SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
From the transition period from to
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Commission File Number 0-14320
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UICI
(Exact name of registrant as specified in its charter)
Delaware 75-2044750
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 McEwen, Suite 200, Dallas, Texas 75244
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (972) 392-6700
Not Applicable
--------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Common Stock, $.01 Par
Value--46,229,000 shares as of September 30, 1998.
INDEX
UICI AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Consolidated condensed balance sheets-September 30,
1998 and December 31, 1997 ......................................... 3
Consolidated condensed statements of income-Three months
ended September 30, 1998 and 1997 and the nine months
ended September 30, 1998 and 1997 .................................. 4
Consolidated statements of comprehensive income-Three
months ended September 30, 1998 and 1997 and the nine
months ended September 30, 1998 and 1997 ........................... 5
Consolidated condensed statements of cash flows-Nine
months ended September 30, 1998 and 1997 ........................... 6
Notes to consolidated condensed financial
statements-September 30, 1998 ...................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................... 14
--------------------------------
SIGNATURES ......................................................... 15
2
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts)
September 30, December 31,
1998 1997
(Unaudited) (Note)
----------- ----------
ASSETS
Investments:
Securities available for sale--
Fixed maturities, at fair value
(cost: 1998--$824,469; 1997--$816,757 ) .......... $ 857,852 $ 831,460
Equity securities, at fair value
(cost: 1998--$18,170; 1997--$12,302) ............. 17,716 14,555
Student loans ............................................ 567,502 11,254
Mortgage and collateral loans ............................ 8,540 27,023
Policy loans ............................................. 21,457 22,173
Credit card loans ........................................ 111,527 54,068
Investment in unconsolidated subsidiary .................. 44,091 28,879
Short-term investments and other investments ............. 149,474 144,354
---------- ----------
Total investments .................................. 1,778,159 1,133,766
Cash ....................................................... 22,135 15,932
Agents' receivables ........................................ 13,240 13,662
Reinsurance receivables .................................... 83,521 78,696
Due premiums and other receivables ......................... 70,425 58,822
Investment income due and accrued .......................... 33,094 14,063
Deferred acquisition costs ................................. 100,817 99,611
Goodwill ................................................... 113,401 111,067
Property and equipment, net ................................ 45,716 46,634
Other ...................................................... 14,387 7,130
---------- ----------
$2,274,895 $1,579,383
========== ==========
LIABILITIES
Policy liabilities:
Future policy and contract benefits ...................... $ 467,941 $ 487,024
Claims ................................................... 298,726 258,821
Unearned premiums ........................................ 102,947 105,696
Other policy liabilities ................................. 16,591 19,751
Federal income taxes ....................................... 29,868 19,891
Other liabilities .......................................... 93,250 78,838
Time deposits .............................................. 63,136 7,596
Short-term debt ............................................ 9,898 20,184
Long-term debt ............................................. 28,994 30,018
Student loan credit facility ............................... 574,957 --
---------- ----------
1,686,308 1,027,819
MINORITY INTERESTS ............................................ 9,327 15,274
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share ..................... 462 462
Preferred stock, par value $.01 per share .................. -- --
Additional paid-in capital ................................. 165,891 165,891
Net unrealized investment gains ............................ 21,104 14,280
Retained earnings .......................................... 391,803 355,657
---------- ----------
579,260 536,290
---------- ----------
$2,274,895 $1,579,383
========== ==========
NOTE: The balance sheet as of December 31, 1997 has been derived from the
audited financial statements at that date.
See notes to consolidated condensed financial statements.
3
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
REVENUES
Premiums
Health ............................................... $184,814 $149,328 $558,009 $431,103
Life premiums and other considerations ............... 12,210 12,282 37,437 35,226
Net investment income .................................. 30,815 20,666 80,369 61,861
Fees and other income .................................. 63,277 53,157 190,020 130,576
Gains on sale of investments ........................... 727 1,916 4,589 3,018
-------- -------- -------- --------
291,843 237,349 870,424 661,784
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses .............. 144,455 102,830 437,594 295,098
Underwriting, acquisition, and other expenses .......... 118,246 98,345 359,666 264,743
Interest expense ....................................... 6,780 804 12,543 2,155
-------- -------- -------- --------
269,481 201,979 809,803 561,996
INCOME BEFORE FEDERAL INCOME TAXES
AND MINORITY INTERESTS ............................... 22,362 35,370 60,621 99,788
Federal income taxes ...................................... 6,931 10,869 18,804 32,094
-------- -------- -------- --------
INCOME BEFORE MINORITY INTERESTS ..................... 15,431 24,501 41,817 67,694
Minority interests ........................................ 1,900 1,887 5,671 3,844
-------- -------- -------- --------
NET INCOME ........................................... $ 13,531 $ 22,614 $ 36,146 $ 63,850
======== ======== ======== ========
NET INCOME PER SHARE.................................. $0.29 $0.50 $0.78 $1.41
===== ===== ===== =====
See notes to consolidated condensed financial statements.
4
UICI AND SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
Net income ......................................................... $ 13,531 $ 22,614 $ 36,146 $ 63,850
Other comprehensive income, before tax:
Unrealized gains in securities:
Unrealized holding gains arising during period ................ 7,790 10,580 10,497 13,169
Less: reclassification adjustment for
losses included in net income ............................... -- 673 -- --
-------- -------- -------- --------
Other comprehensive gain, before tax .................. 7,790 11,253 10,497 13,169
Income tax related to items of
other comprehensive income .................................. (2,725) (4,087) (3,673) (4,608)
-------- -------- -------- --------
Other comprehensive gain, net of tax .................. 5,065 7,166 6,824 8,561
-------- -------- -------- --------
Comprehensive income ............................................... $ 18,596 $ 29,780 $ 42,970 $ 72,411
======== ======== ======== ========
5
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended
September 30,
1998 1997
--------- ---------
OPERATING ACTIVITIES
Net income .................................................... $ 36,146 $ 63,850
Adjustments to reconcile net income to
cash provided by operating activities:
Increase in policy liabilities .............................. 32,275 38,320
Increase in other liabilities ............................... 13,324 9,741
Increase in federal income taxes payable .................... 6,373 4,033
Increase in deferred acquisition costs ...................... (619) (10,995)
Increase in accrued investment income ....................... (19,031) (36)
Increase in reinsurance and other receivables ............... (15,564) (13,003)
Depreciation and amortization ............................... 10,761 4,906
Net income attributable to minority interests ............... 5,671 3,844
Gains on sale of investments ................................ (4,589) (3,018)
Other items, net ............................................ (7,374) (1,843)
--------- ---------
Cash Provided by Operations ............................. 57,373 95,799
--------- ---------
INVESTING ACTIVITIES
(Increase) decrease in other investments ...................... (4,349) 43,936
Increase in student loans ..................................... (567,502) (13,419)
Increase in credit card loans ................................. (57,459) (10,327)
Decrease (increase) in agents' receivables .................... 422 (4,163)
Purchase of subsidiaries and assets, net of cash acquired
of $1,171 in 1997 ........................................... (2,824) (77,247)
Minority interest purchased ................................... (11,117) (15,062)
Increase in property and equipment ............................ (4,034) (6,258)
--------- ---------
Cash Used in Investing Activities ....................... (646,863) (82,540)
FINANCING ACTIVITIES
Deposits from investment products ............................. 12,867 13,608
Withdrawals from investment products .......................... (30,229) (31,352)
Proceeds from student loan credit facility .................... 591,823 --
Repayments to student loan facility ........................... (16,866) --
Net cash provided from time deposits .......................... 55,540 --
Proceeds from debt ............................................ 2,252 2,365
Repayments of debt ............................................ (13,562) (3,068)
Proceeds from exercise of stock options and warrants .......... -- 232
Purchase of treasury stock .................................... -- (194)
Distributions to minority interests ........................... (6,132) (416)
--------- ---------
Cash Provided by (Used in) Financing Activities ......... 595,693 (18,825)
--------- ---------
Net Increase (Decrease) in Cash ......................... 6,203 (5,566)
Net Cash at Beginning of Period ......................... 15,932 15,420
--------- ---------
Cash at End of Period ................................... $ 22,135 $ 9,854
========= =========
See notes to consolidated condensed financial statements.
6
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
September 30, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements for UICI
and its subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1997. Certain amounts in the 1997 financial statements have been
reclassified to conform with the 1998 financial statement presentation.
NOTE B--STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS (SFAS)
Effective January 1, 1998, the Company adopted FASB Statement No. 130,
"Reporting Comprehensive Income." Statement 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is intended to be a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for years beginning
after December 15, 1997. Statement 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt the new
requirements at December 31, 1998. Management does not anticipate that the
adoption of this statement will have a significant effect on the Company's
reported segments.
In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No.
133"), which becomes effective on January 1, 2000 for calendar year companies
such as the Company. The Company is in the process of evaluating the potential
impact, if any, of the new accounting standard.
7
NOTE C--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------- ------- ------- -------
Net income available to common shareholders .......... $13,531 $22,614 $36,146 $63,850
------- ------- ------- -------
Weighted average shares outstanding--
basic earnings per share ........................ 46,229 45,290 46,229 45,209
Effect of dilutive securities:
Employee stock options .......................... 652 24 357 36
------ ------ ------ ------
Weighted average shares outstanding--
dilutive earnings per share ..................... 46,881 45,314 46,586 45,245
------- ------- ------- -------
Basic and diluted earnings per share $0.29 $0.50 $0.78 $1.41
===== ===== ===== =====
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; reliance on key management and
adequacy of claims liabilities. The Credit Services segment's future results
also could be adversely affected by the possibility of future economic downturns
causing an increase in credit losses or change in regulations for credit cards
or credit card national banks. The Company has certain risks associated with the
Educational Finance Group's business. The 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. Investors are also directed to other risks and
uncertainties discussed in documents filed by the Company with the Securities
and Exchange Commission.
8
PART I. FINANCIAL INFORMATION
ITEM 2 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations
UICI and its subsidiaries (the "Company") reported net income of $0.29 per share
for the three month period ended September 30, 1998 compared to net income of
$0.50 per share for the comparable period in 1997. Included in net income are
gains from the sale of investments of $0.01 per share for the three month period
ended September 30, 1998 compared to $0.03 per share for 1997. For the nine
month period ended September 30, 1998, net income was $0.78 per share compared
to $1.41 per share in 1997. Included in net income were gains from the sale of
investments of $0.06 per share for the nine month period ended September 30,
1998 and $0.04 per share for 1997.
The Company's business segments are: (1) Insurance, which includes the
businesses of the Self Employed Agency Division, the Student Insurance Division,
the OKC Division, the Special Risk Division and the National Motor Club
Division; (ii) Financial Services, which includes the businesses of the Credit
Services Division, the Educational Finance Group Division, the Insurdata
Division 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. Allocation of investment income
is based on a number of assumptions and estimates and the segments reported
operating results would change if different methods were applied. Segment
revenues include premiums and other policy changes and considerations, net
investment income, and fees and other income. Financial information by segment
for revenues and income before federal income taxes is summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
Revenues
Insurance:
Self Employed Agency.............. $159,532 $139,686 $464,304 $394,797
Student Insurance................. 23,251 17,624 76,870 63,121
OKC Division...................... 22,964 24,876 67,840 68,729
Special Risk...................... 17,344 4,403 52,873 10,097
National Motor Club............... 7,736 4,662 22,582 4,662
-------- -------- -------- --------
230,827 191,251 684,469 541,406
Financial Services:
Credit Services................... 30,449 13,932 71,824 36,612
Educational Finance Group......... 15,048 7,168 35,309 7,168
Insurdata......................... 10,406 6,483 30,813 17,372
Other Business Units.............. 5,756 12,294 46,005 43,113
-------- -------- -------- --------
61,659 39,877 183,951 104,265
Other Key Factors................. 5,718 8,912 21,191 22,532
-------- -------- -------- --------
298,204 240,040 889,611 668,203
-------- -------- -------- --------
Inter Segment Eliminations........ (6,361) (2,691) (19,187) (6,419)
-------- -------- -------- --------
Total Revenues .......................... $291,843 $237,349 $870,424 $661,784
======== ======== ======== ========
9
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
Income (loss) before federal income taxes Insurance:
Self Employed Agency ................................... $ (2,679) $ 12,211 $ (8,728) $ 40,460
Student Insurance ...................................... 3,046 4,399 7,675 12,395
OKC Division ........................................... 5,386 3,877 14,494 13,460
Special Risk ........................................... 974 738 4,269 2,463
National Motor Club .................................... 799 815 3,527 815
-------- -------- -------- --------
7,526 22,040 21,237 69,593
Financial Services:
Credit Services ........................................ 11,741 5,516 25,488 15,212
Educational Finance Group .............................. (490) 1,301 (2,872) 1,301
Insurdata .............................................. 345 629 2,221 1,696
Other Business Units ................................... 1,328 (9) 3,547 (2,693)
-------- -------- -------- --------
12,924 7,437 28,384 15,516
-------- -------- -------- --------
Other Key Factors ......................................... 1,912 5,893 11,000 14,679
-------- -------- -------- --------
$ 22,362 $ 35,370 $ 60,621 $ 99,788
======== ======== ======== ========
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 COMPARED TO 1997
SELF EMPLOYED AGENCY DIVISION ("SEA"). The SEA Division reported a loss of
$2.7 million for the three month period in 1998 compared to income of $12.2
million for the three month period in 1997, and a loss of $8.7 million for the
nine month period in 1998 compared to income of $40.5 million in 1997.
The lower earnings of SEA for the three month period in 1998 are the result
of the continuing losses from a specific PPO insurance product, which was a
managed care product, for which marketing of new policies was discontinued in
February of 1998. The operating losses for the managed care product were a
continuation of the problems recognized in the fourth quarter of 1997 and first
quarter of 1998, while the traditional indemnity products continued to produce
acceptable profits. The Company is continuing to encourage current inforce
policyholders to raise their deductibles and co-payment amounts and is also
implementing approved rate increases.
The Company has completed a substantial rate increase on these PPO policies as
of October 31, 1998. A new round of rate increases was also started in October.
The marketing organizations have also been successful in directing a larger
portion of new sales to the traditional indemnity products in which the Company
has not experienced the pricing problems and higher claims volume it has had
with the PPO products. The Company believes that the combination of these two
actions will enable this division to return to profitable operations in the
fourth quarter of 1998.
The lower earnings of SEA for the nine month period in 1998 are the result of
the losses from the PPO insurance product discussed above and conforming the
method used to compute the claim reserves on SEA's business in the first quarter
of 1998. The claim reserving method employed by the previous administrator of a
portion of SEA's PPO insurance business was not comparable to the
10
traditional reserving methods employed by the Company for its other self
employed health insurance. While both reserving methods are acceptable for
statutory and GAAP reporting, the Company's method is the more conservative of
the two methods. Conforming the two methods resulted in an increase in the claim
reserves of $12.0 million in the first quarter of 1998.
Revenue for the SEA Division increased to $159.5 million for the three month
period in 1998 from $139.7 million in 1997, an increase of 14%, and increased to
$464.3 million for the nine month period in 1998 from $394.8 million for 1997,
an increase of 18%. The increase in revenues is the result of an increase in the
proportion of direct business compared to coinsured business. New sales in 1998
are lower than 1997 as a result of fewer PPO products being sold since the new
PPO product was introduced in February 1998.
In July 1998, the SEA Division completed the acquisition of the telemarketing
and direct mail operations which have provided marketing leads for its agents
for over 10 years. This provides the agencies with more control over the lead
generation process and should insure the best possible leads at lower cost.
STUDENT INSURANCE. Operating income for the Student Insurance Division
decreased to $3.0 million for the three month period in 1998 from $4.4 million
in 1997 and decreased to $7.7 million for the nine month period in 1998 from
$12.4 million in 1997. The reduced earnings reflect lower margins resulting from
increased loss ratios due to more price competition in the university health
insurance market.
Revenue for Student Insurance increased to $23.3 million for the three month
period in 1998 from $17.6 million in 1997, an increase of 32% and increased to
$76.9 million for the nine month period in 1998 from $63.1 million in 1997, an
increase of 22%. The increase is due primarily to the acquisition of a block of
business in 1997 with annual premium of $12 million.
OKC DIVISION. Operating income for the OKC Division increased to $5.4
million for the three month period in 1998 from $3.9 million in 1997, an
increase of 38% and increased to $14.5 million for the nine month period in 1998
from $13.5 million in 1997, a 7% increase. Revenues for the OKC Division
decreased to $22.9 million for the three month period in 1998 from $24.9 million
in 1997, a decrease of 8%, and decreased to $67.8 million for the nine month
period in 1998 from $68.7 million in 1997, a decrease of 1%. The increase in
earnings for the three month period is due to non-recurring losses in the credit
insurance business in the third quarter of 1997. The 7% increase in earnings for
the nine month period is more indicative of the overall trend. The decrease in
revenues is due to lower premiums on the closed blocks of life and annuity
products.
SPECIAL RISK DIVISION. Operating income for the Special Risk Division
increased to $974,000 for the three month period in 1998 from $738,000 in 1997,
and increased to $4.3 million for the nine month period in 1998 from $2.5 in
1997. Revenues for the Special Risk Division were $17.3 million for the three
month period in 1998 compared to $4.4 million in 1997 and $52.9 million for the
nine month period in 1998 compared to $10.1 million in 1997. The Special Risk
Division was formed during the second quarter of 1997.
NATIONAL MOTOR CLUB ("NMC"). Operating income for NMC was $799,000 for the
three month period in 1998 and $815,000 for 1997 and $3.5 million for the nine
month period in 1998
11
compared to $815,000 in 1997. The three month period ended September 30, 1998
includes $300,000 of relocation expenses. NMC was acquired by the Company in the
third quarter of 1997.
CREDIT SERVICES. Operating income for Credit Services increased to $11.7
million for the three month period in 1998 from $5.5 million in 1997, an
increase of 113%, and increased to $25.5 million for the nine month period in
1998 from $15.2 million in 1997, an increase of 68%. The increase is primarily
due to the continued growth in new sales which increases revenue and operating
income and the income from a new credit card program originated in 1997 which is
now contributing to the bottom line. Revenues for Credit Services increased to
$30.4 million for the three month period in 1998 from $13.9 million in 1997, an
increase of 119% and increased to $71.8 million for the nine month period in
1998 from $36.6 million in 1997, an increase of 96%.
EDUCATIONAL FINANCE GROUP ("EFG"). EFG was acquired during the second
quarter of 1997. EFG had an operating loss of $490,000 in the third quarter of
1998 compared to operating income of $1.3 million in the third quarter of 1997.
The operating loss for the nine months was $2.9 million in 1998 compared to
operating income of $1.3 million in 1997. The change for the quarter is related
to additional expenses of marketing new loans and fewer loans being sold to
third parties. EFG can maximize its profits on the student loans if it holds the
loans until they can be securitized.
At September 30, 1998, EFG had student loans of approximately $555 million
outstanding, an increase of $281 million or 98% since June 30, 1998. The
increase in student loans also resulted in an increase in accrued investment
income of $17.8 million when compared to December 31, 1997. The funding for
these loans has been provided through a warehouse credit facility which is
guaranteed by UICI. Subsequent to September 30, the UICI guarantee was reduced
to approximately $60 million with the advance rate reduced to 95% of the loan
balance. This credit facility is of sufficient size to provide for the funding
of student loans until the loans are securitized or sold. EFG continues to
explore additional funding sources which would reduce or eliminate the guarantee
and funding requirements of UICI.
INSURDATA. Operating income reported for Insurdata of $345,000 was after
the write-off of approximately $740,000 of expenses incurred in preparation of
an initial public offering of equity securities. Because of the recent turmoil
in the financial markets, this offering will not be completed in 1998 or the
foreseeable future. Operating income before the write-off was $1.1 million for
the three month period in 1998 compared to $629,000 in 1997. Operating income
before the write-off for the nine months was $3.0 million compared to $1.7
million in 1997. Revenues for Insurdata were $10.4 million in the three month
period in 1998 compared to $6.5 million in 1997 and $30.8 million for the nine
month period in 1998 compared to $17.4 million in 1997. The increase in revenues
is the reason for the increased operating income as margins have remained
stable. $15.9 million of revenue was for providing the outsourcing of data
processing services for the health insurance operations of the Company in the
nine month period in 1998.
OTHER BUSINESS UNITS. The other business units now consist primarily of
AMLI. The Company has completed the sale of or merged into other business units,
substantially all of the HealthCare Solution companies, with the exception of
Insurdata.
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. Operating income for Other Key Factors was $1.9 million for
the three month period in 1998 compared to $5.9 million for the three month
period
12
in 1997, and $11.0 million for the nine month period in 1998 compared to $14.7
million in 1997. The decrease in the three and nine month periods is mainly
attributed to a decrease in realized investment gains of $1.2 million and a
decrease in investment income on equity of $2.0 million in the three month
period in 1998 when compared to 1997. The decrease in investment income on
equity is attributed to a decrease in investment yield and is also due to the
$55 million of acquisitions in the second half of 1997 which decreased invested
assets. 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. In addition,
the net unrealized investment gains on securities classified as "available for
sale," reported as a separate component of stockholders' equity and net of
applicable income taxes and minority interests was $21.1 million at September
30, 1998 compared to $14.3 million at December 31, 1997.
YEAR 2000 IMPACT. Some of the Company's older computer programs were
written using two digits rather than four to define the applicable year. As a
result, those computer programs have time-sensitive software that recognize a
date using "00" as the year 1900 rather than the year 2000. This could cause a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send premium
notices, or engage in similar normal business activities.
In reviewing its current systems the Company is in the process of upgrading
portions of its software to provide improved functionality and processing
capabilities in its normal course of business. All new software purchased or
developed must be Year 2000 ready.
All remaining existing software is being modified and tested to insure Year 2000
readiness. The Company does not anticipate that the related overall Year 2000
costs will be material to any single year or quarter. The Company expects to
expense approximately $3.5 million of Year 2000-related costs in 1998 and
approximately $1.5 million in 1999. The costs are being funded from current cash
flows.
The project is expected to be substantially tested and completed no later than
June 30, 1999, which is prior to any anticipated impact on its operating
systems. The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
The Company's invested assets increased to $1.8 billion at September 30, 1998
compared to $1.1 billion at December 31, 1997. The primary sources for the asset
growth were the acquisition of student loans by EFG, credit card loans, and cash
provided by current year operations. The sources were partially offset by
withdrawals, net of deposits, and from investment products.
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The student loans originated by EFG have been funded using a warehouse credit
facility. This facility is guaranteed by UICI and provided for advance rates of
up to 103% of the loan balance. The credit agreement and related documents were
recently amended. The advance rate was reduced to 95%, the interest rate was
increased and the UICI guarantee was reduced from $600 million to approximately
$60 million. UICI will provide the additional funding required by the reduced
advance rate as a second secured lender to EFG pursuant to a Subordination and
Intercreditor Agreement entered into with the lender and EFG.
The funding of student loans described above is intended to be for an interim
period of time prior to securitizing or selling the loans. With the recent
turmoil in the financial markets, a securitization of these loans is much more
difficult and might not be possible at a price acceptable to EFG and the
Company. This condition could continue for some extended period of time until
the asset-backed markets clear and stabilize and liquidity returns. The Company
believes that the characteristics of the federally guaranteed student loans make
any repayment loss remote and that the loans can be sold, if necessary, at a
gain.
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
warehouse credit facility. Although the interest rates on the student loans and
the interest rate on the credit facility are variable, the interest earned uses
the 91-day T-Bill on the base rate and the base rate on the credit facility is
LIBOR.
The credit card loans have been funded using time deposits at UICI's credit card
bank. The time deposits have average interest rates of 6% with maturities of no
greater than one year.
On June 1, 1998, as required by the agreement, the Company made its first annual
repayment of $4.0 million on its 8.75 Senior Notes.
Effective August 31, 1998, the Company acquired an additional 15% interest in
its subsidiary, The Chesapeake Life Insurance Company, for $4.5 million in cash.
This increased the Company's ownership percentage to 94% from 79%. The purchase
price was based on a predetermined formula price which approximated GAAP book
value.
Subsequent to September 30, 1998, the Company borrowed $12.0 million from its
revolving credit note with AEGON. The note matures August 1, 2002. The proceeds
were used to fund the student loan credit facility.
Effective August 15, 1998, the Company granted agents and employees of the
Company 7.1 million stock options at an exercise price of $15. The options vest
20% each year beginning on August 15, 1999 and thereafter through year 2001 and
40% on August 15, 2002. All options that are not vested when an agent or
employee leaves will be forfeited.
The Company's board of directors has authorized the repurchase of up to 4.5
million shares of its Common Stock. The shares may be purchased from time to
time on the open market or in private transactions; the timing and extent of the
repurchases, if any, will depend on market conditions and the Company's
evaluation of its financial condition at the time. The Company presently has
approximately 46.2 million shares outstanding.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UICI
----
(Registrant)
Date: November 16, 1998 /s/Ronald L. Jensen
-------------------
Ronald L. Jensen, Chairman of
the Board, President and Director
Date: November 16, 1998 /s/Warren B. Idsal
------------------
Warren B. Idsal, Vice President
(Chief Financial Officer)
15