1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FROM THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-14320
--------------
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
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 46,231,145 shares as of August 4, 1999.
2
INDEX
UICI AND SUBSIDIARIES
Page
----
PART I. FINANCIAL INFORMATION
Consolidated condensed balance sheets-June 30, 1999 (Restated)
(unaudited)-and December 31, 1998 3
Consolidated condensed statements of income (loss)
(unaudited)-Three months ended June 30, 1999 (Restated) and 1998
and six months ended June 30, 1999 (Restated) and 1998 4
Consolidated statements of comprehensive income (loss)
(unaudited)-Three months ended June 30, 1999 (Restated) and 1998
and six months ended June 30, 1999 (Restated) and 1998 5
Consolidated condensed statements of cash flows
(unaudited)-Six months ended June 30, 1999 (Restated) and 1998 6
Notes to consolidated condensed financial statements
(unaudited)-June 30, 1999 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
3
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
RESTATED
June 30,
1999 December 31,
(Unaudited) 1998
(Note A) (Note B)
----------- -----------
ASSETS
Investments:
Securities available for sale--
Fixed maturities, at fair value
(cost: 1999--$878,388; 1998--$865,589).......................... $ 859,997 $ 886,406
Equity securities, at fair value
(cost: 1999--$25,234; 1998--$18,521)............................ 25,090 18,764
Mortgage and collateral loans........................................... 8,532 8,266
Policy loans............................................................ 20,528 21,332
Investment in unconsolidated subsidiary................................. 45,310 45,843
Short-term investments.................................................. 200,643 209,616
---------- ----------
Total investments................................................. 1,160,100 1,190,227
Student loans............................................................. 960,633 670,429
Credit card loans......................................................... 173,264 136,280
Cash .................................................................... 11,966 16,900
Agents' receivables....................................................... 15,255 11,249
Reinsurance receivables................................................... 80,910 89,566
Receivables from related parties.......................................... -- 14,069
Due premiums and other receivables........................................ 32,702 39,675
Investment income due and accrued......................................... 61,518 41,022
Deferred acquisition costs................................................ 83,781 93,008
Goodwill.................................................................. 105,561 108,346
Property and equipment, net............................................... 58,088 51,938
Other .................................................................... 17,346 12,346
---------- ----------
$2,761,124 $2,475,055
========== ==========
LIABILITIES
Policy liabilities:
Future policy and contract benefits..................................... $ 461,939 $ 468,297
Claims.................................................................. 297,669 317,298
Unearned premiums....................................................... 87,198 110,569
Other policy liabilities................................................ 20,676 20,590
Federal income taxes...................................................... (10,774) 36,111
Other liabilities......................................................... 89,864 91,133
Notes payable to related parties.......................................... 156 497
Time deposits............................................................. 157,059 98,913
Short-term debt........................................................... 5,075 29,778
Long-term debt............................................................ 80,196 21,268
Student loan short-term debt.............................................. 331,019 318,853
Student loan long-term notes.............................................. 672,668 350,173
---------- ----------
2,192,745 1,863,480
MINORITY INTERESTS........................................................... 13,846 16,784
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share.................................... 464 464
Preferred stock, par value $.01 per share................................. -- --
Additional paid-in capital................................................ 163,523 166,489
Treasury stock............................................................ (4,575) --
Accumulated other comprehensive income:
Net unrealized investment gains (losses)................................ (12,340) 13,412
Retained earnings......................................................... 407,461 414,426
---------- ----------
554,533 594,791
---------- ----------
$2,761,124 $2,475,055
========== ==========
NOTE: The balance sheet as of December 31, 1998 has been derived from the
audited financial statements at that date.
See notes to consolidated condensed financial statements.
3
4
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
RESTATED RESTATED
1999 1999
(Note A) 1998 (Note A) 1998
--------- -------- --------- --------
REVENUE
Premiums
Health......................................................... $ 176,307 $191,385 $350,786 $373,195
Life premiums and other considerations......................... 11,734 12,510 23,807 25,227
Investment income................................................ 20,686 19,809 41,902 41,411
Other interest income............................................ 23,060 7,028 41,008 8,143
Credit card fees................................................. 45,614 21,804 100,192 38,587
Other fee income................................................. 25,803 26,486 55,501 52,788
Other income..................................................... 869 19,704 1,982 35,369
Gains (losses) on sale of investments............................ (586) 2,045 1,395 3,862
--------- -------- -------- --------
303,487 300,771 616,573 578,582
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses........................ 124,160 144,214 265,632 290,088
Underwriting, acquisition, and insurance expenses................ 66,311 69,077 127,656 139,357
Other expenses................................................... 53,205 55,550 93,465 97,256
Provisions for doubtful accounts................................. 49,474 4,220 76,569 7,859
UMMG purchase.................................................... 35,944 -- 35,944 --
Interest expense................................................. 1,207 646 2,215 1,375
Interest expense - student loan borrowings....................... 13,343 4,388 23,868 4,388
--------- -------- -------- --------
343,644 278,095 625,349 540,323
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES
AND MINORITY INTERESTS....................................... (40,157) 22,676 (8,776) 38,259
Federal income tax (benefit)........................................ (13,067) 7,406 (2,780) 12,537
---------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTERESTS........................ (27,090) 15,270 (5,996) 25,722
Minority interests.................................................. 755 812 969 3,107
--------- -------- -------- --------
NET INCOME (LOSS).............................................. $ (27,845) $ 14,458 $ (6,965) $ 22,615
========= ======== ======== ========
BASIC EARNINGS (LOSS) PER COMMON SHARE......................... $ (0.60) $ 0.31 $ (0.15) $ 0.49
========= ======== ======== ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE....................... $ (0.58) $ 0.31 $ (0.14) $ 0.49
========= ======== ======== ========
See notes to consolidated condensed financial statements.
4
5
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
RESTATED RESTATED
1999 1999
(Note A) 1998 (Note A) 1998
---------- ------- -------- -------
Net income (loss)................................................. $ (27,845) $14,458 $ (6,965) $22,615
Other comprehensive income (loss), before tax:
Unrealized gains (losses) in securities:
Unrealized holding gains (losses) arising during period...... (20,994) 5,956 (40,631) 82
Less: reclassification adjustment for gains (losses)
included in net income..................................... (350) 763 1,036 2,625
---------- ------- -------- -------
Other comprehensive gains (losses),
before tax........................................... (21,344) 6,719 (39,595) 2,707
Income tax (expense) benefit related to items of
other comprehensive income................................. 7,459 (2,347) 13,843 (948)
---------- ------- -------- -------
Other comprehensive gains (losses), net of tax......... (13,885) 4,372 (25,752) 1,759
---------- ------- -------- -------
Comprehensive income (loss)....................................... $ (41,730) $18,830 $ (32,717) $24,374
========== ======= ========= =======
5
6
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
June 30,
RESTATED
1999
(Note A) 1998
-------------- -----------
OPERATING ACTIVITIES
Net income (loss)......................................................... $ (6,965) $ 22,615
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Increase (decrease) in policy liabilities............................... (41,104) 14,852
Increase (decrease) in other liabilities................................ (1,269) 5,036
Increase (decrease) in federal income taxes payable..................... (33,515) 1,238
Decrease (increase) in deferred acquisition costs....................... 9,227 (328)
Decrease (increase) in accrued investment income........................ (14,949) 11,798
Decrease (increase) in reinsurance and other receivables................ 26,731 (23,070)
Depreciation and amortization........................................... 8,288 4,292
UMMG purchase........................................................... 35,944 --
Provision for doubtful accounts......................................... 76,569 7,859
Net income attributable to minority interests........................... 969 3,107
Gains on sale of investments............................................ (1,395) (3,862)
Other items, net........................................................ (4,999) (3,689)
-------------- -----------
Cash Provided by Operating Activities............................... 53,532 39,848
-------------- -----------
INVESTING ACTIVITIES
Increase in student loans................................................. (295,951) (275,430)
Increase in credit card loans............................................. (113,353) (42,733)
Increase in other investments............................................. (44,017) (10,981)
Increase in agents' receivables........................................... (4,006) (1,820)
Decrease (increase) in property and equipment............................. (11,653) 1,858
-------------- -----------
Cash Used in Investing Activities................................... (468,980) (329,106)
-------------- -----------
FINANCING ACTIVITIES
Net cash provided from time deposits...................................... 58,146 32,150
Deposits from investment products......................................... 8,353 6,755
Withdrawals from investment products...................................... (16,521) (20,218)
Proceeds from student loan borrowings..................................... 704,240 286,538
Repayment of student loan borrowings...................................... (369,579) --
Proceeds from debt........................................................ 78,407 1,252
Repayments of debt........................................................ (44,523) (11,681)
Purchase of treasury stock................................................ (4,575) --
Distributions to minority interests....................................... (3,434) (3,725)
-------------- -----------
Cash Provided by Financing Activities............................... 410,514 291,071
-------------- -----------
Net Increase (Decrease) in Cash..................................... (4,934) 1,813
Net Cash at Beginning of Period..................................... 16,900 15,932
-------------- -----------
Cash at End of Period............................................... $ 11,966 $ 17,745
============== ===========
See notes to consolidated condensed financial statements.
6
7
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1999
NOTE A - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Results of operations for the three and six months ended June 30, 1999 have been
restated to reflect (a) the retroactive application, beginning on January 1,
1999, of a revised methodology for determining credit card loan losses and
carrying value of residual assets, (b) the write-off in the second quarter of
1999 of the $35.9 million purchase price of the minority interest in United
Membership Marketing Group, Inc. acquired in the second quarter of 1999, and (c)
a downward adjustment to Education Finance Group's interest income in the amount
of $5.5 million.
The following table reconciles amounts previously reported to amounts currently
being reported in the Consolidated Condensed Statements of Income for the three
and six month periods ended June 30, 1999:
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------ ----------------
Net income as previously reported $ 23,848 $ 44,728
Write off of purchase price of UMMG (35,944) (35,944)
Additional provision for loan losses (34,983) (34,983)
Student loan interest income adjustment (5,547) (5,547)
Tax benefit of above adjustments 24,781 24,781
--------- ---------
Net loss as restated $ (27,845) $ (6,965)
========= =========
NOTE B--BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements for UICI
and its subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, such financial statements do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments, except as otherwise
described herein, consist of normal recurring accruals. Operating results for
the six-month period ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999. 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, 1998. Certain amounts in the 1998 financial statements have been
reclassified to conform with the 1999 financial statement presentation.
NOTE C--RECENT PRONOUNCEMENTS
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 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 are incurred. The effects of initially adopting SOP 97-3
were not material to the Company.
In June 1999, the Financial Accounting Standards Board agreed to defer for one
year the effective date of Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. Under the new rules,
7
8
Statement 133 is effective for all fiscal quarters for fiscal years beginning
after June 15, 2000. Because of the Company's minimal use of derivatives,
management does not anticipate that the adoption of the new Statement will have
a significant effect on the results of operations or the financial position of
the Company.
NOTE D--ACQUISITION
Effective May 1, 1999, the Company acquired all of the minority interest in
United Membership Marketing Group, Inc. (" UMMG") for a cash purchase price of
$32.3. This amount, along with an additional $3.2 million of minority interest
in UMMG acquired in 1998, has been charged to income in the second quarter of
1999.
NOTE E--EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
June 30, June 30,
RESTATED RESTATED
1999 1998 1999 1998
-------- ------- -------- -------
(In thousands except per share amounts)
Net income (loss) available to common shareholders.................... $(27,845) $14,458 $ (6,965) $22,615
-------- ------- -------- -------
Weighted average shares outstanding--
basic earnings per share......................................... 46,231 46,229 46,292 46,229
Effect of dilutive securities:
Employee stock options.......................................... 1,379 29 1,324 30
-------- ------- -------- -------
Weighted average shares outstanding--
dilutive earnings per share...................................... 47,610 46,258 47,616 46,259
-------- ------- -------- -------
Basic earnings (loss) per common share................................ $ (0.60) $ 0.31 $ (0.15) $ 0.49
======== ======= ======== =======
Diluted earnings (loss) per common share.............................. $ (0.58) $ 0.31 (0.14) $ 0.49
======== ======= ======== =======
In 1999, diluted loss per common share is anti-dilutive.
NOTE F--LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various 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.
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
8
9
entered a finding that UICI violated Texas securities disclosure laws and
breached a fiduciary duty owed to Sun, and the District Court awarded the
plaintiff $1.7 million in attorneys' fees, which amount could be increased to
$2.1 million under certain circumstances.
UICI has filed a formal notice of appeal of the Court's decision.
However, the Company does not intend to directly appeal the District Court's
ruling with regard to the distribution of the sales proceeds. The Company's
Chairman has filed a notice of appeal in his personal capacity as a party to the
March 1997 agreement, but he has not determined whether or how he will proceed
with that appeal.
The District Court's December 1998 ruling left unresolved the
disposition of approximately $6.0 million of cash sales proceeds, to which the
Company believes it is entitled in accordance with the interpretation of the
March 1997 agreement adopted by the Court. The Company believes that it is
probable that the outcome of the appeal and/or potential settlement, if any,
will not materially affect the distribution of the cash sales proceeds to the
Company as contemplated by the District Court's final judgment.
On June 1, 1999, the Company was named as a nominal defendant in a
shareholder derivative action filed 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 (which include certain officers, directors and former directors of
the Company), alleging, among other things, breach of fiduciary duty,
conversion, waste of corporate assets, constructive fraud, negligent
misrepresentation, conspiracy and breach of contract. The plaintiff in the
Shareholder Derivative Action is also the private third-party plaintiff in the
Sun Communications Litigation referred to above, and the claims made in the
Shareholder Derivative Litigation arose out of the same transactions that serve
as the factual underpinning to the Sun Communications Litigation referred to
above.
See Part II, Item 1 for additional information concerning the
Shareholder Derivative Litigation.
NOTE G--SEGMENT INFORMATION
The Company's operating segments are: (i) Insurance, which includes the
businesses of the Self Employed Agency Division, the Student Insurance Division,
the OKC Division, the Special Risk Division and the National Motor Club
Division; (ii) Financial Services, which includes the businesses of 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,
realized gains or losses on sale of investments and the operations of the
Company's AMLI subsidiary. Allocations of investment income and certain general
expenses are based on a number of assumptions and estimates, and the business
segments reported operating results would change if different methods were
applied. Certain assets are not individually identifiable by segment and,
accordingly, have been allocated by formulas. Segment revenues include premiums
and other policy charges and considerations, net investment income, and fees and
other income. Operations which do not constitute reportable operating segments
have been combined with Other Key Factors. Depreciation expense and capital
expenditures are not considered material. Management does not allocate income
taxes to segments. Transactions between reportable operating segments are
accounted for under respective agreements which are generally at cost. Financial
information by operating segment for revenues, income before federal income
taxes and minority interests, and identifiable assets is summarized as follows:
9
10
Three Months Ended Six Months Ended
June 30, June 30,
RESTATED RESTATED
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
Revenues
Insurance:
Self Employed Agency........................ $143,338 $155,571 $290,018 $304,772
Student Insurance........................... 29,707 27,765 55,794 53,619
OKC Division................................ 23,561 24,650 47,545 49,691
Special Risk................................ 14,258 17,998 28,805 35,529
National Motor Club......................... 7,644 7,793 14,342 14,846
-------- -------- -------- --------
218,508 233,777 436,504 458,457
Financial Services:
Credit Services............................. 52,345 23,476 111,159 41,375
Educational Finance Group................... 22,649 12,780 46,022 20,261
Insurdata................................... 11,620 10,537 22,835 20,405
Other Business Units........................ 228 18,097 349 32,497
-------- -------- -------- --------
86,842 64,890 180,365 114,538
Other Key Factors............................. 7,023 8,190 17,340 18,413
-------- -------- -------- --------
Intersegment Eliminations..................... (8,886) (6,086) (17,636) (12,826)
-------- -------- -------- --------
Total Revenues................................... $303,487 $300,771 $616,573 $578,582
======== ======== ======== ========
Three Months Ended Six Months Ended
June 30, June 30,
RESTATED RESTATED
1999 1998 1999 1998
-------- ------- -------- -------
(In thousands)
Income (loss) before federal income taxes
and minority interest:
Insurance:
Self Employed Agency........................................... $14,248 $ 243 $17,399 $ (6,049)
Student Insurance.............................................. 743 2,237 1,503 4,629
OKC Division................................................... 4,927 4,999 10,445 9,533
Special Risk................................................... 1,052 2,115 602 3,400
National Motor Club............................................ 1,156 1,714 2,255 2,728
-------- ------- -------- -------
22,126 11,308 32,204 14,241
Financial Services:
Credit Services................................................ (59,402) 8,342 (44,580) 13,747
Educational Finance Group...................................... (4,394) (2,544) (3,168) (2,382)
Insurdata...................................................... 331 905 1,155 1,876
Other Business Units........................................... -- (218) -- 19
-------- ------- -------- -------
(63,465) 6,485 (46,593) 13,260
Other Key Factors................................................. 1,182 4,883 5,613 10,758
-------- ------- -------- -------
$(40,157) $22,676 $ (8,776) $38,259
======== ======= ======== =======
10
11
RESTATED
June 30, December 31,
1999 1998
---------- ----------
(In thousands)
Identifiable Assets
Insurance:
Self Employed Agency.................................................. $ 420,760 $ 444,240
Student Insurance..................................................... 57,719 87,303
OKC Division.......................................................... 592,813 585,055
Special Risk.......................................................... 46,075 51,580
National Motor Club................................................... 25,124 26,038
---------- ----------
1,142,491 1,194,216
Financial Services:
Credit Services....................................................... 235,792 195,242
Educational Finance Group............................................. 1,107,016 773,412
Insurdata............................................................. 19,668 22,338
Other Business Units.................................................. 19,557 19,226
---------- ----------
1,382,033 1,010,218
Other Key Factors........................................................ 236,600 270,621
---------- ----------
Total assets.................................................... $2,761,124 $2,475,055
========== ==========
The Student Insurance assets decreased mainly due to the decrease in
unearned premiums. These single premium policies are earned over the approximate
one year term of the policy for the current school year and therefore the
unearned premiums are lower at or near the end of the school year. This decrease
is consistent with prior years.
The increase in the Credit Services segment assets is primarily
attributable to the increase in the number of American Credit Educators ("ACE")
accounts processed from December 31, 1998 to June 30, 1999.
The increase in the Educational Finance Group assets is due to
increased loan origination volume.
Note H -- SUBSEQUENT EVENTS
Effective July 26, 1999, EFG acquired for $58.2 million 100% of the
outstanding stock of AMS Investment Group, Inc., a holding company whose
principal operations include those of Academic Management Services, Inc.
("AMS"). AMS provides tuition payment plans and also originates student loans.
The acquisition was financed with Company borrowings. For financial reporting
purposes, the acquisition will be accounted for using the purchase method of
accounting, and, as a result, the assets and liabilities acquired will be
recorded at fair value on the date acquired. The Company expects to record
goodwill in connection with its acquisition of AMS in the amount of
approximately $48 million, which will be ratably amortized over a period of
twenty (20) years. The Company does not anticipate that the AMS transaction will
have a material impact on the results of operations for the Company in 1999.
Effective August 6, 1999, EFG completed a $650 million single seller
asset-backed commercial paper conduit through its special purpose entity, EFG
Funding, LLC. Approximately $515 million of commercial paper was issued in a
private placement, bearing annual interest at rates ranging from 5.05% to 5.69%.
The conduit will issue commercial paper from time to time with maturities from
one (1) to two hundred seventy (270) days. Liquidity support is provided by a
separate banking facility. The commercial paper received ratings of A1/P1/F1
from Standard & Poor's, Moody's, and Fitch, respectively.
On March 17, 2000 the Board of Directors of UICI determined, after a
thorough assessment of the unit's prospects, that it will exit from its United
CreditServ (formerly Credit Services Division) sub-prime credit card business.
Accordingly, the United CreditServ unit will be reflected as a discontinued
operation for financial reporting purposes. The Company currently expects to
complete the sale of the
11
12
United CreditServ unit during the year 2000. UICI recorded in the fourth quarter
of 1999 its current estimate of loss that it believes it will incur on disposal
of the United CreditServ unit. The Company currently estimates that such loss
will be $130.0 million pre-tax. UICI currently believes that such loss will
consist primarily of losses upon disposition and continuing operating losses at
Specialized Card Services, Inc.
The following table presents the information for each of the quarters
ended June 30, 1999 and 1998 and each of the six month periods ended June 30,
1999 and 1998 as originally reported and as restated to reflect adjustments
described above and reflection of United CreditServ as discontinued operation.
12
13
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues from continuing operations:
As restated................................... $ 251,389 $ 277,295 $ 505,661 $ 537,207
As included in amounts previously reported.... 256,936 277,295 511,208 537,207
Income from continuing operations
before federal income taxes:
As restated................................... 18,554 14,152 34,976 22,455
As previously reported........................ 24,101 14,152 40,523 22,455
Net income from continuing operations.............
As restated................................... 10,868 9,672 22,182 14,740
As previously reported........................ 16,415 9,672 27,729 14,740
Income (loss) from discontinued operations:
As restated................................... (38,713) 4,786 (29,147) 7,875
As previously reported........................ 7,433 4,786 16,999 7,875
Net income (loss):
As restated................................... (27,845) 14,458 (6,965) 22,615
As previously reported........................ 23,848 14,458 44,728 22,615
Basic earnings (loss) for common stockholders
per common share:
Income from continuing operations:
As restated................................... $ 0.24 $ 0.20 $ 0.48 $ 0.31
As previously reported........................ $ 0.36 $ 0.20 $ 0.60 $ 0.31
Income (loss) from discontinued operations:
As restated................................... $(0.84) $ 0.11 $(0.63) $ 0.18
As previously reported........................ $ 0.16 $ 0.11 $ 0.37 $ 0.18
Net income (loss):
As restated:.................................. $(0.60) $ 0.31 $(0.15) $ 0.49
As previously reported........................ $ 0.52 $ 0.31 $ 0.97 $ 0.49
Diluted earnings (loss) for common stockholders
per common share:
Income from continuing operations:
As restated................................... $ 0.23 $ 0.20 $ 0.47 $ 0.31
As previously reported........................ $ 0.34 $ 0.20 $ 0.58 $ 0.31
Income (loss) from discontinued operations:
As restated................................... $(0.81) $ 0.11 $(0.61) $ 0.18
As previously reported........................ $ 0.16 $ 0.11 $ 0.36 $ 0.18
Net income (loss):
As restated................................... $(0.58) $ 0.31 $(0.14) $ 0.49
As previously reported........................ $ 0.50 $ 0.31 $ 0.94 $ 0.49
13
14
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 a net loss of $0.60
per share for the three-month period ended June 30, 1999, compared to net income
of $0.31 per share for the comparable period in 1998. Included in the net loss
are losses from the sale of investments of $0.01 per share for the three month
period ended June 30, 1999, compared to gains of $0.03 per share for the
comparable period in 1998. For the six-month period ended June 30, 1999, the net
loss was $0.15 per share compared to net income of $0.49 per share for the
comparable period in 1998. Included in net losses are gains from the sale of
investments of $0.02 per share and $0.05 per share for the six month period
ended June 30, 1999 and June 30, 1998, respectively.
The Company's business segments are: (i) Insurance, which includes the
businesses of the Self Employed Agency Division, the Student Insurance Division,
the OKC Division, the Special Risk Division and the National Motor Club
Division; (ii) Financial Services, which includes the businesses United
CreditServ, Inc., the Educational Finance Group Division, the Insurdata Division
and Other Business Units and (iii) Other Key Factors. Allocation of investment
income is based on a number of assumptions and estimates and the business
segments reported operating results would change if different methods were
applied. Segment revenues include premiums and other policy charges and
considerations, net investment income, and fees and other income. Financial
information by segment for revenues and income before federal income taxes and
minority interests is summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
RESTATED RESTATED
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
Revenues
Insurance:
Self Employed Agency........................ $143,338 $155,571 $290,018 $304,772
Student Insurance........................... 29,707 27,765 55,794 53,619
OKC Division................................ 23,561 24,650 47,545 49,691
Special Risk................................ 14,258 17,998 28,805 35,529
National Motor Club......................... 7,644 7,793 14,342 14,846
-------- -------- -------- --------
218,508 233,777 436,504 458,457
Financial Services:
Credit Services............................. 52,345 23,476 111,159 41,375
Educational Finance Group................... 22,649 12,780 46,022 20,261
Insurdata................................... 11,620 10,537 22,835 20,405
Other Business Units........................ 228 18,097 349 32,497
-------- -------- -------- --------
86,842 64,890 180,365 114,538
Other Key Factors............................. 7,023 8,190 17,340 18,413
-------- -------- -------- --------
Inter Segment Eliminations.................... (8,886) (6,086) (17,636) (12,826)
-------- -------- -------- --------
Total Revenues................................... $303,487 $300,771 $616,573 $578,582
======== ======== ======== ========
14
15
Three Months Ended Six Months Ended
June 30, June 30,
RESTATED RESTATED
1999 1998 1999 1998
--------- --------- --------- --------
(In thousands)
Income (loss) before federal income taxes
and minority interest
Insurance:
Self Employed Agency.......................... $ 14,248 $ 243 $ 17,399 $ (6,049)
Student Insurance............................. 743 2,237 1,503 4,629
OKC Division.................................. 4,927 4,999 10,445 9,533
Special Risk.................................. 1,052 2,115 602 3,400
National Motor Club........................... 1,156 1,714 2,255 2,728
-------- --------- --------- --------
22,126 11,308 32,204 14,241
Financial Services:
Credit Services............................... (59,402) 8,342 (44,580) 13,747
Educational Finance Group..................... (4,394) (2,544) (3,168) (2,382)
Insurdata..................................... 331 905 1,155 1,876
Other Business Units.......................... -- (218) -- 19
-------- --------- --------- --------
(63,465) 6,485 (46,593) 13,260
Other Key Factors................................ 1,182 4,883 5,613 10,758
-------- --------- --------- --------
$(40,157) $ 22,676 $ (8,776) $ 38,259
========= ========= ========== ========
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 1999 COMPARED TO 1998
Self Employed Agency Division ("SEA"). Operating income for the three
months ended June 30, 1999 for the SEA Division increased to $14.2 million from
$243,000 in the comparable 1998 period, an increase of $14.0 million, and for
the six months ended June 30, 1999 operating income increased to $17.4 million
from a loss of $6.0 million in the comparable 1998 period. The increases are the
result of rate increases implemented in 1998 and success in directing a larger
portion of new sales to the traditional indemnity products. Revenue for the
three months ended June 30, 1999 for the SEA Division decreased to $143.3
million from $155.6 million for the same period in 1998, and for the six months
ended June 30, 1999 revenue decreased to $290.0 million compared to $304.8
million in the comparable 1998 period. The decrease in revenues in the 1999
periods reflects the negative impact on new sales and recruiting efforts of the
rate increases implemented in 1998.
Student Insurance Division. Operating income for the three months ended
June 30, 1999 for the Student Insurance Division decreased to $743,000 from $2.2
million for the same period in 1998, a decrease of $1.5 million, and for the
six-month period in 1999 operating income decreased to $1.5 million from $4.6
million in the comparable 1998 period. The decrease in operating income
continues to reflect lower margins resulting from aggressive pricing in the
1998/1999 school year. Revenue for the three months ended June 30, 1999 from the
Student Insurance Division increased to $29.7 million from $27.8 million in the
corresponding 1998 period, and for the six month period ended June 30, 1999
revenue increased to $55.8 million from $53.6 million in the 1998 period.
OKC Division. Operating income for the OKC Division was comparable for
the three-month 1999 and 1998 periods, and for the six months ended June 30,
1999 operating income increased to $10.4 million from $9.5 million in the
corresponding 1998 period. Revenues for the three months ended June 30, 1999 for
the OKC Division decreased to $23.6 million from $24.7 million in the comparable
1998 period, and for the six month 1999 period revenues decreased to $47.5
million from $49.7 million in the comparable six-month period of 1998. This
decrease in revenues was primarily due to a decrease in revenue from closed
blocks of business.
15
16
Special Risk Division. Operating income for the three months ended June
30, 1999 for the Special Risk Division decreased to $1.1 million from $2.1
million in the comparable 1998 period, and for the six months ended June 30,
1999 operating income decreased to $602,000 from $3.4 million in the 1998
six-month period. Revenue for the three months ended June 30, 1999 decreased to
$14.3 million from $18.0 million in the corresponding 1998 period, and for the
six months ended June 30, 1999 revenue decreased to $28.8 million from $35.5
million in the comparable 1998 period. The decrease in operating income and
revenue in the 1999 periods was primarily due to a decrease in revenue from
closed blocks of business and renewal actions taken by the Company designed to
eliminate unprofitable business.
National Motor Club. Operating income for the three months ended June
30, 1999 for the National Motor Club decreased to $1.2 million from $1.7 million
in 1998, a decrease of $500,000, and for the six months ended June 30, 1999
operating income decreased to $2.3 million from $2.7 million in the comparable
1998 period, a decrease of $400,000. Operating income for the three and six
month periods ended June 30, 1998 included approximately $400,000 of
non-recurring income from the sale of a building. Revenues for the three and six
month periods of 1999 are comparable to revenues in the corresponding 1998
periods.
Credit Services. Operating income for the three months ended June 30,
1999 for the Company's Credit Services business decreased to a loss of $59.4
million from operating income of $8.3 million in the 1998 period, and for the
six months ended June 30, 1999 operating income decreased to a loss of $44.6
million from $13.7 million in the six months ended June 30, 1998. Revenues for
the three months ended June 30, 1999 increased to $52.3 million from $23.5
million in the comparable 1998 period, and for the six months ended June 30,
1999 revenues increased to $111.2 million from $41.4 million in the six month
1998 period. During the quarter and six months ended June 30, 1999, United
CreditServ provided $49.5 million and $76.4 million, respectively, for credit
card loan losses, primarily associated with its ACE credit card product. The
Company believes that such credit card loan losses were due primarily to
inadequate attention to ACE collections during the quarter and six months ended
June 30, 1999, inefficiencies associated with administrative and operating
systems conversions during the quarter, significant increases in card issuance
volumes during a period of systems inadequacies, mis-pricing of the ACE product,
and the failure of United CreditServ's AFCA credit card portfolio performance to
be sufficiently predictive of the performance of the ACE credit card loan
portfolio. In addition, due primarily to the unprofitability of the ACE credit
card product, during the quarter ended June 30, 1999 United CreditServ charged
to income the $35.9 million purchase price paid to acquire a minority interest
in United Membership Marketing Group, Inc. during the quarter.
Educational Finance Group ("EFG"). EFG's operating income for the three
months ended June 30, 1999 decreased to a loss of $4.4 million from a loss of
$2.5 million in the 1998 three-month period, and for the six months ended June
30, 1999 operating income decreased to a loss of $3.2 million from a loss of
$2.4 million for the same period in 1998. The Company believes that the
operating losses are attributable primarily to operating losses at EFG
Technologies Inc. and Education Loan Administrators Group ("ELA"), which are due
primarily to operating inefficiencies at those units. EFG Technologies, Inc. is
based in Winston-Salem, North Carolina, and is a loan servicer for approximately
600 colleges, universities and private lenders, and ELA markets PLUS Loans
(which are made directly to the parent rather than the student) through direct
mail and telemarketing programs directly to prospective student and parent
borrowers. Revenues for the three months ended June 30, 1999 increased to $22.6
million from $12.8 million in the corresponding 1998 period, and for the six
months ended June 30, 1999 revenues increased to $46.0 million from $20.3
million in the 1998 period.
On June 11, 1999, an EFG special purpose financing subsidiary sold, in
a private placement transaction, $319.5 million principal amount of Auction Rate
Student Loan-Backed Notes at an interest rate of 5.038%. The interest rate on
the notes will be reset monthly by an auction process. The notes were sold in
two tranches and the final maturity on the notes is November 2022.
Insurdata. Operating income for the three months ended June 30, 1999
for Insurdata decreased to $331,000 from $905,000 in the comparable 1998 period,
and for the six months ended June 30, 1999
16
17
operating income decreased to $1.2 million from $1.9 million in the 1998 period.
The decrease was primarily due to restructuring costs associated with the
consolidation of imaging production centers and an increased investment in
Internet-based solutions. Revenues in the three months ended June 30, 1999
increased to $11.6 million from $10.5 million in the corresponding 1998 period,
and for the six months ended June 30, 1999 revenues increased to $22.8 million
from $20.4 million in the comparable 1998 period. Of Insurdata's total revenue
in the six months ended June 30, 1999, $11.4 million was attributable to data
processing services provided to the health insurance operations of UICI,
compared to $10.3 million of such revenue in the six month period ended June 30,
1998.
Other Business Units. During 1998, this category ceased to exist, with
the Other Business Units sold, closed or transferred to other categories.
Other Key Factors. The Other Key Factors category includes investment
income not allocated to the other segments, interest expense on corporate debt,
general expenses relating to corporate operations, amortization of goodwill,
realized gains or losses on sale of investments and the operations of the
Company's AMLI subsidiary. Operating income for the three months ended June 30,
1999 associated with this category decreased to $1.2 million from $4.9 million
in the three months ended June 30, 1998, and for the six months ended June 30,
1999 such operating income decreased to $5.6 million from $10.8 million in the
comparable 1998 period. The decrease in operating income in the three and six
month periods was primarily due to a decrease in realized gains on sale of
investments and an increase in interest and general expenses, which were
partially offset by an increase in investment income not allocated to the other
segments.
LIQUIDITY AND CAPITAL RESOURCES
The Company's invested assets decreased to $1,160 million at June 30,
1999 compared to $1,190 million at December 31, 1998. The primary sources for
the asset reduction were the decreases in market values of the fixed maturity
securities held as "available for sale" and withdrawals (net of deposits) from
investment products.. These decreases were partially offset by cash provided by
current operations, corporate borrowings, and an increase in restricted cash
held by EFG at June 30, 1999. The decrease in market values of the fixed
maturity securities held as "available for sale" was the direct result of
increases in long-term interest rates.
The growth in the credit card receivables portfolio from $136 million
at December 31, 1998 to $173 million at June 30, 1999 was funded using time
deposits at United Credit National Bank ("UCNB") and cash provided from current
operations. The growth in the student loans from $670 million at December 31,
1998 to $960 million at June 30, 1999 was funded from the proceeds of student
loan borrowings and the issuance of long term notes, which indebtedness in the
aggregate increased from $669 million at December 31, 1998 to $1,004 million at
June 30, 1999.
On June 11, 1999, an EFG 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 interest
rate on the notes will be reset monthly by an auction process. The notes were
sold in two equal tranches and mature in November 2022. The notes received a
"AAA" credit rating from Standard & Poor's and Fitch IBCA and an "Aaa " rating
from Moody's Investor Services.
On May 17, 1999, the Company closed on a $100 million unsecured line of
credit with a group of commercial banks. Amounts outstanding under the line of
credit bear interest at an annual rate of seventy-five (75) basis points (0.75%)
over LIBOR. As of June 30, 1999, the Company had borrowed $60 million on this
line of credit, of which $50 million was used to repay $50 million of debt
outstanding under the Company's prior bank facility and the remaining $10
million was used to fund the UMMG acquisition. Subsequent to June 30, 1999, the
Company had borrowed the remaining $40 million, primarily to partially finance
the AMS acquisition and to provide working capital.
17
18
YEAR 2000 READINESS
State of Readiness. 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, process credit cards or student loans or engage in similar normal
business activities. As a result, the Company has implemented a project intended
to ensure that hardware and software systems operated or licensed in the
Company's business are designed to operate and properly manage dates beyond
December 31, 1999 ("Year 2000 Ready"). To date, the Year 2000 Project has
assessed the Company's information technology and operating systems ("IT
Systems") and is assessing non-information technology systems, including
embedded technology, relating to, among other systems, security systems,
elevator systems and heating, ventilating and air conditioning systems ("Non-IT
Systems"). The Year 2000 Project consists of five phases: (i) awareness, (ii)
assessment, (iii) analysis, design and remediation, (iv) testing and validation
and (v) creation of contingency plans in the event of Year 2000 failures.
IT Systems. The Company has completed the first four phases of the Year
2000 project for substantially all of its IT Systems. The Company is in the
process of completing the contingency plans of substantially all of its mission
critical IT systems, and this phase is currently expected to be completed by the
end of the third quarter of 1999.
Non-IT Systems. The Company believes that Year 2000 non-readiness of
its own Non-IT Systems would not have a material adverse effect on the Company's
business or operations. Accordingly, the Company has primarily focused its
efforts on its IT Systems.
Readiness of Third Parties. The Company relies on hardware and software
of third parties as material components of its IT Systems, including network
access between the Company's data center and credit card transaction processors.
As part of the Year 2000 Project, the Company is testing such software, hardware
and interfaces for Year 2000 Ready. . In addition, the Company is polling the
third parties who provide software, hardware or data to the Company regarding
each of such third party's Year 2000 readiness plan and state of readiness. The
Company is requesting written responses from such third parties that their
software, hardware and data is, or will be on a timely basis, Year 2000 ready.
The Company provides services to third parties. If a Year 2000 problem
caused the interruption of such services to those customers, such interruption
could have a material adverse effect on the Company's business and the Company
could incur liability as a result.
Year 2000 Costs. The Company expects to incur internal labor costs, as
well as other expenses, in its Year 2000 Project. The Company's total estimated
cost of the project is approximately $10.5 million, of which approximately $8.3
million, cumulatively, was incurred as of June 30, 1999 and $2.1 million was
incurred during the six-month period ended June 30, 1999. Future costs of the
Year 2000 project will primarily result from the re-deployment of information
technology resources, although no significant internal IT Systems projects are
being deferred to further the Year 2000 Project. Costs associated with the Year
2000 project are expensed as incurred and are paid from operating cash flows.
Risks of Year 2000 Non-Readiness and Contingency Plans. The economy in
general may be adversely affected by risks associated with the Year 2000. The
Company's business, financial condition, and results of operations could be
materially adversely affected if systems that it operates or licenses to third
parties, or systems that are operated by other parties (e.g., utilities,
telecommunications service providers, data providers, associates, credit card
transaction processors) with which the Company's systems interface, are not Year
2000 Ready in time. There can be no assurance that these systems will continue
to properly function and interface and will otherwise be Year 2000 Ready.
Although the Company is not aware of any threatened claims related to the Year
2000, the Company may be subject to litigation arising from such claims and,
depending on the outcome, such litigation could have a material
18
19
adverse affect on the Company. It is not clear whether the Company's insurance
coverage would be adequate to offset these and other business risks related to
the Year 2000.
The Company has not had any material processing disruptions to date
that were caused by Year 2000 issues. Internal testing provides the Company with
a level of confidence that, in a most reasonably likely "worst case" scenario,
these systems will not cause a material disruption on a forward-looking basis. A
most reasonably likely "worst case" scenario would anticipate that it is
possible that potential consequences would include, among other possibilities,
the inability to accurately and timely process benefit claims, update customers'
accounts, bill customers, calculate financial and actuarial data, and report
accurate data to management, shareholders, customers and regulators. The Company
cannot guarantee that it will be able to resolve all of its Year 2000 issues.
Any critical unresolved Year 2000 issues could have a material adverse effect on
the Company's results of operations, liquidity or financial condition.
The expected costs of the Year 2000 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 assurance 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, the success in becoming Year 2000 Ready of third parties whose
software and hardware systems interface with the Company, the outcome of
possible Year 2000 litigation involving the Company and similar uncertainties.
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, ability to predict and effectively
manage claims related to health care costs; reliance on key management and
adequacy of claim liabilities and the ability of the Company and third party
vendors to modify computer systems for the Year 2000 data conversion in a timely
manner. 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 changes in regulations for credit cards or credit card national
banks. The Company has certain risks associated with the Educational Finance
Group 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.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates, and
other relevant market rate or price changes. Market risk is directly influenced
by the volatility and liquidity in the markets in which the related underlying
assets are traded.
19
20
The primary market risk to the Company's investment portfolio is
interest rate risk associated with investments and the amount of interest that
policyholders expect to have credited to their policies. The interest rate risk
taken in the investment portfolio is managed relative to the duration of the
liabilities. The Company's investment portfolio consists mainly of high quality,
liquid securities that provide current investment returns. The Company believes
that the annuity and universal life-type policies are generally competitive with
those offered by other insurance companies of similar size. The Company does not
anticipate significant changes in the primary market risk exposures or in how
those exposures are managed in the future reporting periods based upon what is
known or expected to be in effect in future reporting periods.
Profitability of the student loans is affected by the spreads between
the interest yield on the student loans and the cost of the funds borrowed under
the various credit facilities. Although the interest rates on the student loans
and the interest rate on the credit facilities are variable, the interest earned
on the student loans uses the 91-day T-bill as the base rate while the base rate
on the credit facilities is LIBOR. The effect of rising interest rates is
generally small as both revenues and costs adjust to new market levels.
The Credit Services Division's operations are subject to risk resulting
from interest rate fluctuations to the extent that there is a difference between
the amount of interest earned on the credit cards and the amount of the interest
paid on the time deposits. The maturity of the time deposits is less than one
year. The principal objective of the Company's asset/liability management
activities is to provide maximum levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk and facilitating the
funding needs of the Company.
PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various 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.
Sun Communications Litigation
As previously disclosed, UICI and Ronald L. Jensen (the Company's
Chairman) are involved in litigation (Sun Communications, Inc. v. SunTech
Processing Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation")
with a third party concerning the distribution of the cash proceeds from the
sale and liquidation of SunTech Processing Systems, LLC ("STP") assets in
February 1998. The Dallas County, Texas District Court ruled in December 1998
that, as a matter of law, a March 1997 agreement governing the distribution of
such cash proceeds should be read in the manner urged by Sun Communications,
Inc. ("Sun") and consistent with a court-appointed liquidator's previous ruling.
The District Court entered a judgment directing distribution of the sales
proceeds in the manner urged by Sun. The District Court also entered a finding
that UICI violated Texas securities disclosure laws and breached a fiduciary
duty owed to Sun, and the District Court awarded the plaintiff $1.7 million in
attorneys' fees, which amount could be increased to $2.1 million under certain
circumstances.
UICI believes that the Court was incorrect in its finding that UICI
violated Texas securities laws and the awarding of attorneys' fees, and UICI has
filed a formal notice of appeal of the trial court's decision. However, the
Company does not intend to directly appeal the District Court's ruling with
regard to the distribution of the cash sales proceeds. The Company's Chairman
has filed a notice of appeal in his personal capacity as a party to the March
1997 agreement, but he has not determined whether or how he will proceed with
that appeal.
20
21
The District Court's December 1998 ruling left unresolved the
disposition of approximately $6.0 million of sales proceeds, to which the
Company believes it is entitled in accordance with the interpretation of the
March 1997 agreement adopted by the Court. The Company believes it is probable
that the outcome of the appeal and or potential settlement, if any, will not
materially affect the distribution of the cash sales proceeds to the Company as
contemplated by the District Court's final judgment.
Shareholder Derivative Litigation
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 in the
District Court of Dallas County, Texas (the "Shareholder Derivative
Litigation"). The plaintiff has asserted on behalf of UICI various derivative
claims brought against the individual defendants, alleging, among other things,
breach of fiduciary duty, conversion, waste of corporate assets, constructive
fraud, negligent misrepresentation, conspiracy and breach of contract. Plaintiff
seeks to compel UICI's directors and officers to conduct a complete accounting
and audit relating to all related party transactions and to fully and completely
restate, report and disclose such transactions. Plaintiff further seeks to
recover for UICI's benefit all damages caused by such alleged breach of the
officers' and directors' duty to UICI. The plaintiff in the Shareholder
Derivative Litigation is also the private third-party plaintiff in the Sun
Communications Litigation, and the claims made in the Shareholder Derivative
Litigation arose out of the same transactions that serve as the factual
underpinning to the Sun Communications Litigation referred to above.
UICI has filed notice of removal to the U. S. District Court for the
Northern District of Texas on the basis that federal questions have been raised
which give jurisdiction to the matter to the federal district court. Plaintiff
has filed a motion to remand the case back to Texas state court.
At the regular quarterly meeting of the Company's Board of Directors
held on August 4, 1999, George Lane III and Stuart D. Bilton (non-employee
directors of the Company) were appointed, in accordance with Texas and Delaware
law, to serve as a special committee to investigate and assess on behalf of the
Company the underlying claims made in the Shareholder Derivative Litigation.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
None.
21
22
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: April 6, 2000 /s/Gregory T. Mutz
------------------- --------------------------------------
Gregory T. Mutz, President, Chief
Executive Officer, Principal Financial
Officer and Director
22
23
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule