.5 million in the aggregate. Effective July 1, 2000, the Company
also agreed to issue an aggregate of 2,175,000 newly-issued shares of its common
stock from time to time over the next two years, at a purchase price of $5.25
per share, or $11.4 million in the aggregate, to its stock accumulation plans
created for the benefit of its independent agents. The aggregate of 3,785,000
shares (the "$5.25 shares") when issued will represent approximately 7.8% of the
issued and outstanding shares of UICI common stock.
During the year ended December 31, 2000, approximately 356,000 $5.25 shares
were allocated to the accounts of participants in UICI's employee stock
ownership plan and 255,000 $5.25 shares were issued for the benefit of
participants in its agent stock accumulation plans. In connection therewith, the
Company recognized incremental compensation expense in the amount of $296,000,
representing the difference between the fair market value of such shares at the
time credited and $5.25 per share. In addition, the Company expects to recognize
additional incremental compensation expense over the period ending approximately
July 31, 2002 if and to the extent the value of $5.25 shares allocated to the
accounts of participants in its employee stock ownership plan and/or issued for
the benefit of participants in the agent stock accumulation plans exceeds $5.25
per share. See Note O of Notes to Consolidated Financial Statements.
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Modification of UICI Executive Stock Purchase Program
In January 2001, the Board of Directors of the Company adopted certain
modifications to the UICI Executive Stock Purchase Program (the "ESPP"), which
was initially adopted and implemented in December 1998 to afford directors and
key UICI executives the opportunity to purchase UICI common stock. See Note M of
Notes to Consolidated Financial Statements.
In connection with the January 2001 modifications to the ESPP, for
financial reporting purposes UICI recorded in the quarter ended December 31,
2000 compensation expense in the amount of $4.8 million pre-tax, or $4.1 million
net of tax.
Reconfirmation of 1998 Share Repurchase Program
At its regular meeting held on February 28, 2001, the Board of Directors of
the Company reconfirmed the Company's 1998 share repurchase program, in which it
initially authorized the repurchase of up to 4,500,000 shares of its common
stock from time to time in open market or private transactions. The Company had
previously purchased through early 1999 198,000 shares of common stock pursuant
to the program. Following the reconfirmation of the program, through March 13,
2001, the Company had purchased an additional 807,700 shares pursuant to the
program. The timing and extent of additional repurchases, if any, will depend on
market conditions and the Company's evaluation of its financial resources at the
time of purchase.
2000 COMPARED TO 1999
General
UICI reported 2000 revenues and income from continuing operations of $1.051
billion and $29.1 million ($0.61 per share fully diluted), respectively,
compared to 1999 revenues and income from continuing operations of $1.013
billion and $33.3 million ($0.70 per share fully diluted), respectively. The
Company generated total 2000 net income in the amount of $5.7 million ($0.12 per
share fully diluted), compared to a net loss of $(145.9) million ($(3.05) per
share fully diluted) in 1999, reflecting a loss in 2000 and 1999 from
discontinued operations in the amount of $(23.4) million ($(0.49) per share
fully diluted) and $(179.1) million ($(3.75) per share fully diluted),
respectively.
UICI's 2000 results include a pre-tax operating loss at the Company's
Academic Management Services Corp. student loan unit of $(24.6) million, the
Company's equity in losses of HealthAxis, Inc. of $(15.6) million, and a $26.3
million pre-tax gain from the sale of investment securities.
The Company's Self-Employed Agency ("SEA") Division, which provides health
insurance to the self-employed market, reported operating income of $70.9
million in 2000, a 40.6% increase over operating income of $50.4 million in
1999. The significant increase in operating income of the SEA division was
primarily attributable to improved loss ratios on the Company's managed care
products, continued success in directing a larger portion of new sales to more
traditional, higher margin, indemnity products, and increased productivity of
the Company's dedicated agent field force. The Company's Insurance Segment as a
whole reported operating income in 2000 of $79.0 million, a 17.9% increase over
operating income of $67.0 million generated in 1999.
As discussed further below, AMS's 2000 operating results reflected, in
part, a reduction in operating income as a result of reduced yields on AMS's
student loan portfolio, which resulted from the acquisition of higher cost
student loans in 1998 and 1999. AMS also incurred significant non-recurring
expenses associated with, among other things, the management transition effected
in January 2000, the relocation of AMS's headquarters, the write-off of
facilities development costs and previously capitalized costs incurred in
connection with AMS's Internet strategy, and the previously announced closure of
the San Diego loan origination center. AMS has engaged Lehman Brothers Inc. and
Bank of America Securities Inc. to assist AMS in evaluating various strategic
alternatives, including a possible sale of AMS.
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For the quarter ended December 31, 2000, the Company reported a loss from
continuing operations of $(6.1) million, or $(0.13) per share fully diluted,
compared to a loss of $(4.2) million, or $(0.09) per share fully diluted, for
the corresponding period in 1999. In the fourth quarter of 2000, the Company's
Insurance Segment reported operating income of $13.5 million, which included an
operating loss at the Company's Special Risk unit in the amount of ($6.1)
million. Operating profits at the Company's Insurance Segment were offset by a
$(12.4) million operating loss reported at AMS for the quarter ended December
31, 2000 and special compensation expense in the amount of $(4.8) million
pre-tax associated with modifications to the Company's executive stock purchase
program. See Note O of Notes to Consolidated Final Statements.
Reflecting the terms of the Company's then-pending sale of its United
CreditServ business, during the quarter ended June 30, 2000 the Company recorded
an additional pre-tax loss, and correspondingly increased the liability for loss
on the disposal of the discontinued operation, in the amount of $36.0 million
($23.4 million net of tax). Accordingly, for the full year 2000, the Company
reported a loss from discontinued operations in the amount of $36.0 million
pre-tax ($23.4 million net of tax). During the year ended December 31, 2000, the
discontinued operation incurred a loss from operations in the amount of
approximately $131.9 million, which loss was charged to the liability for loss
on disposal.
Continuing Operations
Revenues. UICI's revenues increased to $1,051.4 million in 2000 from
$1,013.2 million in 1999, an increase of $38.2 million, or 4%, primarily as a
result of an increase in other interest income and the gain on sale of the
HealthAxis.com shares in the amount of $26.3 million, offset by a $27.6 million
reduction in health and life premium income.
Health premiums. Health premiums decreased to $668.3 million in 2000 from
$690.2 million in 1999, a decrease of $21.9 million, or 3%. The decrease in
health premiums in 2000 was attributable primarily to decreased premiums in the
Special Risk Division, which resulted from the Company's entering into
reinsurance and specific retrocession agreements effective January 1, 2000 that
effectively permitted the Company to transfer to an unaffiliated insurance
carrier the insurance revenue and risk portion of the business. This transfer
has continued and will continue to occur monthly as the business renews over the
life of the policies.
Life premiums and other considerations. Life premiums and other
considerations decreased to $40.6 million in 2000 from $46.4 million in 1999, a
decrease of $5.8 million, or 13%. This decrease resulted from reduced premiums
and other considerations from closed blocks of life and annuity business.
Investment income. Investment income increased to $92.5 million in 2000
from $85.5 million in 1999, an increase of $7.0 million, or 8%. The increase was
due to increased earnings from the Company's investment in AMLI Realty Co.,
together with an increase in investment income from restricted cash held at AMS
for a full year in 2000. AMS Investment Group, Inc. was acquired in July 1999.
Other interest income. Other interest income increased to $111.4 million
in 2000 from $65.1 million in 1999, an increase of $46.3 million. The increase
was due to the additional interest income earned on student loans at the
Company's AMS operations in 2000.
Other fee income. Other fee income decreased to $110.4 million in 2000
from $122.9 million in 1999, a decrease of $12.5 million. The decrease was due
to the sale of National Motor Club ("NMC") in July 2000. NMC generated $19.4
million and $24.6 million in other fee income (primarily membership fees) for
the seven month period ended July 2000 and for the full year 1999, respectively.
Other income. Other income decreased to $2.3 million in 2000 from $3.5
million in 1999, a decrease of $1.2 million. The decrease in other income is due
to the sale of the Special Risk's managing general underwriter in September
2000.
Gain on sale of HealthAxis.com stock. On March 14, 2000, the Company sold
in a private sale to an institutional purchaser 2,000,000 shares of
HealthAxis.com common stock. In connection with the sale of such shares, the
Company recognized a pre-tax gain in the amount of $26.3 million.
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Loss on sale of investments. The Company recognized losses on sale of
investments of $411,000 in 2000 compared to $367,000 in 1999. The amount of
realized gains or losses on the sale of investments is a function of interest
rates, market trends and the timing of sales. Losses are more likely during
periods of increasing long-term interest rates. In addition, due to decreasing
long-term interest rates in 2000, the net unrealized investment loss on
securities classified as "available for sale," reported in accumulated other
comprehensive income as a separate component of stockholders' equity and net of
applicable income taxes, was $9.5 million at December 31, 2000, compared to
$30.4 million at December 31, 1999.
Benefits, claims, and settlement expenses. Benefits, claims and settlement
expenses decreased to $464.5 million in 2000 from $514.6 million in 1999, a
decrease of $50.1 million, or 10%. The decrease was primarily due to the
improvement in loss ratios on the Company's managed care products in the SEA
Division.
Underwriting, acquisition and insurance expenses. Underwriting,
acquisition and insurance expenses increased to $250.4 million in 2000 from
$243.4 million in 1999, an increase of $7.0 million or 3%. The increase was
primarily due to increased technology costs.
Other expenses. Other expenses increased to $117.1 million in 2000 from
$114.3 million in 1999, an increase of $2.8 million. The increase was primarily
due to the increased costs of AMS's student loan originations.
Depreciation. Depreciation expense increased to $14.1 million in 2000 from
$13.8 million in 1999, an increase of $300,000.
Interest expense. Interest expense on corporate borrowings increased to
$13.6 million in 2000 from $7.4 million in 1999, an increase of $6.2 million.
The increase was due primarily to the increased level of borrowings outstanding
during 2000. Interest expense on student loan obligations increased to $101.6
million in 2000 from $57.5 million in 1999, an increase of $44.1 million. The
increase was due primarily to AMS's increased student loan origination volume.
Operating Income. Income from continuing operations before federal income
taxes ("operating income") increased to $62.9 million in 2000 from $50.9 million
in 1999. Operating income (loss) for each of the Company's segments and
divisions was as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Income (loss) from continuing operations before income
taxes:
Insurance:
Self Employed Agency................................... $ 70,905 $ 50,415
Student Insurance...................................... (1,877) 49
OKC Division........................................... 13,132 17,405
Special Risk........................................... (5,667) (4,079)
National Motor Club.................................... 2,471 3,200
-------- --------
78,964 66,990
Financial Services:
Academic Management Services........................... (24,640) (19,938)
UICI Administrators.................................... (1,668) 2,322
-------- --------
(26,308) (17,616)
Gain on sale of HealthAxis.com shares..................... 26,300 --
HealthAxis.com operating loss............................. (15,623) --
Other Key Factors......................................... 5,786 7,806
Goodwill amortization..................................... (6,242) (6,328)
-------- --------
Total income from continuing operations before income
taxes.................................................. $ 62,877 $ 50,852
======== ========
25
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Self Employed Agency Division ("SEA"). The SEA Division reported operating
income of $70.9 million in 2000 compared to $50.4 million in 1999. Revenue for
the SEA Division decreased to $566.4 million for the year ended in 2000 from
$566.8 million in 1999, a decrease of $400,000. The increase in operating income
was primarily attributable to improved loss ratios on the Company's managed care
products, continued success in directing a larger portion of new sales to more
traditional, higher margin, indemnity products, and increased productivity of
the Company's dedicated agent field force. The decrease in revenues was
attributable to the decrease in premiums from the coinsurance business, which
was offset by the continued success in new business sales from the Company's CMA
and UGA dedicated agency field forces.
Student Insurance Division. The Student Insurance Division incurred an
operating loss of $(1.9) million in 2000 compared to operating income of $49,000
in 1999. The loss in 2000 reflected increased expenses associated with new
system implementations and lower margins resulting from increased loss ratios on
policies sold in the 1998-1999 policy year. Revenue for the Student Insurance
Division increased to $111.5 million in 2000 from $108.0 million in 1999, an
increase of $3.5 million, or 3%.
OKC Division. Operating income for the OKC Division decreased to $13.1
million in 2000 from $17.4 million in 1999, a decrease of 25%. The decrease in
operating income was attributable to several factors. The OKC Division's life
insurance claim benefits increased over claim benefits in the corresponding
period of the prior year. The Company believes that the higher level of claims
in the life business was due to normal variations in the business for the closed
life blocks. An additional loan reserve was established for the student loans
made by the College Fund Life unit on its life insurance product. Credit
disability insurance claim reserves were increased based on claims experience,
and a reserve for bad debts on premium receivables was established. Operating
income for the workers compensation line of business decreased as a result of
lower premium rates, which has been occurring in this product line in Oklahoma
for the past two years. Revenue for the OKC Division decreased to $92.4 million
in 2000 from $94.1 million in 1999, a decrease of $1.7 million, or 2%.
Special Risk Division. Operating losses for the Special Risk Division
increased to a loss of $(5.7) million in 2000 from a loss of $(4.1) million in
1999. The increase in the Special Risk Division's operating loss was due to
higher loss ratios on closed blocks of business and a significant strengthening
of reserves. Revenue for the Special Risk Division was $30.2 million in 2000
compared to $59.0 million in 1999, a decrease of $28.8 million or 49%. The
decrease in revenue in the 2000 period was attributable to (a) the elimination
of unprofitable blocks of business and implementation of necessary rate
increases on stop-loss accounts and other lines of business causing customers to
terminate their policies and (b) the implementation of reinsurance and specific
retrocession agreements that effectively permitted the Company to transfer the
insurance revenue and risk portion of the Special Risk business managed by
Excess, Inc. (one of the Company's managing general underwriters) to a new
insurance carrier. This transfer was effective January 1, 2000, and will occur
monthly as the business renews over the life of the policies.
Effective July 1, 2000, the Company sold the assets of WinterBrook
HealthCare Management, LLC (a company engaged in repricing of insurance claims)
to an unrelated party for a sales price of $1.9 million. The Company recognized
a pre-tax gain of $1.5 million in the quarter ended September 30, 2000 in
connection with this sale. In addition, in the third quarter of 2000 the Company
completed the sale of Excess, Inc. to the Excess management team. The Company
recognized a gain in the amount of $161,000 (pre-tax) in connection with this
sale.
National Motor Club. On July 27, 2000, the Company completed the sale of
its 97% interest in NMC Holdings, Inc. (the parent of National Motor Club of
America, Inc.) to an investor group consisting of members of the family of
Ronald L. Jensen (including Mr. Jensen). See Note M of Notes to the Consolidated
Financial Statements.
Operating income for the National Motor Club decreased to $2.5 million in
2000 compared to $3.2 million in 1999. Revenues for National Motor Club
decreased to $21.7 million in 2000 from $27.8 million in 1999. The decrease in
operating income and revenues reflects the sale of National Motor Club in July
2000.
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UICI Administrators. The Company has classified the operations of UICI
Administrators, Inc. (a company engaged in the business of providing third party
benefits administration, including eligibility and billing reconciliation),
Insurdata Marketing Services, LLC (a subsidiary of the Company engaged in the
business of marketing third party benefits administration services) and
Healthcare Management Administrators, Inc. (which the Company acquired on
February 3, 2000) as its UICI Administrators business division. UICI
Administrators incurred an operating loss of $(1.7) million in 2000 compared to
operating income of $2.3 million in 1999. Revenues for UICI Administrators
decreased to $18.5 million in 2000 from $46.2 million in 1999.
The decrease in operating income and revenues at the Company's UICI
Administrators division was primarily attributable to the timing of the
contribution of substantially all of the operations of Insurdata Incorporated
(other than the operations of Insurdata Marketing Services, LLC) to
HealthAxis.com in connection with the Insurdata-HealthAxis.com merger, which was
completed in January 2000. The results of operations of Insurdata Incorporated
had previously been included in the results of operations of the UICI
Administrators division. Excluding the 1999 results of operations of Insurdata
Incorporated transferred to HealthAxis.com, for 2000 and 1999, revenues for the
UICI Administrators division were $18.5 million and $4.8 million, respectively,
and operating income (loss) for the division was $(1.7) million and $414,000,
respectively.
Investment in HealthAxis.com, Inc. The Company accounts for its investment
in HealthAxis.com utilizing the equity method and, accordingly, recognizes its
ratable share of HealthAxis.com's income and loss (computed prior to
amortization of goodwill recorded by HealthAxis.com in connection with the
Insurdata Merger). The Company's equity in the loss of HealthAxis.com for 2000
was $15.6 million. HealthAxis.com continues to incur operating losses
attributable to significant marketing, development and other start-up expenses.
HealthAxis.com also incurred losses in 2000 in connection with the sale of its
retail web site and related assets. The Company's share of such losses ($(2.5)
million) is included in the Company's equity in losses for 2000.
On March 14, 2000, the Company sold in a private sale to an institutional
purchaser 2,000,000 shares of HealthAxis.com common stock. In connection with
the sale of such shares, the Company recognized a pre-tax gain in the amount of
$26.3 million.
Other Key Factors. Other key factors include investment income not
allocated to the other segments, interest expense from corporate borrowings,
general expenses relating to corporate operations, realized gains or losses on
sale of investments and the AMLI operations. Operating income in 2000 generated
by other key factors decreased to $5.8 million from $7.8 million, a $2.0 million
decrease or 26%. The decrease is primarily due to additional interest expense
associated with a higher level of corporate borrowings outstanding in 2000.
Goodwill amortization. Goodwill amortization decreased to $6.2 million in
2000 from $6.3 million in 1999, a decrease of $100,000. This decrease in
goodwill amortization was attributable to the sale of NMC in July 2000, the
assets of which included approximately $36.1 million in goodwill. This decrease
was offset by the increase of goodwill amortization from the AMS acquisition in
July 1999, resulting in a full year of amortization in 2000, compared to five
months of amortization in 1999.
27
29
Academic Management Services Corp. ("AMS"). AMS incurred an operating loss
of $(24.6) million in 2000, compared to an operating loss of $(19.9) million in
1999 (in each case exclusive of goodwill amortization and other expenses at the
parent-company level). Revenue for AMS increased to $154.3 million in 2000 from
$104.6 million in 1999. Set forth below is a summary comparative statement of
operations for AMS:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Interest income -- student loans............................ $110,651 $ 65,001
Gain on sale of student loans............................... 7,757 7,404
Other investment income..................................... 8,039 3,986
Fee income -- tuition payment programs...................... 11,898 7,404
Fee income -- loan servicing and other...................... 15,905 15,258
Insurance income............................................ -- 5,539
-------- --------
Total revenue..................................... 154,250 104,592
-------- --------
Interest expense -- student loans........................... 104,043 63,497
Provision for loan loss..................................... 1,810 950
Interest expense -- other indebtedness...................... 4,365 2,398
Depreciation................................................ 4,563 3,378
Amortization of goodwill.................................... 3,989 2,618
Other operating expenses.................................... 66,423 61,284
Less: operating costs deferred.............................. (2,238) (6,977)
-------- --------
182,955 127,148
-------- --------
Loss from operations (including amortization of goodwill and
other expenses at UICI level)............................. (28,705) (22,556)
Amortization of goodwill and other expenses at UICI level... 4,065 2,618
-------- --------
Loss from operations........................................ $(24,640) $(19,938)
======== ========
The increases in 2000 in interest income and interest expense associated
with student loans, as well as the increase in the provision for loan loss,
resulted primarily from higher average carrying amount of student loans held
during the year compared to 1999. In 2000, AMS originated approximately $776.1
million principal amount of new loans, purchased approximately $2.5 million
principal amount of student loans in the secondary market, and sold
approximately $779.8 million principal amount of loans. In 1999, AMS originated
approximately $671.2 million principal amount of new loans, purchased
approximately $401.0 million principal amount of student loans in the secondary
market, and sold approximately $391.0 million principal amount of loans.
Including principal payments and capitalization and amortization of deferred
loan origination costs, student loans decreased approximately $166.0 million in
2000, as compared to an increase of approximately $628.0 million during 1999.
During 2000, an increase in prevailing interest rates had a negative effect on
the cost of financing AMS's student loan portfolio. The spread between the
weighted average interest rate earned on student loans (before amortization of
deferred loan origination costs) and the rate incurred on student loan
indebtedness (before amortization of debt issue costs) for the quarters ended
March 31, June 30, September 30 and December 31, 2000, was approximately 2.06%,
2.12%, 1.72% and 1.88%, respectively,
Included in the interest rate spread on student loans are PLUS loans on
which the interest rate yield is set annually beginning July 1 by regulation at
a fixed rate. At March 31, June 30, September 30 and December 31, 2000, AMS held
PLUS loans in the aggregate principal amount of $371.0 million, $270.0 million,
$253.0 million and $273.0 million, respectively. The prescribed rate earned on
PLUS loans was 7.72% from January 1 to June 30, 2000 and was reset to 8.99%
beginning July 1, 2000. If the interest rate yield exceeds the maximum allowable
rate chargeable to the borrower, AMS, as the holder of PLUS loans, would be
eligible for government subsidized, special allowance payments for the year. The
fixed interest rate yield in 2000 was below the maximum rate. For the twelve
months beginning July 1, 2000, the fixed rate will be below the maximum rate and
AMS will not be entitled to special allowance payments on its PLUS loans. AMS
28
30
finances the cost of such loans at floating interest rates which are reset
monthly and quarterly through its structured finance facilities.
Gain on sale of student loans included gross gains of $22.5 million in 2000
and $16.0 million in 1999. Deferred loan origination costs associated with sold
loans were charged to gain on sale in the amount of $14.7 million and $8.6
million in 2000 and 1999, respectively. While more principal amount of loans was
sold in 2000 than in 1999, resulting in a higher gross gain, the lower net gain
results from higher deferred loan origination costs associated with sold loans
in 2000 compared to 1999. In addition, the sale of loans in the second and third
quarters of 2000 resulted in lower interest income in the second half of the
year, as the sold loans no longer generated interest income. The reduction in
interest earned in the second half of 2000 because of loan sales was offset by
gains on sale of $3.8 million in the first six months of 2000 and $3.1 million
in the second six months.
Other investment income increased to $8.0 million in 2000 from $4.0 million
in 1999. Fee income from tuition payment programs increased to $11.9 million in
2000 from $7.4 million in 1999. Increases in both of these categories resulted
primarily from the acquisition of the Academic Management Services Inc. tuition
payment program business, effective July 27, 1999. Results from this business
were included for a full year in 2000, compared to a period of five months in
1999. Income for the tuition payment program business is seasonal. In 2000,
income from tuition payment program fees earned plus investment income on
tuition payment program trust funds was $3.6 million in the first quarter, $5.5
million in the second quarter, $7.8 million in the third quarter and $3.8
million in the fourth quarter.
Insurance income of $5.5 million in 1999 relates to AMS's student insurance
business. In May 1999, the assets and liabilities associated with AMS's student
insurance business were transferred to UICI's Student Insurance Division.
Interest expense on other indebtedness increased to $4.4 million in 2000
from $2.4 million in 1999, reflecting primarily additional borrowings in the
amount of $30.0 million incurred to acquire Academic Management Services Inc. on
July 27, 1999. Interest expense on this acquisition indebtedness was $2.8
million in 2000. The acquisition debt is scheduled to be repaid on June 30,
2001.
The increases in depreciation expense and amortization of goodwill also
resulted primarily from the inclusion of Academic Management Services Inc.'s
tuition payment program business and its acquisition cost for a full year in
2000, compared to five months in 1999. Amortization of goodwill associated with
the acquisition of this business was $2.4 million in 2000 compared to $1.0
million in 1999.
Other operating expenses increased to $66.4 million in 2000 from $61.3
million in 1999. Included in 2000 operating expenses were approximately $5.7
million associated with the management transition effected in January 2000, the
relocation of AMS's headquarters from South Yarmouth, Massachusetts to Swansea,
Massachusetts, the write-off of facilities development costs and the write-off
of previously capitalized costs incurred in connection with AMS's Internet
strategy and other business initiatives undertaken by prior management. AMS also
incurred $1.2 million in consulting expenses in connection with analysis of
operating strategies. Included in AMS's operating expenses for 2000 is $900,000
in expenses associated with the transfer in the fourth quarter of AMS's
non-campus based association marketing business to UICI's Student Insurance
Division. In addition, operating costs associated with the tuition payment
program business are included for a full year in 2000 compared to five months in
1999.
AMS markets loans to parents of dependent students ("PLUS loans") through
direct mail and telemarketing programs directly to prospective student and
parent borrowers. Until September 2000, these marketing activities were
conducted primarily through the Company's San Diego, California marketing unit.
On September 17, 2000, AMS announced that the California facility would be
closed and the PLUS loan marketing activities would be consolidated into AMS's
Swansea, Massachusetts headquarters. Management believes that these changes will
result in a more cost-effective marketing effort. In 2000, AMS recorded a charge
to income in the amount of $1.5 million, representing expenses incurred in
connection with the exit from its San Diego unit. These costs included
termination benefits for substantially all of the unit's 90 employees and the
cost of certain contractual obligations of the unit.
29
31
Certain costs of originating loans are capitalized in accordance with
Statement of Financial Accounting Standards No. 91, Nonrefundable Fees & Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases. Capitalized costs for PLUS loans incurred by the San Diego unit were
$2.2 million in 2000 as compared to $7.0 million in 1999. The decrease in
capitalized costs resulted from a decrease in total expenses incurred ($7.5
million in 2000 compared to $17.0 million in 1999) and a decrease in PLUS loan
production ($50.0 million in 2000 compared to $192.0 million in 1999).
1999 COMPARED TO 1998
1999 results from continuing operations were impacted by several
significant adjustments taken in the fourth quarter, including (a) a $5.0
million accrual for professional fees, (b) a write off of previously capitalized
software and system development costs in the amount of $2.3 million at the
Company's Student Insurance Division, (c) a strengthening of insurance reserves
associated with the Company's Special Risk operations in the amount of $3.5
million, and (d) a write off in the amount of $9.0 million to adjust AMS's
student loan balance.
Continuing Operations
Revenues. Revenues decreased to $1,013.2 million in 1999 from $1,056.8
million in 1998, a decrease of $43.6 million, or 4%, primarily as a result of
decreases in health premiums.
Health premiums. Health premiums decreased to $690.2 million in 1999 from
$747.3 million in 1998, a decrease of $57.1 million, or 8%. The decrease in
health premiums for the year resulted primarily from decreased premiums in the
self employed market, which was due to the negative impact on new sales and
recruiting efforts of rate increases implemented starting in 1998.
Life premiums and other considerations. Life premiums and other
considerations decreased to $46.4 million in 1999 from $49.3 million in 1998, a
decrease of $2.9 million, or 6%. This decrease resulted from reduced premiums
and other considerations from closed blocks of life and annuity business.
Investment income. Investment income increased to $85.5 million in 1999
from $74.9 million in 1998, an increase of $10.6 million, or 14%. The increase
was due to increased earnings from the Company's investment in AMLI Realty Co.,
along with an increase in investment yield.
Other interest income. Other interest income increased to $65.1 million in
1999 from $31.6 million in 1998, an increase of $33.5 million. The increase was
due to the additional interest income earned on student loans in 1999.
Other fee income. Other fee income increased to $122.9 million in 1999
from $111.1 million in 1998, an increase of $11.8 million. The increase was due
to the increase in revenue from AMS as a result of increased originations from
higher student loan volume.
Other income. Other income decreased to $3.5 million in 1999 from $37.5
million in 1998, a decrease of $34.0 million. The decrease was primarily
attributable to the disposition of the IPN, LLC and HealthCare Automation
business units that were sold to a related party in July 1998, which units
generated an aggregate of $20.4 million in revenues during 1998. In 1998 the
Company also recognized a $9.7 million gain on sale of the ATM transaction
processing assets of SunTech Processing Systems, LLC (an 80%-owned subsidiary of
the Company).
Loss on sale of investments. The Company recognized losses on sale of
investments of $367,000 in 1999 compared to a gain from sale of investments of
$4.9 million in 1998. The amount of realized gains or losses on the sale of
investments is a function of interest rates, market trends and the timing of
sales. Losses are more likely during periods of increasing long-term interest
rates, as occurred in 1999. In addition, due to increasing long-term interest
rates in 1999, the net unrealized investment loss on securities classified as
"available for sale," reported in accumulated other comprehensive income as a
separate component of stockholders' equity and net of applicable income taxes,
was $30.4 million at December 31, 1999, compared to an unrealized gain of $13.4
million at December 31, 1998.
30
32
Benefits, claims, and settlement expenses. Benefits, claims, and
settlement expenses decreased to $514.6 million in 1999 from $586.0 million in
1998, a decrease of $71.4 million, or 12%. The decrease was primarily due to the
decline in premium sales and a decrease in loss ratio in the SEA Division.
Underwriting, acquisition and insurance expenses. Underwriting,
acquisition and insurance expenses decreased to $243.4 million in 1999 from
$270.9 million in 1998, a decrease of $27.5 million or 10%. The decrease was
primarily due to the decline in new policy sales.
Other expenses. Other expenses increased to $119.3 million in 1999 from
$114.4 million in 1998, an increase of $4.9 million. The increase is primarily
due to the increased costs of AMS's student loan originations, which were offset
by the disposition of IPN, LLC and HealthCare Automation, Inc. units that were
sold in July 1998. In 1998, the Company recognized aggregate operating losses
from IPN, LLC and HealthCare Automation, Inc. in the amount of $10.5 million.
Depreciation and amortization. Depreciation and amortization increased to
$20.1 million in 1999 from $15.9 million in 1998, an increase of $4.2 million.
The increase is primarily due to increased goodwill amortization as a result of
the AMS Investment Group, Inc. acquisition by AMS.
Interest expense. Interest expense on corporate borrowings increased to
$7.4 million in 1999 from $3.1 million in 1998, an increase of $4.3 million. The
increase was due primarily to the increased level of borrowings outstanding
during 1999. Interest expense on student loan obligations increased to $57.5
million in 1999 from $19.2 million in 1998, an increase of $38.3 million. The
increase was due primarily to AMS's increased student loan origination volume.
Operating Income. Income from continuing operations before federal income
taxes ("operating income") increased to $50.9 million in 1999 from $47.3 million
in 1998. Operating income (loss) for each of the Company's segments and
divisions was as follows:
YEAR ENDED
DECEMBER 31,
------------------
1999 1998
-------- -------
(IN THOUSANDS)
Insurance:
Self Employed Agency...................................... $ 50,415 $(4,765)
Student Insurance......................................... 49 6,089
OKC....................................................... 17,405 20,436
Special Risk.............................................. (4,079) 5,805
National Motor Club....................................... 3,200 5,099
-------- -------
66,990 32,664
Financial Services:
AMS....................................................... (19,938) (1,339)
HealthAxis.com, Inc. ..................................... 2,322 3,277
Other Business Units...................................... -- 441
-------- -------
(17,616) 2,379
Other Key Factors........................................... 1,478 12,219
-------- -------
$ 50,852 $47,262
======== =======
Self Employed Agency Division ("SEA"). The SEA Division reported operating
income of $50.4 million in 1999 compared to a loss of $4.8 million in 1998.
Revenue for the SEA Division decreased to $566.8 million for the year ended in
1999 from $610.1 million in 1998, a decrease of 7%. The increase in operating
income was the result of continued success on directing a larger portion of new
sales to traditional indemnity products and the improved loss ratio on the PPO
products. The decrease in revenues was attributable to the negative impact of
rate increases, imposed beginning in 1998, on new sales and recruiting efforts.
31
33
Student Insurance Division. The Student Insurance Division generated near
breakeven operating income in 1999 compared to operating income of $6.1 million
in 1998. The reduced earnings reflect lower margins resulting from increased
loss ratios on the 1998-1999 policy year and a write off of previously
capitalized software and system development costs in the amount of $2.3 million.
Revenue for the Student Insurance Division decreased to $108.0 million in 1999
from $111.0 million in 1998, a decrease of 3%.
OKC Division. Operating income for the OKC Division decreased to $17.4
million in 1999 from $20.4 million in 1998, a decrease of 15%. The decrease in
operating income was due to lower profit margins in the workers compensation
business and the write off of additional deferred acquisition costs due to lower
persistency in the College Fund Life Division. Revenue for the OKC Division
decreased to $94.1 million in 1999 from $98.8 million in 1998, a decrease of 5%.
The decrease in revenue was the result of lower revenues on the closed blocks of
life policies and decreased premium in the workers compensation business.
Special Risk Division. Operating income for the Special Risk Division
decreased to a loss of $(4.1) million in 1999 from a gain of $5.8 million in
1998. The decrease in operating income was due to higher loss ratios on closed
blocks of business and a significant strengthening of reserves in the Division's
marine medical business. Revenue for the Special Risk Division was $59.0 million
in 1999 compared to $66.8 million in 1998, a decrease of 12%. The decrease in
revenue was primarily due to elimination of unprofitable blocks of business and
implementation of rate increases on stop-loss accounts causing customers to
terminate their policies.
National Motor Club. Operating income for the National Motor Club was $3.2
million in 1999 compared to $5.1 million in 1998. The decrease in operating
income was primarily attributable to the write off in 1999 of additional
deferred acquisition costs. Revenue for the twelve months ended December 31,
1999 was $27.8 million compared to $27.3 million for the twelve months ended
December 31, 1998.
Academic Management Services Corp. ("AMS"). AMS incurred an operating loss
of $(19.9) million in 1999 compared to an operating loss of $(1.3) million in
1998 (in each case exclusive of goodwill amortization and operating expenses at
the parent company level). Revenue for AMS increased to $104.6 million in 1999
from $57.2 million in 1998. The increase in revenue in 1999 was attributable to
the increased origination and interest income derived from AMS's higher student
loan volume. The increased loss was attributable primarily to increases in
interest expense from higher borrowings and interest rates and sustained
operating losses at AMS Technologies Inc. and Education Loan Administrators
Group. AMS's tuition installment payment plan unit also incurred an operating
loss in 1999, due to the timing of the acquisition and the recording of revenues
in the tuition installment plan business of AMS, which revenues are recorded
primarily in May through August. The acquisition of the Academic Management
Services tuition installment plan business was completed on July 26, 1999.
HealthAxis.com, Inc. (formerly Insurdata). Insurdata reported operating
income of $2.3 million in 1999 compared to operating income of $3.3 million in
1998. Revenue for Insurdata increased to $46.2 million in 1999 from $41.2
million in 1998, an increase of 12%. Insurdata revenue derived from other
divisions and operating units of the Company were $24.4 million and $21.1
million in 1999 and 1998, respectively. These revenues and costs are eliminated
in consolidating the Company's operations.
Other Business Units. During 1998, this category ceased to exist, with the
Other Business Units sold, closed or reclassified.
Other Key Factors. Other key factors include investment income not
allocated to the other segments, interest expense from corporate borrowings,
general expenses relating to corporate operations, amortization of goodwill,
realized gains or losses on sale of investments and the AMLI operations.
Operating income for other key factors decreased to $1.5 million from $12.2
million in 1998. The decrease is primarily due to an increase in amortization of
goodwill (recorded in connection with AMS's acquisition of Academic Management
Services in July 1999), additional interest expense associated with a higher
level of corporate borrowings outstanding during 1999, general corporate
operations and a decrease in realized gains, which was partially offset by an
increase in investment income on equity not allocated to the other segments. The
amount of
32
34
realized gains or losses on the sale of investments is a function of interest
rates, market trends and the timing of sales. Losses are more likely during
periods of increasing long-term interest rates.
Discontinued Operation -- United CreditServ
United CreditServ generated revenues from interest income, credit card fees
and other fee income in the amount of $227.4 million and $123.2 million in 1999
and 1998, respectively. United CreditServ incurred an operating loss of $145.3
million in 1999 compared to an operating profit of $43.5 million in 1998. The
significant operating loss in 1999 was due primarily to increases in the
reserves for credit card loan losses and the write off of the $35.9 million
purchase price of the UMMG minority interest, both of which were attributable to
the unprofitable performance of its ACE credit card product. The Company
believes that such operating losses were due primarily to inadequate attention
to ACE collections during much of 1999, inefficiencies associated with
administrative and operating systems conversions during a period of significant
increases in card issuance volumes, mis-pricing of the ACE product, and the
failure of the AFCA credit card portfolio performance to be sufficiently
predictive of the performance of the ACE credit card loan portfolio. The Company
has also recorded a pre-tax estimated loss on disposal of United CreditServ in
the amount of $130.0 million. See "Liquidity and Capital Resources".
Quarterly Results
The following table presents the information for each of the Company's
fiscal quarters in 2000 and 1999. This information is unaudited and has been
prepared on the same basis as the audited Consolidated Financial Statements of
the Company included herein and, in management's opinion, reflects all
adjustments necessary for a fair presentation of the information for the periods
presented. The operating results for any quarter are not necessarily indicative
of results for any future period.
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2000 2000 2000 2000
------------ ------------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues from continuing
operations:.................. $248,936 $255,241 $263,195 $283,984
Income (loss) from continuing
operations before federal
income taxes:................ (2,544) 16,486 10,632 38,303
Income (loss) from continuing
operations:.................. (6,094) 9,016 6,420 19,791
Income (loss) from discontinued
operations:.................. -- -- (23,400) --
Net income (loss):............. (6,094) 9,016 (16,980) 19,791
Basic earnings (loss) for
common stockholders per
common share:
Income (loss) from continuing
operations:.................. (0.14) 0.19 0.14 0.43
Income (loss) from discontinued
operations:.................. -- -- (0.50) --
Net income (loss):............. (0.14) 0.19 (0.36) 0.43
Diluted earnings (loss) for
common stockholders per
common share:................
Income from continuing
operations:.................. (0.13) 0.19 0.13 0.42
Income (loss) from discontinued
operations:.................. -- -- (0.49) --
Net income (loss):............. $ (0.13) $ 0.19 $ (0.36) $ 0.42
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1999 1999 1999
------------ ------------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues from continuing
operations:.................. $256,129 $251,393 $251,389 $254,272
Income (loss) from continuing
operations before federal
income taxes:................ (6,017) 21,893 18,554 16,422
Income (loss) from continuing
operations:.................. (4,186) 15,254 10,868 11,314
Income (loss) from discontinued
operations:.................. (120,904) (29,081) (38,713) 9,566
Net income (loss):............. (125,090) (13,827) (27,845) 20,880
Basic earnings (loss) for
common stockholders per
common share:
Income (loss) from continuing
operations:.................. (0.09) 0.33 0.24 0.24
Income (loss) from discontinued
operations:.................. (2.61) (0.63) (0.84) 0.21
Net income (loss):............. (2.70) (0.30) (0.60) 0.45
Diluted earnings (loss) for
common stockholders per
common share:................
Income from continuing
operations:.................. (0.09) 0.32 0.23 0.24
Income (loss) from discontinued
operations:.................. (2.53) (0.61) (0.81) 0.20
Net income (loss):............. $ (2.62) $ (0.29) $ (0.58) $ 0.44
Computation of earnings (loss) per share for each quarter is made
independently of earnings (loss) per share for the year.
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Privacy Initiatives
Recently-adopted legislation and regulations governing the use and security
of individuals' nonpublic personal data by financial institutions, including
insurance companies, may have a significant impact on the Company's business and
future results of operations.
GRAMM-LEACH-BLILEY ACT AND STATE INSURANCE LAWS AND REGULATIONS
The business of insurance is primarily regulated by the states and is also
affected by a range of legislative developments at the state and federal levels.
The recent Financial Services Modernization Act of 1999 (the so-called
Gramm-Leach-Bliley Act, or "GLBA") includes several privacy provisions and
introduces new controls over the transfer and use of individuals' nonpublic
personal data by financial institutions, including insurance companies,
insurance agents and brokers and certain other entities licensed by state
insurance regulatory authorities. Additional federal legislation aimed at
protecting the privacy of nonpublic personal financial and health information is
proposed and over 400 state privacy bills are pending. The privacy rules under
GLBA became effective in November 2000, but compliance with the rules has been
deferred and is optional until July 1, 2001. By July 1, 2001 the Company is
required to provide written notice of its privacy practices to all of the
Company's customers/insureds, the Company must give customers/insureds an
opportunity to state their preferences regarding the Company's use of their
non-public personal information, and the Company must honor those preferences.
GLBA provides that there is no federal preemption of a state's insurance
related privacy laws if the state law is more stringent than the privacy rules
imposed under GLBA. Accordingly, state insurance regulators or state
legislatures will likely adopt rules that will limit the ability of insurance
companies, insurance agents and brokers and certain other entities licensed by
state insurance regulatory authorities to disclose and use non-public
information about consumers to third parties. These limitations will require the
disclosure by these entities of their privacy policies to consumers and, in some
circumstances, will allow consumers to prevent the disclosure or use of certain
personal information to an unaffiliated third party. Pursuant to the authority
granted under GLBA to state insurance regulatory authorities to regulate the
privacy of nonpublic personal information provided to consumers and customers of
insurance companies, insurance agents and brokers and certain other entities
licensed by state insurance regulatory authorities, the National Association of
Insurance Commissioners has recently promulgated a new model regulation called
Privacy of Consumer Financial and Health Information Regulation. Some states are
expected to issue this model regulation before July 1, 2001, while other states
must pass certain legislative reforms to implement new state privacy rules
pursuant to GLBA. In addition, GLBA requires state insurance regulators to
establish standards for administrative, technical and physical safeguards
pertaining to customer records and information to (a) ensure their security and
confidentiality, (b) protect against anticipated threats and hazards to their
security and integrity, and (c) protect against unauthorized access to and use
of these records and information. However, no state insurance regulators have
yet issued any final regulations in response to such security and
confidentiality requirements. The privacy and security provisions of GLBA will
significantly affect how a consumer's nonpublic personal information is
transmitted through and used by diversified financial services companies and
conveyed to and used by outside vendors and other unaffiliated third parties.
Due to the increasing popularity of the Internet, laws and regulations may
be passed dealing with issues such as user privacy, pricing, content and quality
of products and services, and those regulations could adversely affect the
growth of the online financial services industry. If Internet use does not grow
as a result of privacy or security concerns, increasing regulation or for other
reasons, the growth of UICI's Internet-based business would be hindered. It is
not possible at this time to assess the impact of the privacy provisions on
UICI's financial condition or results of operations.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
The federal Health Insurance Portability and Accountability Act of 1996
("HIPAA") contains provisions requiring mandatory standardization of certain
communications between health plans (including health insurance companies),
electronic clearinghouses and health care providers who transmit certain health
34
36
information electronically. HIPAA requires health plans to use specific
data-content standards, mandates the use of specific identifiers (e.g., national
provider identifiers and national employer identifiers) and requires specific
privacy and security procedures. HIPAA authorized the Secretary of the federal
Department of Health and Human Services ("HHS") to issue standards for the
privacy and security of medical records and other individually identifiable
patient data.
In December 2000, HHS issued final regulations regarding the privacy of
individually-identifiable health information. This final rule on privacy applies
to both electronic and paper records and imposes extensive requirements on the
way in which health care providers, health plan sponsors, health insurance
companies and their business associates use and disclose protected information.
Under the new HIPAA privacy rules, the Company will now be required to (a)
comply with a variety of requirements concerning its use and disclosure of
individuals' protected health information, (b) establish rigorous internal
procedures to protect health information and (c) enter into business associate
contracts with other companies that use similar privacy protection procedures.
The final rules do not provide for complete federal preemption of state laws,
but, rather, preempt all contrary state laws unless the state law is more
stringent. These rules must be complied with by April 14, 2003.
Sanctions for failing to comply with standards issued pursuant to HIPAA
include criminal penalties of up to $250,000 per violation and civil sanctions
of up to $25,000 per violation. Due to the complex and controversial nature of
the privacy regulations, they may be subject to court challenge, as well as
further legislative and regulatory actions that could alter their effect.
In August 2000, HHS published for comment proposed rules related to the
security of electronic health data, including individual health information and
medical records, for health plans, health care providers, and health care
clearinghouses that maintain or transmit health information electronically. The
proposed rules would require these businesses to establish and maintain
responsible and appropriate safeguards to ensure the integrity and
confidentiality of this information. The standards embraced by these rules
include the implementation of technical and organization policies, practices and
procedures for security and confidentiality of health information and protecting
its integrity, education and training programs, authentication of individuals
who access this information, system controls, physical security and disaster
recovery systems, protection of external communications and use of electronic
signatures. These proposed rules have not yet become final.
UICI is currently reviewing the potential impact of the HIPAA privacy
regulations on its operations, including its information technology and security
systems. The Company cannot at this time predict with specificity what impact
(a) the recently adopted final HIPAA rules governing the privacy of
individually-identifiable health information and (b) the proposed HIPAA rules
for ensuring the security of individually-identifiable health information may
have on the business or results of operations of the Company. However, these new
rules will likely increase the Company's burden of regulatory compliance with
respect to our life and health insurance products and other information-based
products, and may reduce the amount of information the Company may disclose and
use if the Company's customers do not consent to such disclosure and use. There
can be no assurance that the restrictions and duties imposed by the recently
adopted final rules on the privacy of individually-identifiable health
information, or the proposed rule on security of individually-identifiable
health information, will not have a material adverse effect on UICI's business
and future results of operations.
Income Taxes
The Company's effective tax rate from continuing operations was 53.7% for
2000 compared to 34.6% for 1999 and 33.3% for 1998. The 1999 and 1998 effective
rate varied from the federal tax rate of 35%, primarily due to the small life
insurance company deduction allowed for certain insurance subsidiaries of the
Company, the effect of certain tax credits and the change in the valuation
allowance related to deferred tax assets. The 2000 effective tax rate varied
from the federal tax rate of 35%, primarily due to the significant operating
loss at AMS, from which the Company was not able to recognize any tax benefit.
AMS is not part of the Company's consolidated group for tax purposes and, as a
result, files a separate tax return. As of December 31, 2000, the
35
37
Company has recognized a net deferred tax asset of $32.9 million. Realization of
the net deferred tax asset is dependent on generating sufficient taxable income.
Although realization is not assured, management believes it is more likely than
not that the net deferred tax asset will be realized based on anticipated
profits and available tax planning strategies. See Note K of Notes to
Consolidated Financial Statements.
Liquidity and Capital Resources
GENERAL
Historically, the Company's primary sources of cash have been premium
revenues from policies issued, investment income, fees and other income,
deposits to fund the credit card receivables, and borrowings to fund student
loans. The primary uses of cash have been payments for benefits, claims and
commissions under those policies, operating expenses and the funding of credit
card receivables and student loans. Net cash used in operations totaled $22.7
million in 2000 and $58.3 million in 1999. Net cash provided by operations
totaled $140.5 million in 1998. The Company's insurance subsidiaries invest a
substantial portion of these funds, pending payment of the subsidiaries' pro
rata share of future benefits and claims.
UICI is a holding company, the principal assets of which are its
investments in its separate operating subsidiaries, including its regulated
insurance subsidiaries. The holding company's ability to fund its cash
requirements is largely dependent upon its ability to access cash, by means of
dividends or other means, from its subsidiaries. The laws governing the
Company's insurance subsidiaries restrict dividends paid by the Company's
domestic insurance subsidiaries in any year. Inability to access cash from its
subsidiaries could have a material adverse effect upon the Company's liquidity
and capital resources.
During the year ended December 31, 2000, the losses at United CreditServ
had a material adverse effect upon the liquidity and cash flow of the Company.
During 2000, UICI contributed to United CreditServ an aggregate of $171.3
million in cash. In addition, on June 28, 2000, the Company funded an $8.0
million principal prepayment owing on its bank credit facility, on June 1, 2000
the Company made a mandatory principal payment on its senior notes outstanding
in the amount of $4.0 million, and effective July 27, 2000 the Company prepaid
$6.0 million owing to an affiliated lender (see Note M to Notes to Consolidated
Financial Statements). UICI at the holding company level funded these cash
contributions and other cash needs with the proceeds of the sale of investment
securities, a borrowing from a third party in the amount of $24.0 million funded
in July 2000, approved sales of assets from the parent company to the Company's
regulated insurance company subsidiaries completed in June and July 2000
generating cash proceeds in the aggregate amount of approximately $26.2 million,
dividends in the amount of $19.0 million paid during the six months ended June
30, 2000 from CLICO, the sale to The MEGA Life and Health Insurance Company of
CLICO for $19.0 million in July 2000, cash proceeds in the amount of $21.8
million from the disposition of its National Motor Club unit completed in July
2000, and cash on hand.
The Company believes that its exit from the credit card business is now
substantially complete. On January 29, 2001, the Company completed the voluntary
liquidation of UCNB, in accordance with the terms of a plan of voluntary
liquidation approved by the OCC. See Note B to Notes to Consolidated Financial
Statements. UCNB surrendered to the OCC its national bank charter and
distributed to a wholly-owned subsidiary of UICI the residual assets of the Bank
in the amount of approximately $26.0 million, substantially all of which
consisted of cash and cash equivalents. The Company utilized a substantial
portion of the proceeds of the liquidation to prepay indebtedness owing to
Lender LLC (see "2000 Debt Restructuring" below) in the amount of $21.1 million
and other indebtedness in the amount of $5.0 million. Giving effect to the
liquidation of UCNB and to the prepayment of such indebtedness, at March 16,
2001, UICI at the parent company level held cash and cash equivalents in the
amount of $21.5 million and had short and long term indebtedness outstanding in
the amount of $35.8 million.
UICI currently estimates that, through December 31, 2001, the holding
company will have operating cash requirements in the amount of approximately
$85.3 million. The Company currently anticipates that these cash requirements at
the holding company level will be funded by cash on hand, cash received from
interest income, anticipated tax refunds, dividends from domestic and offshore
insurance companies and tax
36
38
sharing reimbursements from subsidiaries (which will be partially offset by
holding company operating expenses).
Prior approval by insurance regulatory authorities is required for the
payment of dividends by a domestic insurance company that exceed certain
statutory limitations based on surplus and net income. At December 31, 2000, the
domestic insurance companies could pay aggregate dividends to the parent company
of approximately $47.4 million without prior approval by statutory authorities.
There can be no assurance that the cash requirements at the holding company
level will not exceed current estimates, or that the holding company will be
able to raise sufficient cash to fund cash requirements on a timely basis.
2000 Debt Restructuring
At December 31, 2000 and 1999, the Company (excluding indebtedness of
Academic Management Services Corp.) had outstanding long and short term
indebtedness in the amount of $66.8 million and $120.6 million, respectively.
Giving effect to the prepayment of indebtedness with the proceeds of the January
2001 liquidation of UCNB, at March 5, 2001 the Company (excluding indebtedness
of Academic Management Services Corp.) had short and long term indebtedness
outstanding in the amount of $35.8 million.
In May 1999, the Company entered into a $100.0 million unsecured credit
facility (the "Bank Credit Facility") with a group of commercial banks. Amounts
outstanding under the Bank Credit Facility initially bore interest at an annual
rate of LIBOR plus 75 basis points (0.75%). At December 31, 1999, the Company
had fully drawn on the Bank Credit Facility, of which $50.0 million was used to
repay $50.0 million of debt outstanding under the Company's prior bank facility
and $50.0 million was used to fund the UMMG and AMS acquisitions (completed in
May 1999 and July 1999, respectively) and current operations. Effective December
31, 1999, the interest rate on amounts outstanding under the Bank Credit
Facility was increased to LIBOR plus 100 basis points (1.00%).
On March 14, 2000, a limited liability company controlled by the Company's
Chairman ("Lender LLC") loaned $70.0 million to a newly-formed subsidiary of the
Company (the "Lender LLC Loan"). The proceeds of the Lender LLC Loan, together
with $5.0 million of cash on hand, were used to reduce indebtedness outstanding
under the Bank Credit Facility from $100.0 million to $25.0 million. The Lender
LLC Loan bore interest at the prevailing prime rate, was guaranteed by UICI, was
due and payable in July 2001 and was secured by a pledge of investment
securities and shares of the Company's National Motor Club unit.
In connection with the March 2000 paydown of indebtedness outstanding under
the Bank Credit Facility, the Bank Credit Facility was amended to provide, among
other things, that the $25.0 million balance outstanding would be due and
payable on July 10, 2000, amounts outstanding under the facility would be
secured by a pledge of investment securities and shares of Mid-West National
Life Insurance Company of Tennessee ("Mid-West"), and the restrictive covenants
formerly applicable to UICI and its restricted subsidiaries (primarily the
Company's insurance companies) were made applicable solely to Mid-West. Amounts
outstanding under the Bank Credit Facility continued to bear interest at LIBOR
plus 100 basis points per annum. On April 11, 2000 and June 28, 2000, the
Company made principal payments of $11.0 million and $8.0 million, respectively,
under the Bank Credit Facility, and on June 30, 2000, Lender LLC, against
payment to the banks of $6.0 million, assumed 100% of the banks' remaining $6.0
million position in the Bank Credit Facility.
Effective July 27, 2000, the Company and Lender LLC completed a
restructuring of the terms of the Lender LLC Loan. As part of the restructuring,
the Company paid to Lender LLC principal owing on the Lender LLC Loan in the
amount of $6.0 million and amended the terms of the Lender LLC Loan to provide
that the aggregate principal amount of $70.0 million then owing by the Company
would consist of a $32.0 million unsecured tranche and a $38.0 million tranche
secured by a pledge of 100% of the capital stock of Mid-West (the "Amended
Lender LLC Loan"). The Amended Lender LLC Loan (a) matured on January 1, 2002,
(b) continued to bear interest at the prevailing prime rate from time to time,
with interest
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39
accruing but not payable until the earlier to occur of full prepayment of the
Lender LLC Loan or January 1, 2002, and (c) was mandatorily prepayable monthly
to the extent of 1% of the original outstanding principal balance of the Amended
Lender LLC Loan. The security interest in all remaining collateral previously
pledged to secure payment of the Lender LLC Loan and indebtedness outstanding
under the bank credit facility (including all investment securities and shares
of the Company's National Motor Club unit) was released in full.
In addition to scheduled principal payments totaling $3.5 million made
during the course of 2000, on October 20, 2000, the Company prepaid the
unsecured tranche of the Amended Lender LLC Loan in the amount of $12.5 million.
In addition, on November 2, 2000, the Company prepaid an additional $17.4
million of the unsecured tranche and $17.6 million of the secured tranche.
Accordingly, at December 31, 2000, the Company had no indebtedness outstanding
under the unsecured tranche and $19.0 million outstanding under the secured
tranche of the Amended Lender LLC Loan.
On January 30, 2001, the Company prepaid in full principal and accrued
interest on the secured tranche of the Amended Lender LLC Loan in the amount of
$21.1 million, utilizing a portion of the proceeds received in liquidation of
UCNB, and Lender LLC's security interest in 100% of the capital stock of
Mid-West was released in full.
Additional 2000 Indebtedness
On July 19, 2000, the Company's offshore-domiciled insurance companies
incurred indebtedness with an institutional lender in the amount of $24.0
million. The indebtedness bears interest at the per annum rate of 11.0%, matures
on August 1, 2001, is secured by a pledge of all of the assets of the offshore
companies, and is guaranteed by the Company. The proceeds of the borrowing were
advanced to the parent company to fulfill liquidity needs at the parent company.
At December 31, 2000, the outstanding balance on the loan was $18.0 million, and
at March 5, 2001, the outstanding balance on the loan was $6.0 million.
Effective June 29, 2000, UICI executed and delivered an unsecured
promissory note payable to a systems vendor in the amount of $10.0 million,
which note bears interest at LIBOR plus 150 basis points (1.5%) (7.9% at
December 31, 2000), and is payable as to principal in equal quarterly
installments in the amount of $500,000, commencing October 1, 2000, with a final
maturity of June 30, 2005. The note was delivered to discharge an account
payable by UCS in the amount of $10.0 million owing to the systems vendor.
Effective October 1, 2000, the Company's AMS subsidiary amended the terms
of its unsecured term loan facility (under which, at December 31, 2000, $21.3
million of indebtedness was outstanding) to eliminate all financial covenants.
In connection with the amendment of the facility, the Company agreed to
unconditionally guarantee the payment when due of such indebtedness. Since
December 31, 2000, AMS has made one additional quarterly payment of $2.5 million
and has one additional quarterly payment of $2.5 million due, with the $16.3
million balance due June 30, 2001.
UNITED CREDITSERV
At December 31, 1999, UCNB held unsecuritized net credit card receivables
in the amount of $190.7 million, and had outstanding time deposits in the amount
of $290.0 million. On September 29, 2000, the Company completed the sale of
substantially all of the non-cash assets associated with its United CreditServ
credit card unit, including its credit card receivables portfolios and its Sioux
Falls, South Dakota servicing operations, for a cash sales price of
approximately $124.0 million. Following the sale of the Company's United
CreditServ unit, UCNB prepaid all of its remaining certificates of deposit
then-outstanding in the amount of approximately $79.0 million, and all such
deposit liabilities were discharged as of October 23, 2000. Following the
prepayment of all deposit liabilities of UCNB, at December 31, 2000 UCNB held
cash, cash equivalents and U.S. Treasury securities in the amount of $26.0
million.
The Company securitized $60.0 million, $30.0 million and $29.0 million of
credit card receivables in 1998, 1997 and 1996, respectively. The Company did
not securitize any credit card receivables in 2000 or 1999. The Company
purchased participating interests in such securitizations in the aggregate
principal amount
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40
of $6.0 million, $3.0 million and $2.9 million in 1998, 1997 and 1996,
respectively. On December 31, 1999, the Company sold for cash at par $10.0
million principal amount of such participating interests to Ronald L. Jensen
(the Company's Chairman). See Note M of Notes to Consolidated Financial
Statements. All of such securitizations were prepaid utilizing a portion of the
cash proceeds of the sale of the non-cash assets of the Company's United
CreditServ credit card unit completed in September 2000.
A liquidity and capital assurances agreement, dated May 15, 1998, between
UICI and UCNB provided that, upon demand by UCNB, UICI would purchase
certificates of deposit issued by UCNB to assure sufficient liquidity to meet
UCNB's funding demands and would contribute capital to UCNB sufficient for UCNB
to comply with its stated policy of maintaining a total (Tier I and Tier II)
risk-based capital ratio of at least 12%. In connection with the liquidation of
UCNB completed in January 2001, the OCC formally acknowledged the termination by
UICI of the liquidity and capital assurances agreement.
ACADEMIC MANAGEMENT SERVICES CORP.
AMS's student loan portfolio decreased from $1.307 billion at December 31,
1999 to $1.126 billion at December 31, 2000. However, the time-weighted average
carrying amount of student loans held by AMS during 2000 exceeded the
time-weighted average carrying amount of student loans held by AMS during 1999.
In March 1998, AMS entered into a master repurchase agreement and credit
facility with a financial institution, the obligations under which are partially
(approximately $13.0 million at December 31, 2000) guaranteed by the Company.
The repurchase agreement provides for the purchase of student loans by the
financial institution, and the financial institution may put the student loans
back to AMS on the last day of each month. AMS, in turn, has the right to
require the financial institution to repurchase the student loans on such date,
with the interest rate on the credit facility reset on such date. The credit
facility provides for up to $150.0 million of financing and may be increased
subject to monthly confirmations. The credit facility had an outstanding balance
of $113.4 million and $318.8 million at December 31, 2000 and 1999,
respectively, and bears interest at a variable annual rate of LIBOR plus 75
basis points (7.4% at December 31, 2000). The credit facility has a term of one
year and is secured by student loans originated under the Federal Family
Education Loan Program ("FFELP"), which are guaranteed by the federal government
or alternative loans guaranteed by private guarantors. The financial institution
may value the loans at any time and require AMS to repay any amount by which the
market value of the loans is less than the amount required by the credit
facility.
On June 11, 1999, an AMS special purpose financing subsidiary sold, in a
private placement transaction, $319.5 million principal amount of Auction Rate
Student Loan-Backed Notes at an initial interest rate of 5.038%. The notes were
sold in two tranches (Class A-1 and Class A-2) and mature in November 2022. At
December 31, 2000, the outstanding balance on the notes was $290.0 million
bearing interest at a weighted annual composite rate of 6.922%. The notes
received a "AAA" credit rating from Standard & Poor's and Fitch IBCA and an
"Aaa" rating from Moody's Investor Services. The outstanding balance of the
Notes at December 31, 2000 and 1999 was $290.0 million and $317.8 million,
respectively.
Effective August 6, 1999 AMS completed a closing and funding of $515.0
million of its $650.0 million single seller asset-backed commercial paper
conduit, pursuant to which commercial paper may be issued from time to time with
maturities from one to 270 days. Approximately $618.4 million of commercial
paper bearing interest at a weighted annual composite rate of 6.659% was issued
and outstanding under the facility at December 31, 2000. Liquidity support is
provided by a separate banking facility. Under the terms of the program, should
the support facility be activated, such borrowings thereunder would be repaid
using collections of underlying student loans, bear interest at LIBOR plus
seventy-five (75) basis points and mature in August 2034. The commercial paper
received ratings of A1/P1/F1 from Standard & Poor's, Moody's, and Fitch,
respectively.
On October 7, 1999 AMS completed a $344.0 million financing of three
classes of notes. The $229.0 million Class A-1 notes were structured as
three-month LIBOR floating rate notes and were priced with a spread of 42 basis
points with the interest rate to be reset quarterly. The Class A-1 notes with an
outstanding balance of $198.1 million at December 31, 2000, have an expected
average life of 3.5 years with
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41
legal final maturity in April 2009. The $57.5 million Class A-2 and $57.5
million Class A-3 notes were structured as auction rate notes with an initial
interest rate of 6.38%. The interest rate on these notes is reset quarterly
pursuant to auctions conducted by Lehman Brothers and BancAmerica Securities.
Legal final maturity of the A-2 and A-3 notes is July 2027. Lehman Brothers and
BancAmerica Securities were the initial purchasers of all three classes of
notes. At December 31, 2000, the outstanding balance of the notes was $313.1
million bearing interest at a weighted annual composite rate of 7.0%. All three
classes of notes received AAA/Aaa/AAA ratings from Standard & Poor's, Moody's
and Fitch IBCA respectively.
In connection with its AMS tuition installment payment plan business, at
December 31, 2000 and 1999, the Company had $111.8 million and $113.1 million of
restricted cash, respectively, representing amounts collected under the tuition
plan program and a corresponding liability due to the various educational
institutions.
Other Matters
On July 27, 2000, the Company sold to an investor group consisting of
Jensen family members (including Mr. Jensen) (the "NMC Buyer") its 97% interest
in NMC Holdings, Inc. ("NMC"), the parent company of its National Motor Club of
America unit, for a purchase price of $56.8 million, representing 97% of the
value of NMC as determined by independent appraisal. The purchase price was paid
at closing in cash in the amount of $21.8 million and by delivery of a
promissory note (the "NMC Note") issued by the NMC Buyer in the principal amount
of $35.0 million. The NMC Note was an unsecured, full recourse obligation of the
NMC Buyer and was unconditionally guaranteed by Mr. Jensen. The NMC Note bore
interest at the per annum rate of prime fluctuating from time to time, and was
initially payable in three equal installments of principal in the amount of
$11.7 million due on each of October 1, November 1 and December 1, 2000,
respectively. Effective October 1, 2000, the NMC Note was amended to provide for
three equal installments of principal in the amount of $11.7 million due on each
of November 1 and December 1, 2000 and January 1, 2001, respectively. In
accordance with the terms of the June Consent Orders, the Company pledged the
NMC Note to UCNB to secure, in part, the Company's obligations under UCNB's
Capital Plan. On October 31, 2000, the OCC consented to the release by UCNB of
its security interest in the NMC Note. On November 2, 2000, the NMC Buyer
prepaid the NMC Note in its entirety.
Effective July 31, 2000, UCS sold all of its outstanding shares of UMMG for
a purchase price in the amount of $25,000 in cash, with an additional amount of
up to $2.0 million payable over the next five years, contingent upon the
performance of the business. The purchaser is an entity controlled by the former
President of UMMG. UMMG is a Lakewood, Colorado-based provider of marketing,
administrative and support services for the Company's credit card programs. In
addition, on July 31, 2000, UICI signed a credit agreement with the purchaser,
pursuant to which it has agreed to lend to the purchaser up to $1.0 million on a
revolving basis. As of December 31, 2000, the Company had advanced to UMMG $1.0
million under the credit agreement.
The state of domicile of each of the Company's domestic insurance
subsidiaries imposes minimum risk-based capital requirements that were developed
by the NAIC. The formulas for determining the amount of risk-based capital
specify various weighting factors that are applied to financial balances and
premium levels based on the perceived degree of risk. Regulatory compliance is
determined by a ratio of a company's regulatory total adjusted capital, as
defined, to its authorized control level risk-based capital, as defined.
Companies' specific trigger points or ratios are classified within certain
levels, each of which requires specified corrective action. At December 31,
2000, the risk-based capital ratio of each of the Company's domestic insurance
subsidiaries significantly exceeded the ratios for which regulatory corrective
action would be required.
Dividends paid by domestic insurance companies out of earned surplus in any
year are limited by the law of the state of domicile. See Item 5 -- Market for
Registrant's Common Stock and Related Stockholder Matters and Note L to Notes to
the Consolidated Financial Statements.
40
42
Investments
General. The Company has an Investment Committee that monitors the
investment portfolio of the Company and its subsidiaries. The Investment
Committee receives investment management services from external professionals.
Investments are selected based upon the parameters established in the
Company's investment policies. Emphasis is given to the selection of high
quality, liquid securities that provide current investment returns. Maturities
or liquidity characteristics of the securities are managed by continually
structuring the duration of the investment portfolio to be consistent with the
duration of the policy liabilities. Consistent with regulatory requirements and
internal guidelines, the Company invests in a range of assets, but limits its
investments in certain classes of assets, and limits its exposure to certain
industries and to single issuers.
Set forth below is a summary of the Company's investments by category at
December 31, 2000 and 1999:
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------------- -----------------------
% OF TOTAL % OF TOTAL
CARRYING CARRYING CARRYING CARRYING
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Securities available for sale --
Fixed maturities, at fair value (cost:
2000 -- $827,905;
1999 -- $904,662)................ $ 814,433 76.3% $ 861,337 82.9%
Equity securities, at fair value
(cost:
2000 -- $18,926;
1999 -- $25,951)................. 16,916 1.6 23,079 2.2
Mortgage and collateral loans........... 5,368 0.5 6,324 0.6
Policy loans............................ 20,171 1.9 20,444 2.0
Investment in HealthAxis.com............ 18,442 1.7 -- --
Investment in other equity investees.... 43,196 4.0 47,696 4.6
Short-term investments.................. 149,525 14.0 79,608 7.7
---------- ----- ---------- -----
Total investments............. $1,068,051 100.0% $1,038,488 100.0%
========== ===== ========== =====
Investment accounting policies. The Company has classified its entire
fixed maturity portfolio as "available for sale." This classification requires
the portfolio to be carried at fair value with the resulting unrealized gains or
losses, net of applicable income taxes, reported in accumulated other
comprehensive income as a separate component of stockholders' equity. As a
result, fluctuations in interest rates will result in increases or decreases to
the Company's stockholders' equity.
Fixed maturity securities. Fixed maturity securities accounted for 76.3%
and 82.9% of the Company's total investments at December 31, 2000 and 1999,
respectively. Fixed maturity securities at December 31, 2000 consisted of the
following:
DECEMBER 31, 2000
---------------------
% OF TOTAL
CARRYING CARRYING
VALUE VALUE
-------- ----------
(IN THOUSANDS)
U.S. Treasury and U.S. Government agency obligations........ $ 63,772 7.8%
Corporate bonds............................................. 532,090 65.4
Mortgage-backed securities issued by U.S. Government
agencies and authorities.................................. 70,975 8.7
Other mortgage and asset backed securities.................. 147,596 18.1
-------- -----
$814,433 100.0%
======== =====
Included in the fixed maturity portfolio is a concentration of
mortgage-backed securities such as collateralized mortgage obligations and
mortgage-backed pass-throughs. To limit its credit risk, the Company
41
43
invests in mortgage-backed securities that are rated investment grade by the
public rating agencies. The Company's mortgage-backed securities portfolio is a
conservatively structured portfolio that is concentrated in the less volatile
tranches, in the form of planned amortization classes, sequential payment and
commercial mortgage-backed securities. The Company's objectives are to minimize
prepayment risk during periods of declining interest rates and minimize duration
extension risk during periods of rising interest rates. The Company has less
than 1% of its investment portfolio invested in the more volatile tranches.
As of December 31, 2000 and 1999, $779.4 million (or 96%) and $826.6
million (or 96%), respectively, of the fixed maturity securities portfolio was
rated BBB or better (investment grade) and $35.0 million (or 4%) and $35.0
million (or 4%), respectively, of the fixed maturity securities portfolio was
invested in below investment grade securities (rated less than BBB). A quality
distribution for fixed maturity securities at December 31, 2000 is set forth
below:
DECEMBER 31, 2000
---------------------
% OF TOTAL
CARRYING CARRYING
RATING VALUE VALUE
------ -------- ----------
(IN THOUSANDS)
U.S. Governments and AAA.................................... $220,686 27.1%
AA.......................................................... 91,134 11.2
A........................................................... 277,500 34.1
BBB......................................................... 190,068 23.3
Less than BBB............................................... 35,045 4.3
-------- -----
$814,433 100.0%
======== =====
Inflation
Inflation historically has had a significant impact on the health insurance
business. In recent years, inflation in the costs of medical care covered by
such insurance has exceeded the general rate of inflation. Under basic hospital
medical insurance coverage, established ceilings for covered expenses limit the
impact of inflation on the amount of claims paid. Under catastrophic hospital
expense plans and preferred provider contracts, covered expenses are generally
limited only by a maximum lifetime benefit and a maximum lifetime benefit per
accident or sickness. Thus, inflation may have a significantly greater impact on
the amount of claims paid under catastrophic hospital expense and preferred
provider plans as compared to claims under basic hospital medical coverage. As a
result, trends in health care costs must be monitored and rates adjusted
accordingly. Under the health insurance policies issued in the self-employed
market, the primary insurer generally has the right to increase rates upon 30-60
days written notice and subject to regulatory approval in some cases.
The annuity and universal life-type policies issued directly and assumed by
the Company are significantly impacted by inflation. Interest rates affect the
amount of interest that existing policyholders expect to have credited to their
policies. However, the Company believes that the annuity and universal life-type
policies are generally competitive with those offered by other insurance
companies of similar size, and the investment portfolio is managed to minimize
the effects of inflation.
Recently Issued Accounting Pronouncements
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation". Interpretation No. 44
provides guidance on twenty practice issues regarding the application of APB
Opinion No. 25, Accounting for Stock Issued to Employees. The FASB focused on
interpreting rather than completely overhauling APB 25's intrinsic value
framework. The Interpretation is effective July 1, 2000, and is to be applied
prospectively to all new awards, modifications to outstanding awards, and
changes in employee status after that date, with certain exceptions. Because the
FASB decided that the Interpretation should be applied prospectively from July
1, 2000 except for certain events, no
42
44
adjustments were made to the financial statements for periods prior to July 1,
2000, upon the initial application of the Interpretation. The Company has
implemented this guidance.
In September 2000, the FASB issued Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
replacing Statement No. 125. Statement No. 140 changes certain provisions of
Statement No. 125 and could have a significant impact on commercial companies
that engage in securitization transactions. The Statement is effective for
transfers occurring after March 31, 2001. However, the expanded disclosures
about securitizations and collateral are effective for fiscal years ending after
December 15, 2000.
In June 2000, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 2000. Because of the
Company's minimal use of derivatives, the adoption of the new Statement will not
have a significant effect on earnings or the financial position of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates, and
other relevant market rate or price changes. Market risk is directly influenced
by the volatility and liquidity in the markets in which the related underlying
assets are traded.
The primary market risk to the Company's investment portfolio is interest
rate risk associated with investments and the amount of interest that
policyholders expect to have credited to their policies. The interest rate risk
taken in the investment portfolio is managed relative to the duration of the
liabilities. The Company's investment portfolio consists mainly of high quality,
liquid securities that provide current investment returns. The Company believes
that the annuity and universal life-type policies are generally competitive with
those offered by other insurance companies of similar size. The Company does not
anticipate significant changes in the primary market risk exposures or in how
those exposures are managed in the future reporting periods based upon what is
known or expected to be in effect in future reporting periods.
Profitability of the student loans is affected by the spreads between the
interest yield on the student loans and the cost of the funds borrowed under the
various credit facilities. Although the interest rates on the student loans and
the interest rate on the credit facilities are variable, the gross interest
earned by lenders on Stafford student loans uses the results of 91-day T-bill
auctions as the base rate, while the base rate on the credit facilities is
LIBOR. The effect of rising interest rates on earnings on Stafford loans is
generally small, as both revenues and costs adjust to new market levels. In
addition to Stafford loans, the Company holds PLUS loans on which the interest
rate yield is set annually beginning July 1 through June 30 by regulation at a
fixed rate. The Company had approximately $272.9 million principal amount of
PLUS loans outstanding at December 31, 2000. The fixed yield on PLUS loans was
7.72% for the twelve months ended June 30, 2000 and was reset to 8.99% for the
twelve months beginning July 1, 2000. These loans are financed with borrowings
whose rates are subject to reset, generally monthly. During the twelve months
beginning July 1, 2000, the cost of borrowings to finance this portion of the
student loan portfolio could rise or fall while the rate earned on the student
loans will remain fixed.
Sensitivity analysis is defined as the measurement of potential loss in
future earnings, fair values or cash flows of market sensitive instruments
resulting from one or more selected hypothetical changes in interest rates and
other market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. "Near
term" is defined as a period of time going forward up to one year from the date
of the consolidated financial statements.
In this sensitivity analysis model, the Company uses fair values to measure
its potential loss. The primary market risk to the Company's market sensitive
instruments is interest rate risk. The sensitivity analysis model uses a 100
basis point change in interest rates to measure the hypothetical change in fair
value of financial instruments included in the model. For invested assets,
duration modeling is used to calculate changes in fair values. Duration on
invested assets is adjusted to call, put and interest rate reset features.
43
45
The sensitivity analysis model produces a loss in fair value of market
sensitive instruments of $31.6 million based on a 100 basis point increase in
interest rates as of December 31, 2000. This loss value only reflects the impact
of an interest rate increase on the fair value of the Company's financial
instruments.
The Company has not used derivative financial instruments in managing its
market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements of the Company and other
information required by this Item 8 are included in this Form 10-K beginning on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the Company's Proxy Statement to be filed in connection with the 2001
Annual Meeting of Shareholders, of which the section entitled "Election of
Directors" is incorporated herein by reference.
For information on executive officers of the Company, reference is made to
the item entitled "Executive Officers of the Company" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
See the Company's Proxy Statement to be filed in connection with the 2001
Annual Meeting of Stockholders, of which the subsection entitled "Executive
Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the Company's Proxy Statement to be filed in connection with the 2001
Annual Meeting of Stockholders, of which the subsection entitled "Nominees" and
the subsection entitled "Beneficial Ownership of Common Stock" are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the Company's Proxy Statement to be filed in connection with the 2001
Annual Meeting of Stockholders, of which the subsection entitled "Certain
Relationships and Related Transactions" is incorporated herein by reference.
44
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
The following consolidated financial statements of UICI and subsidiaries
are included in Item 8:
PAGE
----
Independent Auditors' Report on Financial Statements and
Financial Statement Schedules............................. F-2
Consolidated Balance Sheets -- December 31, 2000 and 1999... F-3
Consolidated Statements of Operations -- Years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 2000, 1999 and 1998.................... F-5
Consolidated Statements of Cash Flows -- Years ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Financial Statement Schedules
Schedule II -- Condensed Financial Information of Registrant
December 31, 2000, 1999 and 1998:
UICI (Parent Company)....................................... F-72
Schedule III -- Supplementary Insurance Information...................... F-75
Schedule IV -- Reinsurance.............................................. F-77
Schedule V -- Valuation and Qualifying Accounts........................ F-78
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and therefore have
been omitted.
(a) Exhibits
The response to this portion of Item 14 is submitted as a separate section
of this report. See attached exhibit index.
(b) Reports on Form 8-K
None.
45
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UICI
By /s/ GREGORY T. MUTZ*
-----------------------------------
Gregory T. Mutz,
President and Chief Executive
Officer
Date: March 15, 2001
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RONALD L. JENSEN* Chairman of the Board and March 15, 2001
----------------------------------------------------- Director
Ronald L. Jensen
/s/ GREGORY T. MUTZ* President, Chief Executive March 15, 2001
----------------------------------------------------- Officer, and Director
Gregory T. Mutz
/s/ MATTHEW R. CASSELL Vice President and Chief March 15, 2001
----------------------------------------------------- Financial Officer
Matthew R. Cassell
/s/ STUART D. BILTON* Director March 15, 2001
-----------------------------------------------------
Stuart D. Bilton
/s/ GEORGE H. LANE, III* Director March 15, 2001
-----------------------------------------------------
George H. Lane, III
/s/ WILLIAM J. GEDWED* Director March 15, 2001
-----------------------------------------------------
William J. Gedwed
/s/ PATRICK J. MCLAUGHLIN* Director March 15, 2001
-----------------------------------------------------
Patrick J. McLaughlin
/s/ RICHARD T. MOCKLER* Director March 15, 2001
-----------------------------------------------------
Richard T. Mockler
/s/ CONSUELO PALACIOS Chief Accounting Officer March 15, 2001
-----------------------------------------------------
Consuelo Palacios
*By: /s/ GLENN W. REED (Attorney-in-fact) March 15, 2001
-------------------------------------------------
Glenn W. Reed
46
48
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A)(1) AND (2), (C), AND (D)
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 2000
UICI
AND
SUBSIDIARIES
DALLAS, TEXAS
F-1
49
REPORT OF INDEPENDENT AUDITORS
Board of Directors
UICI
We have audited the accompanying consolidated balance sheets of UICI and
subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
UICI and subsidiaries at December 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
February 28, 2001
F-2
50
UICI AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
ASSETS
Investments
Securities available for sale --
Fixed maturities, at fair value (cost:
2000 -- $827,905; 1999 -- $904,662)..................... $ 814,433 $ 861,337
Equity securities, at fair value (cost:
2000 -- $18,926; 1999 -- $25,951)....................... 16,916 23,079
Mortgage and collateral loans............................. 5,368 6,324
Policy loans.............................................. 20,171 20,444
Investment in HealthAxis.com.............................. 18,442 --
Investment in other equity investees...................... 43,196 47,696
Short-term investments.................................... 149,525 79,608
---------- ----------
Total Investments.................................. 1,068,051 1,038,488
Cash........................................................ 83,058 74,091
Student loans............................................... 1,156,072 1,326,050
Restricted cash............................................. 222,660 489,720
Reinsurance receivables..................................... 120,723 104,946
Due premiums and other receivables and assets............... 52,766 58,800
Investment income due and accrued........................... 62,014 51,751
Refundable income taxes..................................... 13,978 21,415
Deferred acquisition costs.................................. 68,515 80,188
Goodwill.................................................... 92,120 152,668
Deferred income tax......................................... 32,949 84,249
Property and equipment, net................................. 75,128 56,978
---------- ----------
$3,048,034 $3,539,344
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy and contract benefits....................... $ 429,167 $ 452,776
Claims.................................................... 358,108 335,943
Unearned premiums......................................... 98,491 97,548
Other policy liabilities.................................. 17,927 19,090
Other liabilities........................................... 156,953 112,631
Collections payable......................................... 111,787 113,057
Note payable to related party............................... 18,954 --
Debt........................................................ 47,828 120,637
Student loan credit facilities.............................. 1,358,056 1,730,348
Net liabilities of discontinued operations, including
reserve for losses on disposal............................ -- 149,880
---------- ----------
2,597,271 3,131,910
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $0.01 per share -- authorized
10,000,000 shares, no shares issued and outstanding in
2000 and 1999........................................... -- --
Common Stock, par value $0.01 per share -- authorized
100,000,000 shares in 2000 and 1999; 48,292,580 issued
and 46,950,962 outstanding in 2000; 46,616,121 issued
and 46,406,418 outstanding in 1999...................... 483 466
Additional paid-in capital................................ 186,820 173,585
Accumulated other comprehensive loss...................... (10,068) (30,432)
Retained earnings......................................... 274,277 268,544
Treasury stock, at cost (87,456 shares in 2000 and 209,703
shares in 1999)......................................... (749) (4,729)
---------- ----------
450,763 407,434
---------- ----------
$3,048,034 $3,539,344
========== ==========
See notes to consolidated financial statements.
F-3
51
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
REVENUE
Premiums:
Health (includes amounts received from related parties
of $943, $-0-, and $-0- in 2000, 1999, and 1998,
respectively)......................................... $ 668,314 $ 690,171 $ 747,275
Life premiums and other considerations.................. 40,637 46,416 49,347
---------- ---------- ----------
708,951 736,587 796,622
Investment income......................................... 92,451 85,497 74,892
Other interest income (includes amounts received from
related parties of $911, -0-, and $-0- in 2000, 1999,
and 1998, respectively)................................. 111,415 65,055 31,642
Other fee income.......................................... 110,372 122,930 111,138
Other income (includes amounts received from related
parties of $3,817, $6,945, and $687 in 2000, 1999, and
1998, respectively)..................................... 2,278 3,481 37,545
Gain on sale of HealthAxis.com shares..................... 26,300 -- --
Gains (losses) on sale of investments..................... (411) (367) 4,912
---------- ---------- ----------
1,051,356 1,013,183 1,056,751
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses................. 464,457 514,574 586,035
Underwriting, acquisition, and insurance expenses
(includes amounts paid to related parties of $31,334,
$15,266, and $35,315 in 2000, 1999, and 1998,
respectively)........................................... 250,413 243,435 270,870
Stock appreciation expense................................ 5,308 5,000 --
Other expenses, (includes amounts paid to related parties
of $8,176, $2,002, and $150 in 2000, 1999, and 1998,
respectively)........................................... 117,053 114,264 114,438
Depreciation.............................................. 14,148 13,835 10,380
Interest expense (includes amounts paid to related parties
of $4,525, $-0-, and $-0- in 2000, 1999, and 1998,
respectively)........................................... 13,639 7,433 3,059
Interest expense -- student loan credit facility.......... 101,596 57,462 19,224
Equity in operating loss from HealthAxis.com investment... 15,623 -- --
Goodwill amortization..................................... 6,242 6,328 5,483
---------- ---------- ----------
988,479 962,331 1,009,489
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES....... 62,877 50,852 47,262
Federal income taxes........................................ 33,744 17,602 15,739
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS........................... 29,133 33,250 31,523
DISCONTINUED OPERATION:
Income (loss) from operations, (net of income tax
(expense) benefit $-0-, $50,673, and ($16,238) in 2000,
1999, and 1998, respectively)........................... -- (94,632) 27,246
Estimated loss on disposal (net of income tax benefit of
$12,600 and $45,500 in 2000 and 1999, respectively)..... (23,400) (84,500) --
---------- ---------- ----------
(23,400) (179,132) 27,246
---------- ---------- ----------
NET INCOME (LOSS)........................................... $ 5,733 $ (145,882) $ 58,769
========== ========== ==========
Earnings (loss) per share:
Basic earnings (loss)
Income from continuing operations....................... $ 0.62 $ 0.72 $ 0.68
Income (loss) from discontinued operations.............. (0.50) (3.87) 0.59
---------- ---------- ----------
Net income (loss)....................................... $ 0.12 $ (3.15) $ 1.27
========== ========== ==========
Diluted earnings (loss)
Income from continuing operations....................... $ 0.61 $ 0.70 $ 0.67
Income (loss) from discontinued operations.............. (0.49) (3.75) 0.59
---------- ---------- ----------
Net income (loss)....................................... $ 0.12 $ (3.05) $ 1.26
========== ========== ==========
See notes to consolidated financial statements.
F-4
52
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON PAID-IN INCOME RETAINED TREASURY
STOCK CAPITAL (LOSS) EARNINGS STOCK TOTAL
------ -------- ------------- --------- -------- ---------
Balance at January 1, 1998................ $462 $165,891 $ 14,280 $ 355,657 $ -- $ 536,290
Comprehensive income
Net income.............................. 58,769 58,769
---------
Other comprehensive loss, net of tax
Change in unrealized gains
(losses) on securities.............. (1,328) (1,328)
Deferred income tax benefit........... 47 47
Other................................. 413 413
---------
Other comprehensive loss.............. (868)
---------
Comprehensive income...................... 57,901
---------
Common stock issued....................... 2 3,898 3,900
Note receivable from shareholder.......... (3,300) (3,300)
---- -------- -------- --------- -------- ---------
Balance at December 31, 1998.............. 464 166,489 13,412 414,426 -- 594,791
Comprehensive income
Net loss................................ (145,882) (145,882)
---------
Other comprehensive loss, net of tax
Change in unrealized gains (losses) on
securities.......................... (67,411) (67,411)
Deferred income tax benefit........... 22,744 22,744
Other................................. 823 823
---------
Other comprehensive loss.............. (43,844)
---------
Comprehensive loss........................ (189,726)
---------
Exercise of stock options and warrants.... 2 6,568 6,570
Purchase of treasury stock................ (11,681) (11,681)
Retirement of treasury stock.............. (6,952) 6,952 --
Capital contribution...................... 10,129 10,129
Notes receivable from shareholders........ (2,649) (2,649)
---- -------- -------- --------- -------- ---------
Balance at December 31, 1999.............. 466 173,585 (30,432) 268,544 (4,729) 407,434
Comprehensive income
Net income.............................. 5,733 5,733
---------
Other comprehensive income, net of tax
Change in unrealized gains (losses) on
securities.......................... 31,302 31,302
Deferred income tax expense........... (10,391) (10,391)
Other................................. (547) (547)
---------
Other comprehensive income............ 20,364
---------
Comprehensive income...................... 26,097
---------
Common stock issued....................... 17 9,047 9,064
Common shares unearned.................... (6,271) (6,271)
Retirement of treasury stock.............. (66) (66)
Sale of treasury stock.................... (3,125) 4,046 921
Capital contribution...................... 12,563 12,563
Notes receivable from shareholders........ 1,021 1,021
---- -------- -------- --------- -------- ---------
Balance at December 31, 2000.............. $483 $186,820 $(10,068) $ 274,277 $ (749) $ 450,763
==== ======== ======== ========= ======== =========
See notes to consolidated financial statements.
F-5
53
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
----------- ----------- ---------
Operating Activities
Net income (loss)......................................... $ 5,733 $ (145,882) $ 58,769
Loss on Disposal of Discontinued Operation................ 36,000 130,000 --
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Amounts charged to loss on disposal of discontinued
operations............................................ (131,898) -- --
Increase in policy liabilities.......................... 32,466 10,525 66,935
Decrease in accrued investment income................... (7,466) (10,418) (26,959)
Increase (decrease) in other liabilities................ (50,816) 26,346 17,267
Stock appreciation expense.............................. 5,308 -- --
Deferred income tax (benefit) change.................... 45,325 (75,269) (2,004)
(Decrease) increase in federal income taxes payable..... -- (36,111) 16,529
Refundable income taxes................................. 7,437 (21,415) --
Decrease (increase) in reinsurance receivables and other
receivables........................................... (5,693) 18,269 (12,593)
Acquisition costs deferred.............................. (21,654) (19,146) (18,430)
Amortization of deferred acquisition costs.............. 23,664 31,966 24,480
Depreciation and amortization........................... 25,671 26,491 17,083
Operating loss of HealthAxis.com........................ 15,623 -- --
(Gains) loss on sale of investments..................... (25,889) 367 (4,912)
Other items, net........................................ 23,449 ____5,971 4,299
----------- ----------- ---------
Cash Provided by (Used in) Operating Activities..... (22,740) (58,306) 140,464
----------- ----------- ---------
Investing Activities
Securities available-for-sale
Purchases............................................... (123,617) (207,274) (468,889)
Sales................................................... 150,078 111,172 332,234
Maturities, calls and redemptions....................... 49,917 49,256 81,537
Credit card loans
Fundings................................................ (221,530) (411,537) (442,300)
Repayments.............................................. 288,084 357,141 300,088
Sales................................................... 124,122 -- 60,000
Student loans
Purchases and originations.............................. (783,600) (1,144,122) (766,180)
Maturities.............................................. 165,894 75,861 34,445
Sales................................................... 787,684 434,114 72,560
Other investments
Purchases............................................... (2,173) (4,992) (42,951)
Sales, repayments and maturities........................ 8,859 3,222 39,943
Decrease (increase) in restricted cash.................. 267,060 (311,309) (34,569)
Short-term investments -- net............................. 21,709 (26,682) (51,095)
Purchase of subsidiaries and life and health business net
of cash acquired of $425, $20, and $2,137 in 2000, 1999,
and 1998, respectively.................................. (4,481) (52,231) (3,061)
Proceeds from subsidiaries sold, net of cash disposed of
$8,319 in 2000; $-0- in 1999 and $1,528 in 1998......... 36,854 -- 21,270
Sale of two million shares of HealthAxis.com.............. 30,000 -- --
Additions to property and equipment....................... (17,138) (29,487) (20,680)
Decrease (increase) in agents' receivables................ (2,870) 995 2,412
----------- ----------- ---------
Cash Provided by (Used in) Investing Activities..... 774,852 (1,155,873) (885,236)
----------- ----------- ---------
Financing Activities
Net cash provided by (used in) time deposits.............. (290,023) 191,110 91,317
Proceeds from notes payable............................... 104,000 127,499 40,620
Repayment of notes payable................................ (189,015) (45,667) (28,990)
Issuance of note receivable to related party.............. (35,000) -- --
Proceeds from note receivable from related party.......... 35,000 -- --
Proceeds from payable to related party.................... 76,000 -- 100
Repayment of payable to related party..................... (57,046) (497) --
Proceeds from student loan credit facility................ 723,700 2,487,728 684,979
Repayment of student loan credit facility................. (1,095,992) (1,468,350) (15,953)
Deposits from investment products......................... 15,965 15,954 16,490
Withdrawals from investment products...................... (45,809) (38,776) (37,963)
Capital Contributions..................................... 12,563 10,129 --
Other..................................................... 2,512 (7,760) (4,860)
----------- ----------- ---------
Cash Provided by (Used in) Financing Activities..... (743,145) 1,271,370 745,740
----------- ----------- ---------
Net Increase in Cash........................................ 8,967 57,191 968
Cash at Beginning of Period................................. 74,091 16,900 15,932
----------- ----------- ---------
Cash at End of Period....................................... $ 83,058 $ 74,091 $ 16,900
=========== =========== =========
See notes to consolidated financial statements.
F-6
54
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of UICI and its
subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Nature of Operations
The Company offers insurance (primarily health and life) and selected
financial services to niche consumer and institutional markets. Information on
the Company's operations by segment is included in Note Q.
The Company issues health insurance policies, including catastrophic
coverages, to niche markets, particularly to the self-employed and student
markets. Through its OKC Division, the Company has acquired blocks of life and
annuity policies from other insurers and also sells insurance products
(primarily life and workers compensation) in selected niche markets. Academic
Management Services Corp. provides financial solutions for college students and
the educational institutions they attend by offering an integrated package of
student loans and student loan servicing. The Company holds approximately 45.3%
of the issued and outstanding shares of HealthAxis, Inc., a healthcare payer
system development company providing technology solutions and related
outsourcing services to the healthcare industry. Other Business Units in the
past consisted primarily of healthcare solutions companies. During the year
ended December 31, 1998, substantially all of the companies comprising this
segment were sold or closed down, and this unit ceased to exist in 1998. Other
Key Factors includes investment income not allocated to the other segments,
corporate interest expenses, general expenses relating to corporate operations,
amortization of goodwill, realized gains or losses on sale of investments and
the AMLI operations.
Discontinued Operation
On March 17, 2000, the Board of Directors of the Company determined, after
a thorough assessment of the unit's prospects, that it would exit from its
United CreditServ sub-prime credit card business. Accordingly, the United
CreditServ unit has been separately reflected as a discontinued operation for
financial reporting purposes for all periods presented. The Company completed
the sale of the United CreditServ unit during the year 2000. See Note B.
Liquidity and Capital Resources
Historically, the Company's primary sources of cash have been premium
revenues from policies issued, investment income, fees and other income,
deposits to fund the credit card receivables, and borrowings to fund student
loans. The primary uses of cash have been payments for benefits, claims and
commissions under those policies, operating expenses and the funding of credit
card receivables and student loans. Net cash used in operations totaled $22.7
million in 2000, $58.3 million in 1999 and net cash provided by operations
totaled $140.5 million in 1998. The Company's insurance subsidiaries invest a
substantial portion of these funds, pending payment of the subsidiaries' pro
rata share of future benefits and claims.
UICI is a holding company, the principal assets of which are its
investments in its separate operating subsidiaries, including its regulated
insurance subsidiaries. The holding company's ability to fund its cash
requirements is largely dependent upon its ability to access cash, by means of
dividends or other means, from its subsidiaries. The laws governing the
Company's insurance subsidiaries restrict dividends paid by the Company's
domestic insurance subsidiaries in any year. Inability to access cash from its
subsidiaries could have a material adverse effect upon the Company's liquidity
and capital resources.
F-7
55
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 2000, the operating losses at United
CreditServ had a material adverse effect upon the liquidity and cash flow of the
Company. During 2000, UICI contributed to United CreditServ an aggregate of
$171.3 million in cash. In addition, on June 28, 2000, the Company funded an
$8.0 million principal prepayment owing on its bank credit facility, on June 1,
2000 the Company made a mandatory principal payment on its senior notes
outstanding in the amount of $4.0 million; and on July 27, 2000 the Company
prepaid $6.0 million owing to an affiliated lender (see Note M to Notes to
Consolidated Financial Statements). UICI at the holding company level funded
these cash contributions and other cash needs with the proceeds of the sale of
investment securities, a borrowing from a third party in the amount of $24.0
million funded in July 2000, approved sales of assets from the parent company to
the Company's regulated insurance company subsidiaries completed in June and
July 2000 generating cash proceeds in the aggregate amount of approximately
$26.2 million, dividends in the amount of $19.0 million paid during the six
months ended June 30, 2000 from CLICO, the sale to The MEGA Life and Health
Insurance Company of CLICO for $19.0 million in July 2000, cash proceeds in the
amount of $21.8 million from the disposition of its National Motor Club unit
completed in July 2000, and cash on hand.
The Company believes that its exit from the credit card business is now
substantially complete. On January 29, 2001, the Company completed the voluntary
liquidation of UCNB, in accordance with the terms of a plan of voluntary
liquidation approved by the OCC. See Note B. UCNB surrendered to the OCC its
national bank charter and distributed to a wholly-owned subsidiary of UICI the
residual assets of the Bank in the amount of approximately $26.0 million,
substantially all of which consisted of cash and cash equivalents. The Company
utilized the proceeds of the liquidation to prepay indebtedness (including
interest) owing to Lender LLC (See Note I) and an unaffiliated lender in the
amount of $21.1 million and $5.0 million, respectively.
Giving effect to the liquidation of UCNB and to the prepayment of such
indebtedness, at March 16, 2001 the Company held cash and cash equivalents in
the amount of $21.5 million and had short and long term indebtedness outstanding
in the amount of $35.8 million. UICI currently estimates that, through December
31, 2001 the holding company will have operating cash requirements in the amount
of approximately $85.3 million. The Company currently anticipates that these
cash requirements at the holding company level will be funded by cash on hand,
cash received from interest income, anticipated tax refunds, dividends from
domestic and offshore insurance companies and tax sharing reimbursements from
subsidiaries (which will be partially offset by holding company operating
expenses).
Prior approval by insurance regulatory authorities is required for the
payment of dividends by a domestic insurance company that exceed certain
limitations based on statutory surplus and net income. At December 31, 2000, the
Company's domestic insurance companies could pay aggregate dividends to the
parent company of approximately $47.4 million without prior approval by
statutory authorities.
There can be no assurance that the cash requirements at the holding company
level will not exceed current estimates, or that the holding company will be
able to raise sufficient cash to fund cash requirements on a timely basis.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-8
56
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basis of Presentation
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The more significant
variances between GAAP and statutory accounting practices prescribed or
permitted by regulatory authorities for insurance companies are: fixed
maturities are carried at fair value for investments classified as available for
sale for GAAP rather than generally at amortized cost; the deferral of new
business acquisition costs, rather than expensing them as incurred; the
determination of the liability for future policyholder benefits based on
realistic assumptions, rather than on statutory rates for mortality and
interest; the provision for deferred income taxes for GAAP; the recording of
reinsurance receivables as assets for GAAP rather than as reductions of
liabilities; and the exclusion of non-admitted assets for statutory purposes.
(See Note L for stockholders' equity and net income from insurance subsidiaries
as determined using statutory accounting practices.)
Investments
Investments are valued as follows:
Fixed maturities consist of bonds and notes issued by governments,
businesses, or other entities, mortgage and asset backed securities and
similar securitized loans. All fixed maturity investments are classified as
available for sale and carried at fair value.
Equity securities consist of common and non-redeemable preferred
stocks and are carried at fair value.
Mortgage and collateral loans are carried at unpaid balances, less
allowance for losses.
Policy loans are carried at unpaid balances.
Short-term investments are carried at fair value, which approximates
cost.
Investments in equity investees, including the Company's investment in
HealthAxis.com, are principally stated at the Company's cost as adjusted
for contributions or distributions and the Company's share of income or
loss.
Realized gains and losses on sales of investments are recognized in
net income on the specific identification basis and include write downs on
those investments deemed to have an other than temporary decline in fair
values. Unrealized investment gains or losses on securities carried at fair
value, net of applicable deferred income tax, are reported in accumulated
other comprehensive income (loss) as a separate component of stockholders'
equity and accordingly have no effect on net income (loss).
Purchases and sales of short-term financial instruments are part of
investing activities and not necessarily a part of the cash management
program. Short-term financial instruments are classified as investments in
the Consolidated Balance Sheets and are included as investing activities in
the Consolidated Statements of Cash Flows.
Student loans, consisting of student loans originated and student
loans purchased, are carried at their unpaid principal balances plus
capitalized loan origination costs and unamortized premiums on loans
purchased in the secondary market. Capitalized loan origination costs
consist of the incremental direct costs associated with originating student
loans, principally salaries and related expenses. Capitalized loan
origination costs and premiums on purchased loans are amortized over the
life of the underlying loans or included in the calculation of gain or loss
if loans are sold in the secondary market.
F-9
57
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Acquisition Costs
The costs of writing new insurance business, principally commissions, which
vary with and are directly related to the production of new business, have been
deferred. The cost of business acquired through acquisition of subsidiaries or
blocks of business is determined based upon estimates of the future profits
inherent in the business acquired. Costs associated with traditional life
business are being amortized over the estimated premium-paying period of the
related policies in proportion to the ratio of the annual premium revenue to the
total premium revenue anticipated. Such anticipated premium revenue, which is
modified to reflect actual lapse experience, was estimated using the same
assumptions as were used for computing policy benefits. For universal life-type
and annuity contracts, deferrable costs are amortized in proportion to the ratio
of a contract's annual gross profits to total anticipated gross profits. Costs
associated with commissions on the health business are generally amortized over
the effective period for the related unearned premiums. Costs associated with
sales leads on the health business are amortized over a two-year period.
Anticipated investment income is considered in determining whether a premium
deficiency exists. That amortization is adjusted when estimates of current or
future gross profits to be realized from a group of products are revised.
Restricted Cash
At December 31, 2000 and 1999, the Company held restricted cash in the
amount of $222.7 million and $489.7 million, respectively. Restricted cash
consists primarily of funds held by AMS for the benefit of participants in AMS's
tuition budgeting program. In addition, at December 31, 2000 and 1999, the
Company's subsidiary, Sun Tech Processing Systems, LLC, had $20.8 million and
$19.7 million, respectively, of funds held in an account designated by a court
registry (see Notes M and N).
A subsidiary of AMS has entered into a trust agreement (the "Trust") with a
bank (trustee) for the safekeeping of payments received from beneficiaries
(participants in the tuition budgeting program). All funds are held in trust for
the benefit of the beneficiaries. AMS is entitled to the interest earned on the
funds held in trust as well as tuition budgeting program fees deposited into the
Trust. The Trust held approximately $112.5 million at amortized cost (which
approximated market) of participant payments at December 31, 2000. The funds are
invested in U.S. Treasury securities, government agency securities, high-grade
commercial paper, and money market funds of insured depository institutions at
December 31, 2000.
Property and Equipment
Property and equipment includes buildings and leasehold improvements, land,
and furniture and equipment, all of which are reported at depreciated cost that
is computed using straight line and accelerated methods based upon the estimated
useful lives of the assets (generally 3 to 7 years for furniture and equipment
and 30 to 39 years for buildings.) Buildings and leasehold improvements at cost
at December 31, 2000 and 1999 was $32.6 million and $11.7 million, respectively.
Furniture and equipment at cost at December 31, 2000 and 1999 was $84.7 and
$86.4 million, respectively. Land at cost at December 31, 2000 and 1999 was $2.9
million and $1.2 million, respectively. Total accumulated depreciation for
property and equipment was $45.1 million and $42.3 million at December 31, 2000
and 1999, respectively.
Goodwill
The excess of cost over the underlying value of the net assets of companies
acquired is generally amortized on a straight-line basis over twenty to
twenty-five years. The Company continually reevaluates the propriety of the
carrying amount of goodwill, as well as the amortization period to determine
whether current events and circumstances warrant adjustments to the carrying
value and/or revised estimates of useful life. The Company assesses the
recoverability of goodwill based upon several factors, including management's
intention with respect to the operations to which the goodwill relates and those
operations' projected future income and undiscounted cash flows. An impairment
loss would be recorded in the period such determination
F-10
58
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was made. The Company had goodwill of $106.6 million and $170.7 million at
December 31, 2000 and 1999, respectively, and accumulated amortization of $14.5
million and $18.0 million at December 31, 2000 and 1999, respectively, of
accumulated amortization, resulting in net goodwill of $92.1 million and $152.7
million at December 31, 2000 and 1999, respectively. Amortization expense
recorded for continuing operations totaled $6.2 million, $6.3 million and $5.5
million in 2000, 1999 and 1998, respectively. The significant decrease in
goodwill was primarily due to the sale of the Company's National Motor Club
unit, which at the time of the sale had unamortized goodwill of $36.1 million.
Future Policy and Contract Benefits and Claims
Traditional life insurance future policy benefit liabilities are computed
on a net level premium method using assumptions with respect to current
investment yield, mortality, withdrawal rates, and other assumptions determined
to be appropriate as of the date the business was issued or purchased by the
Company. Future contract benefits related to universal life-type and annuity
contracts are generally based on policy account values. Claims liabilities
represent the estimated liabilities for claims reported plus claims incurred but
not yet reported. The liabilities are subject to the impact of actual payments
and future changes in claim factors; as adjustments become necessary they are
reflected in current operations.
Recognition of Premium Revenues and Costs
Premiums on traditional life insurance are recognized as revenue when due.
Benefits and expenses are matched with premiums so as to result in recognition
of income over the term of the contract. This matching is accomplished by means
of the provision for future policyholder benefits and expenses and the deferral
and amortization of acquisition costs. Revenues for universal life-type and
annuity contracts consist of policy and surrender charges assessed during the
year. Contract benefits that are charged to expense include benefit claims
incurred in the period in excess of related contract balances, and interest
credited to contract balances.
Student Loan Income
The Company recognizes student loan income as earned, including adjustments
for the amortization of premiums. Marketing fees for student loans that are sold
to third parties are earned when received and are included in other fee income.
Unearned Premiums
Premiums on health insurance contracts are recognized as earned over the
period of coverage on a pro rata basis.
Reinsurance
Insurance liabilities are reported before the effects of ceded reinsurance.
Reinsurance receivables and prepaid reinsurance premiums are reported as assets.
The cost of reinsurance is accounted for over the terms of the underlying
reinsured policies using assumptions consistent with those used to account for
the policies.
Federal Income Taxes
Deferred income taxes are recorded to reflect the tax consequences of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end.
F-11
59
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Comprehensive Income
Included in comprehensive income is the reclassification adjustments for
realized gains (losses) included in net income of $(2.6) million, $35,000 and
$1.5 million for the years ended December 31, 2000, 1999 and 1998, respectively.
Guaranty Funds and Similar Assessments
The Company is assessed amounts by state guaranty funds to cover losses of
policyholders of insolvent or rehabilitated insurance companies, by state
insurance oversight agencies to cover the operating expenses of such agencies
and by other similar legislative entities. These mandatory assessments may be
partially recovered through a reduction in future premium taxes in certain
states. Effective January 1, 1999, the Company adopted the provisions of AICPA
Statement of Position 97-3 ("SOP 97-3"), under which these assessments are
accrued in the period in which they have been incurred. At December 31, 2000 and
1999, the Company had accrued $1.9 million and $1.8 million, respectively, to
cover the cost of these assessments. The Company expects to pay these
assessments over a period of up to five years, and the Company expects to
realize the recorded premium tax offsets and/or policy surcharges over a period
of up to 10 years. The Company incurred expenses for guaranty fund assessments
in the amount of $1.3 million and $587,000 in 2000 and 1999, respectively.
New Pronouncements
In June 2000, FAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued, and as amended, is required to be adopted in
years beginning after June 15, 2000. This Statement requires all derivatives to
be recorded on the balance sheet at fair value. This results in the offsetting
changes in fair values or cash flows of both the hedged item being recognized in
earnings in the same period. Changes in fair values of derivatives not meeting
the Statement's hedge criteria are included in income. Because of the Company's
minimal use of derivatives, the adoption of the new Statement will not have a
significant effect on earnings or the financial position of the Company.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation". Interpretation No. 44
provides guidance on twenty practice issues regarding the application of APB
Opinion No. 25, Accounting for Stock Issued to Employees. The FASB focused on
interpreting rather than completely overhauling APB 25's intrinsic value
framework. The Interpretation is effective July 1, 2000, and is to be applied
prospectively to all new awards, modifications to outstanding awards, and
changes in employee status after that date, with certain exceptions. Because the
FASB decided that the Interpretation should be applied prospectively from July
1, 2000 except for certain events, no adjustments were made to the financial
statements for periods prior to July 1, 2000, upon the initial application of
the Interpretation. The Company has implemented this guidance.
In September 2000, the FASB issued Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
replacing Statement No. 125. Statement No. 140 changes certain provisions of
Statement No. 125 and could have a significant impact on commercial companies
that engage in securitization transactions. The Statement is effective for
transfers occurring after March 31, 2001. However, the expanded disclosures
about securitizations and collateral are effective for fiscal years ending after
December 15, 2000.
NOTE B -- DISCONTINUED OPERATION
Through the Company's United CreditServ, Inc. subsidiary ("United
CreditServ"), prior to 2000 the Company marketed credit support services to
individuals with no, or troubled, credit experience and assisted such
individuals in obtaining a nationally recognized credit card. The activities of
United CreditServ were
F-12
60
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
conducted primarily through its wholly-owned subsidiaries United Credit National
Bank ("UCNB") (a special purpose national bank, based in Sioux Falls, South
Dakota, chartered solely to hold credit card receivables); Specialized Card
Services, Inc. (provider of account management and collections services for all
of the Company's credit card programs); United Membership Marketing Group, Inc.
("UMMG") (a Lakewood, Colorado-based provider of marketing, administrative and
support services for the Company's credit card programs); and UICI Receivables
Funding Corporation ("RFC"), a single-purpose, bankruptcy-remote entity through
which certain credit card receivables were securitized.
Through 1999, United CreditServ marketed its credit card programs and
access to a credit card through the American Fair Credit Association LLC
("AFCA"), an independent membership association that provided credit education
programs and other benefits, and American Credit Educators LLC ("ACE"), which
marketed credit education materials and had a marketing agreement with UCNB to
solicit credit card applications. AFCA applicants were required to meet certain
requirements (including payment of initiation and monthly membership fees) in
order to become members of AFCA, and, in order to obtain a credit card, to meet
underwriting criteria established by UCNB.
During the year ended December 31, 1999, United CreditServ incurred a
pre-tax operating loss in the amount of approximately $145.3 million (inclusive
of the write off of the $35.9 million purchase price of UMMG), primarily
attributable to significant increases to credit card loan loss reserves
associated with the non-performance of its ACE credit card product. The Company
believes that such losses were due primarily to inadequate attention to ACE
collections, inefficiencies associated with administrative and operating systems
conversions during a period of significant increases in card issuance volumes,
mis-pricing of the ACE product, and the failure of the AFCA credit card
portfolio performance to be sufficiently predictive of the performance of the
ACE credit card loan portfolio.
In March 2000 the Board of Directors of UICI determined, after a thorough
assessment of the unit's prospects, that UICI would exit from its United
CreditServ sub-prime credit card business and, as a result, the United
CreditServ unit has been reflected as a discontinued operation for financial
reporting purposes. At December 31, 1999, the Company established a liability
for loss on the disposal of the discontinued operation in the amount of $130.0
million (pre-tax), which liability was included in net liabilities of
discontinued operations. The liability for loss on disposal established by the
Company at December 31, 1999 represented the Company's then-current estimate of
all additional losses (including asset write-downs, the estimated loss on the
sale of the business and/or the assets and continuing operating losses through
the date of sale) that it then believed it would incur as part of any sale of
the United CreditServ unit.
Reflecting the terms of the Company's then-pending sale of its United
CreditServ business, during the quarter ended June 30, 2000 the Company recorded
an additional pre-tax loss, and correspondingly increased the liability for loss
on the disposal of the discontinued operation, in the amount of $36.0 million
($23.4 million net of tax). Accordingly, for the full year 2000, the Company
reported a loss from discontinued operations in the amount of $36.0 million
pre-tax ($23.4 million net of tax).
During the year ended December 31, 2000, the discontinued operation
incurred a loss from operations in the amount of approximately $131.9 million,
which loss was charged to the liability for loss on disposal.
UCNB agreed to the issuance of separate Consent Orders issued by the OCC in
February and June, 2000, which Consent Orders were subsequently terminated by
the OCC in January 2001. In addition, the Company and UCS agreed to the issuance
of separate Consent Orders issued by the OCC in June 2000. In January 2001, the
UCS Order was terminated by the OCC and the UICI Order was substantially
modified. See Note N.
On September 29, 2000, the Company completed the sale of substantially all
of the non-cash assets associated with its United CreditServ credit card unit,
including its credit card receivables portfolios and its Sioux Falls, South
Dakota servicing operations, for a cash sales price of approximately $124.0
million. In
F-13
61
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
addition to the cash sales price received at closing, the transaction
contemplates an incentive cash payment contingent upon the post-closing
performance of the ACE credit card portfolio over a one-year period. The Company
retained United CreditServ's Texas collections facility, and UICI continues to
hold United CreditServ's building and real estate in Sioux Falls, South Dakota.
The Company has leased the Sioux Falls facilities to the purchaser of the credit
card assets pursuant to a long-term lease. UICI also retained the right to
collect approximately $250 million face amount of previously written off credit
card receivables. In connection with the sale, UICI or certain of its
subsidiaries retained substantially all liabilities and contingencies associated
with its credit card business, including liability for payment of all
certificates of deposit issued by UCNB, loans payable and liabilities associated
with pending litigation and other claims.
At December 31, 1999, UCNB had $290.0 million of certificates of deposits
outstanding, and UCNB held approximately $110.5 million in cash, cash
equivalents and short term U.S. Treasury securities. Following the sale of the
Company's United CreditServ unit, UCNB prepaid all of its remaining certificates
of deposit then-outstanding in the amount of approximately $79.0 million, and
all such deposit liabilities were discharged as of October 23, 2000. Following
the prepayment of all deposit liabilities of UCNB, at December 31, 2000 UCNB
held cash, cash equivalents and U.S. Treasury securities in the amount of $26.0
million.
The 1999 and 2000 operating losses at United CreditServ had a material
adverse effect upon the liquidity and cash flows of the Company. Since the
Company first announced losses at its United CreditServ unit in December 1999,
UICI through United CreditServ contributed to UCNB as capital an aggregate of
$176.6 million in cash. UICI at the holding company level funded these cash
contributions and other cash needs with the proceeds of sale of investment
securities; a borrowing from a third party in the amount of $24.0 million funded
in July 2000; approved sales of assets from the parent company to the Company's
regulated insurance company subsidiaries completed in June and July 2000
generating cash proceeds in the aggregate amount of approximately $26.2 million;
dividends in the amount of $19.0 million paid during the six months ended June
30, 2000 from The Chesapeake Life Insurance Company ("CLICO") (one of its
regulated insurance company subsidiaries); the sale to The MEGA Life and Health
Insurance Company of CLICO for $19.0 million in July 2000; cash proceeds in the
amount of $21.8 million from the disposition of its National Motor Club unit
completed in July 2000; and cash on hand.
On January 29, 2001, the Company completed the voluntary liquidation of
UCNB, in accordance with the terms of a plan of voluntary liquidation approved
by the OCC. UCNB surrendered to the OCC its national bank charter and
distributed to a wholly-owned subsidiary of UICI the residual assets of UCNB,
including available cash and cash equivalents in the amount of approximately
$26.0 million.
As part of the plan of liquidation, and in accordance with the terms of the
June 2000 Consent Order issued by the OCC against UICI, UICI expressly assumed
all liabilities of UCNB, including contingent liabilities associated with
pending and future litigation. In addition, on January 29, 2001, the OCC vacated
the Consent Orders issued against UCNB in February 2000 and June 2000 and the
June 2000 Consent Order issued against UICI's United CreditServ subsidiary. The
OCC substantially modified the June 2000 Consent Order issued with respect to
UICI to eliminate all restrictive provisions except a reconfirmation of UICI's
obligation to assume all liabilities of UCNB. Finally, the OCC formally
acknowledged the termination by UICI of the liquidity and capital assurances
agreement, which formerly provided that, upon demand by UCNB, UICI would assure
the liquidity and capital adequacy of UCNB.
F-14
62
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Set forth below is a summary of the operating results of the United
CreditServ business for each of the years ended December 31, 2000, 1999 and
1998, respectively.
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
--------- --------- --------
(IN THOUSANDS)
REVENUE
Net interest income.............................. $ 15,922 $ 20,129 $ 10,285
Credit card fees and other income................ 109,445 207,246 112,867
--------- --------- --------
Total revenues........................... 125,367 227,375 123,152
EXPENSES
Provision for loan losses........................ 177,365 211,747 73,954
UMMG purchase.................................... -- 35,944 --
Operating expenses............................... 74,619 118,661 4,494
Depreciation and amortization.................... 5,281 6,328 1,220
--------- --------- --------
Total expenses........................... 257,265 372,680 79,668
Income (loss) from operations before amounts
charged to loss on disposal...................... (131,898) (145,305) 43,484
Amounts charged to loss on disposal................ 131,898 -- --
--------- --------- --------
Income (loss) from operations...................... -- (145,305) 43,484
Federal income taxes (benefit)..................... -- (50,673) 16,238
--------- --------- --------
Income (loss) from operations...................... -- (94,632) 27,246
Estimated loss on disposal, net of income tax
benefit.......................................... (23,400) (84,500) --
--------- --------- --------
Income (loss) from discontinued operations......... $ (23,400) $(179,132) $ 27,246
========= ========= ========
At December 31, 1999, the assets and liabilities of the United CreditServ
business to be disposed of consisted of the following:
DECEMBER 31,
1999
------------
Assets
Cash.................................................. $ 18,469
Short term investments................................ 92,070
Credit card receivables, net of allowance for
losses............................................. 190,676
Other assets.......................................... 46,869
---------
Total assets.................................. 348,084
Liabilities
Time deposits......................................... 290,023
Notes payable......................................... 12,241
Other liabilities..................................... 65,700
Reserve for loss on disposal.......................... 130,000
---------
Total liabilities............................. 497,964
---------
Net liabilities to be disposed.......................... $(149,880)
=========
At December 31, 2000, the remaining assets of the discontinued operations
in the amount of $54.3 million (consisting of cash and short-term investments in
the amount of $27.8 million and other assets in the amount of $26.5 million)
were reclassified to cash and other assets, respectively, on the Company's
consolidated balance sheet, and the remaining liabilities of the discontinued
operations in the amount of
F-15
63
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$53.0 million (consisting of notes payable in the amount of $4.3 million and
other liabilities in the amount of $48.6 million) were reclassified to notes
payable and other liabilities, respectively, on the Company's consolidated
balance sheet.
At December 31, 1999, Specialized Card Services, Inc. (a wholly-owned
subsidiary of the Company) ("SCS") had a $5.0 million unsecured loan payable to
Norwest Bank of South Dakota bearing interest at a rate of 8.50% per annum. The
loan was paid in full on March 31, 2000. In addition, SCS has various loans with
the South Dakota Board of Economic Development bearing interest at a rate of
3.00% per annum. The balance outstanding under these loans was $4.3 million and
$7.2 million at December 31, 2000 and 1999, respectively. The loans mature in
2003 and 2004. These loans are included as debt on the Company's consolidated
balance sheet at December 31, 2000. The proceeds were used to purchase equipment
and leasehold improvements.
NOTE C -- ACQUISITIONS AND DISPOSITIONS
On July 27, 2000, the Company sold to an investor group consisting of
members of the family of Ronald L. Jensen (the Company's Chairman) (including
Mr. Jensen) (the "NMC Buyer") its 97% interest in NMC Holdings, Inc. ("NMC"),
the parent company of its National Motor Club of America unit, for a purchase
price of $56.8 million, representing 97% of the value of NMC as determined by
independent appraisal. The purchase price was paid at closing in cash in the
amount of $21.8 million and by delivery of a promissory note (the "NMC Note")
issued by the NMC Buyer in the principal amount of $35.0 million. See Note M.
The $12.6 million, net of tax, received in excess of the net book value of NMC
was reflected as an increase to additional paid in capital.
Effective July 31, 2000, a wholly-owned subsidiary of the Company sold all
of its outstanding shares of UMMG for a purchase price in the amount of $25,000
in cash, with an additional amount of up to $2.0 million payable over the next
five years, contingent upon the performance of the business. The purchaser is an
entity controlled by the former President of UMMG. UMMG is a Lakewood,
Colorado-based provider of marketing, administrative and support services for
the Company's credit card programs. In addition, on July 31, 2000, UICI signed a
credit agreement with the purchaser, pursuant to which it has agreed to lend to
the purchaser up to $1.0 million on a revolving basis. As of December 31, 2000,
the Company had advanced to UMMG $1.0 million under the credit agreement.
Effective July 1, 2000, the Company sold the assets of WinterBrook
HealthCare Management, LLC (a company engaged in repricing of insurance claims)
to an unrelated party for a sales price of $1.9 million. The Company recognized
a pre-tax gain of $1.5 million in the quarter ended September 30, 2000 in
connection with this sale.
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.
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 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
F-16
64
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
renegotiated purchase price equal to $4.0 million (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. The Company
recorded $1.9 million in goodwill in connection with this acquisition and is
amortizing the goodwill on a straight line basis over 15 years.
Effective July 26, 1999, the Company's AMS subsidiary acquired for $58.0
million 100% of the outstanding capital stock of AMS Investment Group, Inc., a
holding company whose principal operations consist of Academic Management
Services, Inc. The acquisition was financed with the proceeds of AMS borrowings
and the issuance to the Company of preferred stock. The Company recorded $49.8
million of goodwill in connection with this acquisition and is amortizing the
goodwill on a straight line basis over twenty years. Total fair value of assets
acquired was $255.1 million (including goodwill) and fair value of liabilities
assumed was $197.1 million at purchase date.
Effective September 30, 1999, the Company acquired from a partnership (the
partners of which consisted primarily of certain of the Company's agents) the
remaining 21% interest in National Managers Life Insurance Company, Ltd.,
("National Managers") for cash in the amount of $794,000 increasing the
Company's ownership in National Managers to 100%. The purchase price was based
on a predetermined formula that approximated GAAP book value.
In November 1999, the Company's former National Motor Club subsidiary
acquired a 90% interest in Landen Bias Corporation (also known as Coachnet) for
cash in the amount of $4.6 million. The fair value of the assets (including
goodwill) was $6.4 million and the fair value of the liabilities assumed was
$1.8 million at the purchase date. Landen Bias Corporation was sold as part of
the NMC sale. See Note M.
Effective August 31, 1998, the Company acquired from Mr. Jensen's adult
children and Onward and Upward, Inc. (which is wholly owned by Mr. Jensen's
adult children) ("OUI") a 5.6% interest and a 15.9% interest, respectively, in
the Company's subsidiary, The Chesapeake Life Insurance Company, for an purchase
price of $4.5 million (of which $2.0 million and $2.5 million was paid to OUI
and Mr. Jensen's adult children, respectively). The purchase price was based on
a predetermined formula that approximated GAAP book value.
In July 1998, the Company acquired certain assets of Core Marketing, Ltd.
(which was owned by Mr. Jensen's adult children), a marketing entity (see Note
M) for $2.8 million in cash. Total fair value of assets acquired was $3.6
million and total fair value of liabilities assumed was $831,000.
Effective July 1, 1998, the Company sold to IPN Acquisitions, Inc. (in
which Mr. Jensen held a 100% equity interest) its equity interest in IPN, LLC (a
healthcare solutions company) for cash in the amount of $3.5 million, which
represented the net book value of the assets acquired and included $9.3 million
of assets and $5.8 million of liabilities. As part of the sale transaction, IPN
Acquisitions, Inc. agreed to indemnify the Company against future obligations to
be incurred by IPN, LLC and granted to the Company the right to repurchase up to
80% of IPN, LLC on or before January 1, 2000, at an option price equal to 80% of
the $3.5 million selling price, adjusted for any capital contributions or
distributions after the sale, plus a premium depending on when the option was
exercised. The Company did not exercise the repurchase option. See Note M.
Effective July 1, 1998, the Company sold to HAI Acquisitions, Inc.
(unrelated to HealthAxis, Inc.) (in which Mr. Jensen held a 100% equity
interest) its equity interest in HealthCare Automation, Inc. (a healthcare
solutions company) for cash in the amount of $1.9 million, which represented the
net book value of the assets sold and included $2.6 million of assets and
$750,000 of liabilities. As part of the sale transaction, HAI Acquisitions, Inc.
granted to the Company the right to repurchase up to 80% of HealthCare
Automation, Inc. on or before January 1, 2000, at an option price equal to 80%
of the $1.9 million selling price, adjusted for any capital contributions or
distributions after the sale, plus a premium depending on when the option was
exercised. The Company did not exercise the repurchase option. See Note M.
F-17
65
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1998, the Company sold its ATM transaction processing assets of
a subsidiary for $17.5 million (see Note M). During 1998, the Company recognized
other income of $9.7 million as a result of this sale.
For financial reporting purposes, the acquisitions described above were
accounted for using the purchase method of accounting, and, as a result, the
assets and liabilities acquired were recorded at fair value on the dates
acquired. The Consolidated Statement of Operations for the year of the
acquisition includes the results of operations of each acquired company from
their respective dates of acquisition. The effect of these acquisitions on the
Company's results of operations was not material. Accordingly, pro forma
financial information has not been presented.
Deferred Acquisition Costs
Included in deferred acquisition costs are the unamortized costs of writing
new insurance policies and the costs of policies acquired through acquisitions.
The following is an analysis of deferred acquisition costs:
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Costs of policies acquired:
Beginning of year..................................... $17,436 $21,910 $24,938
Additions.......................................... -- 213 --
Amortization(a).................................... (2,934) (4,687) (3,028)
Sale of National Motor Club........................ (9,734) -- --
------- ------- -------
End of year........................................ 4,768 17,436 21,910
Costs of policies issued................................ 63,747 62,752 71,098
------- ------- -------
Total Deferred Acquisition Costs.............. $68,515 $80,188 $93,008
======= ======= =======
---------------
(a) The discount rate used in the amortization of the costs of policies
acquired ranges from 7% to 8%.
NOTE D -- INVESTMENTS
A summary of net investment income is set forth below:
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Fixed maturities........................................ $60,385 $60,833 $59,321
Equity securities....................................... 1,228 1,386 969
Mortgage and collateral loans........................... 627 816 1,653
Policy loans............................................ 1,333 1,353 1,357
Short-term investments.................................. 16,130 9,740 8,010
Investment in equity investees.......................... 9,158 7,857 5,038
Other investments....................................... 7,526 7,208 2,013
------- ------- -------
96,387 89,193 78,361
Less investment expenses................................ (3,936) (3,696) (3,469)
------- ------- -------
$92,451 $85,497 $74,892
======= ======= =======
F-18
66
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Realized gains and (losses) and the change in unrealized investment gains
and (losses) on fixed maturity and equity security investments are summarized as
follows:
GAINS
FIXED EQUITY OTHER (LOSSES) ON
MATURITIES SECURITIES INVESTMENTS INVESTMENTS
---------- ---------- ----------- -----------
(IN THOUSANDS)
Year Ended December 31:
2000
Realized................................ $ (3,545) $26,440 $2,994 $ 25,889
Change in unrealized.................... 29,854 863 585 31,302
-------- ------- ------ --------
Combined........................ $ 26,309 $27,303 $3,579 $ 57,191
======== ======= ====== ========
1999
Realized................................ $ (802) $ 885 $ (450) $ (367)
Change in unrealized.................... (64,142) (3,116) (153) (67,411)
-------- ------- ------ --------
Combined........................ $(64,944) $(2,231) $ (603) $(67,778)
======== ======= ====== ========
1998
Realized................................ $ 3,311 $ 1,635 $ (34) $ 4,912
Change in unrealized.................... 1,113 (2,010) (431) (1,328)
-------- ------- ------ --------
Combined........................ $ 4,424 $ (375) $ (465) $ 3,584
======== ======= ====== ========
Gross unrealized investment gains pertaining to equity securities were
$639,000, $500,000 and $1.9 million at December 31, 2000, 1999 and 1998,
respectively. Gross unrealized investment losses pertaining to equity securities
were $2.6 million, $3.4 million and $1.6 million at December 31, 2000, 1999 and
1998, respectively.
The amortized cost and fair value of investments in fixed maturities are as
follows:
DECEMBER 31, 2000
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
U.S. Treasury and U.S. Government agency
Obligations.............................. $ 62,620 $1,367 $ (215) $ 63,772
Mortgage-backed securities issued by U.S.
Government agencies and Authorities...... 70,132 1,189 (346) 70,975
Other mortgage and asset backed
Securities............................... 148,131 2,143 (2,678) 147,596
Other corporate bonds...................... 547,022 4,448 (19,380) 532,090
-------- ------ -------- --------
Total fixed maturities........... $827,905 $9,147 $(22,619) $814,433
======== ====== ======== ========
F-19
67
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
U.S. Treasury and U.S. Government agency
Obligations.............................. $ 63,614 $ 57 $ (2,200) $ 61,471
Mortgage-backed securities issued by U.S.
Government agencies and authorities...... 65,423 152 (1,875) 63,700
Other mortgage and asset backed
Securities............................... 186,344 821 (6,864) 180,301
Other corporate bonds...................... 589,281 992 (34,408) 555,865
-------- ------ -------- --------
Total fixed maturities........... $904,662 $2,022 $(45,347) $861,337
======== ====== ======== ========
Fair values for fixed maturity securities are based on quoted market
prices, where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from quotation services.
The amortized cost and fair value of fixed maturities at December 31, 2000,
by contractual maturity, are shown below. Fixed maturities subject to early or
unscheduled prepayments have been included based upon their contractual maturity
dates. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
AMORTIZED COST FAIR VALUE
-------------- ----------
(IN THOUSANDS)
Maturity
One year or less............................................ $ 24,999 $ 24,931
Over 1 year through 5 years................................. 197,898 193,846
Over 5 years through 10 years............................... 238,484 230,792
Over 10 years............................................... 148,261 146,293
-------- --------
609,642 595,862
Mortgage and asset backed securities........................ 218,263 218,571
-------- --------
Total fixed maturities............................ $827,905 $814,433
======== ========
Proceeds from the sale and call of investments in fixed maturities were
$148.0 million, $98.9 million and $332.2 million for 2000, 1999 and 1998,
respectively. Gross gains of $1.3 million, $2.1 million and $6.5 million, and
gross losses of $5.0 million, $2.9 million and $3.2 million were realized on the
sale and call of fixed maturity investments during 2000, 1999 and 1998,
respectively. Proceeds from the sale of equity investments were $12.6 million,
$12.2 million and $8.1 million for 2000, 1999 and 1998, respectively. Gross
gains of $1.1 million, $1.8 million and $1.7 million and gross losses of
$867,000, $935,000 and $48,000 were realized on sales of equity investments
during 2000, 1999 and 1998, respectively.
Following is a summary of the Company's equity securities:
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(IN THOUSANDS)
Common Stocks.................................. $ 351 $ 412 $ 129 $ 233
Non-redeemable preferred stocks................ 18,575 16,504 25,822 22,846
------- ------- ------- -------
$18,926 $16,916 $25,951 $23,079
======= ======= ======= =======
F-20
68
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value, which represents carrying amounts, of equity securities are
based on quoted market prices. For equity securities not actively traded, market
values are estimated using values obtained from quotation services.
The carrying amounts of the Company's investments in mortgage, collateral
and policy loans approximate fair value. The fair values for mortgage,
collateral and policy loans are estimated using discounted cash flow analysis,
using interest rates currently being offered for similar loans to borrowers with
similar credit ratings.
The carrying values for mortgage and collateral loans are net of allowance
of $650,000 for each of 2000 and 1999.
The Company recognizes the credit risk involved in the fixed maturities
portfolio. The credit risk is minimized by investing primarily in investment
grade securities. Included in fixed maturities is a concentration of mortgage
and asset backed securities. At December 31, 2000, the Company had a carrying
amount of $218.6 million of mortgage and asset backed securities, of which $71.0
million were government backed, $75.1 million were rated AAA, $42.0 million were
rated AA, $23.4 million were rated A, and $7.1 million were rated BBB by
external rating agencies. At December 31, 1999, the Company had a carrying
amount of $244.0 million of mortgage and asset backed securities, of which $63.7
million were government backed, $102.1 million were rated AAA, $38.4 million
were rated AA, $33.3 million were rated A, and $6.5 million were rated BBB by
external rating agencies.
At December 31, 2000 and 1999, the Company held a 10% and 12% investment
interest, respectively, in AMLI Residential Trust (a real estate investment
trust), which investment is accounted for under the equity method of accounting.
This investment, which is included in investment in equity investees, was
recorded at $23.1 million and $26.8 million at December 31, 2000 and 1999,
respectively, and the market value was $63.0 million and $60.1 million at
December 31, 2000 and 1999, respectively. During 2000 and 1999, the Company
received dividends from AMLI Residential Trust in the amount of $4.7 million and
$3.8 million, respectively.
Under the terms of various reinsurance agreements (see Note H), the Company
is required to maintain assets in escrow with a fair value equal to the
statutory reserves assumed under the reinsurance agreements. Under these
agreements, the Company had on deposit, securities with a fair value of
approximately $157.7 million as of December 31, 2000. In addition, at December
31, 2000, domestic insurance subsidiaries had securities with a fair value of
$17.4 million on deposit with insurance departments in various states.
NOTE E -- INVESTMENT IN HEALTHAXIS, INC. (FORMERLY HEALTHAXIS.COM, INC.)
During 2000 the Company held a significant investment interest in
HealthAxis.com, Inc. ("HealthAxis.com"), a provider of Internet-enabled,
integrated proprietary software applications that address the workflow and
processing inefficiencies embedded in the healthcare insurance industry.
HealthAxis.com, through its proprietary web-enabled enrollment and plan
administration applications, provides Internet enrollment and online access to
claims data. These software applications increase the efficiency of a client's
interaction with other participants by eliminating paper-based processes and
improving the client's ability to share data with plan members and other
industry participants. HealthAxis.com's clients include large insurance
carriers, Blue Cross and Blue Shield organizations, third party administrators,
self-funded employers, and other industry participants. HealthAxis.com also
provides systems integration, technology management and data capture services to
its clients.
The Company's interest in HealthAxis.com was derived from the January 7,
2000 merger (the "Insurdata Merger") of Insurdata Incorporated (formerly a
wholly-owned subsidiary of UICI) with and into HealthAxis.com, the sole
operating subsidiary of HealthAxis, Inc. (formerly Provident American
Corporation) ("HAI") (HAXS:Nasdaq). HealthAxis.com formerly was a web-based
retailer of health insurance products and related consumer services. During 1999
and in advance of the Insurdata Merger, Insurdata
F-21
69
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transferred to UICI the net assets of Insurdata Administrators (a division of
Insurdata engaged in the business of providing third party benefits
administration, including eligibility and billing reconciliation) and its member
interest in Insurdata Marketing Services, LLC (a subsidiary of Insurdata engaged
in the business of marketing third party benefits administration services) for
cash in the amount of $858,000, representing the aggregate book value of the net
assets and member interest so transferred. The Company recognized no gain on the
non-monetary exchange of stock in the Insurdata Merger due to uncertainty of
realization of the gain.
Following the Insurdata Merger, the Company held approximately 43.6%, and
HAI held approximately 28.1%, of the issued and outstanding capital stock of
HealthAxis.com, the surviving corporation in the Insurdata Merger. On March 14,
2000, the Company sold in a private sale to an institutional purchaser 2,000,000
shares of HealthAxis.com common stock and, giving effect to such sale, the
Company held 39.2% of the issued and outstanding shares of common stock of
HealthAxis.com.
On September 29, 2000, UICI purchased from a third party $1.7 million
principal amount of HAI 2% convertible subordinated debentures and a warrant to
purchase 12,291 shares of HAI common stock at an exercise price of $3.01 per
share, for a total purchase price of $1.2 million. The debentures mature in
September 2005 and are convertible into 185,185 shares of HAI common stock.
On January 26, 2001, HAI acquired all of the outstanding shares of
HealthAxis.com that HAI did not then own in a stock-for-stock merger of
HealthAxis.com with a wholly-owned subsidiary of HAI (the "HAI Merger"). In the
HAI Merger, HealthAxis.com shareholders (including the Company) received 1.334
shares of HAI common stock for each share of HealthAxis.com common stock
outstanding. Following the HAI Merger, the Company beneficially holds 23,944,030
shares of HAI common stock (including the 185,185 shares issuable upon
conversion of the HAI convertible subordinated debentures), representing
approximately 45.3% of the issued and outstanding shares of HAI. Of such
23,944,030 shares beneficially held by UICI, 8,581,714 shares (representing
16.2% of HAI's total issued and outstanding shares) are subject to the terms of
a Voting Trust Agreement, pursuant to which trustees unaffiliated with the
Company have the right to vote such shares. Gregory T. Mutz and Patrick J.
McLaughlin, President and a director of UICI, respectively, serve on the Board
of Directors of HAI.
The Company has accounted for its investment in HealthAxis.com (and intends
to account for its investment in HAI) utilizing the equity method and has
recognized its ratable share of HealthAxis.com's income and loss (computed prior
to amortization of goodwill recorded by HealthAxis.com in connection with the
Insurdata Merger). At December 31, 2000, the Company's carrying value of its
investment in HealthAxis.com was $18.4 million, representing its carryover
investment in Insurdata plus the Company's investment in shares of
HealthAxis.com acquired prior to the Insurdata Merger ($5.0 million of preferred
stock) and its investment in the HAI convertible subordinated debentures, all as
reduced by the Company's cost of the shares of HealthAxis.com sold in March 2000
and by the Company's equity in the losses of HealthAxis.com for the year ended
December 31, 2000 in the amount of $15.6 million.
Effective June 30, 2000, HealthAxis.com sold to Digital Insurance, Inc.
("Digital") certain assets used in connection with HealthAxis.com's retail
website, including the retail website user interface, all existing in-force
insurance policies, certain physical assets, and rights under certain
agreements, including, but not limited to portal marketing agreements and
agreements related to HealthAxis.com's affiliate partner program. As part of the
consideration received by HealthAxis.com in the transaction, Digital issued to
HealthAxis.com 11% of the outstanding shares of common stock of Digital (on a
fully diluted basis).
HealthAxis.com generated revenues of $43.7 million, $46.2 million and $41.2
million in 2000, 1999 and 1998, respectively, of which 63%, 58% and 58% were
derived from information systems and software development services provided to
UICI and its affiliates.
F-22
70
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Set forth below is summary condensed balance sheet and income statement
data for HealthAxis.com as of and for the year ended December 31, 2000. This
financial information has been adjusted to exclude the effects of push-down
accounting for the Insurdata Merger.
DECEMBER 31,
2000
--------------
(IN THOUSANDS)
Assets
Cash and cash equivalents............................ $16,840
Other current assets................................. 10,597
Property and equipment............................... 10,616
Other assets......................................... 9,361
-------
Total assets................................. $47,414
=======
Liabilities
Accounts payable and accrued expenses................ $ 5,780
Other liabilities.................................... 2,817
-------
Total liabilities.................................... 8,597
Stockholders' equity................................. 38,817
-------
Total liabilities and equity................. $47,414
=======
YEAR ENDED
DECEMBER 31,
2000
--------------
(IN THOUSANDS)
Revenue................................................ $ 43,671
Operating expenses..................................... 82,272
--------
Net loss..................................... $(38,601)
========
NOTE F -- STUDENT LOANS
The Company through its AMS subsidiary markets student loans to students at
selected colleges and universities. AMS has historically targeted universities
serving graduate healthcare professionals.
At December 31, 1999, the Company had the right to purchase and/or direct
the sale of loans totaling approximately $283.0 million which expired unused in
January 2000.
Following is a summary of the Company's student loans:
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------------- -----------------------
CARRYING CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
FFELP loans.......................... $1,004,319 $1,044,492 $1,179,070 $1,230,949
Alternative loans.................... 142,045 142,045 133,112 133,112
Deferred loan origination costs...... 17,181 -- 16,120 --
Allowance for losses................. (7,473) -- (2,252) --
---------- ---------- ---------- ----------
Total student loans.................. $1,156,072 $1,186,537 $1,326,050 $1,364,061
========== ========== ========== ==========
The fair value of student loans is estimated based on values of recent
sales of student loans by the Company.
F-23
71
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FFELP loans are guaranteed as to 98% of principal and accrued interest by
the federal government or other private insurers. Certain alternative loans are
guaranteed as to 95% of principal and accrued interest by private insurers. The
Company has established a reserve for potential losses on the portion of
principal and accrued interest not guaranteed by the federal government or other
private insurers and for potential losses on uninsured student loans. The
reserve is maintained at a level that the Company believes is adequate to absorb
estimated credit losses.
The Company's provision for losses on student loans is summarized as
follows:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
------- ------- -----
(IN THOUSANDS)
Balance at beginning of year................................ $2,252 $ 935 $400
Provisions for losses....................................... 5,221 1,317 535
------ ------ ----
Balance at end of year...................................... $7,473 $2,252 $935
====== ====== ====
The Company recognized interest income from the student loans of $115.3
million, $66.4 million and $29.0 million in 2000, 1999 and 1998, respectively.
During 2000 and 1999, respectively, the Company acquired loans with
principal and accrued interest balances of $2.5 million and $409.1 million,
respectively. The Company purchased the loans at a (discount) or premium of
($75,000) and $12.8 million, respectively, in accordance with the terms of
purchase agreements. The discount or premium is being amortized over the life of
the loans or included in the calculation of gain or loss if loans are sold in
the secondary market.
Included in other fees for the year ended December 31, 2000 and 1999 was
approximately $7.8 million and $7.4 million, respectively, in gain from the sale
of loans. The sold loans had a carrying value of $779.8 million and $397.8
million at the respective dates of sale in 2000 and 1999, respectively.
NOTE G -- POLICY LIABILITIES
Liability for future policy and contract benefits consists of the
following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Life............................................ $270,877 $267,309
Annuity......................................... 158,290 185,467
-------- --------
$429,167 $452,776
======== ========
With respect to traditional life insurance, future policy benefits are
computed on a net level premium method using assumptions with respect to current
investment yield, mortality and withdrawal rates determined to be appropriate as
of the date the business was acquired by the Company. Substantially all reserve
interest assumptions range from 7% to 8%. Such liabilities are graded to equal
statutory values or cash values prior to maturity.
Interest rates credited to future contract benefits related to universal
life-type contracts approximated 5.3%, 5.4% and 5.5% during 2000, 1999 and 1998,
respectively. Interest rates credited to the liability for future contract
benefits related to annuity contracts generally ranged from 3.0% to 7.3% during
2000, 4.5% to 7.2% during 1999 and 4.5% to 6.0% during 1998.
F-24
72
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As described in Note H, the Company assumes certain life and annuity
business from subsidiaries of AEGON USA, INC. ("AEGON"), utilizing the same
actuarial assumptions as the ceding company. The liability for future policy
benefits related to life business has been calculated using an interest rate of
9% graded to 5% over twenty years for life policies. Mortality and withdrawal
rates are based on published industry tables or experience of the ceding company
and include margins for adverse deviation. Interest rates credited to the
liability for future contract benefits related to these annuity contracts
generally ranged from 4.8% to 5.5% during each of 2000, 1999, and 1998.
The carrying amounts and fair values of the Company's liabilities for
investment-type contracts (included in future policy and contract benefits and
other policy liabilities in the consolidated balance sheets) are as follows:
DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
Direct annuities........................... $ 85,383 $ 79,577 $ 93,579 $ 90,023
Assumed annuities.......................... 72,907 72,494 91,888 91,049
Supplemental contracts without life
contingencies............................ 1,818 1,818 1,885 1,885
-------- -------- -------- --------
$160,108 $153,889 $187,352 $182,957
======== ======== ======== ========
Fair values under investment-type contracts consisting of direct annuities
and supplemental contracts without life contingencies are estimated using the
assumption-reinsurance pricing method, based on estimating the amount of profits
or losses an assuming company would realize, and then discounting those amounts
at a current market interest rate. Fair values for the Company's liabilities
under assumed annuity investment-type contracts are estimated using the cash
surrender value of the annuity.
Activity in the claims liability is summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Claims liability at beginning of year, net of related
reinsurance recoverables........................... $303,006 $300,695 $248,969
Add:
Incurred losses, net of reinsurance, occurring
during:
Current year.................................... 469,248 499,119 577,823
Prior years..................................... (15,779) 1,602 (10,151)
-------- -------- --------
453,469 500,721 567,672
-------- -------- --------
Deduct payments for claims, net of reinsurance,
occurring during:
Current year.................................... 243,975 272,381 332,056
Prior years..................................... 202,689 226,029 183,890
-------- -------- --------
446,664 498,410 515,946
-------- -------- --------
Claims liability at end of year, net of related
reinsurance recoverables (2000 -- $48,297;
1999 -- $32,937; and 1998 -- $16,603).............. $309,811 $303,006 $300,695
======== ======== ========
F-25
73
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above reconciliation shows incurred losses related to 2000 and 1998
developed in amounts less than originally anticipated due to better than
expected experience. The incurred loss related to 1999 reflects adverse
development related to performance of a managed care product.
NOTE H -- REINSURANCE
In 2000, 1999 and 1998, approximately 13%, 17% and 21%, respectively, of
the Company's health premiums and 1%, 1% and 2% of the Company's life premiums
were assumed from AEGON. Prior to 1997, the health business assumed was marketed
by UGA Inc. and issued through AEGON's insurance subsidiaries. Under the terms
of its coinsurance agreement, AEGON's insurance subsidiaries have agreed to cede
and the Company has agreed to assume through coinsurance 60% of the health
business previously sold by UGA Inc. agents for business written on AEGON's
insurance subsidiaries prior to 1998. In 1998, 1999 and 2000, the Company
directly issued the health business written by UGA Inc. agents and retained all
of the business.
The Company's insurance subsidiaries, in the ordinary course of business,
reinsure certain risks with other insurance companies. These arrangements
provide greater diversification of risk and limit the maximum net loss potential
to the Company arising from large risks. To the extent that reinsurance
companies are unable to meet their obligations under the reinsurance agreements,
the Company remains liable.
Reinsurance transactions reflected in the consolidated financial statements
are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Premiums:
Premiums Written:
Direct............................................. $667,583 $641,308 $608,205
Assumed............................................ 121,063 162,253 229,411
Ceded.............................................. (76,658) (70,262) (45,658)
-------- -------- --------
Net Written........................................ $711,988 $733,299 $791,958
======== ======== ========
Premiums Earned:
Direct............................................. $663,560 $635,208 $617,867
Assumed............................................ 118,468 164,626 226,024
Ceded.............................................. (73,077) (63,247) (47,269)
-------- -------- --------
Net Earned......................................... $708,951 $736,587 $796,622
======== ======== ========
F-26
74
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- DEBT
Set forth below is a summary of the Company's short and long term
indebtedness outstanding at December 31, 2000 and 1999 (excluding debt at
Academic Management Services Corp.) (see Note J):
DECEMBER 31,
------------------
2000 1999
------- --------
(IN THOUSANDS)
Short-term debt:
Note payable to related party............................. $18,954 $ --
Other notes............................................... 18,000 602
Portion of long-term debt due in 2000..................... 6,317 34,032
------- --------
Total short-term debt............................. $43,271 $ 34,634
======= ========
Long-term debt:
8.75% Senior Notes........................................ $15,803 $ 19,754
Line of Credit............................................ -- 100,000
Other notes............................................... 14,025 281
------- --------
29,828 120,035
Less: amounts due in 2000................................. (6,317) (34,032)
------- --------
Total long-term debt.............................. $23,511 $ 86,003
======= ========
On June 22, 1994, the Company authorized an issue of its 8.75% Senior Notes
due June 2004 in the aggregate amount of $27.7 million. In accordance with the
agreement governing the terms of the notes (the "Note Agreement"), on June 1,
1998 and on each June 1 thereafter to and including June 1, 2003, the Company is
required to repay approximately $4.0 million aggregate principal together with
accrued interest thereon to the date of such repayment. The Company made its
first scheduled payment on June 1, 1998. The principal amount of the notes
outstanding was $15.8 million and $19.7 million at December 31, 2000 and 1999,
respectively. The Company incurred $1.5 million, $1.9 million and $2.2 million
of interest expense on the notes in the years ended December 31, 2000, 1999 and
1998, respectively. The Note Agreement contains restrictive covenants that
include certain financial ratios, limitations on additional indebtedness as a
percentage of certain defined equity amounts and the disposal of certain
subsidiaries, including primarily the Company's regulated insurance
subsidiaries.
In May 1999, the Company entered into a $100 million unsecured credit
facility (the "Bank Credit Facility") with a group of commercial banks. Amounts
outstanding under the Bank Credit Facility initially bore interest at an annual
rate of LIBOR plus 75 basis points (0.75%). At December 31, 1999, the Company
had fully drawn on the Bank Credit Facility, of which $50.0 million was used to
repay $50.0 million of debt outstanding under the Company's prior bank facility
and $50.0 million was used to fund the UMMG and Academic Management Services
acquisitions (completed in May 1999 and July 1999, respectively) and current
operations. Effective December 31, 1999, the interest rate on amounts
outstanding under the Bank Credit Facility was increased to LIBOR plus 100 basis
points (1.00%).
On March 14, 2000, a limited liability company controlled by the Company's
Chairman ("Lender LLC") loaned $70.0 million to a newly-formed subsidiary of the
Company (the "Lender LLC Loan"). The proceeds of the Lender LLC Loan, together
with $5.0 million of cash on hand, were used to reduce indebtedness outstanding
under the Bank Credit Facility from $100.0 million to $25.0 million. The Lender
LLC Loan bore interest at the prevailing prime rate, was guaranteed by UICI, was
due and payable in July 2001 and was secured by a pledge of investment
securities and shares of the Company's National Motor Club unit.
F-27
75
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As part of the March 2000 paydown of indebtedness under the Bank Credit
Facility, the Bank Credit Facility was amended to provide, among other things,
that the $25.0 million balance outstanding would be due and payable on July 10,
2000, amounts outstanding under the facility would be secured by a pledge of
investment securities and shares of Mid-West National Life Insurance Company of
Tennessee ("Mid-West"), and the restrictive covenants formerly applicable to
UICI and its restricted subsidiaries (primarily the Company's insurance
companies) were made applicable solely to Mid-West. Amounts outstanding under
the Bank Credit Facility continued to bear interest at LIBOR plus 100 basis
points per annum. On April 11, 2000 and June 28, 2000, the Company made
principal payments of $11.0 million and $8.0 million, respectively, under the
Bank Credit Facility, and on June 30, 2000, Lender LLC, against payment to the
banks of $6.0 million, assumed 100% of the banks' remaining $6.0 million
position in the Bank Credit Facility.
Effective July 27, 2000, the Company and the Lender LLC completed a further
restructuring of the terms of the Lender LLC Loan. As part of the restructuring,
the Company paid to Lender LLC principal owing on the Lender LLC Loan in the
amount of $6.0 million and amended the terms of the Lender LLC Loan to provide
that the aggregate principal amount of $70.0 million then owing by the Company
(the "Amended Lender LLC Loan") would consist of a $32.0 million unsecured
tranche and a $38.0 million tranche secured by a pledge of 100% of the capital
stock of Mid-West. The Amended Lender LLC Loan (a) matured on January 1, 2002,
(b) continued to bear interest at the prevailing prime rate from time to time,
with interest accruing but not payable until the earlier to occur of full
prepayment of the Lender LLC Loan or January 1, 2002, and (c) was mandatorily
prepayable monthly to the extent of 1% of the original outstanding principal
balance of the Amended Lender LLC Loan. The security interest in all remaining
collateral previously pledged to secure payment of the Lender LLC Loan and
indebtedness outstanding under the bank credit facility (including all
investment securities and shares of the Company's National Motor Club unit) was
released in full.
In addition to scheduled principal payments totaling $3.5 million made
during the course of 2000, on October 20, 2000, the Company prepaid the
unsecured tranche of the Amended Lender LLC Loan in the amount of $12.5 million,
and on November 2, 2000, the Company prepaid an additional $17.4 million of the
unsecured tranche and $17.6 million of the secured tranche. Accordingly, at
December 31, 2000, the Company had no indebtedness outstanding under the
unsecured tranche and $19.0 million outstanding under the secured tranche of the
Amended Lender LLC Loan.
On January 30, 2001, the Company prepaid in full all principal and accrued
interest owing on the secured tranche of the Amended Lender LLC Loan in the
amount of $21.1 million, utilizing a portion of the proceeds received in
liquidation of UCNB, and the lender's security interest in 100% of the capital
stock of Mid-West was released in full.
On July 19, 2000, the Company's offshore-domiciled insurance companies
incurred indebtedness with an institutional lender in the amount of $24.0
million. The indebtedness bears interest at the per annum rate of 11.0%, matures
on August 1, 2001, is secured by a pledge of all of the assets of the offshore
companies, and is guaranteed by the Company. The proceeds of the borrowing were
advanced to the parent company to fulfill liquidity needs at the parent company.
At December 31, 2000, the outstanding balance on the loan was $18.0 million, and
at March 5, 2001, the outstanding balance on the loan was $6.0 million.
Effective June 29, 2000, UICI executed and delivered an unsecured
promissory note payable to a systems vendor in the amount of $10.0 million,
which note bears interest at LIBOR plus 150 basis points (1.5%) (7.9% at
December 31, 2000), and is payable as to principal in equal quarterly
installments in the amount of $500,000, commencing October 1, 2000, with a final
maturity of June 30, 2005. The note was delivered to discharge an account
payable by UCS in the amount of $10.0 million owing to the systems vendor, which
payable was reflected in the consolidated balance sheet of the Company (included
in net liabilities of discontinued operation).
F-28
76
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective October 1, 2000, the Company's AMS subsidiary amended the terms
of its unsecured term loan facility (under which, at December 31, 2000, $21.3
million of indebtedness was outstanding) to eliminate all financial covenants.
In connection with the amendment of the facility, UICI (the parent company)
agreed to unconditionally guarantee the payment when due of such indebtedness.
The note matures on June 30, 2001.
Effective May 17, 1999, the Company terminated a $12.0 million revolving
credit note with AEGON. The Company did not borrow on this revolving credit note
during 1999.
Principal payments required in each of the five years are as follows:
(IN THOUSANDS)
--------------
2001................................................... $43,271
2002................................................... 6,331
2003................................................... 6,647
2004................................................... 9,033
2005................................................... 1,500
The carrying amounts of the Company's short-term debt approximate fair
values.
The fair value of the long-term debt was $30.7 million and $120.8 million
at December 31, 2000 and 1999, respectively. The fair value of the Company's
long-term debt is estimated using discounted cash flow analysis, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
Total interest paid was $6.9 million, $7.4 million and $3.1 million in the
years ended December 31, 2000, 1999 and 1998, respectively.
NOTE J -- STUDENT LOAN CREDIT FACILITIES
Following is a summary of debt outstanding under student loan credit
facilities at Academic Management Services Corp. ("AMS").
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Short-term debt:
Lehman Warehouse Line of Credit........................... $ 113,389 $ 318,735
Bank of America Warehouse Line of Credit.................. -- 79,004
Portion of long-term debt due in 2001..................... 639,791 10,917
---------- ----------
Total short-term debt............................. $ 753,180 $ 408,656
========== ==========
Long-term debt:
Auction Rate notes........................................ $ 404,990 $ 432,790
Floating Rate notes....................................... 198,094 229,000
Commercial Paper.......................................... 618,374 639,235
Other notes............................................... 23,209 31,584
---------- ----------
1,244,667 1,332,609
Less: amounts due in 2001................................. (639,791) (10,917)
---------- ----------
Total long-term debt.............................. $ 604,876 $1,321,692
========== ==========
On June 11, 1999, an AMS special purpose financing subsidiary sold, in a
private placement transaction, $319.5 million principal amount of Auction Rate
Student Loan-Backed Notes at an initial interest rate of
F-29
77
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5.038%. The notes were sold in two tranches (Class A-1 and Class A-2) and mature
in November 2022. The interest rate (6.95% for Class A-1 and 6.9% for Class A-2
at December 31, 2000) on the notes will be reset monthly by an auction process.
The notes received a "AAA" credit rating from Standard & Poor's and Fitch IBCA
and an "Aaa" rating from Moody's Investor Services. The outstanding balance of
the Notes at December 31, 2000 and 1999 was $290.0 million and $317.8 million,
respectively.
In July 1999 AMS entered into a $30.0 million loan agreement with Bank of
America, N.A. the proceeds of which were used to partially finance the
acquisition of Academic Management Services, Inc. (AMS's tuition installment
payment business). The note requires quarterly principal payments beginning
December 1999 and matures on June 30, 2001. Effective October 1, 2000, AMS
amended the terms of the agreement governing the terms of the note to eliminate
all financial covenants. In connection with the amendment of the loan agreement,
UICI agreed to unconditionally guarantee the payment when due of such
indebtedness. The note bears interest at prime plus 0.5% (9.5% at December 31,
2000). The balance at December 31, 2000 and 1999 was $21.3 million and $28.8
million, respectively.
Effective August 6, 1999 AMS completed a closing and funding of $515.0
million of its $650.0 million single seller asset-backed commercial paper
conduit, pursuant to which commercial paper may be issued from time to time with
maturities from one to 270 days. Approximately $618.4 million and $639.2 million
of commercial paper was issued and outstanding under the facility at December
31, 2000 and 1999, respectively. At December 31, 2000, commercial paper issued
under this facility had interest rates ranging from 6.45% to 6.75%. Liquidity
support is provided by a separate banking facility. Under the terms of the
program, in the event the support facility is activated, borrowings thereunder
would be repaid using collections of underlying student loans, would bear
interest at LIBOR plus seventy-five (75) basis points and would mature in August
2034. The commercial paper received ratings of A1/P1/F1 from Standard & Poor's,
Moody's, and Fitch, respectively.
On October 7, 1999, AMS completed a $344.0 million financing of three
classes of notes. The $229.0 million Class A-1 notes were structured as
three-month LIBOR floating rate notes and were priced with a spread of 42 basis
points with the interest rate to be reset quarterly. The Class A-1 notes, with
an outstanding balance of $198.1 million and $229.0 million at December 31, 2000
and 1999, respectively, have an expected average life of 3.5 years with legal
final maturity in April 2009. The $57.5 million Class A-2 and $57.5 million
Class A-3 notes, the entire original amount of which remained outstanding at
December 31, 2000 and 1999, were structured as auction rate notes with an
initial interest rate of 6.38%. The interest rate (6.72% at December 31, 2000)
on these notes is reset quarterly pursuant to auctions conducted by Lehman
Brothers and BancAmerica Securities. Legal final maturity of the Class A-2 and
Class A-3 notes is July 27, 2000. Lehman Brothers and BancAmerica Securities
were the initial purchasers of all three classes of notes. All three classes of
notes received AAA/Aaa/AAA ratings from Standard & Poor's, Moody's and Fitch
IBCA respectively.
Until July 2000, AMS had a line of credit outstanding with a commercial
bank, secured by the AMS student loan portfolio. The maximum amount outstanding
under this line during 2000 was approximately $97.0 million, with an average
monthly balance of approximately $37.5 million.
AMS has a note payable to Fleet National Bank in the outstanding principal
amount of $2.0 million and $2.1 million at December 31, 2000 and 1999,
respectively, maturing June 30, 2004. The note bears interest at 8.3% at
December 31, 2000, requires principal and interest payments quarterly and is
secured by a first mortgage on real estate held by AMS.
In March 1998, AMS entered into a master repurchase agreement and credit
facility with a financial institution, the obligations under which are partially
(approximately $13.0 million at December 31, 2000) guaranteed by the Company.
The repurchase agreement provides for the purchase of student loans by the
financial institution, and the financial institution may put the student loans
back to AMS on the last day of
F-30
78
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
each month. AMS, in turn, has the right to require the financial institution to
repurchase the student loans on such date, with the interest rate on the credit
facility reset on such date. The credit facility provides for up to $150.0
million of financing and may be increased subject to monthly confirmations. The
credit facility had an outstanding balance of $113.4 million and $318.8 million
at December 31, 2000 and 1999, respectively, and bears interest at a variable
annual rate of LIBOR plus 75 basis points (7.4% at December 31, 2000). The
credit facility has a term of one year and is secured by student loans
originated under the Federal Family Education Loan Program, which loans are
guaranteed by the federal government, or alternative loans guaranteed by private
guarantors. The financial institution may value the loans at any time and
require AMS to repay any amount by which the market value of the loans is less
than the amount required by the credit facility.
In December 1998, AMS sold $357.4 million of loans to a trust which issued
floating rate student loan asset-backed securities in a private offering. The
Company has partially guaranteed the performance of the loans. The AAA rated
Class A securities were acquired by a financial institution. The Class A
securities had a variable interest rate of LIBOR plus 75 basis points. The trust
could issue up to $550.0 million of securities with a maturity of 30 years. At
December 31, 1998, the trust had issued Class A securities totaling $350.2
million and the interest rate on the Class A securities was 6.38%. The Company's
borrowings vary to reflect current interest rates and carrying amounts
approximate fair value. In connection with its August 1999 commercial paper
program, the Company redeemed these notes.
Principal payments required in each of the five years are as follows:
(IN THOUSANDS)
--------------
2001................................................... $753,180
2002................................................... 167
2003................................................... 167
2004................................................... 1,458
2005................................................... --
During the year ended December 31, 2000 and 1999, AMS paid total interest
on borrowings in the amount of $100.4 million and $57.5 million, respectively.
F-31
79
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- FEDERAL INCOME TAXES
Deferred income taxes for 2000 and 1999 reflect the impact of temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities. Deferred liabilities and assets consist of the
following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Deferred tax liabilities:
Deferred policy acquisition and loan origination.......... $ 23,192 $ 22,794
Investment in subsidiaries................................ 4,536 4,536
Other..................................................... 3,578 6,838
-------- --------
Total gross deferred tax liabilities.............. 31,306 34,168
-------- --------
Deferred tax assets:
Loss on disposal of discontinued operation................ 11,936 45,500
Policy liabilities........................................ 27,733 21,690
Unrealized loss on securities............................. 5,250 15,668
Allowance for losses on investments....................... -- 12,136
Operating loss carryforwards.............................. 22,254 13,533
Capital loss carryforwards................................ 7 404
Annual credit card fees................................... -- 6,139
Accrued expenses.......................................... 7,243 7,064
Tax credit carryovers..................................... 2,185 --
Other..................................................... 4,098 2,966
-------- --------
Total gross deferred tax assets................... 80,706 125,100
Less: valuation allowance................................... (16,451) (6,683)
-------- --------
Deferred tax assets............................... 64,255 118,417
-------- --------
Net deferred tax asset...................................... $ 32,949 $ 84,249
======== ========
The Company establishes a valuation allowance when management believes,
based on the weight of the available evidence, that it is more likely than not
that some portion of the deferred tax asset will not be realized. Realization of
the net deferred tax asset is dependent on generating sufficient future taxable
income. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced. The net change in the total valuation
allowance was an increase of approximately $9.8 million for 2000 and an increase
of approximately $5.0 million for 1999. The 2000 and 1999 increases in the
valuation allowance arise primarily from AMS, which files a separate income tax
return. The Company was not able to recognize any tax benefit associated with
the significant net operating losses of AMS, which is not part of the Company's
consolidated group for tax purposes.
F-32
80
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income tax expense (benefit) consisted of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
-------- -------- -------
(IN THOUSANDS)
From operations:
Continuing operations:
Current tax expense.............................. $ 31,764 $ 17,737 $18,682
Deferred tax expense (benefit)................... 1,980 (135) (2,943)
-------- -------- -------
Total from continuing operations............ 33,744 17,602 15,739
-------- -------- -------
Discontinued operations:
Current tax expense (benefit).................... (54,906) (21,039) 15,299
Deferred tax expense (benefit)................... 42,306 (75,134) 939
-------- -------- -------
Total from discontinued operation........... (12,600) (96,173) 16,238
-------- -------- -------
Total....................................... $ 21,144 $(78,571) $31,977
======== ======== =======
The Company's effective income tax rates applicable to continuing
operations varied from the maximum statutory federal income tax rate as follows:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
---- ------------ ----
Statutory federal income tax rate.......................... 35.0% 35.0% 35.0%
Small life insurance company deduction..................... (1.3) 0.6 (0.6)
Operating loss not benefited............................... 15.8 (2.2) --
Low-income housing credit.................................. (1.7) 0.5 --
Taxable distributions...................................... 1.5 -- --
Nondeductible compensation expenses........................ 2.2 -- --
Other items, net........................................... 2.2 0.7 (1.1)
---- ---- ----
Effective income tax rate applicable to continuing
operations............................................ 53.7% 34.6% 33.3%
==== ==== ====
Under pre-1984 federal income tax laws, a portion of a life insurance
company's "gain from operations" was not subject to current income taxation but
was accumulated for tax purposes in a memorandum account designated as
"policyholders' surplus account." These amounts are not taxable unless a life
insurance company fails to qualify as a life insurance company for federal
income tax purposes for two consecutive years, these amounts are distributed to
the Company, or these amounts exceed certain statutory limitations. The
aggregate accumulation in this account for the Company's life insurance
subsidiaries was approximately $11.7 million at December 31, 2000. For the
taxable years ended December 31, 1999 and 2000, The MEGA Life and Health
Insurance Company (MEGA) did not qualify as a life insurance company for federal
income tax purposes. Accordingly, taxes and interest of approximately $3.5
million have been provided in 1999 and 2000 on MEGA's policyholders' surplus
account of $8.7 million.
At December 31, 2000, certain acquired subsidiaries of the Company had
aggregate federal tax loss carryforwards of $5.6 million for use to offset
future taxable income, under certain circumstances, with expiration dates
ranging between 2002 and 2007. The maximum amounts of federal tax loss
carryforwards available are $2.0 million in 2001, $658,000 per year from 2002
through 2006, and $388,000 in 2007.
Total federal income taxes paid in prior years and recovered during 2000
total $40.8 million. Total federal income taxes paid were $11.8 million, $40.2
million and $15.7 million for 2000, 1999 and 1998, respectively.
F-33
81
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UICI, MEGA, two other non-life insurance subsidiaries and all of the
Company's non-insurance subsidiaries (other than AMS) file a consolidated
federal income tax return. AMS and the Company's life insurance subsidiaries all
file separate federal income tax returns.
The Company has interests in several limited liability corporations that
file separate tax returns. The Company's consolidated results of operations
reflect 100% of the income from these companies.
NOTE L -- STOCKHOLDERS' EQUITY
On August 11, 2000, the Company issued to the UICI Employee Stock Ownership
and Savings Plan ("the Employee Plan") 1,610,000 shares of UICI common stock at
a purchase price of $5.25 per share, or $8.5 million in the aggregate. The
purchase price for the shares was paid by delivery to UICI of the Employee
Plan's $8.5 million promissory note, which matures in three years and is secured
by a pledge of the purchased shares. See Note O.
In November 1998, the Company's board of directors authorized the
repurchase of up to 4,500,000 shares of the Company's Common Stock. The shares
were authorized to be purchased from time to time on the open market or in
private transactions. As of December 31, 2000, the Company had repurchased
198,000 shares pursuant to such authorization, all of which were purchased in
1999. At its regular meeting held on February 28, 2001, the Board of Directors
of the Company reconfirmed the Company's 1998 share repurchase program.
Following reconfirmation of the program, through March 13, 2001, the Company had
purchased an additional 807,700 shares pursuant to the program. The timing and
extent of additional repurchases, if any, will depend on market conditions and
the Company's evaluation of its financial resources at the time of purchase.
Effective September 15, 1999, the Company entered into an Assumption
Agreement with a related party (see Note M), pursuant to which UICI agreed to
assume and discharge an unfunded obligation to purchase and transfer to
independent sales agents, representatives and independent organizations, in
consideration of a cash payment made by the related party to the Company in the
amount of $10.1 million, 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, 1999). On October 29, 1999, the Company received the cash payment.
In 1999, the Company entered into a put/call agreement on the Company's
common stock with a related party. See Note M.
Pursuant to the Company's Executive Stock Purchase Program, during 1998 and
1999 the Company extended loans to officers, directors and employees in the
amount of $3.3 million and $2.9 million, respectively, the proceeds of which
were used to purchase Company Common Stock. The six-year term loans bear
interest at 5.22%-5.37% per annum, and interest is payable quarterly. Loans are
full recourse to borrowers and are payable in full upon the occurrence of
certain events. The terms of the loans were significantly modified during the
year ended December 31, 2000. See Note O.
Generally, total stockholders' equity of domestic insurance subsidiaries,
as determined in accordance with statutory accounting practices, in excess of
minimum statutory capital requirements is available for transfer to the parent
company subject to the tax effects of distribution from the "policyholders'
surplus account" described in Note K on federal income taxes. The minimum
statutory capital and surplus requirements of the Company's domestic insurance
subsidiaries at December 31, 2000 was $37.1 million.
Prior approval by insurance regulatory authorities is required for the
payment of dividends by a domestic insurance company that exceed certain
limitations based on statutory surplus and net income. At December 31, 2000, the
Company's domestic insurance companies could pay aggregate dividends to the
parent company of approximately $47.4 million without prior approval by
statutory authorities.
F-34
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Combined net income and stockholders' equity for the Company's domestic
insurance subsidiaries determined in accordance with statutory accounting
practices and adjusted for percentage of ownership and pro rata share of net
income are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Net income........................................... $ 45,688 $ 50,761 $ 4,804
Stockholders' equity................................. $286,275 $287,360 $227,167
The Company's insurance subsidiaries statutory-basis financial statements
are prepared in accordance with accounting practices prescribed or permitted by
the Oklahoma, Tennessee, or Texas Insurance Departments. Currently, "prescribed"
statutory accounting practices are interspersed throughout state insurance laws
and regulations, the NAIC's Accounting Practices and Procedures Manual and a
variety of other NAIC publications. "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices may
differ from state to state, may differ from company to company within a state,
and may change in the future.
The NAIC revised the Accounting Practices and Procedures Manual in a
process referred to as Codification. The revised manual will be effective
January 1, 2001. The domiciled states of the Company's insurance subsidiaries
(Oklahoma, Tennessee and Texas) have adopted the provisions of the revised
manual. The revised manual has changed, to some extent, prescribed statutory
accounting practices and will result in changes to the accounting practices that
the Company's insurance subsidiaries use to prepare its statutory-basis
financial statements. The cumulative effect of changes in accounting practices
adopted to conform to the revised Accounting Practices and Procedures Manual
will be reported as an adjustment to surplus as of January 1, 2001 in the
Company's statutory statements. The impact of these changes did not result in a
reduction in the Company's statutory-basis capital and surplus as of adoption.
NOTE M -- RELATED PARTY TRANSACTIONS
Introduction
Historically, the Company and its subsidiaries have engaged from time to
time in transactions and joint investments with executive officers and entities
controlled by executive officers, particularly Ronald L. Jensen (the Company's
Chairman) and entities in which Mr. Jensen and his adult children have an
interest ("Jensen Affiliates").
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
transaction. Prior to March 2000, the Board of Directors had adopted a policy
requiring that, where Mr. Jensen was the interested director, a contract or
transaction with Mr. Jensen or other company in which Mr. Jensen had 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 were
not employees of the Company or its subsidiaries. While the Company believes
that during 1999 the Board of Directors was apprised of and reviewed in advance
all significant transactions between all Jensen Affiliates and the Company, the
formal Board policy governing independent approval did 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 (1) to require (i) until March 20,
F-35
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001, prospective review and approval by a majority of the "Disinterested
Outside Directors" of any contract or transaction with a related party involving
payments of $60,000 or more over the life of any contract, and (ii) after March
20, 2001, review and approval of any contract or transaction with a related
party involving payments of $250,000 or more in any twelve-month period or $1.0
million over the life of the contract and (2) defining a "related-party" as a
person or entity that is an "affiliate" of the Company or any entity in which
any officer or director of the Company has a 5% or greater equity interest. A
"Disinterested Outside Director" is any director of UICI who is an employee of
neither the Company nor any affiliate of the Company and otherwise holds no
interest in any person or entity with which the Company proposes to enter into a
transaction in question. Formal amendments to the Company's related party
transactions policies and procedures, incorporating the Special Litigation
Committee's recommendations, were adopted and approved by the Board of Directors
of UICI at the Board's annual meeting held on June 8, 2000.
The Company believes that the terms of all such transactions with all
related parties, including all Jensen Affiliates, are and have been on terms no
less favorable to the Company than could have been obtained in arms' length
transactions with unrelated third parties.
Transactions 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 2000,
1999, and 1998, SIR received insurance renewal commissions of $7.7 million,
$10.1 million and $20.9 million, respectively, on the policies previously issued
by AEGON prior to January 1, 1997 and coinsured by the Company. During 2000,
1999, and 1998, SIR received renewal commissions of $2.9 million, $3.3 million
and $4.7 million, respectively, on policies issued prior to January 1, 1997 and
issued directly by the Company.
In accordance with the terms of an amendment, dated July 22, 1998, to the
terms of the sale of the UGA assets to the Company, SIR was granted the right to
retain 10% of net renewal commissions on any new business written by the UGA
agency force after January 1, 1997. During the years ended December 31, 2000,
1999 and 1998, the Company paid to SIR the amount of $1.1 million, $677,000 and
$274,000, respectively, pursuant to this arrangement.
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"),
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
F-36
84
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $10.1 million 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.
Mr. Jensen's five adult children hold in the aggregate 100% of the equity
interest in Onward & Upward, Inc. ("OUI"), which is the holder of approximately
6.50% of the Company's outstanding Common Stock. 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). In July 2000, the
Company extended until October 31, 2000 the period during which OUI may exercise
its initial put right under the Put/Call Agreement. In November 2000, the
Company extended until March 31, 2001 the period during which OUI may exercise
its initial put right under the Put/Call Agreement.
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 in 1998.
During 2000, 1999 and 1998, the Company received $2,000, $163,000 and
$13,000, 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 bearing
the name of RSB for the Company's ACE and AFCA credit card programs. The
agreement governing the terms of the issuance of such credit cards provided that
UICI would pay to RSB a fee in the amount of $0.50 per card issued for each
month a credit card bearing the RSB name remained outstanding. In 2000, 1999 and
1998, the Company paid fees in the amount of $33,000, $108,000 and $188,000,
respectively, pursuant to this agreement. The agreement terminated on June 30,
2000.
In accordance with the terms of a Receivable Purchase Agreement, through
May 31, 1998 UICI purchased from RSB at par value for cash all receivables
generated under the ACE program. Pursuant to this program, during the year ended
December 31, 1998, the Company purchased from RSB credit card receivables in the
amount of $265,000.
Until September 30, 2000, the Company's United CreditServ unit processed
and serviced credit cards issued by RSB, at a monthly rate of $5.25 per account.
The Company received $856,000, $1.5 million and $647,000 from RSB for services
performed in connection with processing and marketing of credit cards in 2000,
1999 and 1998, respectively.
F-37
85
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RSB has also originated student loans for Academic Management Services
Corp. ("AMS") and resold originated loans to AMS at par less an origination fee
of 31 basis points (0.31%). In 1998, RSB originated $21.6 million in student
loans for AMS and received $67,000 in origination fees. During 1999, RSB
originated $59.8 million aggregate principal amount of student loans for AMS,
for which it received $176,000 in origination fees. During 2000, RSB originated
$80.9 million aggregate principal amount of student loans for AMS, for which it
received $245,000 in origination fees. The agreement governing the terms of
RSB's origination services for AMS expires on January 20, 2002.
At December 31, 1998, the Company had loans outstanding owing to RSB in the
aggregate principal amount of $497,000, which bore interest at annual rates
ranging from 9% to 9.25%. The loans were paid in full in August 1999.
RSB has also historically provided student loan origination services for
the Company's College Fund Life Division. Pursuant to a Loan Origination and
Purchase Agreement, dated June 12, 1999, RSB originated student loans and resold
such loans to UICI Funding Corporation ("Funding") (a wholly owned subsidiary of
UICI) at par (plus accrued interest) less an origination fee of 31 basis points
(0.31%). Effective June 12, 2000, RSB and Funding amended the agreement to
provide that student loans originated by RSB would be resold to Funding at par
(plus accrued interest). Funding, in turn, resells the loans to the College Fund
Life Division 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 2000 and 1999, RSB originated $19.5 million and $15.3
million aggregate principal amount, respectively, of student loans for MEGA and
Mid-West, for which it received origination fees in the amounts of $12,000 and
$47,000, respectively.
During 2000 and 1999, RSB collected on behalf of, and paid to, Funding $1.7
million and $1.3 million, respectively, in guarantee fees 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 2000, RSB paid to MEGA
and Mid-West administrative fees for such services in the amounts of $149,000
and $328,000, respectively.
During 2000 and 1999, the Company received from RSB interest income in the
amount of $37,000 and $5,000, respectively, on money market reserve accounts
maintained at RSB by the Company.
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 UICI Marketing for certain benefits (e.g., National Motor Club memberships)
provided to association members. UICI Marketing, in turn, purchases such
benefits from third parties (including, in some cases, the Company). The Company
believes that the fees earned by UICI Marketing as a percentage of UICI
Marketing's cost of benefits during 2000 and 1999 was approximately 29% and 23%,
respectively, which is prior to any allocation of overhead. During 2000, 1999
and 1998, SAS paid to MEGA $9.7 million, $6.0 million and $900,000,
respectively, pursuant to this arrangement.
During 2000, 1999 and 1998, the Company paid to SAS $-0-, $151,000 and
$-0-, respectively, for telemarketing services. During 2000, 1999 and 1998, the
Company paid to SAS $176,000, $166,000 and $214,000, respectively, for various
services and reimbursement of expenses. The Company received from SAS $7,000,
$32,000 and $95,000 during 2000, 1999 and 1998, respectively, for reimbursement
of expenses. During 2000, 1999 and 1998, SAS paid to MEGA $325,000, $325,000 and
$114,000, respectively, for leased office facilities.
F-38
86
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2000, 1999 and 1998, the Company provided to HMA leased facilities
and data processing, accounting, management and administrative services. The
Company received fees of $34,000, $3.5 million and $9.2 million in 2000, 1999
and 1998, respectively, and the Company paid HMA $-0-, $273,000 and $69,000 in
2000, 1999 and 1998, 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 2000, 1999 and 1998, Insurdata Marketing Services received
commissions from HMA in the amount of $38,000, $630,000 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 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 approximately $4.0 million (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 Communications, Inc. ("NetLojix") provides long distance voice
telecommunications services to the Company and its subsidiaries, pursuant to a
series of agreements originally executed in 1998 and most recently renegotiated
and extended in September 2000. Mr. Jensen and his adult children own
beneficially in the aggregate approximately 59% of the issued capital stock of
NetLojix.
The Company's current agreement with NetLojix expires on October 31, 2002
and requires UICI to purchase a minimum of $86,000 in service per month at a
rate of $0.0299 per minute for interstate calls and $0.070 per minute, or $0.075
per minute, depending on the state, for intrastate calls. The Company's prior
agreement (which was effective August 1, 1999 and terminated on October 31,
2000) required UICI to purchase a minimum of $200,000 in service per month at a
rate of $0.035 per minute for interstate calls and $0.075 per minute for
intrastate calls. Effective August 1, 1998, UICI and NetLojix entered into a one
year long distance service agreement (the "1998 NetLojix Agreement"), which
required UICI to purchase a minimum of $120,000 in service per month at a rate
of $0.052 per minute for interstate calls and $0.088 per minute for intrastate
calls. Pursuant to the terms of a separate agreement, dated March 1, 1999,
NetLojix also provided UICI Marketing (a division of UICI) with long distance
service for a period of five months ended July 31, 1999, which agreement
required UICI Marketing to purchase a minimum of $4,209 in service per month at
rate of $0.048 per minute for interstate calls and either $0.081 per minute or
$0.084 per minute, depending on the state, for intrastate calls.
F-39
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company (including UICI Marketing) paid NetLojix in the aggregate $4.0
million, $4.4 million (including $254,936 paid pursuant to the separate
agreement with UICI Marketing) and $2.4 million in 2000, 1999 and 1998,
respectively, for long distance telecommunications services.
Pursuant to the terms of an agreement, dated August 1, 1998, between the
Company and Special Investment Risks, Ltd. ("SIR") (which is wholly owned by Mr.
Jensen), SIR agreed to reimburse the Company to the extent that the rates
charged by NetLojix pursuant to the 1998 NetLojix Agreement exceeded the quoted
rates of a non-affiliated provider. In accordance with the terms of that
agreement, during the year ended December 31, 1999 and 1998, the Company
received from SIR reimbursement payments of $192,000 and $114,000, respectively.
The agreement expired in 1999.
At December 31, 2000, 1999 and 1998, the Company had accounts payable owing
to NetLojix under the services agreement in the amount of approximately
$270,000, $404,000 and $252,000, respectively.
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 57.2% 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. During the year ended December 31, 1998, the
Company earned interest on this loan in the amount of $262,000.
In January 1999, the Company sold to Excell a stop loss policy issued by
MEGA. During 2000 and 1999, Excell paid to the Company total premiums on such
policy in the amount of $-0- and $153,000, respectively. Excell paid to the
Company $53,000 in 2000 for medical administration fees.
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 6.5% of
the Company's outstanding Common Stock.
During 1998, the Company acquired from OUI and Mr. Jensen's adult children
a 15.9% interest and 5.6% interest, respectively, in the Company's subsidiary,
The Chesapeake Life Insurance Company, for a purchase price of $4.5 million (of
which $2.0 million and $2.5 million was paid to OUI and Mr. Jensen's adult
children, respectively). 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In 2000, 1999 and 1998, the Company paid $144,000, $147,000 and $2,000,
respectively, to Small Business Ink (a division of Specialized Association
Services, in which the adult children of Mr. Jensen own 99%) 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 34.6% and Mr.
Jensen's five adult children hold in the aggregate a 7.9% equity interest in
Tesia. At December 31, 1998, the Company had written off its aggregate
investment of $6.1 million made prior to 1999, of which $-0- was made during
1998. 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. During 2000, the Company made no additional
investment in Tesia.
At December 31, 2000, 1999 and 1998, the Company held a 16.1%, 23.0% and
29.9% equity interest, respectively, in Tesia. After recognizing its share
(16.1%, 23.0% and 29.9% in 2000, 1999, and 1998, respectively) of Tesia's
operating losses, at December 31, 2000, 1999 and 1998, the Company's carrying
value of its investment in Tesia was $-0- for each such year.
In the year ended December 31, 2000, 1999 and 1998, the Company received
$-0-, $8,400, and $-0-, respectively, from Tesia 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 2000, 1999 and 1998, the Company paid to Impact $-0-, $111,000 and
$319,000, respectively, for promotional services.
During 2000, 1999 and 1998, Impact paid the Company $79,000, $13,000 and
$17,000, respectively, for reimbursement of expenses.
INTERACTIVE MEDIA WORKS, INC.
During 2000, 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-,
$1,435,000 and $-0-, respectively, for voice activation services related to the
Company's 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 was owned by one of Mr. Jensen's adult
children until March 2000) $333, $11,000 and $-0-in 2000, 1999 and 1998,
respectively, for lead generation services.
In 2000, 1999 and 1998, SBS paid to subsidiaries of the Company $13,000,
$659,000 and $-0-, respectively, for generating Internet leads.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WINTERBROOK VSO, LLC
During 2000, 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) $-0-, $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
$10.0 million 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 $4.1 million; (b) a Class B 10.00% Asset Backed Certificate,
Series 1997-1, in the outstanding principal amount of $3.0 million; and (c) a
Class B 10.00% Asset Backed Certificate, Series 1996-1, in the outstanding
principal amount of $2.9 million (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. The Class B Certificates were liquidated and paid off at
par from a portion of the proceeds of the September 2000 sale of the non-cash
assets associated with the Company's credit card unit.
SALE OF SUNTECH PROCESSING SYSTEMS, LLC
In 1996, the Company invested $4.0 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 $4.0 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
$6.0 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 $6.0 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Mr. Jensen agreed to provide financing to CDS in the total amount of
approximately $12.0 million to pay off outstanding CDS indebtedness,
approximately $2.0 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.
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.
While 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, Mr. Jensen has
agreed, pursuant to an agreement reached with the Company in June 1998 (the
"Assurance Agreement"), that, if UICI receives less than $15.1 million in the
pending Sun Litigation, then Mr. Jensen will advance funds to UICI sufficient to
increase UICI's recovery to $15.1 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.
On August 1, 2000, the Court of Appeals for the Fifth District of Texas at
Dallas reversed the trial court's judgment as to UICI's liability for attorneys'
fees and its finding that UICI violated Texas securities laws and breached a
fiduciary duty. The Appeals Court also reversed the trial court's judgment that
directed distribution of the STP sales proceeds in the manner urged by Sun. On
December 8, 2000, the Appeals Court
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
affirmed its earlier decision and denied the Company's, Mr. Jensen's and Sun's
respective motions for rehearing.
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 $10.0 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 Assurances Agreement,
Mr. Jensen has agreed that, if UICI receives less than $15.1 million in the
lawsuit, then Mr. Jensen will advance funds to UICI sufficient to increase
UICI's recovery to $15.1 million. The Assurance Agreement also restricts the
manner in which UICI can seek funds in satisfaction of Mr. Jensen's previously
unconditional agreement (the "Jensen 1996 Guaranty") to indemnify the Company
for any loss or reduction in value of the Company's Class A investment in CDS.
By letter dated July 7, 2000, Mr. Jensen submitted a formal proposal to
purchase the Company's 80% interest in STP for $15.6 million ("Proposal A") or,
alternatively, to purchase for $15.1 million the Company's rights and claim of
rights to receive funds held in the registry of the Court in the Sun Litigation
("Proposal B"). As part of either proposal, the Company would agree to terminate
and release Mr. Jensen from any and all obligations arising under the Jensen
1996 Guaranty and the Assurance Agreement. As part of Mr. Jensen's proposals,
Mr. Jensen has offered to indemnify and hold the Company harmless from and
against, among other things, (a) the breach of fiduciary duty claim asserted by
Sun against the Company and Sun's related claim for attorneys' fees, (b) Sun's
claim for attorneys' fees arising out of the distribution issue in the Sun
Litigation, and (c) any and all other claims of any nature asserted by Sun
against the Company in the Sun Litigation arising out of or relating directly to
the March 1997 agreement governing the distribution of cash proceeds from the
sale and liquidation of STP.
Mr. Jensen's proposal to purchase UICI's 80% interest in STP contemplated
by Proposal A may be subject to the consent of Sun. The Company solicited the
consent of Sun to the transfer so that it might accept Proposal A, but Sun was
unwilling to grant such consent and objected to Proposal B, claiming that Sun's
consent is required to consummate either Proposal. Following approval of the
disinterested outside directors of UICI in accordance with the related party
transactions policies and procedures adopted by the UICI Board, on July 21,
2000, the Company formally accepted Proposal A and, in the alternative, Proposal
B. On November 22, 2000, the Court in the Company's pending Shareholder
Derivative Litigation (see Note N of Notes to Consolidated Financial Statements)
approved the alternative settlements between Mr. Jensen and the Company, subject
to any alleged right on the part of Sun to consent to Proposal A and/or Proposal
B. The Company subsequently sued Sun separately (UICI v. Sun Communications,
Inc., pending in 134th Judicial District Court of Dallas County, Texas, Cause
No. 009353), seeking to resolve the consent issue. Sun subsequently moved to
abate the separate suit.
The Company cannot at this time predict how, when or in what fashion the
Sun Litigation will ultimately be resolved. However, for financial reporting
purposes, any cash ultimately received by the Company from Mr. Jensen pursuant
to the Assurance Agreement may be treated as a capital contribution to the
Company, and the gain would be reduced by a corresponding amount. In such case,
however, the Company's consolidated stockholders' equity would not be adversely
affected. In 1998, the Company's results of operations reflected a pre-tax gain
from the STP sale of $9.7 million ($6.7 million after-tax, or $0.15 per share).
MARCH 2000 LOAN
On March 14, 2000, a limited liability company controlled by Mr. Jensen
("Lender LLC") loaned $70.0 million (the "Lender LLC Loan") to a newly formed
subsidiary of the Company. The proceeds of the
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UICI AND SUBSIDIARIES
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Lender LLC Loan, 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 Lender LLC Loan bore interest at the prevailing
prime rate, was guaranteed by UICI, was due and payable in July 2001 and was
secured by a pledge of investment securities and shares of the Company's
National Motor Club unit.
In connection with the March 2000 paydown of indebtedness outstanding under
the Bank Credit Facility, the Bank Credit Facility was amended to provide, among
other things, that the $25.0 million balance outstanding would be due and
payable on July 10, 2000, amounts outstanding under the facility would be
secured by a pledge of investment securities and shares of Mid-West National
Life Insurance Company of Tennessee ("Mid-West"), and the restrictive covenants
formerly applicable to UICI and its restricted subsidiaries (primarily the
Company's insurance companies) were made applicable solely to Mid-West. Amounts
outstanding under the Bank Credit Facility continued to bear interest at LIBOR
plus 100 basis points per annum. On April 11, 2000 and June 28, 2000, the
Company made principal payments of $11.0 million and $8.0 million, respectively,
under the Bank Credit Facility, and on June 30, 2000, Lender LLC, against
payment to the banks of $6.0 million, assumed 100% of the banks' remaining $6.0
million position in the Bank Credit Facility.
JUNE -- JULY 2000 TRANSACTIONS
In June and July 2000, the Company entered into a series of transactions
(the "July 2000 Transactions") with Mr. Jensen and affiliates of Mr. Jensen, the
proceeds of which were utilized, in part, to fund the Company's cash and other
obligations under the Consent Order, dated June 29, 2000, issued by the OCC to
memorialize the terms of the UCNB Capital Plan approved by the OCC. See Note B.
In accordance with the policies and procedures of the Board of Directors,
each of the July 2000 Transactions was approved by the disinterested outside
directors of the Company at a meeting of the Board of Directors held on July 21,
2000, as being fair to UICI and its shareholders. The Board's determination was
made, in part, in reliance upon the opinion of an independent financial advisor
that the July 2000 Transactions, in their totality, were fair to the public
shareholders of UICI (consisting of non-Jensen affiliated shareholders) from a
financial point of view.
Restructuring of Lender LLC Loan. Effective July 27, 2000, the Company and
the Lender LLC completed a restructuring of the terms of the Lender LLC Loan. As
part of the restructuring, the Company paid to Lender LLC principal owing on the
Lender LLC Loan in the amount of $6.0 million and amended the terms of the
Lender LLC Loan to provide that the aggregate principal amount of $70.0 million
then owing by the Company would consist of a $32.0 million unsecured tranche and
a $38.0 million tranche secured by a pledge of 100% of the capital stock of
Mid-West (the "Amended Lender LLC Loan"). The Amended Lender LLC Loan (a)
matured on January 1, 2002, (b) continued to bear interest at the prevailing
prime rate from time to time, with interest accruing but not payable until the
earlier to occur of full prepayment of the Lender LLC Loan or January 1, 2002,
and (c) was mandatorily prepayable monthly to the extent of 1% of the
outstanding principal balance of the Amended Lender LLC Loan. The security
interest in all remaining collateral previously pledged to secure payment of the
Lender LLC Loan and indebtedness outstanding under the bank credit facility
(including all investment securities and shares of the Company's National Motor
Club unit) was released in full.
In addition to scheduled payments of principal made during the course of
2000, on October 20, 2000, the Company prepaid the unsecured tranche of the
Amended Lender LLC Loan in the amount of $12.5 million, and on November 2, 2000,
the Company prepaid an additional $17.4 million of the unsecured tranche and
$17.6 million of the secured tranche. Accordingly, at December 31, 2000, the
Company had no indebtedness outstanding under the unsecured tranche and $19.0
million outstanding under the secured tranche of the Amended Lender LLC Loan.
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 30, 2001, the Company prepaid in full principal and accrued
interest on the secured tranche of the Amended Lender LLC Loan in the amount of
$21.1 million, utilizing a portion of the proceeds received in liquidation of
UCNB, and Lender LLC's security interest in 100% of the capital stock of
Mid-West was released in full.
Sale of NMC Holdings, Inc. On July 27, 2000, the Company sold to an
investor group consisting of Jensen family members (including Mr. Jensen) (the
"NMC Buyer") its 97% interest in NMC Holdings, Inc. ("NMC"), the parent company
of its National Motor Club of America unit, for a purchase price of $56.8
million, representing 97% of the value of NMC as determined by independent
appraisal. The purchase price was paid at closing in cash in the amount of $21.8
million and by delivery of a promissory note (the "NMC Note") issued by the NMC
Buyer in the principal amount of $35.0 million. For financial reporting
purposes, the $12.6 million, net of tax, received by the Company in excess of
the net book value of NMC was reflected in additional paid in capital.
The NMC Note was an unsecured, full recourse obligation of the NMC Buyer
and was unconditionally guaranteed by Mr. Jensen. The NMC Note bore interest at
the per annum rate of prime fluctuating from time to time, and was initially
payable in three equal installments of principal in the amount of $11.7 million
due on each of October 1, November 1 and December 1, 2000, respectively.
Effective October 1, 2000, the NMC Note was amended to provide for three equal
installments of principal in the amount of $11.7 million due on each of November
1 and December 1, 2000 and January 1, 2001, respectively. In accordance with the
terms of the June Consent Orders, the Company pledged the NMC Note to UCNB to
secure, in part, the Company's obligations under the Capital Plan. On October
31, 2000, the OCC consented to the release by UCNB of its security interest in
the NMC Note. On November 2, 2000, the NMC Buyer prepaid the NMC Note in its
entirety. Under the terms of the NMC Note, the Company received $875,000 in
interest in 2000.
On July 27, 2000, UICI, NMC Buyer and NMC entered into a Management
Agreement, the terms of which governed the provision by UICI to NMC of
management and administrative services, information technology services,
telephone services and other services formerly provided to NMC by UICI. The
Management Agreement was terminable (a) by UICI at any time upon not less than
60 days' notice to NMC and the NMC Buyer, and (b) by NMC at any time following
the payment in full of the NMC Note upon not less than 30 days' notice to UICI.
Pursuant to the Management Agreement, UICI agreed to allow William Gedwed
(formerly an Executive Vice President of the Company and currently a Director of
the Company and the holder of approximately 3% of the equity interest in NMC) to
serve as a consultant to NMC for the term of the Management Agreement. As of
December 31, 2000, the Company was owed by NMC $50,000 pursuant to the terms of
the Management Agreement.
Mr. Gedwed resigned as an executive officer of UICI effective December 31,
2000, and NMC terminated the Management Agreement effective January 31, 2001.
Jensen Indemnity Agreement. To secure in part the Company's obligations
under the Capital Plan, effective June 29, 2000 Mr. Jensen pledged to UCNB $7.1
million face amount of Series B Certificates created as part of the Company's
securitizations of credit card receivables issued in 1997 and 1998 generated by
UICI's credit card operations. As a condition to Mr. Jensen's pledge of the
Series B Certificates, on June 29, 2000 the Company executed and delivered an
Indemnity Agreement, pursuant to which the Company agreed, among other things,
to indemnify and hold Mr. Jensen harmless from and against (A) loss, cost,
expense, or liability incurred by Mr. Jensen arising from, in respect of or in
connection with, a default by the Company of its obligations under the June
Consent Orders, the UCNB Capital Plan or the Liquidity and Capital Assurances
Agreement, and (B) any and all losses, costs and expenses (including reasonable
attorneys' fees and expenses) incurred by Mr. Jensen in enforcing any rights
under the Indemnity Agreement.
Sale of UICI Shares to NMC. Pursuant to the terms of an agreement, dated
July 13, 2000, between the Company and NMC, on July 24, 2000, the Company issued
to NMC 175,000 treasury shares of common
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock at a purchase price of $5.25 per share. It is anticipated that the 175,000
shares will be used to fund incentive stock programs for the benefit of NMC
employees.
National Motor Club
As discussed above, on July 27, 2000, the Company sold its 97% interest in
NMC Holdings, Inc., the parent company of its National Motor Club of America
("NMC") unit, to an investor group consisting of Jensen family members
(including Mr. Jensen) for a purchase price of $56.8 million, representing 97%
of the value of NMC as determined by independent appraisal. William J. Gedwed (a
director of the Company) holds 3% of the issued and outstanding common stock of
NMC Holdings, Inc. The Chesapeake Life Insurance Company ("CLICO") (formerly a
direct wholly owned subsidiary of the Company) and National Motor Club of
America ("NMCA") were previously parties to an administrative service agreement,
pursuant to which CLICO agreed to issue life, accident and health insurance
polices to NMCA for the benefit of NMCA members in selected states. NMCA, in
turn, agreed to provide to CLICO certain administrative and recordkeeping
services in connection with the NMCA members for whose benefit the policies have
been issued. Following the acquisition of CLICO by The MEGA Life and Health
Insurance Company ("MEGA") (a wholly-owned insurance subsidiary of the Company)
in July 2000, MEGA and NMCA entered into a similar administrative service
agreement for a two year term ending in December 31, 2002. During the year ended
December 31, 2000, 1999 and 1998, NMCA paid to MEGA and Chesapeake insurance
premiums in the amount of $2.6 million, $2.7 million and $3.0 million,
respectively, pursuant to such arrangements.
In connection with the sale of NMC in July 2000, NMC entered into a
sublease agreement with MEGA, pursuant to which NMC subleases from MEGA
approximately 17,000 square feet of office space. During the year ended December
31, 2000, NMC paid to MEGA $144,000 pursuant to the sublease. NMC has notified
MEGA that it intends to terminate the sublease arrangement effective July 1,
2001.
OTHER TRANSACTIONS
Effective July 1, 1998, the Company sold to IPN Acquisitions, Inc. (in
which Mr. Jensen held 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. As
part of the sale transaction, IPN Acquisitions, Inc. agreed to indemnify the
Company against future obligations to be incurred by IPN, LLC and granted to the
Company the right to repurchase up to 80% of IPN, LLC on or before January 1,
2000, at an option price equal to 80% of the $3.5 million selling price,
adjusted for any capital contributions or distributions after the sale, plus a
premium depending on when the option was exercised. The Company did not exercise
the repurchase option.
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. As part of the sale transaction, HAI Acquisitions,
Inc. granted to the Company the right to repurchase up to 80% of HealthCare
Automation, Inc. on or before January 1, 2000, at an option price equal to 80%
of the $1.9 million selling price, adjusted for any capital contributions or
distributions after the sale, plus a premium depending on when the option was
exercised. The Company did not exercise the repurchase option.
In 2000, 1999 and 1998, the Company paid $-0-, $28,000 and $79,000,
respectively, to United Group Service Center, Inc. (in which Mr. Jensen holds a
100% equity interest) for reimbursement of expenses. In 2000, 1999 and 1998, the
Company received $9,000, $43,000 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.
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UICI AND SUBSIDIARIES
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Academic Management Services Corp. (formerly known as Educational Finance
Group, Inc.)
The former president of Academic Management Services Corp. and the current
holder of 25% of the equity interest in AMS (the "Former AMS Officer") is a
partner in a partnership from which the Company's AMS subsidiary formerly leased
office space. During 2000, 1999 and 1998, AMS paid $15,000, $149,000 and $-0-,
respectively, under the terms of the lease. AMS terminated the lease on January
13, 2000. AMS also paid $-0-, $3,000 and $2,000 in 2000, 1999 and 1998,
respectively, for facilities services to a property management company, the sole
shareholders of which included members of the family of the Former AMS Officer.
AMS also utilized the services of a travel agency owned by the Former AMS
Officer and members of his family. During 2000, 1999 and 1998, AMS incurred for
the benefit of the travel agency the cost of space and salary and benefits for
one agency employee in the amount of $-0-, $28,000 and $14,000, respectively.
In 1998, the Former AMS Officer contributed a $9.0 million note payable to
him by AMS as equity to AMS. This note payable had a balance of $10.5 million at
December 31, 1997.
In his capacity as an employee of AMS, the Former AMS Officer received
compensation from AMS in the amount of $-0-, $239,000 and $200,000 in 2000, 1999
and 1998, respectively.
The Former AMS Officer and an employee of AMS together hold 66% of the
equity interest in a company to which AMS paid $66,000 in 1998 for web-site
development services.
Transactions with Phillip A. Gray
During 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 former majority owned subsidiary
of the Company) ("UMMG"). During 1999 and 1998, 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 and
1998, UCNB made payments to ACE totaling $79.6 million and $52.6 million,
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 and 1998, ACE paid to UMMG the amount of $16.3 million and $21.0
million, 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 2000, 1999 and 1998, AFCA paid to UMMG cash in the amount of
approximately $4.7 million, $15.3 million and $24.5 million, respectively, for
fulfillment services and marketing materials. In 2000, 1999 and 1998, AFCA paid
to United CreditServ $-0-, $300,000 and $900,000, respectively, for processing
fees.
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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
an 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 $2.0 million to the prior owners (the "Gray Group"), including
$1.6 million 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 and 1998 Mr. Gray
received cash dividend distributions in the amount of $6.5 million and $1.2
million, another officer of UMMG received $646,000 and $455,000, respectively,
and the remaining minority holders of equity interests received $537,000 and
$114,000, respectively.
Mr. Gray received additional compensation from UMMG in the amount of
$291,000 and $931,000 in 1999 and 1998, respectively.
In 1997, UMMG advanced to Mr. Gray a loan in the amount of $2.0 million, of
which $1.8 million was outstanding at December 31, 1998. 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 $1.3 million in dividends to the members of the
Gray Group, including $1.1 million to Mr. Gray and $106,000 to the other
officer. During 1999 and 1998, FSR distributed cash dividends to Mr. Gray in the
amount of $286,000 and $168,000, respectively. During 1999 and 1998, FSR
distributed cash dividends to the other officer in the amount of $29,000 and
$17,000, respectively. During 1999 and 1998, FSR distributed cash dividends to
the remaining members of the Gray Group in the amount of $14,000 and $25,000.
At the closing of the April 1999 Buyout, the Company loaned Mr. Gray and
the other officer the additional amounts of $859,000 and $251,000, respectively,
which loans were added to indebtedness owing to the Company under the FSR
Capital Loans. Accordingly, at December 31, 2000 and 1999, Mr. Gray had total
indebtedness owing to the Company in the amount of $1.0 million and $1.0
million, respectively, and the other
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
officer had total indebtedness outstanding in the amount of $267,000 and
$267,000, respectively, 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 N).
Transactions with HealthAxis, Inc.
At December 31, 2000, UICI held beneficially approximately 39.2% of the
issued and outstanding shares of common stock of HealthAxis.com, Inc., a
provider of Internet-enabled, integrated proprietary software applications that
address the workflow and processing inefficiencies embedded in the healthcare
insurance industry. Following the January 2001 merger of HealthAxis.com, Inc.
with a wholly-owned subsidiary of HealthAxis, Inc. ("HAI"), the Company holds
23,944,030 shares of HAI common stock (Nasdaq: HAXS) (including 185,185 shares
issuable upon conversion of HAI convertible subordinated debentures),
representing approximately 45.3% of the issued and outstanding shares of HAI.
Gregory T. Mutz (the President and a director of the Company) and Patrick J.
McLaughlin (a director of the Company) serve as directors of HAXS.
HAI, through its proprietary web-enabled enrollment and plan administration
applications, provides Internet enrollment and online access to claims data. HAI
also provides systems integration, technology management and data capture
services to its clients. Pursuant to the terms of an information technology
services agreement, amended and restated as of January 3, 2000 (the "Services
Agreement"), HAI provides information systems and software development services
(including administration of the Company's computer data center) to the Company
and its insurance company affiliates. The Services Agreement has an initial
five-year term ending on January 3, 2005, which is subject to extension by the
Company. Pursuant to the terms of the Services Agreement, UICI paid to HAI $27.4
million, $27.0 million and $24.0 million in 2000, 1999 and 1998, respectively,
which amounts represented 63%, 58% and 58% of HAI's total revenues in such
years, respectively. At December 31, 2000, 1999, and 1998, UICI had accounts
payable to HAI relating to services provided under the Services Agreement in the
amount of $3.0 million, $2.7 million, and $1.9 million, respectively.
HAI leases certain facilities from the Company, for which it paid $287,000
in 2000. In addition, in 2000 HAI paid $12,000 to the Company for medical
administration fees and $19,000 for other shared expenses.
During the quarter ended December 31, 2000, the Company transferred to HAI
certain claims administration software and related proprietary rights for a sale
price of $1.6 million, which was the Company's book value of such software as of
the date of sale. Effective January 25, 2001, the Company also entered into a
license agreement with HAI, pursuant to which it has licensed from HAI the right
to use HAI's proprietary Insur-Web(TM) and Insur Enroll(TM) software for a
perpetual term for a one-time license fee of $1.8 million plus an annual
maintenance fee in the amount of $276,000, payable commencing on the date of the
first successful implementation of the system at UICI. UICI has the right for
two years to cease the use of the software and put the software back to HAI for
a refund of a prorated portion of the license fee.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000 and 1999, the Company held a
10.4% and 14% fully diluted interest respectively, 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, 2000 and 1999, AMLI
had outstanding secured loans owing from Mr. Mutz in the aggregate amount of
$2.1 million and $2.1 million, respectively, the proceeds of which were used to
purchase 108,891 shares of AMLI beneficial interest.
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, 2000 and 1999, ACPT had an outstanding loan owing from Mr. Mutz (or
companies affiliated with Mr. Mutz) in the amount of $508,000 and $600,000,
respectively, the proceeds of which were used to purchase stock in ACPT.
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.
UICI Executive Stock Purchase Program. In accordance with the Company's
Executive Stock Purchase Program (the "ESPP") (see Note O), in December 1998 the
Company extended a loan to Mr. Mutz in the amount of $3.3 million, the proceeds
of which were used to purchase 200,000 shares of Common Stock of the Company at
a purchase price of $19.50 per share. The loan bore interest at the rate of 5%
per annum, payable quarterly, had a six-year term, and is full recourse to Mr.
Mutz. In June 1999, the Company extended an additional loan to Mr. Mutz pursuant
to the ESPP in the amount of $429,000, the proceeds of which were used to
purchase 20,000 shares of Company Common Stock at a purchase price of $24.45 per
share. The loan bore interest at 5.37%, payable quarterly, had a six-year term,
and was full recourse to Mr. Mutz.
The amount outstanding under Mr. Mutz's ESPP loans at December 31, 2000 and
1999, including accrued interest, was $2.8 million and $3.3 million,
respectively.
As part of modifications to the ESPP adopted by the Company's Board of
Directors on January 2, 2001, the Company granted to Mr. Mutz 107,104 shares of
UICI common stock, discharged $1.5 million principal amount of the ESPP loan,
and paid to Mr. Mutz a one-time cash bonus in the amount of $1.1 million (which
was calculated to reimburse Mr. Mutz for income and other taxes payable upon
receipt of the UICI stock and discharge of the portion of the ESPP loan). The
terms of the ESPP loan were modified to extend the maturity date to January 1,
2007. Giving effect to the discharge of the indebtedness, at January 2, 2001 the
amount outstanding under Mr. Mutz's ESPP loan was $1.3 million. See Note O.
OTHER LOANS TO MANAGEMENT
In accordance with the Company's Executive Stock Purchase Program (the
"ESPP") (see Note O), during 1999 the Company extended loans to Messrs. Reed,
Gedwed, Prater, Estell, and Benac (all executive officers of the Company at the
time the loans were made), in the amounts of $417,000, $203,000, $158,000,
$230,000 and $204,000, 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, had a six-year
term,
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000, Messrs. Reed, Gedwed, Prater, and Benac had
outstanding loans payable to the Company under the ESPP in the amounts of
$421,000, $206,000, $158,000, and $206,000, respectively, including accrued
interest.
As part of modifications to the ESPP adopted by the Company's Board of
Directors on January 2, 2001, the Company discharged $297,000 and $113,000
principal amount of indebtedness under the ESPP owing by Mr. Reed and Mr.
Prater, respectively, and paid to Mr. Reed and Mr. Prater a one-time cash bonus
in the amount of $160,000 and $61,000, respectively (which was calculated to
reimburse Mr. Reed and Mr. Prater for income and other taxes payable upon
discharge of the portion of their ESPP loan). The terms of Mr. Reed's and Mr.
Prater's ESPP loans were modified to extend the maturity date to January 1,
2007. Giving effect to the discharge of the indebtedness, at January 2, 2001 the
amount outstanding under Mr. Reed's and Mr. Prater's ESPP loan was $120,000 and
$45,000, respectively. On March 14, 2001, the Company subsequently entered into
an agreement with Mr. Prater, pursuant to which Mr. Prater resigned as an
executive officer of the Company and as an officer of various UICI affiliates
effective February 1, 2001. In accordance with the agreement, the Company agreed
to forgive the indebtedness owing by Mr. Prater under the ESPP in the amount of
$45,000.
OTHER TRANSACTIONS
On September 1, 1999, the Company entered into separate indemnification
agreements with each of Messrs. Reed, Gedwed and Prater, 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 2000, 1999 and 1998,
the Company paid advisory fees in the amount of $231,000, $366,000 and $373,000
to Emerald Capital Group, Ltd., for which Patrick J. McLaughlin (a Director of
the Company) serves as a managing director and owner. During 2000, 1999 and
1998, the Company paid investment advisory fees in the amount of $145,000,
$140,000 and $127,000 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 2000 and 1999, the Company
paid an aggregate of $237,000 and $188,000, respectively, 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 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.
The Company and Richard Estell (a former officer and director of the
Company) 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
$230,000, the proceeds of which were used to purchase
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of Common Stock. The Company terminated the consulting arrangement with
Mr. Estell effective March 1, 2001, at which time the Company delivered to Mr.
Estell a one-time payment in the amount of $180,000 in accordance with the terms
of the agreement.
In accordance with the Company's Executive Stock Purchase Program (the
"ESPP") (see Note O), during 1999 the Company extended a loan to Mr. McLaughlin
in the amount of $44,000, 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. The
outstanding balance under the loan, including accrued interest, at December 31,
2000 was $44,000.
Effective December 31, 2000, the Company entered into an agreement with
William J. Gedwed (a director of the Company), pursuant to which Mr. Gedwed
resigned as an executive officer of the Company effective December 31, 2000 and
as an officer of various UICI affiliates effective February 1, 2001. In
accordance with the agreement, Mr. Gedwed has also agreed to provide consulting
services to MEGA for a two-year term ending December 31, 2002 for an annual fee
of $120,000.
In October 2000, the Company entered into an agreement with William P.
Benac (formerly an Executive Vice President of the Company), pursuant to which
Mr. Benac resigned as an executive officer of the Company and various UICI
affiliates effective October 27, 2000. In accordance with the agreement, Mr.
Benac received a one-time severance payment of $50,000, and Mr. Benac has also
agreed to provide consulting services to UICI for a term ending January 15, 2003
for an aggregate fee of $120,000.
On March 14, 2001, the Company entered into an agreement with Charles T.
Prater, pursuant to which Mr. Prater resigned as an executive officer of the
Company and as an officer of various UICI affiliates effective February 1, 2001.
In accordance with the agreement, the Company agreed to forgive indebtedness
owing by Mr. Prater in the amount of $45,000, and Mr. Prater has agreed to
provide consulting services to MEGA for a one-year term ending March 31, 2002
for an annual fee of $135,000.
In accordance with the terms of the Company's ESPP, in May 1999 Messrs.
Bilton and Lane (directors of the Company) purchased 2,408 shares and 2,408
shares, respectively, of the Company's Common Stock, at a purchase price equal
to 85% of the then market value of such shares. In accordance with the terms of
the Company's ESPP, in June 2000 Mr. Mockler (a director of the Company),
purchased 2,408 shares of UICI common stock in exchange for cash in the amount
of $50,000 and a promissory note in the amount of $8,000. At December 31, 2000,
the amount outstanding on Mr. Mockler's note was $8,000.
In May 2000, Resolution Reinsurance Intermediaries, LLC ("Resolution Re"),
a 50%-owned subsidiary of the Company, loaned to the other 50% shareholder of
Resolution Re (who is also an employee of the Company) the amount of $69,300.
The loan bore interest at 8.5% and was repaid in full in October 2000.
Commencing in April 2000, Resolution Re leased space in a building owned by the
shareholder/employee at a rental rate of $4,000 per month. During 2000,
Resolution Re paid to the shareholder/employee the aggregate amount of $36,000
pursuant to this arrangement. The lease was terminated in February 2001.
NOTE N -- COMMITMENTS AND CONTINGENCIES
The Company is a party to the following material legal proceedings:
Securities Class Action Litigation
As previously disclosed, in December 1999 and February 2000, the Company
and certain of its executive officers were named as defendants in three
securities class action lawsuits alleging, among other things, that UICI's
periodic filings with the SEC contained untrue statements of material facts
and/or failed to disclose all material facts relating to the condition of UICI's
credit card business, in violation of Section 10(b) of the
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The three cases have
been subsequently consolidated as Herbert R. Silver, et al. v. UICI et al, which
is pending in U.S. District Court for the Northern District of Texas. Plaintiffs
purport to represent a class of persons who purchased UICI common stock from
April 16, 1999 through December 9, 1999. On June 12, 2000, plaintiffs filed a
consolidated amended class action complaint, amending, consolidating and
supplementing the allegations made in the original cases.
On August 4, 2000, UICI and the individual defendants filed a motion to
dismiss the case in its entirety, asserting that plaintiffs failed to properly
plead the elements of a Section 10(b) claim. On January 31, 2001, the Court
ordered plaintiffs to file a second amended complaint clarifying and curing
certain enumerated deficiencies in plaintiffs' pleadings, which amended
complaint is due to be filed on or before April 2, 2001.
The Company intends to continue to vigorously contest the allegations in
the cases.
Sun Communications Litigation
As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are involved in litigation (Sun Communications, Inc. v. SunTech Processing
Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation") with a third
party concerning the distribution of the cash proceeds from the sale and
liquidation of SunTech Processing Systems, LLC ("STP") assets in February 1998.
The Dallas County, Texas District Court ruled in December 1998 that, as a matter
of law, a March 1997 agreement governing the distribution of such cash proceeds
should be read in the manner urged by Sun Communications, Inc. ("Sun") and
consistent with a court-appointed liquidator's previous ruling. The District
Court entered a judgment directing distribution of the sales proceeds in the
manner urged by Sun. The District Court also entered a finding that UICI had
violated Texas securities disclosure laws and breached a fiduciary duty owed to
Sun, and the District Court awarded the plaintiff $1.7 million in attorneys'
fees, which amount could be increased to $2.1 million under certain
circumstances.
On September 10, 1999, the Company filed its initial briefs in support of
its appeal of the District Court's decision as to the awarding of attorneys'
fees and its finding that UICI violated Texas securities laws and breached a
fiduciary duty. The Company did not, however, appeal the District Court's ruling
with regard to the interpretation of the March 1997 agreement. On September 10,
1999, Mr. Jensen filed his initial brief in support of his appeal of, among
other things, the trial court's December 1998 finding in the Sun Litigation that
Mr. Jensen was not entitled to any of the proceeds from the sale of Sun.
On August 1, 2000, the Court of Appeals for the Fifth District of Texas at
Dallas rendered its opinion on the appeal, reversing the trial court's judgment
as to UICI's liability for attorneys' fees and its finding that UICI violated
Texas securities laws and breached a fiduciary duty. The Appeals Court also
reversed the trial court's judgment that directed distribution of the STP sales
proceeds in the manner urged by Sun. In December 2000, the Appeals Court
affirmed its earlier decision and denied the Company's, Mr. Jensen's and Sun's
respective motions for rehearing.
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 $10.0 million to Mr. Jensen in satisfaction of certain creditor
and preferred equity claims. If and to the extent that Mr. Jensen's
interpretation of the March 1997 agreement is ultimately adopted in the Sun
Litigation after all rights to appeal have been exhausted, the amount of such
proceeds which UICI may ultimately receive directly from STP may be reduced.
However, in such event and in accordance with an agreement reached with the
Company in June 1998 (the "Assurance Agreement"), Mr. Jensen has agreed that, if
UICI receives less than $15.1 million in the lawsuit, then Mr. Jensen will
advance funds to UICI sufficient to increase UICI's recovery to $15.1 million.
The Assurance Agreement also restricts the manner in which UICI can seek funds
in satisfaction of Mr. Jensen's previously unconditional
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agreement (the "Jensen 1996 Guaranty") to indemnify the Company for any loss or
reduction in value of the Company's Class A investment in Cash Delivery Systems,
LLC.
By letter dated July 7, 2000, Mr. Jensen submitted a formal proposal to
purchase the Company's 80% interest in STP for $15.6 million ("Proposal A") or,
alternatively, to purchase for $15.1 million the Company's rights and claim of
rights to receive funds held in the registry of the Court in the Sun Litigation
("Proposal B"). As part of either proposal, the Company would agree to terminate
and release Mr. Jensen from any and all obligations arising under the Jensen
1996 Guaranty and the Assurance Agreement. As part of Mr. Jensen's proposals,
Mr. Jensen has offered to indemnify and hold the Company harmless from and
against, among other things, (a) the breach of fiduciary duty claim asserted by
Sun against the Company and Sun's related claim for attorneys' fees, (b) Sun's
claim for attorneys' fees arising out of the distribution issue in the Sun
Litigation, and (c) any and all other claims of any nature asserted by Sun
against the Company in the Sun Litigation arising out of or relating directly to
the March 1997 agreement governing the distribution of cash proceeds from the
sale and liquidation of STP.
Mr. Jensen's proposal to purchase UICI's 80% interest in STP contemplated
by Proposal A may be subject to the consent of Sun. The Company solicited the
consent of Sun to the transfer so that it might accept Proposal A, but Sun was
unwilling to grant such consent and objected to Proposal B, claiming that Sun's
consent is required to consummate either Proposal. Following approval of the
disinterested outside directors of UICI in accordance with the related party
transactions policies and procedures adopted by the UICI Board, on July 21,
2000, the Company formally accepted Proposal A and, in the alternative, Proposal
B. On November 22, 2000, the Court in the Company's pending Shareholder
Derivative Litigation (see discussion below) approved the alternative
settlements between Mr. Jensen and the Company, subject to any alleged right on
the part of Sun to consent to Proposal A and/or Proposal B. The Company
subsequently sued Sun separately (UICI v. Sun Communications, Inc., pending in
134th Judicial District Court of Dallas County, Texas, Cause No. 009353),
seeking to resolve the consent issue. Sun subsequently moved to abate the
separate suit.
The Company cannot at this time predict how, when or in what fashion the
Sun Litigation will ultimately be resolved. However, for financial reporting
purposes, any cash ultimately received by the Company from Mr. Jensen pursuant
to the Assurance Agreement may be treated as a capital contribution to the
Company, and the gain would be reduced by a corresponding amount. In such case,
however, the Company's consolidated stockholders' equity would not be adversely
affected. In 1998, the Company's results of operations reflected a pre-tax gain
from the STP sale of $9.7 million ($6.7 million after-tax, or $0.15 per share).
Shareholder Derivative Litigation
As previously disclosed, on June 1, 1999, the Company was named as a
nominal defendant in a shareholder derivative action captioned Richard Schappel
v. UICI, Ronald Jensen, Richard Estell, Vernon Woelke, J. Michael Jaynes, Gary
Friedman, John Allen, Charles T. Prater, Richard Mockler and Robert B. Vlach,
which was filed and is pending in the District Court of Dallas County, Texas
(the "Shareholder Derivative Litigation"). The plaintiff has asserted on behalf
of UICI various derivative claims brought against the individual defendants,
alleging, among other things, breach of fiduciary duty, conversion, waste of
corporate assets, constructive fraud, negligent misrepresentation, conspiracy
and breach of contract. Plaintiff seeks to compel UICI to conduct a complete
accounting and audit relating to all related party transactions and to fully and
completely restate, report and disclose such transactions. Plaintiff further
seeks to recover for UICI's benefit all damages caused by such alleged breach of
the officers' and directors' duties to UICI. The plaintiff in the Shareholder
Derivative Litigation is also the president of Sun (the plaintiff in the Sun
Litigation), and substantially all of the initial claims made in the Shareholder
Derivative Litigation arose out
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the same transactions that serve as the factual underpinning to the Sun
Communications Litigation referred to above.
At the regular quarterly meeting of the Company's Board of Directors held
on August 4, 1999, George Lane III and Stuart D. Bilton (non-employee directors
of the Company) were appointed, in accordance with Texas and Delaware law, to
serve as a special committee (the "Special Litigation Committee") to investigate
and assess on behalf of the Company the underlying claims made in the
Shareholder Derivative Litigation.
On January 18, 2000, plaintiff filed an amended petition and request for
injunctive relief. Plaintiff expanded his complaint to include a request for an
injunction against the Company prohibiting, among other things, any existing or
future transactions between UICI and any and all entities related to Ronald L.
Jensen unless each such transaction is fully and fairly disclosed to UICI
shareholders, together with an opinion from an independent public accounting
firm opining with particularity as to the fairness of each proposed transaction.
On February 4, 2000, the Court granted the Company's motion for a statutory
stay of all further proceedings in the case, in accordance with Texas law
(including action on plaintiff's request for injunctive relief), pending
completion of the review of the claims currently undertaken by the Special
Litigation Committee, and its determination as to what further action, if any,
should be taken with respect to those claims. Subsequent to imposition of the
statutory stay, plaintiff filed (a) a motion to lift the statutory stay for the
limited purpose of hearing a motion for summary judgement to enforce Mr.
Jensen's 1996 agreement (the "Jensen 1996 Guaranty") to indemnify the Company
for any loss or reduction in value of the Company's Class A investment in Cash
Delivery Systems, LLC, (b) a second amended complaint and (c) a motion to lift
the statutory stay for the limited purpose of hearing a motion for summary
judgment against certain individual defendants with respect to the breach of
fiduciary duty claim in the Sun Litigation. The second amended complaint added
reference to the consent order issued by the OCC; attempted to quantify damages
alleged to have resulted from numerous related party transactions previously
disclosed in the Company's public filings; added an allegation of usurpation of
corporate opportunities; and requested injunctive relief that would require the
Company to, among other things, freeze, review and where appropriate rescind all
related party transactions, and require detailed reporting of related party
transactions.
On March 20, 2000, the Special Litigation Committee delivered to the Board
of Directors of UICI its findings with respect to the allegations in the
original complaint. Based on its review and assessment of the allegations in the
original complaint, the Special Litigation Committee recommended that the
Company (a) seek dismissal of claims raised in the original complaint in the
derivative lawsuit, including dismissal of claims relating to the Jensen 1996
Guaranty (see discussion below); (b) seek the release to UICI of approximately
$7.6 million of uncontested proceeds from the STP sale held in the District
Court's registry; (c) seek from Mr. Jensen and/or former management certain
legal fees incurred by UICI in connection with the Sun Litigation that it
believes were incurred without appropriate board approval (which fees were
reimbursed by Mr. Jensen on July 5, 2000); (d) seek reimbursement of certain
legal fees awarded to Sun if and only if certain ongoing appeals prove
unsuccessful; and (e) implement certain heightened related-party transaction
controls. The Special Litigation Committee also recommended that UICI ratify the
Assurance Agreement, which allows UICI to recover up to $15.1 million from the
STP sale and which also requires UICI to look to the proceeds from the STP sale
to satisfy the Jensen 1996 Guaranty of the value of UICI's initial investment in
a predecessor company to STP. The Company's Board of Directors affirmed the
Special Litigation Committee's findings and recommendations and directed
management to implement the specific recommendations as promptly as practicable.
On March 22, 2000, the Special Litigation Committee reported to the Court
its findings and recommendations with respect to the allegations in the original
complaint, and the Court granted plaintiff's motion to lift the statutory stay
in the proceedings for the purposes of evaluating the Special Litigation
Committee's decision on the Jensen 1996 Guaranty (and the derivative plaintiff's
motion for summary judgment on the
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Jensen 1996 Guaranty) and releasing the $7.6 million of uncontested funds from
the sale of STP to the Company. The Company filed a motion with the appeals
court in the Sun Litigation seeking a distribution to UICI of $7.6 million of
uncontested funds. Following Sun's demand that a portion of the remaining funds
held in the court's registry in the Sun Litigation be distributed to Sun, the
court of appeals denied all requested relief.
On June 10, 2000, the Court dismissed plaintiff's claims arising from the
Jensen 1996 Guaranty. On April 30, 2000, UICI filed a motion to disqualify
plaintiff and his counsel, alleging that they were not fair and adequate
representatives of UICI. On May 4, 2000, plaintiff filed a Motion to Show
Authority, alleging that UICI did not have the authority to file the motion to
disqualify. The motion to disqualify and the motion to show authority are still
pending before the Court.
On September 11, 2000, the Court lifted the statutory stay in the case at
the request of the Special Litigation Committee, in anticipation of the
Committee's report with respect to nine specific transactions that were the
subject of allegations made in plaintiff's first and second amended complaints.
On September 21, 2000, the Special Litigation Committee delivered to the Board
of Directors of UICI its findings with respect to these specific allegations.
Based on its review and assessment, the Special Litigation Committee recommended
that the Company (a) seek dismissal of the claims related to eight of the nine
transactions reviewed, (b) make certain supplemental disclosures with respect to
certain of the related party transactions that were the subject of the first and
second amended complaints, and (c), with respect to one of the nine
transactions, seek reimbursement of a portion of compensation paid to an
employee of the Company during the period 1995-1996. After plaintiff submitted
supplemental information to the Special Litigation Committee, the Special
Litigation Committee withdrew its recommendation that the Company seek
reimbursement of a portion of compensation paid to an employee, and conducted
further review. The Company's Board of Directors affirmed the Special Litigation
Committee's September 21, 2000 findings and recommendations and directed
management to implement the specific recommendations as promptly as practicable.
In October 2000, the Company and the Special Litigation Committee filed a
motion for final settlement and release of certain derivative claims related to
the reimbursement of certain legal fees from Mr. Jensen and for dismissal of all
derivative claims asserted by plaintiff relating to the Sun Litigation. The
Company also sought the court's approval to allow Mr. Jensen to purchase the
Company's 80% interest in STP for $15.6 million ("Proposal A") or,
alternatively, to purchase for $15.1 million the Company's rights and claim of
rights to receive funds held in the registry of the court in the Sun Litigation
("Proposal B") (see discussion above under the caption "Sun Communications
Litigation"). On November 22, 2000, the Court granted the motion for settlement
and release of the derivative claims related to the reimbursement of certain
legal fees from Mr. Jensen, granted the motion to dismiss the derivative claims
asserted by the plaintiff relating to the Sun Litigation and related
transactions, and approved the alternative settlements between Mr. Jensen and
the Company, subject to any alleged right on the part of Sun Communications,
Inc. ("Sun") to consent to Proposal A and/or Proposal B. The Company
subsequently sued Sun separately (UICI v. Sun Communications, Inc., pending in
134th Judicial District Court of Dallas County, Texas, Cause No. 009353),
seeking to resolve the consent issue. Sun subsequently moved to abate the
separate suit.
In November 2000, plaintiff filed an application for attorneys' fees and
reimbursement of expenses. The Company intends to vigorously oppose such
application and to seek an offset of its own attorneys' fees.
On January 25, 2001, the Special Litigation Committee delivered to the
Company its final findings, recommendations, and conclusions. The Special
Litigation Committee reinstated the prior recommendation that the Company seek a
portion of the compensation paid to an employee of the Company during the period
1995-1996, which compensation had previously been recovered by the Company in
December 2000. In addition, the Special Litigation Committee found that it "has
uncovered absolutely no evidence of any pattern of behavior that would suggest
any motive to disadvantage the Company on the part of any of UICI's present or
former officers or directors," and concluded that, in its opinion and except
with respect to the compensation
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
previously recovered from the employee and the legal fees previously recovered
from Mr. Jensen (seediscussion above), the "related party transactions that were
undertaken accrued to the significant benefit of UICI." Finally, the Special
Litigation Committee recommended dismissal of plaintiff's lawsuit in its
entirety. At a meeting held on February 28, 2001, the UICI Board of Directors
accepted the final recommendations and conclusions of the Special Litigation
Committee.
ACE and AFCA Litigation
As previously disclosed, the Company and UCNB are parties to separate
lawsuits filed in February 2000 by American Credit Educators, Inc. ("ACE") and
American Fair Credit Association, Inc. ("AFCA"), organizations through which
United CreditServ formerly marketed its credit card programs (American Credit
Educators, LLC v. United Credit National Bank and UICI and American Fair Credit
Association, Inc. v. United Credit National Bank and UICI, each pending in the
United States District Court for the District of Colorado). In the suits,
plaintiffs have alleged, among other things, that UCNB has breached its
agreements with ACE and AFCA and have claimed damages in an indeterminate
amount. ACE and AFCA are each controlled by Phillip A. Gray, the former head of
UICI's credit card operations.
On January 12, 2001, AFCA filed a second amended complaint seeking, among
other things, a declaratory judgement and injunctive relief and alleging breach
of contract and other causes of action. ACE filed a first amended complaint on
November 6, 2000.
On September 28, 2000, ACE and AFCA filed motions for preliminary
injunctions to compel UICI to, among other things, deposit a significant portion
of the proceeds of the sale of UICI's credit card business in escrow under court
supervision. AFCA filed a supplement to its motion on February 2, 2001, alleging
the liquidation of UCNB as an additional ground for relief. On October 16, 2000,
the Company and UCNB filed motions to dismiss both cases. On January 12, 2001,
the court granted UCNB's motion to dismiss UCNB from the case as to claims for
monetary relief and denied the remainder of UICI's motion to dismiss.
Following the voluntary liquidation of UCNB completed on January 29, 2001
(see Note B), the legal existence of UCNB terminated and, in accordance with the
terms of the June 2000 Consent Order issued by the OCC against UICI, UICI
expressly assumed all liabilities of UCNB, including contingent liabilities
associated with pending and future litigation. Accordingly, on February 5, 2001,
UICI moved to substitute UICI for UCNB as a party defendant and to substitute
United CreditServ for UCNB for purposes of asserting and prosecuting
counterclaims, cross-claims third party complaints and other offensive
pleadings. On March 9, 2001, the court granted UICI's motion to consolidate the
ACE and AFCA lawsuits and ordered the plaintiffs to file an amended complaint on
or before March 23, 2001, after which UICI will have 20 days to file a response
to the amended complaint. The court denied ACE's motion for preliminary
injunction without prejudice, and AFCA subsequently withdrew its motion for a
preliminary injunction.
The Company believes that it has meritorious defenses to the allegations
and intends to vigorously contest the cases.
Mitchell Litigation
As previously disclosed, the Company is one of three named defendants in a
class action suit filed in 1997 (Dadra Mitchell v. American Fair Credit
Association, United Membership Marketing Group, LLC and UICI) pending in
California state court (the "Mitchell case"), in which plaintiffs have alleged
that defendants violated California law regarding unfair and deceptive trade
practices by making misleading representations about, and falsely advertising
the nature and quality of, the benefits of membership in American Fair Credit
Association ("AFCA"). Plaintiffs also filed a companion case in federal district
court in San Francisco captioned Dadra Mitchell v. BankFirst, N.A., which
alleges violations of the federal Truth in Lending Act and Regulation Z. on the
theory that the 90-day notice period required for termination of AFCA membership
was
F-58
106
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not properly disclosed. The only defendant in the federal case (the "BankFirst
case") is BankFirst, N.A., a bank that issued a VISA credit card made available
through the AFCA program.
On April 12, 1999, the California state court in the Mitchell case
certified a class of all California residents who entered into a membership
contract with AFCA through April 12, 1999.
On September 27, 1999, the parties reached a tentative settlement with
respect to the AFCA case and the BankFirst case. However, the existence of the
February and June Consent Orders to which UCNB became subject in 2000 and
certain subsequent statements by AFCA's principal called into question whether
consummation of the tentative settlement was possible or practicable.
Accordingly, the parties advised the courts that the settlement was unlikely to
occur.
On May 4, 2000, the court in the BankFirst case granted Bankfirst's motion
for summary judgment and entered a judgment terminating the case in favor of
Bankfirst and against plaintiff Mitchell. Plaintiff Mitchell subsequently filed
a notice of appeal to the United States Court of Appeals for the Ninth Circuit.
In October 2000, the state court in the Mitchell case granted, in part, and
denied, in part the joint motions of UICI, AFCA and UMMG to compel arbitration
and to narrow the scope of the plaintiff class. The court severed from the class
action the claims for recovery of money by way of damages or restitution of
class members who joined AFCA after January 1, 1998 and who executed signed
arbitration agreements. However, the state court denied UICI's motion to compel
arbitration with respect to these class members' claims for injunctive relief
and, as a result, their claims for injunctive relief remain part of the class
action. With respect to class members who were existing members of AFCA in
January of 1998 and who received through the mail an amendment adding
arbitration of disputes to their AFCA membership agreement, the state court
denied UICI's motion to compel arbitration unless the member also signed a
separate arbitration agreement. In addition, the state court clarified that its
prior April 12, 1999 order certified a class with respect to all claims pleaded
in the complaint, not solely claims under the California Credit Services Act of
1984.
On October 12, 2000, UICI, jointly with defendants AFCA and UMMG, filed a
Notice of Appeal from the state court's October 2000 orders and from its
original class certification order dated April 12, 1999. By letter dated October
12, 2000, defendants notified plaintiffs of the filing of their Notice of Appeal
and that, consequently, all proceedings in the Mitchell case were stayed.
In a status conference on the Mitchell case held on December 21, 2000, the
state court considered, among other issues, the extent and scope of the stay of
proceedings in the state court resulting from defendants' October 12, 2000
Notice of Appeal. The state court determined that it would presume that the stay
of proceedings in the state court resulting from defendants' October 12, 2000
Notice of Appeal extended to the entire Mitchell case and that such stay would
continue in effect until further order of the state court upon fully noticed
motion by plaintiff Mitchell. As of March 1, 2001, UICI had not received notice
from plaintiff Mitchell of a motion for any relief from the stay, and there have
been no further proceedings in the state court. Accordingly, at this time, it is
unclear whether or not plaintiffs will move for relief from the stay of
proceedings, and, if so, what relief from the stay, if any, will be granted to
plaintiffs pending the outcome of UICI's appeal.
Reinsurance Litigation
On November 3, 2000, The MEGA Life and Health Insurance Company (a
wholly-owned subsidiary of the Company) ("MEGA") was named as a party defendant
in a suit filed by General & Cologne Life Re of America ("Cologne Re") (General
& Cologne Life Re of America vs. The MEGA Life and Health Insurance Company),
which is currently pending in the High Court of Justice, Queen's Bench Division,
Commercial Court, Royal Courts of Justice, in London, England. Plaintiff has
alleged that it is due the sum of L1,592,358.54 (approximately US $2.5 million
as of January 21, 2001) for losses incurred in a health
F-59
107
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
insurance program in the United Kingdom in which Cologne Re was a cedant of
reinsurance and MEGA was Cologne Re's retrocessionaire.
MEGA believes it has meritorious defenses and counterclaims against Cologne
Re, which it served on Cologne Re on February 16, 2001, and intends to
vigorously defend the case and prosecute its counterclaims.
Gottstein Litigation
As previously disclosed, UICI, Ronald L. Jensen, and UGA, Inc. are party
defendants in a purported class action lawsuit filed in November 1998
(Gottstein, et al. v. The National Association for the Self-Employed, et al.,
pending in the United States District Court for the District of Kansas). The
class representatives have alleged fraud, conspiracy to commit fraud, breach of
fiduciary duty, violation of the Kansas Consumer Protection Act, conspiracy to
commit RICO violations, and violation of RICO, all arising out of the concurrent
sales of individual health insurance policies underwritten and marketed by PFL
Life Insurance Company ("PFL") and memberships in The National Association for
the Self-Employed ("NASE").
On February 1, 2001, the court approved a settlement including all
potential class members in all states, including Kansas. Under the terms of a
cost sharing agreement with a unit of AEGON USA, UICI and/or MEGA will be
obligated to reimburse the AEGON USA unit for 50% of the cash cost of the
settlement.
State of Connecticut Investigation
As previously disclosed, on April 19, 2000, the Connecticut Attorney
General's Office served upon UCNB a Civil Investigative Demand, seeking
information regarding UCNB's credit card fees, disclosures, marketing practices,
affinity relationships and the handling of payments from consumers to UCNB. On
May 26, 2000, UCNB submitted a timely response to the information request.
United Credit National Bank
As previously disclosed, on February 25, 2000, the Board of Directors of
United Credit National Bank ("UCNB") consented to the issuance by the OCC of a
Consent Order (the "February Consent Order"). Until January 29, 2001, UCNB was a
special purpose national bank headquartered in Sioux Falls, South Dakota, and an
indirect wholly owned (except for directors' qualifying shares) subsidiary of
the Company. Among other things, the February Consent Order required UCNB, until
further notice from the OCC, to cease all activities with ACE and AFCA (UCNB's
only marketing organizations) and prohibited UCNB from introducing new products
or services, without accompanying policies and procedures reviewed and approved
by the OCC providing for, among other things, appropriate risk management,
internal control, management information and data processing systems.
On June 29, 2000, the Company, UCS and UCNB agreed to the issuance by the
OCC of separate Consent Orders (the "June Consent Orders") memorializing the
terms of a definitive Capital Plan previously submitted by the Company and UCNB
and approved by the OCC as required by the February Consent Order (the "UCNB
Capital Plan"). The June Consent Orders required, among other things, (a) the
Company through UCS to contribute additional capital to UCNB in the amount of
$50.0 million in prescribed increments over a thirty-day period ended July 29,
2000 (which $50.0 million was contributed as required); (b) UCNB to maintain
prescribed capital ratios throughout the plan period; (c) UCNB to adopt and
implement certain credit card administrative policies and procedures; and (d)
the Company, on or before December 31, 2000, to assume all of UCNB's remaining
contingent liabilities. In accordance with the June Consent Orders, the
Company's obligations under the UCNB Capital Plan were initially secured by (a)
a pledge by Mr. Jensen of $7.1 million face amount of investment securities
owned by Mr. Jensen and (b) a pledge by the Company of a short-term promissory
note in the principal amount of $35.0 million issued to the
F-60
108
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company and guaranteed by Mr. Jensen in connection with the purchase by an
investment group consisting of Jensen family members (including Mr. Jensen) of
the Company's National Motor Club unit. See Note M. On October 31, 2000, the OCC
consented to the release by UCNB of its security interest in the $35.0 million
promissory note.
On January 29, 2001, the Company completed the voluntary liquidation of
UCNB, in accordance with the terms of a plan of voluntary liquidation approved
by the OCC. UCNB surrendered to the OCC its national bank charter and
distributed to a wholly-owned subsidiary of UICI the residual assets of UCNB,
including available cash and cash equivalents in the amount of approximately
$26.0 million.
As part of the plan of liquidation, on January 29, 2001, the OCC terminated
the February and June Consent Orders issued against UCNB and the June 2000
Consent Order issued against UICI's United CreditServ subsidiary. The OCC
substantially modified the June Consent Order issued with respect to UICI to
eliminate all restrictive provisions except a reconfirmation of UICI's
obligation to assume all liabilities of UCNB.
In the event that UICI fails to comply with the terms of the June Consent
Order, as modified, such failure could result in sanctions brought against the
Company and its officers and directors, including the assessment of civil money
penalties and enforcement of the Consent Order in Federal District Court.
Roe Litigation
On March 8, 2001, UICI and UCNB were named as defendants in a case (Timothy
M. Roe v. Phillip A. Gray, American Fair Credit Association, Inc., UICI, UCNB,
et al) filed in the U.S. District Court for the District of Colorado. On his own
behalf and on behalf of a purported class of similarly situated individuals,
plaintiff in connection with the AFCA credit card program has alleged breach of
contract and violations of the federal Credit Repair Organizations Act and the
Truth-In-Lending Act and seeks certain declaratory relief.
The Company believes that it has meritorious defenses to the allegations
and intends to vigorously contest the case.
Other Previously Disclosed Litigation
Certain previously disclosed litigation (in particular, LaTonya Tarver v.
UCNB, American Credit Educators, L.L.C. and various unnamed defendants; Wylean
Tarver v. UCNB, American Credit Educators, L.L.C. and unnamed defendants; EFG,
Inc. v. Marcus Katz, et al.; Michael D. Jacola, et al. v. The MEGA Life and
Health Insurance Company, et al., and The Klinefelter Family Revocable Living
Trust, et al. v. First Life Assurance Company, et al.) has been finally and
favorably resolved without imposition of material liability against the Company.
Other Matters
The Company and its subsidiaries are parties to various other pending legal
proceedings arising in the ordinary course of business, including some asserting
significant damages arising from claims under insurance policies, disputes with
agents and other matters. Based in part upon the opinion of counsel as to the
ultimate disposition of such lawsuits and claims, management believes that the
liability, if any, resulting from the disposition of such proceedings will not
be material to the Company's financial condition or results of operations.
Other Commitments and Contingencies
The Company and its subsidiaries lease office space and data processing
equipment under various lease agreements with initial lease periods of three to
ten and one-half years. Minimum lease commitments, at
F-61
109
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2000 were $12.0 million in 2001, $10.9 million in 2002, $8.1
million in 2003, $4.7 million in 2004, and $4.1 million in 2005 and $3.3 million
thereafter. Rent expense was $12.4 million, $14.8 million, and $9.2 million for
the years ended December 31, 2000, 1999 and 1998, respectively.
In conjunction with its life insurance operations, the Company commits to
assist in funding the higher education of its insureds with student loans. As of
December 31, 2000, the Company had outstanding commitments to fund student loans
for the years 2001 through 2023. The interest rates on these commitments vary as
described below. Loans are limited to the cost of school or prescribed maximums.
These loans are generally guaranteed as to principal and interest by an
appropriate guarantee agency and are also collateralized by either the related
insurance policy or the co-signature of a parent or guardian. The total
commitment for the next five school years and thereafter as well as the amount
the Company expects to fund considering utilization rates and lapses are as
follows:
TOTAL EXPECTED
COMMITMENT FUNDING
---------- --------
(IN THOUSANDS)
2001........................................................ $ 187,116 $16,749
2002........................................................ 228,464 15,356
2003........................................................ 254,568 12,013
2004........................................................ 253,666 8,479
2005........................................................ 246,364 5,172
Thereafter.................................................. 615,966 6,708
---------- -------
$1,786,144 $64,477
========== =======
Interest rates on the above commitments are principally variable (national
prime plus 2%).
At December 31, 2000, the Company had a $6.0 million letter of credit
relating to its insurance operations.
NOTE O -- EMPLOYEE BENEFIT AND STOCK OPTION PLANS
UICI Employee Stock Ownership and Savings Plan
The Company maintains for the benefit of its and its subsidiaries'
employees the UICI Employee Stock Ownership and Savings Plan (the "Employee
Plan"). The Employee Plan through its 401(k) feature enables eligible employees
to make pre-tax contributions to the Employee Plan in an amount not in excess of
15% of compensation (subject to overall limitations) and to direct the
investment of such contributions among several investment options, including
UICI common stock. A second feature of the Employee Plan constitutes an employee
stock ownership plan (the "ESOP"), contributions to which are invested primarily
in shares of UICI common stock. The ESOP feature allows participants to receive
from UICI and its subsidiaries discretionary matching contributions and to share
in certain supplemental contributions made by UICI and its subsidiaries.
Contributions by UICI and its subsidiaries to the Employee Plan under the ESOP
feature currently vest in prescribed increments over a seven-year period.
On August 11, 2000, the Company issued to the Employee Plan 1,610,000
shares of UICI common stock at a purchase price of $5.25 per share, or $8.5
million in the aggregate. The purchase price for the shares was paid by delivery
to UICI of the Employee Plan's $8.5 million promissory note (the "Plan Note"),
which matures in three years and is secured by a pledge of the purchased shares.
The shares of UICI common stock purchased with the Plan Note (the "$5.25 ESOP
Shares") are held in a suspense account for allocation among participants as and
when the Company's matching and supplemental contributions to the ESOP are made.
It is expected that the Plan Note will be extinguished over a period of
approximately two years by
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110
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
crediting UICI's matching and supplemental contribution obligations under the
ESOP feature of the Employee Plan against principal and interest due on the Plan
Note.
During the year ended December 31, 1999 and 1998, the Company recorded
compensation expense associated with contributions to the Employee Plan in the
amount of $5.0 million and $4.1 million, respectively. During the year ended
December 31, 2000, the Company recorded compensation expense associated with
contributions to the Employee Plan in the amount of $5.0 million. Included in
the $5.0 million expense is $387,000 of stock appreciation, of which $296,000
was allocable to continuing operations and is reflected as stock appreciation
expense on the Company's consolidated statement of income. The amount classified
as stock appreciation expense represents the incremental compensation expense
associated with the allocation during the year of 283,000 $5.25 ESOP Shares
(73,000 $5.25 ESOP Shares were allocated to discontinued operations) to fund the
Company's matching and supplemental contributions to the ESOP. As and when UICI
makes matching and supplemental contributions to the ESOP by allocating to
participants' accounts the $5.25 ESOP Shares held in the suspense account, the
Company will record additional compensation expense equal to the excess, if any,
between the fair value of the shares allocated and $5.25 per share. The
allocated $5.25 ESOP Shares are considered outstanding for purposes of the
computation of earnings per share.
The Company currently estimates that approximately 600,000 $5.25 ESOP
Shares will be allocated to participants' ESOP accounts during 2001. The fair
value of the 1,254,000 unallocated $5.25 ESOP Shares totaled $7.4 million at
December 31, 2000.
Agent Stock Accumulation Plans
The Company sponsors a series of stock accumulation plans (the "Agent
Plans") for the benefit of the independent insurance agents and independent
sales representatives associated with UGA -- Association Field Services, New
United Agency, Cornerstone Marketing of America, CLD Agency and CFLD Association
Field Services agency field forces.
The Agent Plans generally combine an agent-contribution feature and a
Company-match feature. The agent-contribution feature generally provides that
eligible participants are permitted to allocate a portion (subject to prescribed
limits) of their commissions or other compensation earned on a monthly basis to
purchase shares of UICI common stock at the fair market value of such shares at
the time of purchase. Under the Company-match feature of the Agent Plans,
participants are eligible to have posted to their respective Agent Plan accounts
book credits in the form of equivalent shares generally equal to a number of
shares of UICI common stock purchased by the participant under the
agent-contribution feature of the Agent Plans. The "matching credits" vest over
time (generally in prescribed increments over a ten-year period, commencing the
plan year following the plan year during which contributions are first made
under the agent-contribution feature), and vested matching credits in a
participant's plan account on a prescribed date of each year are converted from
book credits to an equivalent number of shares of UICI common stock purchased by
the administrator of the Agent Plans. Matching credits forfeited by participants
no longer eligible to participate in the Agent Plans are reallocated each year
among eligible participants and credited to eligible participants' Agent Plan
accounts.
The Agent Plans do not constitute qualified plans under Section 401(a) of
the Internal Revenue Code of 1986 or employee benefit plans under the Employee
Retirement Income Security Act of 1974, and the Agent Plans are not subject to
the vesting, funding, nondiscrimination and other requirements imposed on such
plans by the Internal Revenue Code and ERISA.
Effective July 1, 2000, the Company agreed to issue an aggregate of
2,175,000 newly issued shares of its common stock to its Agent Plans from time
to time over the next two years, at a purchase price of $5.25 per share (the
"$5.25 Agent Plan Shares"), or $11.4 million in the aggregate. In lieu of
purchasing UICI shares in
F-63
111
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the open market, the Company will utilize these newly issued $5.25 Agent Plan
Shares to satisfy its commitment under the Company-match feature of the Agent
Plans. In addition, for approximately the next two years, the Company has agreed
to grant matching credits to participating agents' accounts in the Agent Plans
based on the lesser of $5.25 per share or fair market value.
During the year ended December 31, 1999 and 1998, the Company recorded
compensation expense associated with the Agent Plans in the amount of $3.0
million and $3.7 million, respectively. During the year ended December 31, 2000,
the Company recorded compensation expense associated with the Agent Plans in the
amount of $3.0 million, of which $2.8 million was classified as underwriting,
acquisition and insurance expenses on the Company's consolidated statement of
income. The balance, or $175,000, was reflected as stock appreciation expense on
the Company's consolidated statement of income and represents the incremental
compensation expense associated with the 255,000 $5.25 Agent Plan Shares issued
under the Company-match feature of the Agent Plans. For so long as the Company
utilizes these newly-issued $5.25 Agent Plan Shares to satisfy its commitment
under the Company-match feature of the Agent Plans, for financial reporting
purposes the Company will recognize incremental compensation expense in any
period in an amount equal to the difference between the fair market value of
such shares allocated to participants' accounts and $5.25. $5.25 Agent Plan
Shares purchased by the administrator to fund vested matching credits are
considered outstanding for purposes of the computation of earnings per share.
The Company currently estimates that approximately 640,000 $5.25 Agent Plan
Shares will be issued to satisfy the Company match feature of the Agent Plans
during 2001. The fair value of the 2,175,000 unissued $5.25 Agent Plan Shares
totaled $12.9 million at December 31, 2000.
Stock Option Plans
In accordance with the terms of the Company's 1998 Employee Stock Option
Plan and the Company's 1998 Agent Stock Option Plan, each effective August 15,
1998, the Company granted agents and employees of the Company options to
purchase an aggregate of 8.1 million shares of Company common stock at an
exercise price of $15 per share. The options vest in 20% increments in each
year, commencing on August 15, 1999 and ending August 15, 2001, and the
remaining 40% vest on August 15, 2002. At December 31, 2000 and 1999, options to
purchase 2,429,875 shares and 3,844,634 shares, respectively, were outstanding
under the 1998 Plans. In the year ended December 31, 2000 and 1999, the Company
recognized $-0- and $6.0 million of compensation expense in connection with the
1998 Plans.
In accordance with the terms of the Company's 1987 Stock Option Plan, as
amended (the "1987 Plan"), 4,000,000 shares of common stock of the Company have
been reserved for issuance upon exercise of options that may be granted to
officers, key employees, and certain eligible non-employees at an exercise price
equal to the fair market value at the date of grant. The options vest in 20%
annual increments every twelve months, subject to continuing employment,
provided that an option will vest 100% upon death, permanent disability, or
change of control of the Company. All options under the 1987 Plan are
exercisable over a five-year period. During the year ended December 31, 2000 and
1999, the Company granted to officers, directors and employees under the 1987
Plan options to purchase an aggregate of 713,408 shares and 147,682 shares,
respectively, at an average exercise price of $6.63 and $24.94 per share,
respectively, which was equal to the market price at the date of grant.
In December 1998, the Company issued under the 1987 Plan 200,000 options at
an option price of $19.50 to the Company's President and Chief Executive
Officer. The exercise price was equal to the market price of the stock at the
date the option was granted.
In connection with the Company's acquisition of AMLI Realty Co. ("ARC") in
1996, options previously outstanding under the ARC employee stock option plan
were converted into the right to receive shares of the Company's common stock.
At December 31, 2000 and 1999, 60,591 options (at a weighted exercise price per
F-64
112
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share of $12.72) and 60,591 options (at a weighted exercise price per share of
$12.72), respectively, were outstanding under the ARC plan. Options issued under
the ARC plan were fully vested as of December 31, 2000 and 1999.
Set forth below is a summary of stock option transactions:
NUMBER OF AVERAGE OPTION
SHARES PRICE PER SHARE($)
---------- ------------------
Outstanding options at January 1, 1998................... 60,591 12.72
Granted................................................ 8,294,305 15.11
Canceled............................................... (2,167,346) 15.00
----------
Outstanding options at December 31, 1998................. 6,187,550 15.12
Granted................................................ 147,682 24.94
Canceled............................................... (1,644,316) 15.00
Exercised.............................................. (438,009) 15.00
----------
Outstanding options at December 31, 1999................. 4,252,907 15.52
Granted................................................ 713,408 6.63
Canceled............................................... (1,451,719) 15.03
----------
Outstanding options at December 31, 2000................. 3,514,596 13.92
==========
Options exercisable at December 31,
1998................................................... 60,591 15.12
1999................................................... 615,034 15.07
2000................................................... 969,166 15.51
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of underlying stock on the date
of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1999: risk-free interest rate of 6.58%; dividend yield of 0.0%;
volatility factor of the expected market price of the Company's common stock of
0.49; and a weighted-average expected life of the option of five years. The
weighted average grant date fair value per share of stock options issued in
2000, 1999 and 1998 was $3.45, $11.07 and $6.03, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect on
net income (loss) of the stock compensation amortization for the
F-65
113
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years presented above is not likely to be representative of the effects on
reported net income for future years. The Company's pro forma information
follows (in thousands except for earnings per share information):
2000 1999 1998
-------- --------- -------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
Pro forma income (loss):
Income from continuing operations.................. $ 27,427 $ 33,102 $30,165
Income (loss) from discontinued operations......... (23,400) (179,132) 27,246
-------- --------- -------
Net income (loss).......................... $ 4,027 $(146,030) $57,411
======== ========= =======
Pro forma earnings (loss) per common share:
Basic earnings (loss):
From continuing operations......................... $ 0.59 $ 0.71 $ 0.65
Income (loss) from discontinued operations......... (0.50) (3.87) 0.59
-------- --------- -------
Net income (loss).......................... $ 0.09 $ (3.16) $ 1.24
======== ========= =======
Diluted earnings (loss):
From continuing operations......................... $ 0.57 $ 0.69 $ 0.65
Income (loss) from discontinued operations......... (0.49) (3.75) 0.59
-------- --------- -------
Net income (loss).......................... $ 0.08 $ (3.06) $ 1.24
======== ========= =======
Restricted Stock Grants
In March 2000 and in January and February 2001, the Company issued an
aggregate of 56,459 shares and 96,250 shares of restricted stock, respectively,
to selected officers and key employees with a weighted average price per share
on the date of issuance of $6.63 and $7.22, respectively. Until the second
anniversary of the date of grant, all of such shares are subject to forfeiture
if a grantee ceases to provide material services to the Company as an employee
for any reason other than death. Upon death or a Change in Control (as defined)
of the Company, the shares of restricted stock are no longer subject to
forfeiture. All of such grants of restricted stock are subject to the approval
of the shareholders of the Company.
UICI Executive Stock Purchase Program
To encourage the ownership of UICI Common Stock among directors and key
executives, in December 1998 the Company adopted the UICI Executive Stock
Purchase Program (the "ESPP"). Pursuant to the ESPP, the directors and selected
executives of UICI were offered the opportunity, in the alternative, to either
purchase shares of UICI common stock at a purchase price equal to 85% of the
then-prevailing market price per share (the "Discount Option"), or purchase
shares of common stock at 100% of the then fair market value, such purchase to
be financed by the executive to the extent of $3.00 per share and by UICI to the
extent of the balance (the "Loan Option").
In the case of the Loan Option, UICI agreed to finance the balance of the
purchase price by accepting delivery of a full recourse, five-year promissory
note bearing interest at the rate of the greater of the then -- prevailing Fed
funds rate or 5% per annum to be paid quarterly in arrears. In addition to the
foregoing, with respect to each of Discount Option and the Loan Option, UICI
offered to issue to the executives on a one-for-one basis stock options to
purchase UICI common stock exercisable at the then-prevailing market price per
share. Options so issued were to be governed by the terms of UICI's Amended and
Restated 1987 Stock Option Plan.
A total of 24 current executives and outside directors elected pursuant to
the ESPP to purchase an aggregate of 308,422 shares of UICI common stock, of
which an aggregate of 9,878 shares were purchased
F-66
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pursuant to the Discount Option at a weighted average purchase price of $22.67
per share and 298,544 shares were purchased pursuant to the Loan Option at a
weighted average purchase price of $21.26 per share. As part of the ESPP, the
Company issued an aggregate of 308,422 options to purchase UICI common stock at
a weighted average exercise price of $21.40 per share. Current executives and
directors had indebtedness outstanding owing to the Company under the Loan
Option at December 31, 2000 in the aggregate amount of $4.4 million (including
$2.8 million payable by Gregory T. Mutz, the Company's President and Chief
Executive Officer).
Following the significant decline in the price of UICI common stock
following UICI's announcement of losses at its United CreditServ credit card
unit in December 1999, the Board of Directors sought means to revise the ESPP in
a manner that would better serve its intended objectives. The Board became
increasingly concerned that the ESPP had in fact contributed to negative morale
among a group of key UICI executives, none of whom had direct involvement with
the difficulties at United CreditServ.
Following a recommendation of the Board's Compensation Committee, the Board
of Directors of the Company (including all of the outside disinterested members
of the Board), at a meeting held on January 2, 2001, approved modifications to
the ESPP that were generally designed to restore executives economically to
where they would have been if the ESPP were implemented in January 2001
according to its original design and the stock price in January 2001 had been
$9.00 per share. The modifications were designed to assure that the ESPP serves
as reasonable incentive on a going-forward basis to those executives who
continue to serve the Company and who will, as a result, be relied upon to
assure the Company's future success. As originally applied to the Company's
outside directors and to executives no longer with the Company, the terms of the
ESPP remain unmodified.
In particular, in January 2001 UICI issued an aggregate of 11,054 shares of
UICI common stock to the five executives who purchased shares pursuant to the
Discount Option. Giving effect to such issuance, the executives have an average
cost in shares purchased pursuant to the Discount Option of $9.00 per share. In
addition, UICI discharged an aggregate of $997,000 of indebtedness owed by 13
current executives (other than Mr. Mutz) who elected to purchase shares pursuant
to the Loan Option, representing 73% of the indebtedness previously owing by
such persons. Giving effect to this debt discharge, these individuals will have
acquired pursuant to the ESPP an aggregate of 62,934 shares at a cost of
$566,000 ($378,000 of indebtedness plus $188,000 of cash invested), or $9.00 per
share.
Mr. Mutz initially purchased pursuant to the ESPP a total of 220,000 shares
of UICI stock at an aggregate purchase price of $4.4 million, or $19.95 per
share, which purchase was initially financed with $660,000 ($3.00 per share) in
cash and by indebtedness owing to UICI in the amount of $3.7 million. Mr. Mutz
subsequently paid down principal on his loan in the amount of $960,000.
Accordingly, through December 31, 2000, Mr. Mutz had paid a total of $1.6
million in cash and had outstanding against his 220,000 shares a total of $2.8
million in indebtedness.
In January 2001 UICI discharged indebtedness owing by Mr. Mutz in the
amount of $1.5 million. Giving effect to such forgiveness, Mr. Mutz currently
owes UICI $1.3 million, or $6.00 per share initially purchased. In addition,
UICI issued to Mr. Mutz 107,104 shares of UICI common stock. Giving effect to
the debt forgiveness and the issuance of the shares, Mr. Mutz pursuant to the
ESPP holds an aggregate of 327,104 shares of UICI common stock at a cost to Mr.
Mutz of $2.9 million ($1.3 million of indebtedness plus $1.6 million of cash
invested), or $9.00 per share.
UICI cancelled the 290,404 options that were issued to executives pursuant
to the ESPP at a weighted average option price of $21.17 per share. In addition,
the maturity of the promissory notes delivered in connection with the Loan
Option was extended to January 1, 2007. All other terms and conditions of the
original notes remain in effect.
F-67
115
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon the issuance of the UICI shares and the discharge of indebtedness in
January 2001, executives/ directors recognized immediate income for federal tax
purposes and UICI became entitled to an immediate deduction and tax benefit in a
corresponding amount. In order to afford participants a means to pay their tax,
UICI transferred to participants the benefit of UICI's tax savings by paying a
cash tax "gross-up" payment to affected participants in the aggregate amount of
$1.7 million.
In connection with the January 2001 modifications to the ESPP, for
financial reporting purposes UICI recorded in the quarter ended December 31,
2000 compensation expense in the amount of $4.8 million pre-tax, or $4.1 million
net of tax. The 118,158 shares of UICI common stock issued to participants were
issued from treasury shares.
Other Compensation Plans
Effective August 15, 1998, the Company's Chairman agreed to contribute the
value of 100,000 shares of UICI stock to all agents and employees of UICI and
certain others as of August 15, 1998. The value of these shares vest at August
15, 2002. The value of these shares will be distributed in cash per capita at
the time of vesting to those employees and agents who were employed or engaged
by the Company on August 15, 1998 and remain employed or engaged on the vesting
date. At December 31, 2000, the Company's liability for this compensation was
$359,000.
In January 2000, the Company established a plan, pursuant to which 25% of
the cash equivalent value of 100,000 shares of UICI common stock will be
distributed to eligible employees in each of January 2001, 2002, 2003 and 2004.
At December 31, 2000, the Company's liability for this compensation was
$309,000.
NOTE P -- INVESTMENT ANNUITY SEGREGATED ACCOUNTS
The Company had deferred investment annuity policies which have segregated
account assets and liabilities amounting to $244.0 million and $239.9 million at
December 31, 2000 and 1999, respectively, which are funded by specific assets
held in segregated custodian accounts for the purposes of providing policy
benefits and paying applicable premiums, taxes and other charges as due. Because
investment decisions with respect to these segregated accounts are made by the
policyholders, these assets and liabilities are not presented in these financial
statements. The assets are held in individual custodian accounts, from which the
Company has received hold harmless agreements and indemnification.
NOTE Q -- SEGMENT INFORMATION
The Company's operating segments are: (i) Insurance Segment, which
includes the businesses of the Self Employed Agency Division, the Student
Insurance Division, the OKC Division, the Special Risk Division and the National
Motor Club Division (until sold on July 27, 2000); (ii) the Financial Services
Segment, which includes the businesses of Academic Management Services Corp. and
the Company's investment in HealthAxis.com, Inc. (formerly Insurdata
Incorporated), and other business units and (iii) Other Key Factors.
Other Key Factors include investment income not allocated to the other
segments, interest and general expenses relating to corporate operations,
amortization of goodwill and realized gains or losses on sale of investments.
Allocations of investment income and certain general expenses are based on a
number of assumptions and estimates, and the business segments reported
operating results would change if different methods were applied. Certain assets
are not individually identifiable by segment and, accordingly, have been
allocated by formulas. Segment revenues include premiums and other policy
charges and considerations, net investment income, and fees and other income.
Operations that do not constitute reportable operating segments have been
combined with Other Key Factors. Depreciation expense and capital expenditures
are not considered material. Management does not allocate income taxes to
segments. Transactions between
F-68
116
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reportable operating segments are accounted for under respective agreements that
are generally at cost. Financial information by operating segment for revenues,
income before federal income taxes and minority interests and assets is
summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
Revenues
Insurance:
Self Employed Agency........................... $ 566,385 $ 566,847 $ 610,097
Student Insurance.............................. 111,476 107,975 111,047
OKC Division................................... 92,425 94,135 98,801
Special Risk................................... 30,170 59,005 66,819
National Motor Club............................ 21,697 27,806 27,257
---------- ---------- ----------
822,153 855,768 914,021
---------- ---------- ----------
Financial Services:
Academic Management Services................... 154,250 104,592 57,233
UICI Administrators............................ 18,548 46,184 41,236
Other Business Units........................... -- -- 34,773
---------- ---------- ----------
172,798 150,776 133,242
---------- ---------- ----------
Gain on sale of HealthAxis.com shares............ 26,300 -- --
Other Key Factors................................ 34,565 37,913 32,993
Intersegment Eliminations........................ (4,460) (31,274) (23,505)
---------- ---------- ----------
Total revenues......................... $1,051,356 $1,013,183 $1,056,751
========== ========== ==========
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
-------- -------- -------
(IN THOUSANDS)
Income (loss) from continuing operations before
federal income taxes
Insurance:
Self Employed Agency................................ $ 70,905 $ 50,415 $(4,765)
Student Insurance................................... (1,877) 49 6,089
OKC Division........................................ 13,132 17,405 20,436
Special Risk........................................ (5,667) (4,079) 5,805
National Motor Club................................. 2,471 3,200 5,099
-------- -------- -------
78,964 66,990 32,664
Financial Services:
Academic Management Services........................ (24,640) (19,938) (1,339)
UICI Administrators................................. (1,668) 2,322 3,277
Other Business Units................................ -- -- 441
-------- -------- -------
(26,308) (17,616) 2,379
-------- -------- -------
Gain on sale of HealthAxis.com shares............... 26,300 -- --
HealthAxis.com operating loss....................... (15,623) -- --
Other Key Factors................................... 5,786 7,806 17,702
Goodwill amortization............................... (6,242) (6,328) (5,483)
-------- -------- -------
Total income from continuing operations
before federal income taxes............... $ 62,877 $ 50,852 $47,262
======== ======== =======
F-69
117
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Assets
Insurance:
Self Employed Agency...................................... $ 446,106 $ 400,610
Student Insurance......................................... 78,197 72,184
OKC Division.............................................. 666,552 679,889
Special Risk.............................................. 97,647 85,012
National Motor Club....................................... -- 50,717
---------- ----------
1,288,502 1,288,412
---------- ----------
Financial Services:
Academic Management Services.............................. 1,479,217 1,888,445
UICI Administrators....................................... 6,392 23,645
Other Business Units...................................... -- 20,029
---------- ----------
1,485,609 1,932,119
---------- ----------
Other Key Factors........................................... 273,923 318,813
---------- ----------
Total assets from continuing operations........... $3,048,034 $3,539,344
========== ==========
NOTE R -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- --------- -------
(IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
Income (loss) available to common shareholders:
Income from continuing operations available to
common shareholders............................. $ 29,133 $ 33,250 $31,523
Income (loss) from discontinued operations......... (23,400) (179,132) 27,246
-------- --------- -------
Net income (loss).................................. $ 5,733 $(145,882) $58,769
======== ========= =======
Weighted average shares outstanding
(thousands) -- basic earnings (loss) per share..... 46,573 46,326 46,244
Effect of dilutive securities:
Employee stock options and other shares (see Note
N)................................................. 1,193 1,504 224
-------- --------- -------
Weighted average shares outstanding -- dilutive
earnings (loss) per share.......................... 47,766 47,830 46,468
-------- --------- -------
Basic earnings (loss) per share
Income from continuing operations.................. $ 0.62 $ 0.72 $ 0.68
Income (loss) from discontinued operations......... (0.50) (3.87) 0.59
-------- --------- -------
Net income (loss).................................. $ 0.12 $ (3.15) $ 1.27
======== ========= =======
Diluted earnings (loss) per share
Income from continuing operations.................. $ 0.61 $ 0.70 $ 0.67
Income (loss) from discontinued operations......... (0.49) (3.75) 0.59
-------- --------- -------
Net income (loss).................................. $ 0.12 $ (3.05) $ 1.26
======== ========= =======
F-70
118
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE S -- SUPPLEMENTAL FINANCIAL STATEMENT DATA
Set forth below is certain supplemental information concerning
underwriting, policy acquisition costs and insurance expenses for the years
ended December 31, 2000, 1999 and 1998:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Amortization of deferred policy acquisition costs.... $ 22,585 $ 31,966 $ 24,480
Commissions.......................................... 66,478 65,451 97,614
Administrative expenses.............................. 143,162 129,646 130,262
Premium taxes........................................ 18,188 16,372 18,514
-------- -------- --------
$250,413 $243,435 $270,870
======== ======== ========
F-71
119
SCHEDULE II
UICI (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Investments:
Investments in and advances to subsidiaries*.............. $435,366 $636,146
Investment in agents' receivables......................... -- 11,145
Guaranteed student loans.................................. -- 4,030
Collateral loans.......................................... -- 1,256
Investment in HealthAxis.com.............................. 10,112 --
Short-term and other investments.......................... _-- 296
-------- --------
Total Investments................................. 445,478 652,873
Cash and cash equivalents................................... 17,009 39,480
Refundable income taxes..................................... 17,704 28,695
Deferred income tax......................................... 25,531 --
Other....................................................... 7,530 4,454
-------- --------
$513,252 $725,502
======== ========
LIABILITIES
Accrued expenses and other liabilities...................... $ 18,232 $ 17,796
Short-term debt............................................. 5,951 3,951
Long-term debt.............................................. 19,352 115,803
Payable to Related Party-short term......................... 18,954 --
Net liabilities of discontinued operations.................. -- 149,880
Federal income taxes payable................................ -- 30,638
-------- --------
62,489 318,068
STOCKHOLDERS' EQUITY
Preferred stock............................................. -- --
Common stock................................................ 483 466
Additional paid-in capital.................................. 186,820 173,585
Accumulated other comprehensive loss........................ (10,068) (30,432)
Retained earnings........................................... 274,277 268,544
Treasury stock.............................................. (749) (4,729)
-------- --------
450,763 407,434
-------- --------
$513,252 $725,502
======== ========
---------------
* Eliminated in consolidation.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of UICI and Subsidiaries.
F-72
120
UICI
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- --------- -------
Income:
Dividends from subsidiaries*.............................. $ 45,273 $ 50,416 $37,863
Interest income (includes amounts received from related
parties of $875, $-0-, and $-0-, in 2000, 1999, and
1998, respectively).................................... 3,893 3,174 6,736
Interest and other income from subsidiaries*.............. 1,499 6,515 1,043
Gain (loss) on sale of investments........................ 27,079 (403) (41)
Fees and other income (includes amounts received from
related parties of $-0-, $33, and $-0-, in 2000, 1999,
and 1998, respectively)................................ 354 1,423 723
-------- --------- -------
78,098 61,125 46,324
-------- --------- -------
Expenses:
General and administrative expenses (includes amounts paid
to related parties of $348, $317, and $-0-, in 2000,
1999, and 1998, respectively).......................... 31,054 21,658 4,320
Administrative expenses to subsidiaries*.................. -- -- 215
Interest expense (includes amounts paid to related parties
of $4,525, $-0-, and $-0-, in 2000, 1999, and 1998,
respectively).......................................... 5,902 7,067 2,641
-------- --------- -------
36,956 28,725 7,176
-------- --------- -------
Income before equity in undistributed earnings of
subsidiaries and federal income taxes (benefit)........... 41,142 32,400 39,148
Equity in undistributed earnings of continuing operations... (12,755) (5,523) (522)
-------- --------- -------
Income before federal income taxes.......................... 28,387 26,877 38,626
Federal income taxes (benefit).............................. (746) (6,373) 7,103
-------- --------- -------
Net income from continuing operations............. 29,133 33,250 31,523
Net income (loss) of discontinued operations................ (23,400) (179,132) 27,246
-------- --------- -------
Net income (loss)........................................... $ 5,733 $(145,882) $58,769
======== ========= =======
---------------
* Eliminated in consolidation.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of UICI and Subsidiaries.
F-73
121
UICI
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
--------- --------- --------
Operating Activities
Net Income (loss)........................................ $ 5,733 $(145,882) $ 58,769
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Equity in undistributed (earnings) loss of subsidiaries
of discontinued operations............................ 23,400 179,132 (27,246)
Equity in undistributed earnings of continuing
operations............................................ 12,755 5,523 522
(Gains) losses on sale of investments.................... (26,928) 403 41
Decrease (increase) in other receivables................. 635 (2,649) (3,300)
Increase (decrease) in accrued expenses and other
liabilities........................................... (1,180) 16,625 (2,016)
Deferred income taxes (benefit).......................... 30,861 (3,901) (1,047)
Increase in federal income taxes payable................. 18,205 139 6,260
Operating loss of HealthAxis.com......................... 15,623 -- --
Other items, net......................................... (1,814) 8,847 (2,693)
--------- --------- --------
Cash provided by continuing operations................... 77,290 58,237 29,290
Amounts (contributed to) received from discontinued
operations............................................ (174,557) (5,551) 15,497
--------- --------- --------
Net cash Provided by (Used in) Operating
Activities..................................... (97,267) 52,686 44,787
--------- --------- --------
Investing Activities
Purchase of subsidiaries................................. (4,481) -- --
Sale of subsidiaries and assets.......................... 45,939 -- 21,270
Purchase of minority interest............................ -- (878) (11,117)
Increase of investments in and advances to
subsidiaries.......................................... 47,555 (91,037) (79,525)
Sale of two million shares of HealthAxis.com............. 30,000 -- --
Net decrease (increase) in other investments............. 3,925 9,217 (10,661)
Decrease (increase) in agents' receivables............... 11,145 (676) 8,197
--------- --------- --------
Net cash Provided by (Used in) Investing
Activities..................................... 134,083 (83,374) (71,836)
--------- --------- --------
Financing Activities
Proceeds of notes payable................................ 10,000 115,000 37,000
Repayment of notes payable............................... (104,451) (43,950) (15,950)
Proceeds of payable to related party..................... 146,000 -- --
Repayment of payable to related party.................... (127,046) -- --
Proceeds from capital contribution....................... 12,214 10,129 --
Sale (purchase) of treasury stock........................ 3,979 (4,729) --
Other changes in equity.................................. 17 (7,760) 3,900
--------- --------- --------
Net cash Provided by (Used in) Financing
Activities..................................... (59,287) 68,690 24,950
--------- --------- --------
Increase (decrease) in Cash...................... (22,471) 38,002 (2,099)
Cash and cash equivalents at Beginning of
Period......................................... 39,480 1,478 3,577
--------- --------- --------
Cash and cash equivalents at End of Period....... $ 17,009 $ 39,480 $ 1,478
========= ========= ========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of UICI and Subsidiaries.
F-74
122
SCHEDULE III
UICI
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
COL. A COL. B COL. C COL. D COL. E
------ ----------- -------------- -------- ------------
FUTURE POLICY
DEFERRED BENEFITS,
POLICY LOSSES,
ACQUISITION CLAIMS, AND UNEARNED POLICYHOLDER
COSTS LOSS EXPENSES PREMIUMS FUNDS
----------- -------------- -------- ------------
(IN THOUSANDS)
December 31, 2000:
Self Employed Agency......................... $20,628 $271,439 $ 35,538 $ 7,998
Student Insurance............................ 2,924 25,206 31,779 --
OKC Division................................. 44,573 413,346 27,204 9,929
Special Risk................................. 390 75,697 3,364 --
National Motor Club.......................... -- 1,587 606 --
------- -------- -------- -------
Total................................ $68,515 $787,275 $ 98,491 $17,927
======= ======== ======== =======
December 31, 1999:
Self Employed Agency......................... $17,313 $256,434 $ 33,762 $ 8,016
Student Insurance............................ 2,862 24,543 27,954 --
OKC Division................................. 48,550 443,575 30,278 11,074
Special Risk................................. 650 62,509 1,450 --
National Motor Club.......................... -- 1,658 4,104 --
------- -------- -------- -------
Total................................ $69,375 $788,719 $ 97,548 $19,090
======= ======== ======== =======
December 31, 1998:
Self Employed Agency......................... $22,856 $255,170 $ 37,142 $ 7,972
Student Insurance............................ 3,212 25,621 31,546 --
OKC Division................................. 50,894 465,782 35,957 9,560
Special Risk................................. 910 37,552 1,552 3,058
National Motor Club.......................... 1,611 1,470 4,372 --
------- -------- -------- -------
Total................................ $79,483 $785,595 $110,569 $20,590
======= ======== ======== =======
F-75
123
SCHEDULE III
UICI
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
COL. F COL. G COL. H COL. I COL. J COL. K
-------- ---------- ----------- ------------ --------- --------
BENEFITS, AMORTIZATION
CLAIMS OF DEFERRED
LOSSES, AND POLICY OTHER
PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
REVENUE INCOME* EXPENSES COSTS EXPENSES* WRITTEN
-------- ---------- ----------- ------------ --------- --------
(IN THOUSANDS)
2000:
Self Employed Agency...... $521,077 $20,899 $314,963 $ 8,573 $147,535
Student Insurance......... 107,367 2,870 83,272 25 28,817
OKC Division.............. 57,732 27,889 39,576 13,727 19,185
Special Risk.............. 20,725 2,676 24,753 260 4,056
National Motor Club....... 2,050 115 1,893 -- 47
-------- ------- -------- ------- --------
$708,951 $54,449 $464,457 $22,585 $199,640 $711,988
======== ======= ======== ======= ======== ========
1999:
Self Employed Agency...... $526,224 $19,252 $349,472 $14,327 $131,262
Student Insurance......... 103,633 2,768 78,807 349 27,196
OKC Division.............. 57,283 29,579 39,623 13,496 16,338
Special Risk.............. 46,756 2,628 44,301 260 8,902
National Motor Club....... 2,691 153 2,371 3,534 71
-------- ------- -------- ------- --------
$736,587 $54,380 $514,574 $31,966 $183,769 $733,299
======== ======= ======== ======= ======== ========
1998:
Self Employed Agency...... $572,516 $18,467 $430,228 $ 3,030 $162,490
Student Insurance......... 107,029 2,764 76,448 3,393 23,863
OKC Division.............. 58,915 32,667 38,573 17,797 14,777
Special Risk.............. 55,155 2,455 38,115 260 13,430
National Motor Club....... 3,007 363 2,671 -- 70
-------- ------- -------- ------- --------
$796,622 $56,716 $586,035 $24,480 $214,630 $791,958
======== ======= ======== ======= ======== ========
---------------
* Allocations of Net Investment Income and Other Operating Expenses are based on
a number of assumptions and estimates, and the results would change if
different methods were applied.
F-76
124
SCHEDULE IV
UICI
AND SUBSIDIARIES
REINSURANCE
(DOLLARS IN THOUSANDS)
PERCENTAGE
OF AMOUNT
GROSS ASSUMED
AMOUNT CEDED ASSUMED NET AMOUNT TO NET
---------- ---------- ---------- ---------- ----------
Year Ended December 31, 2000
Life insurance in force......... $4,436,448 $ 863,540 $ 474,936 $4,047,844 11.7%
========== ========== ========== ========== ====
Premiums:
Life insurance.................. $ 42,299 $ 6,286 $ 4,624 $ 40,637 11.4%
Health insurance................ 621,262 66,791 113,843 668,314 17.0%
---------- ---------- ---------- ----------
$ 663,561 $ 73,077 $ 118,467 $ 708,951
========== ========== ========== ==========
Year Ended December 31, 1999
Life insurance in force......... $5,366,204 $1,144,756 $ 501,703 $4,723,151 10.6%
========== ========== ========== ========== ====
Premiums:
Life insurance.................. $ 50,695 $ 9,795 $ 5,516 $ 46,416 11.9%
Health insurance................ 584,513 53,452 159,110 690,171 23.1%
---------- ---------- ---------- ----------
$ 635,208 $ 63,247 $ 164,626 $ 736,587
========== ========== ========== ==========
Year Ended December 31, 1998
Life insurance in force......... $4,850,858 $1,291,525 $1,668,440 $5,227,773 31.9%
========== ========== ========== ========== ====
Premiums:
Life insurance.................. $ 51,755 $ 13,237 $ 10,829 $ 49,347 21.9%
Health insurance................ 566,112 34,032 215,195 747,275 28.8%
---------- ---------- ---------- ----------
$ 617,867 $ 47,269 $ 226,024 $ 796,622
========== ========== ========== ==========
F-77
125
SCHEDULE V
UICI
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
RECOVERIES/ DEDUCTIONS/
BALANCE AT ADDITIONS CHARGED AMOUNTS BALANCE AT
BEGINNING COST AND TO OTHER CHARGED END OF
OF PERIOD EXPENSES ACCOUNTS OFF PERIOD
---------- --------- -------- ----------- -----------
Allowance for losses
Year ended December 31, 2000
Agents' receivables.................... $1,982 $1,264 -- $(1,863) $1,383
Mortgage and collateral loans.......... 650 -- -- -- 650
Student loans.......................... 2,252 5,388 -- (167) 7,473
Real estate............................ 1,083 -- -- -- 1,083
Year Ended December 31, 1999
Agents' receivables.................... $ 483 $1,851 -- $ (352) $1,982
Mortgage and collateral loans.......... 650 -- -- -- 650
Student loans.......................... 935 1,317 -- -- 2,252
Real estate............................ 1,083 -- -- -- 1,083
Year Ended December 31, 1998
Agents' receivables.................... $1,491 $ 95 -- $(1,103) $ 483
Mortgage and collateral loans.......... 650 -- -- -- 650
Student loans.......................... 400 535 -- -- 935
Real estate............................ 2,723 400 -- (2,040) 1,083
F-78
126
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2 -- Plan of Reorganization of United Group Insurance Company,
as subsidiary of United Group Companies, Inc. and Plan
and Agreement of Merger of United Group Companies, Inc.
into United Insurance Companies, Inc., filed as Exhibit
2-1 to the Registration Statement on Form S-1, File No.
33-2998, filed with the Securities and Exchange
Commission on January 30, 1986 and incorporated by
reference herein.
3.1(A) -- Certificate of Incorporation of UICI, as amended, filed
as Exhibit 4.1 (a) to Registration Statement on Form S-8,
File No. 333-85113, filed with the Securities and
Exchange Commission on August 13, 1999 and incorporated
by reference herein.
3.2(A) -- Restated By-Laws, as amended, of the Company, filed as
Exhibit 4.1(b) to Registration Statement on Form S-8 File
No. 333-85113, filed with the Securities and Exchange
Commission on August 13, 1999 and incorporated by
reference herein.
10.1(B) -- Reinsurance Agreement between AEGON USA Companies and
UICI Companies Effective January 1, 1995, as amended
through November 21, 1995 and incorporated by reference
herein.
10.1(C) -- Amendment No. 3 to Reinsurance Agreement between AEGON
USA Companies and UICI Companies effective April 1, 1996,
and filed as Exhibit 10.1 to the Company's Current Report
on Form 8-K dated April 1, 1996 (File No. 0-14320), and
incorporated by reference herein. The Amendment No. 3
amends the Reinsurance Agreement between AEGON USA
Companies and UICI Companies effective January 1, 1995,
as amended through November 21, 1995, filed as Exhibit
10.1(B) on Annual Report on Form 10-K for year ended
December 31, 1995, (File No. 0-14320), filed on March 29,
1996, and incorporated by reference herein.
10.2 -- Agreements Relating to United Group Association Inc.,
filed as Exhibit 10-2 to the Registration Statement on
Form S-18, File No. 2-99229, filed with the Securities
and Exchange Commission on July 26, 1985 and incorporated
by reference herein.
10.3 -- Agreement for acquisition of capital stock of Mark Twain
Life Insurance Corporation by Mr. Ronald L. Jensen, filed
as Exhibit 10-4 to the Registration Statement on Form
S-1, File No. 33-2998, filed with the Securities and
Exchange Commission on January 30, 1986 and incorporated
by reference herein.
10.3(A) -- Assignment Agreement among Mr. Ronald L. Jensen, the
Company and Onward and Upward, Inc. dated February 12,
1986 filed as Exhibit 10-4(A) to Amendment No. 1 to
Registration Statement on Form S-1, File No. 33-2998,
filed with the Securities and Exchange Commission on
February 13, 1986 and incorporated by reference herein.
10.4 -- Agreement for acquisition of capital stock of Mid-West
National Life Insurance Company of Tennessee by the
Company filed as Exhibit 2 to the Report on Form 8-K of
the Company, File No. 0-14320, dated August 15, 1986 and
incorporated by reference herein.
127
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.5(A) -- Stock Purchase Agreement, dated July 1, 1986, among the
Company, Charles E. Stuart and Stuart Holding Company, as
amended July 7, 1986, filed as Exhibit 11(c)(1) to
Statement on Schedule 14D-1 and Amendment No. 1 to
Schedule 13D, filed with the Securities and Exchange
Commission on July 14, 1986 and incorporated by reference
herein.
10.5(B) -- Acquisition Agreement, dated July 7, 1986 between
Associated Companies, Inc. and the Company, together with
exhibits thereto, filed as Exhibit (c)(2) to Statement on
Schedule 14D-1 and Amendment No. 1 to Schedule 13D, filed
with the Securities and Exchange Commission on July 14,
1986 and incorporated by reference herein.
10.5(C) -- Offer to Purchase, filed as Exhibit (a)(1) to Statement
on Schedule 14D-1 and Amendment No. 1 to Schedule 13D,
filed with the Securities and Exchange Commission on July
14, 1986 and incorporated by reference herein.
10.6 -- Agreement for acquisition of capital stock of Life
Insurance Company of Kansas, filed as Exhibit 10.6 to the
1986 Annual Report on Form 10-K, File No. 0-14320, filed
with the Securities and Exchange Commission on March 27,
1987 and incorporated by reference herein.
10.7 -- Agreement Among Certain Stockholders of the Company,
filed as Exhibit 10-6 to the Registration Statement on
Form S-18, File No. 2-99229, filed with the Securities
and Exchange Commission on July 26, 1985 and incorporated
by reference herein.
10.8 -- Form of Subscription Agreement for 1985 Offering, filed
as Exhibit 10-7 to the Registration Statement on Form
S-1, File No. 33-2998, filed with the Securities and
Exchange Commission on January 30, 1986 and incorporated
by reference herein.
10.9 -- Repurchase Agreement between Life Investors Inc., UGIC,
Ronald Jensen and Keith Wood dated January 6, 1984, filed
as Exhibit 10-8 to Registration Statement on Form S-1,
File No. 33-2998, filed with the Securities and Exchange
Commission on January 30, 1986 and incorporated by
reference herein.
10.10 -- Treaty of Assumption and Bulk Reinsurance Agreement for
acquisition of certain assets and liabilities of Keystone
Life Insurance Company, filed as Exhibit 10.10 to the
1987 Annual Report on Form 10-K, File No. 0-14320, filed
with the Securities and Exchange Commission on March 28,
1988 and incorporated by reference herein.
10.11 -- Acquisition and Sale-Purchase Agreements for the
acquisition of Orange State Life and Health Insurance
Company and certain other assets, filed as Exhibit 10.11
to the 1987 Annual Report on Form 10-K, File No. 0-14320,
filed with the Securities and Exchange Commission on
March 28, 1988 and incorporated by reference herein.
10.12 -- United Insurance Companies, Inc. 1987 Stock Option Plan,
included with the 1988 Proxy Statement filed with the
Securities and Exchange Commission on April 25, 1988 and
incorporated by reference herein, filed as Exhibit 10.12
to the 1988 Annual Report on Form 10-K, File No. 0-14320,
filed with the Securities and Exchange Commission on
March 30, 1989 and incorporated by reference herein.
10.13 -- Amendment to the United Insurance Companies, Inc. 1987
Stock Option Plan, filed as Exhibit 10.13 to the 1988
Annual Report on Form 10-K, File No. 0-14320, filed with
the Securities and Exchange Commission on March 30, 1989
and incorporated by reference herein.
128
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.14 -- UICI Restated and Amended 1987 Stock Option Plan as
amended and restated March 16, 1999 filed as exhibit 10.1
to Form 10-Q dated March 31, 1999, (File No. 0-14320),
and incorporated by reference herein.
10.15 -- Amendment to Stock Purchase Agreement between American
Capital Insurance Company and United Insurance Companies,
Inc., filed as Exhibit 10.15 to the 1988 Annual Report on
Form 10-K, File No. 0-14320, filed with the Securities
and Exchange Commission on March 30, 1989 and
incorporated by reference herein.
10.16 -- Agreement of Substitution and Assumption Reinsurance
dated as of January 1, 1991 by and among Farm and Home
Life Insurance Company, the Arizona Life and Disability
Insurance Guaranty Fund and United Group Insurance
Company, as modified by a Modification Agreement dated
August 26, 1991, together with schedules and exhibits
thereto, filed as Exhibit 2 to Schedule 13D, filed with
the Securities and Exchange Commission on September 3,
1991 and incorporated by reference herein.
10.17 -- Stock Purchase Agreement dated as of August 26, 1991 by
and among Farm and Home Life Insurance Company, First
United, Inc. and The MEGA Life and Health Insurance
Company, filed as Exhibit 3 to Schedule 13D, filed with
the Securities and Exchange Commission on September 3,
1991 and incorporated by reference herein.
10.18 -- Stock Purchase Agreement dated as of August 26, 1991 by
and among Farm and Home Life Insurance Company, The
Chesapeake Life Insurance Company and Mid-West National
Life Insurance Company of Tennessee, filed as Exhibit 4
to Schedule 13D, File No. 0-14320 filed with the
Securities and Exchange Commission on September 3, 1991
and incorporated by reference herein.
10.19 -- Second Agreement of Modification to Agreement of
Substitution and Assumption Reinsurance dated as of
November 15, 1991 among Farm and Home Life Insurance
Company, United Group Insurance Company, and the Arizona
Life and Disability Insurance Guaranty Fund, filed as
Exhibit 1 to Amendment No. 1 to Schedule 13D, File No.
0-14320 filed with the Securities and Exchange Commission
on February 5, 1992 and incorporated by reference herein.
This agreement refers to a Modification Agreement dated
September 12, 1991. The preliminary agreement included in
the initial statement was originally dated August 26,
1991.
10.20 -- Addendum to Agreement of Substitution and Assumption
Reinsurance dated as of November 22, 1991 among United
Group Insurance Company, Farm and Home Life Insurance
Company, and the Arizona Life and Disability Insurance
Guaranty Fund, filed as Exhibit 2 to Amendment No. 1 to
Schedule 13D, File No. 0-14320 filed with the Securities
and Exchange Commission on February 5, 1992 and
incorporated by reference herein.
10.21 -- Modification Agreement dated November 15, 1991 between
First United, Inc., Underwriters National Assurance
Company, and Farm and Home Life Insurance Company, The
MEGA Life and Health Insurance Company, and the Insurance
Commissioner of the State of Indiana, and filed as
Exhibit 3 to Amendment No. 1 to Schedule 13D, File No.
0-14320 filed with the Securities and Exchange Commission
on February 5, 1992 and incorporated by reference herein.
129
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.22 -- Agreement of Reinsurance and Assumption dated December
14, 1992 by and among Mutual Security Life Insurance
Company, in Liquidation, National Organization of Life
and Health Insurance Guaranty Associations, and The MEGA
Life and Health Insurance Company, and filed as Exhibit 2
to the Company's Report on Form 8-K dated March 29, 1993,
(File No. 0-14320), and incorporated by reference herein.
10.23 -- Acquisition Agreement dated January 15, 1993 by and
between United Insurance Companies, Inc. and Southern
Educators Life Insurance Company, and filed as Exhibit 2
to the Company's Report on Form 8-K dated March 29, 1993,
(File No. 0-14320), and incorporated by reference herein.
10.24 -- Stock Exchange Agreement effective January 1, 1993 by and
between Onward and Upward, Inc. and United Insurance
Companies, Inc. and filed as Exhibit 2 to the Company's
Report on Form 8-K dated March 29, 1993, (File No.
0-14320), and incorporated by reference herein.
10.25 -- Stock Purchase Agreement by and among United Insurance
Companies, Inc. and United Group Insurance Company and
Landmark Land Company of Oklahoma, Inc. dated January 6,
1994, and filed as Exhibit 10.27 to Form 10-Q dated March
31, 1994, (File No. 0-14320), and incorporated by
reference herein.
10.26 -- Private Placement Agreement dated June 1, 1994 of 8.75%
Senior Notes Payable due June 2004 in the aggregate
amount of $27,655,000, and filed as Exhibit 28.1 to the
Company's Report on Form 8-K dated June 22, 1994, (File
No. 0-14320), and incorporated by reference herein.
10.27 -- Asset Purchase Agreement between UICI Companies and PFL
Life Insurance Company, Bankers United Life Assurance
Company, Life Investors Insurance Company of America and
Monumental Life Insurance Company and Money Services,
Inc. effective April 1, 1996, as filed as Exhibit 10.2 to
the Company's Report on Form 8-K dated April 1, 1996
(File No. 0-14320) and incorporated by reference herein.
10.28 -- General Agent's Agreement between Mid-West National Life
Insurance Company of Tennessee and United Group
Association, Inc. effective April 1, 1996, and filed as
Exhibit 10.3 to the Company's Report on Form 8-K dated
April 1, 1996 (File No. 0-14320), and incorporated by
reference herein.
10.29 -- General Agent's Agreement between The MEGA Life and
Health Insurance Company and United Group Association,
Inc. Effective April 1, 1996, and filed as Exhibit 10.4
to the Company's Report on Form 8-K dated April 1, 1996
(File No. 0-14320) and incorporated by reference herein.
10.30 -- Agreement between United Group Association, Inc. and
Cornerstone Marketing of America effective April 1, 1996,
and filed as Exhibit 10.5 to the Company's Current Report
on Form 8-K dated April 1, 1996 (File No. 0-14320) and
incorporated by reference herein.
10.31 -- Stock exchange agreement dated October 1996 by and
between Amli Realty Co. and UICI, as amended by that
first amendment stock exchange agreement dated November
4, 1996 filed as Exhibit 10.31 to the Registration
Statement on Form S-3 File No. 333-23899 filed with the
Securities and Exchange Commission on April 25, 1997 and
incorporated by reference herein.
130
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.32 -- Agreement dated December 6, 1997 by and between UICI,
UICI Acquisition Corp., ELA Corp., and Marcus A. Katz,
Cary S. Katz, Ryan D. Katz and RK Trust #2 filed as
Exhibit 10.32 to the Registration Statement on Form S-3
File No. 333-42937 filed with the Securities and Exchange
Commission on December 22, 1997 and incorporated by
reference herein.
10.33 -- Repurchase Agreement dated as of March 27, 1998 as
amended between Lehman Commercial Paper, Inc. and
Educational Finance Group, Inc. filed as exhibit 10.1 to
Form 10-Q dated September 30, 1999, (File No. 0-14320),
and incorporated by reference herein.
10.34 -- Loan Agreement among UICI, Bank of America, as
administrative agent, The First National Bank of Chicago
as documentation agent, and Fleet National Bank as co-
agent dated May 17, 1999 filed as exhibit 10.2 to Form
10-Q dated September 30, 1999, (File No. 0-14320), and
incorporated by reference herein.
10.35 -- Indenture Agreement dated as of August 5, 1999 between
AMS-III, LP, as Issuer and The First National Bank of
Chicago, as Indenture Trustee and Eligible Lender Trustee
filed as exhibit 10.3 to Form 10-Q dated September 30,
1999, (File No. 0-14320), and incorporated by reference
herein.
10.36 -- Indenture Agreement dated as of June 14, 1999 between
AMS-II, LP, as Issuer and The First National Bank of
Chicago, as Indenture Trustee and Eligible Lender Trustee
filed as exhibit 10.4 to Form 10-Q dated September 30,
1999, (File No. 0-14320), and incorporated by reference
herein.
10.37 -- Agreement and Plan of Merger by and among UICI, UICI
Acquisition Co., and HealthPlan Services Corporation
dated as of October 5, 1999 filed as exhibit 2 to Form
8-K dated October 5, 1999 and incorporated by reference
herein.
10.38 -- Voting Agreements dated October 5, 1999 between UICI and
Automatic Data Processing, Inc., James K. Murray, Jr.,
Shinnston Enterprises, Ltd., Elm Grove Associates,
William Bennett, and Robert Parker filed as exhibits
99.1, 99.2, 99.3, 99.4, 99.5, 99.6 and 99.7, respectively
to Form 8-K dated October 5, 1999 and incorporated herein
10.39 -- Amended and Restated Agreement and Plan of Merger, dated
as of February 18, 2000, by and among UICI, UICI
Acquisition Co., UICI Capital Trust I and HealthPlan
Services Corporation filed as exhibit 99.2 to Form 8-K
dated February 18, 2000 and incorporated by reference
herein.
10.40 -- Amended and Restated Loan Agreement, dated as of March
10, 2000, between UICI, the Banks named therein and Bank
of America, NA, for itself and as agent, filed as exhibit
99.2 to Form 8-K dated March 22, 2000 and incorporated by
reference herein.
10.41 -- Promissory Note, dated March 14, 2000, payable by UICI
SUB I, Inc. to LM Finance, LLC, filed as exhibit 99.3 to
Form 8-K dated March 22, 2000 and incorporated by
reference herein.
10.42 -- Guaranty, dated March 14, 2000, from UICI to LM Finance,
LLC, filed as exhibit 99.4 to Form 8-K dated March 22,
2000 and incorporated by reference herein.
10.43 -- Second Amendment and Restated Loan Agreement, dated as of
July 27, 2000, between UICI and LM Finance LLC, filed as
exhibit 10.43 to Form 10-Q dated June 30, 2000, (File No.
0-14320), and incorporated by reference herein.
131
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.44 -- Stock Purchase Agreement dated, July 27,2000, between
UICI and C&J Investments, LLC filed as exhibit 10.44 to
Form 10-Q dated June 30, 2000, (File No. 0-14320), and
incorporated by reference herein.
10.45 -- Management Agreement, dated December 31, 2000 between
UICI, The Mega Life and Health Insurance Company and
William J. Gedwed. *
10.46 -- UICI 2000 Restricted Stock Plan effective January 1,
2000. *
10.47 -- UICI 2001 Restricted Stock Plan effective January 1,
2001. *
10.48 -- Termination Agreement, dated April 13, 2000 between UICI,
UICI Acquisition Co., UICI Capital Trust I, and
HealthPlan Services Corporation.
10.49 -- Management Agreement dated October 13, 2000 between UICI
and William P. Benac. *
10.50 -- Information Technology Services Agreement by and between
UICI and Insurdata Incorporated (now HealthAxis.Inc.),
dated January 3, 2000.
10.51 -- Management Agreement between NMC Holdings, Inc. and UICI
dated July 27, 2000.
10.52 -- Administrative Service Agreement dated July 27,2000
between The MEGA Life and Health Insurance Company and
National Motor Club of America, Inc.
10.53 -- Stock Purchase Agreement dated May 12, 2000 between UICI
and The Mega Life and Health Insurance Company with
respect to all of the outstanding capital stock of The
Chesapeake Life Insurance Company.
10.54 -- Promissory Note dated June 29, 2000 between UICI and
Columbus Bank and Trust maturing June 30, 2005.
10.55 -- Stock Purchase Agreement dated June 20, 2000 between UICI
and The MEGA Life and Health Insurance Company with
respect to all of the Outstanding capital stock of Amli
Realty Co.
10.56 -- Agreement dated September 15, 1999 between UICI and
Onward and Upward, Inc. ("Put/Call Agreement) with
respect to the TOP Plan Funding Obligation, together with
extension agreements dated August 15, 2000, October 16,
2000, and February 7, 2001.
10.57 -- Promissory Note and Loan Agreement dated July 19, 2000
between United Group Reinsurance, Inc. and Money
Services, Inc., maturing August 1, 2001.
10.58 -- Promissory Note and Loan Agreement dated July 19, 2000
between Financial Services Reinsurance Ltd. and Money
Services, Inc., maturing August 1,2001.
10.59 -- Promissory Note and Loan Agreement dated July 19, 2000
between U.S. Managers Life Insurance Company Ltd. and
Money Services, Inc., maturing August 1, 2001.
10.60 -- Asset Purchase and Transfer Agreement dated August 4,
2000 between Specialized Card Services, Inc., United
Credit National Bank, UICI Receivables Funding
Corporation, and UICI and Household Bank (SB), N.A. and
Household Credit Services, Inc. , together with Amendment
No. 1.
10.61 -- Lease Agreement dated September 30, 2000 between
Household Credit Services, Inc. (tenant) and Specialized
Card Services, Inc. (Landlord).
10.62 -- Sublease Agreement dated July 27, 2000 between The Mega
Life and Health Insurance and National Motor Club of
America, Inc.
132
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.63 -- Software License Agreement dated January 30, 2001 between
UICI and HealthAxis.com.
10.64 -- Agreement, dated March 14, 2001, between UICI, MEGA and
Charles Prater*
21 -- Subsidiaries of UICI
23 -- Consent of Independent Auditors
24 -- Power of Attorney
---------------
* Indicates a management contract and/or benefit plan as required by Item
14(a)(3) of Form 10-K.