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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, 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 Number 0-14320
UICI
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(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
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Not Applicable
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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-- 46,403,907 shares as of November 5, 1999.
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INDEX
UICI AND SUBSIDIARIES
Page
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PART I. FINANCIAL INFORMATION
Consolidated condensed balance sheets-September 30, 1999
(unaudited)-and December 31, 1998 3
Consolidated condensed statements of income
-Three months ended September 30, 1999 and 1998
and nine months ended September 30, 1999 and 1998 4
Consolidated statements of comprehensive income
-Three months ended September 30, 1999 and 1998
and nine months ended September 30, 1999 and 1998 5
Consolidated condensed statements of cash flows
-Nine months ended September 30, 1999 and 1998 6
Notes to consolidated condensed financial statements
-September 30, 1999 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
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UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
September 30, December 31,
1999 1998
(Unaudited) (Note)
------------ ------------
ASSETS
Investments:
Securities available for sale--
Fixed maturities, at fair value
(cost: 1999--$885,282; 1998--$865,589) ......... $ 856,765 $ 886,406
Equity securities, at fair value
(cost: 1999--$25,300; 1998--$18,521) ........... 23,362 18,764
Mortgage and collateral loans ......................... 8,460 8,266
Policy loans .......................................... 20,499 21,332
Investment in unconsolidated subsidiary ............... 45,235 45,843
Short-term investments ................................ 136,238 194,273
------------ ------------
Total investments ............................... 1,090,559 1,174,884
Student loans ........................................... 1,204,417 670,429
Credit card loans ....................................... 280,378 136,280
Cash .................................................... 36,020 16,900
Restricted cash ......................................... 249,190 15,343
Agents' receivables ..................................... 11,724 11,249
Reinsurance receivables ................................. 90,564 89,566
Receivables from related parties ........................ 10,129 14,069
Due premiums and other receivables ...................... 50,123 39,675
Investment income due and accrued ....................... 77,048 41,022
Deferred acquisition costs .............................. 83,832 93,008
Goodwill ................................................ 194,367 108,346
Property and equipment, net ............................. 85,496 51,938
Other ................................................... 23,598 12,346
------------ ------------
$ 3,487,445 $ 2,475,055
============ ============
LIABILITIES
Policy liabilities:
Future policy and contract benefits ................... $ 458,163 $ 468,297
Claims ................................................ 316,274 317,298
Unearned premiums ..................................... 89,693 110,569
Other policy liabilities .............................. 20,033 20,590
Federal income taxes .................................... 15,201 36,111
Other liabilities ....................................... 139,808 91,133
Collections payable ..................................... 176,256 --
Notes payable to related parties ........................ -- 497
Time deposits ........................................... 224,449 98,913
Short-term debt ......................................... 10,095 29,778
Long-term debt .......................................... 119,974 21,268
Student loan short-term debt ............................ 283,485 318,853
Student loan long-term debt ............................. 997,825 350,173
------------ ------------
2,851,256 1,863,480
MINORITY INTERESTS ......................................... 13,683 16,784
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share .................. 466 464
Preferred stock, par value $.01 per share ............... -- --
Additional paid-in capital .............................. 163,098 166,489
Treasury stock .......................................... (4,575) --
Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses) .............. (20,093) 13,412
Retained earnings ....................................... 483,610 414,426
------------ ------------
622,506 594,791
------------ ------------
$ 3,487,445 $ 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.
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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,
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUE
Premiums
Health ................................................ $ 169,061 $ 184,814 $ 519,847 $ 558,009
Life premiums and other considerations ................ 12,521 12,210 36,328 37,437
Investment income ....................................... 20,329 19,596 62,231 61,007
Other interest income ................................... 24,309 11,218 70,864 19,361
Credit card fees ........................................ 64,981 27,552 165,173 66,139
Other fee income ........................................ 33,890 30,496 89,391 83,284
Other income ............................................ 1,262 1,919 3,244 37,288
Gains (losses) on sale of investments ................... (89) 727 1,306 4,589
------------ ------------ ------------ ------------
326,264 288,532 948,384 867,114
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses ............... 122,840 147,506 388,472 437,594
Underwriting, acquisition, and insurance expenses ....... 55,819 67,976 180,509 207,333
Other expenses .......................................... 48,286 31,062 136,430 122,739
Depreciation and amortization ........................... 8,000 5,182 16,287 10,761
Provision for doubtful accounts ........................ 38,701 7,664 80,287 15,523
Interest expense ........................................ 2,463 730 4,678 2,105
Interest expense - student loan borrowings .............. 13,737 6,050 37,605 10,438
------------ ------------ ------------ ------------
289,846 266,170 844,268 806,493
INCOME BEFORE FEDERAL INCOME TAXES
AND MINORITY INTERESTS .............................. 36,418 22,362 104,116 60,621
Federal income taxes ....................................... 11,843 7,797 33,844 20,334
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTERESTS ...................... 24,575 14,565 70,272 40,287
Minority interests ......................................... 119 1,034 1,088 4,141
------------ ------------ ------------ ------------
NET INCOME ............................................ $ 24,456 $ 13,531 $ 69,184 $ 36,146
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE ....................... $ 0.52 $ 0.29 $ 1.49 $ 0.78
============ ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE ..................... $ 0.51 $ 0.29 $ 1.45 $ 0.78
============ ============ ============ ============
See notes to consolidated condensed financial statements.
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UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net income ...................................................... $ 24,456 $ 13,531 $ 69,184 $ 36,146
Other comprehensive income (loss), before tax:
Unrealized gains (losses) in securities:
Unrealized holding gains (losses) arising during period .... (12,074) 7,651 (52,705) 7,733
Less: reclassification adjustment for gains (losses)
included in net income ................................... 154 139 1,190 2,764
---------- ---------- ---------- ----------
Other comprehensive income (loss)
before tax ......................................... (11,920) 7,790 (51,515) 10,497
Income tax (expense) benefit related to items of
other comprehensive income ............................... 4,167 (2,725) 18,010 (3,673)
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of tax .................. (7,753) 5,065 (33,505) 6,824
---------- ---------- ---------- ----------
Comprehensive income ............................................ $ 16,703 $ 18,596 $ 35,679 $ 42,970
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UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended
September 30,
1999 1998
------------ ------------
OPERATING ACTIVITIES
Net income .............................................. $ 69,184 $ 36,146
Adjustments to reconcile net income to
cash provided by operating activities:
Increase in restricted cash ........................... (233,847) --
Increase in reinsurance, related party and
other receivables .................................... (3,787) (15,564)
Increase in accrued investment income ................. (36,026) (19,031)
Decrease (increase) in deferred acquisition costs ..... 9,176 (619)
(Decrease) increase in policy liabilities ............. (17,784) 32,275
Increase (decrease) in federal income taxes payable ... (6,173) 6,373
Increase in other liabilities ........................ 37,640 13,324
Increase in collections payable ....................... 176,256 --
Depreciation and amortization ......................... 16,287 10,761
Provision for doubtful accounts ....................... 80,287 15,523
Net income attributable to minority interests ......... 1,088 5,671
Gains on sale of investments .......................... (1,306) (4,589)
Other items, net ...................................... (10,616) (7,374)
------------ ------------
Cash Provided by Operating Activities ............. 80,379 72,896
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INVESTING ACTIVITIES
Increase in student loans ............................... (511,061) (567,502)
Increase in credit card loans ........................... (223,398) (72,982)
Increase in other investments ........................... (56,657) (18,290)
Decrease (increase) in agents' receivables .............. (1,151) 422
Increase in property and equipment ...................... (35,504) (4,034)
------------ ------------
Cash Used in Investing Activities ................. (827,771) (662,386)
------------ ------------
FINANCING ACTIVITIES
Net cash provided from time deposits .................... 125,536 55,540
Deposits from investment products ....................... 11,998 12,867
Withdrawals from investment products .................... (26,805) (30,229)
Proceeds from student loan borrowings ................... 1,640,924 591,823
Repayment of student loan borrowings .................... (1,082,063) (16,866)
Proceeds from debt ...................................... 154,615 2,252
Repayments of debt ...................................... (46,089) (13,562)
Purchase of treasury stock .............................. (10,649) --
Proceeds from exercise of stock options ................. 5,623 --
Issuance of notes receivable for stock sale ............. (2,938) --
Distributions to minority interests ..................... (3,640) (6,132)
------------ ------------
Cash Provided by Financing Activities ............. 766,512 595,693
------------ ------------
Net Increase in Cash ............................. 19,120 6,203
Net Cash at Beginning of Period ................... 16,900 15,932
------------ ------------
Cash at End of Period ............................. $ 36,020 $ 22,135
============ ============
See notes to consolidated condensed financial statements.
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
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, 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 (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 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 B--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 a reduction in future premium taxes in certain
states. Effective January 1, 1999, the Company adopted the provisions of AICPA
Statement of Position 97-3 ("SOP 97-3"), under which these assessments are
accrued in the period in which they 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, 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 C--ACQUISITIONS
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 million and, in connection with the acquisition,
recorded $35.9 million in goodwill to be amortized over twenty five years. The
acquisition was funded with existing cash and Company borrowings. As part of
this transaction, UMMG entered into seven-year exclusive marketing agreements
with American Fair Credit Association ("AFCA") and American Credit Educators
("ACE").
Effective July 26, 1999, Educational Finance Group ("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
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provides tuition payment plans and also originates student loans. The
acquisition was financed with Company borrowings. The Company recorded $ 53.7
million of goodwill in connection with this acquisition and is amortizing it
straight line over twenty-five years.
For financial reporting purposes, the acquisitions were accounted for
using the purchase method of accounting. The effect of these acquisitions on the
Company's results of operations was not material.
NOTE D--Assumption of Agency Matching Total Ownership Plan ("AMTOP") Obligation
In 1986 and 1996, respectively, United General Agency, Inc. (now
Specialized Investment Risks, Inc., as successor to United General Agency, Inc.
("SIR")), which is owned by Ronald L. Jensen, the Company's Chairman,
established, for the benefit of its independent insurance agents, independent
sales representatives and independent organizations associated with SIR, the
Agency Matching Total Ownership Plan I and the Agency Matching Total Ownership
Plan II (collectively, the "Plans"). Effective as of January 1, 1997, SIR
assigned and transferred to UICI certain assets associated with SIR's agency
operations. In connection with that transfer, SIR agreed to retain the liability
to fund the Plans to the extent of 922,587 shares of UICI Common Stock,
representing the corresponding number of unvested AMTOP Credits (as defined in
the Plans) at January 1, 1997. As of August 30, 1999, the liability of SIR to
fund the Plans remained undischarged to the extent of 369,174 shares of UICI
Common Stock (the "Unfunded Obligation").
Effective September 15, 1999, SIR and the Company entered into an
Assumption Agreement, pursuant to which UICI agreed to assume and discharge the
Unfunded Obligation, in consideration of a cash payment made to the Company in
the amount of $10,129,212, representing the dollar value of 369,174 shares of
UICI Common Stock at $27.4375 per share (the closing price of UICI common stock
at September 15). At September 30, 1999, the Company reflected this amount in
receivables from related parties and recorded a liability for the corresponding
unfunded obligation in other liabilities. On October 29, SIR funded the cash
payment.
To ensure that the dollar value of the Unfunded Obligation will not
exceed the dollar proceeds received from SIR plus a reasonable allowance for the
cost of funds, effective September 15, 1999, the Company and Onward and Upward,
Inc. (the sole shareholders of which include Ronald L. Jensen's five adult
children, who collectively own approximately 12.4% of the issued and outstanding
shares of UICI common stock) entered into a Put/Call Agreement. Pursuant to the
Put/Call Agreement, for a thirty day period commencing on July 1 of each year
(commencing in 2000 through 2006), the Company has an option to purchase from
Onward and Upward, and Onward and Upward has a corresponding right to require
the Company to purchase, up to 369,174 shares of Common Stock at an initial
purchase price in 2000 of $28.50 per share. The put/call price escalates over
time in annual dollar increments to recognize an increase in value of the
underlying UICI stock based upon historical past performance (an approximate
6.0% annual rate of appreciation).
The Assumption Agreement and the Put/Call Agreement and the
transactions contemplated thereby were approved by the Board of Directors of the
Company. The Company believes that assumption of the obligations of SIR
represented by the Unfunded Obligation presented an attractive source of funds
at an effective cost less than its prevailing all-in cost of funds. In addition,
the Company believes that the Put/Call Agreement afforded the Company the
necessary hedge on its obligation to deliver a fixed number of shares of UICI
Common Stock in the future,
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at a cost significantly less than it could obtain such a hedge in the open
market from an unaffiliated third party.
NOTE E--LONG TERM DEBT
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 75 basis points (0.75%) over LIBOR. As
of September 30, 1999, the Company had fully drawn on the line of credit, of
which $50 million was used to repay $50 million of debt outstanding under the
Company's prior bank facility and $50 million was used to fund the UMMG and AMS
acquisitions (completed in May 1999 and July 1999, respectively) and current
operations.
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.
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 to 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.
NOTE F--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,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands except per share amounts)
Net income available to common shareholders ... $ 24,456 $ 13,531 $ 69,184 $ 36,146
---------- ---------- ---------- ----------
Weighted average shares outstanding--
basic earnings per share ................. 46,305 46,229 46,303 46,229
Effect of dilutive securities:
Employee stock options ................... 1,541 652 1,414 357
---------- ---------- ---------- ----------
Weighted average shares outstanding--
dilutive earnings per share .............. 47,846 46,881 47,717 46,586
---------- ---------- ---------- ----------
Basic earnings per common share ............... $ 0.52 $ 0.29 $ 1.49 $ 0.78
========== ========== ========== ==========
Diluted earnings per common share ............. $ 0.51 $ 0.29 $ 1.45 $ 0.78
========== ========== ========== ==========
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NOTE G--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
UICI and Ronald L. Jensen (the Company's Chairman) are involved in
litigation (Sun Communications, Inc. v. SunTech Processing Systems, LLC, UICI,
Ronald L. Jensen, et al) (the "Sun Litigation") with a third party concerning
the distribution of the cash proceeds from the sale and liquidation of SunTech
Processing Systems, LLC ("STP") assets in February 1998. The Dallas County,
Texas District Court ruled in December 1998 that, as a matter of law, a March
1997 agreement governing the distribution of such cash proceeds should be read
in the manner urged by Sun Communications, Inc. ("Sun") and consistent with a
court-appointed liquidator's previous ruling. The District Court entered a
judgment directing distribution of the sales proceeds in the manner urged by
Sun. The District Court also entered a finding that UICI violated Texas
securities disclosure laws and breached a fiduciary duty owed to Sun, and the
District Court awarded the plaintiff $1.7 million in attorneys' fees, which
amount could be increased to $2.1 million under certain circumstances.
UICI believes that the District Court was incorrect in the awarding of
attorneys' fees and in its finding that UICI violated Texas securities laws and
breached a fiduciary duty, and on September 10, 1999 the Company appealed the
District Court's decision as to those issues. The Company has not, however,
appealed the District Court's ruling with regard to the interpretation of the
March 1997 agreement. On September 10, 1999, Mr. Jensen filed an appeal of the
trial court's December 1998 finding in the Sun Litigation that Mr. Jensen was
not entitled to any of the proceeds from the sale of Sun. On October 4, 1999,
Sun filed its brief in opposition to the appeal.
In the brief filed in his appeal of the District Court's December 1998
finding, Mr. Jensen has reasserted that the March 1997 agreement requires that,
before STP can make a distribution to UICI and Sun, it must advance
approximately $10 million to Mr. Jensen in satisfaction of certain creditor and
preferred equity claims. If and to the extent that Mr. Jensen's interpretation
of the March 1997 agreement is ultimately adopted in the Sun Litigation after
all rights to appeal have been exhausted, the amount of such proceeds which UICI
may ultimately receive directly from STP may be reduced. However, in such event
and in accordance with an agreement reached with the Company in June 1998 (the
"Assurances Agreement"), Mr. Jensen has agreed to fully reimburse the Company to
the extent of any reduction in cash proceeds from the amount determined by the
District Court to be due the Company directly from STP.
The Company cannot at this time predict how, when or in what fashion
the appellate court will dispose of the various claims of the Company and Mr.
Jensen on appeal. The appellate court may affirm the District Court's judgment,
may return the case to the District Court for trial, or may reverse the District
Court's decision and render a judgment. In addition, there can be no assurances
as to the time period during which the appeals filed by Mr. Jensen or the
Company in the Sun Litigation may be heard and a final judgment rendered which
affords no party in the Sun Litigation the right to further appeal. However, for
financial reporting purposes, any cash ultimately received by the Company from
Mr. Jensen pursuant to the Assurances Agreement
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would be treated as a capital contribution to the Company, and the Company's
pre-tax operating results would be reduced by a corresponding amount. In such
case, however, the Company's consolidated stockholders' equity would not be
adversely affected. In 1998, the Company's results of operations reflected a
pre-tax gain from the STP sale of $9.7 million ($6.7 million after-tax, or $0.15
per share).
On October 8, 1999, Sun filed a motion seeking a partial distribution
of the approximately $19.8 million of STP sales proceeds currently held in the
Court's registry. The trial court entered an order granting relief on October
21, 1999, which order has been stayed pending the Court of Appeals' final
determination with respect to Sun's motion seeking a partial distribution.
The District Court's December 1998 ruling left unresolved the
disposition of approximately $6.0 million of sales proceeds from the sale and
liquidation of STP, to which the Company believes it is entitled in accordance
with the interpretation of the March 1997 agreement adopted by the District
Court. Based on the current caseload in the Texas appellate courts, the Company
does not currently believe that a final judgment in the Sun Litigation will be
rendered prior to 2001. 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 judgement.
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. The U. S.
District Court has yet to rule on the motion to remand.
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.
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Mitchell Litigation
The Company and one of its subsidiaries are named defendants in a
purported class action suit filed in 1997 (Dadra Mitchell v. American Fair
Credit Association, United Membership Marketing Group, LLC and UICI) pending in
California state court, in which plaintiffs have alleged that defendants
violated California law regarding unfair and deceptive trade practices by making
misleading representations about, and falsely advertising the nature and quality
of, the benefits of membership in American Fair Credit Association ("AFCA"). The
Company markets credit cards through AFCA.
The California state court in the Mitchell case has certified a class
of all California residents who entered into a membership contract with AFCA
through April 12, 1999. Defendants' motions to compel arbitration and to narrow
the class definition are pending before the court. On September 27, 1999, the
parties met before a mediator in an attempt to resolve the dispute. In that
mediation, the parties reached an agreement in principle to settle the case. The
proposed settlement remains subject to formal documentation and court approval,
and at this time the portion of any cash outlay for which the Company will be
liable is unclear.
The Company does not currently believe that the settlement, if entered
into in accordance with the terms tentatively agreed to in the mediation, will
have a material adverse effect on the results of operations or financial
condition of the Company.
Klinefelter Litigation
The MEGA Life and Health Insurance Company (a wholly-owned subsidiary
of the Company) ("Mega") is a party defendant in a purported class action suit
filed in December 1996 (The Klinefelter Family Revocable Living Trust, et al. v.
First Life Assurance Company, et al.) pending in the District Court of Hidalgo
County, Texas, in which the named plaintiffs have alleged breach of contract,
violations of the Texas Deceptive Trade Practices Act and the Texas Insurance
Code arising from the sale of so-called "vanishing premium" life insurance
policies. The trial court has certified a nationwide class consisting of all
purchasers of the insurance policies. Mega has appealed what it believes to be
an improper class certification order, and Mega has moved for summary judgment
as to all claims asserted by the representative plaintiffs on an individual
basis and as to the claims asserted by the class as a whole. Defendants' motion
for summary judgment has been stayed pending outcome of the appeal of the class
certification order.
The parties have been engaged in intense settlement negotiations and
multiple mediations. The Company does not currently believe that the outcome of
the Klinefelter case will have a material adverse effect on the results of
operations or financial condition of the Company.
Alabama Litigation
During the quarter ended September 30, 1999, United Credit National
Bank ("UCNB") (an indirect wholly-owned subsidiary of the Company) was named as
a defendant in two lawsuits in Macon County, Alabama (LaTonya Tarver v. UCNB,
American Credit Educators, L.L.C. ("ACE") and various unnamed defendants and
Wylean Tarver v. UCNB, ACE and unnamed defendants) and two lawsuits in Bullock
County, Alabama (Mandy B. Shell v. UCNB, ACE, Charles P. Ostrowski and unnamed
defendants and Ruby N. Cunningham v. UCNB, ACE, Charles P. Ostrowski and unnamed
defendants) arising from 1999 telemarketing activities undertaken by UCNB and/or
ACE.
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UCNB has filed motions to dismiss and motions to compel arbitration in
all four lawsuits, which motions are pending. The Company believes that it has
meritorious defenses to the allegations and intends to vigorously contest the
cases. The telemarketing activities in question were conducted for UCNB by a
third party on an outsourced basis, and the Company believes that UCNB is
entitled to indemnification by the third party in connection with the cases.
Katz Litigation
The Company is currently involved in a dispute with the former owners
of ELA Corporation, a student loan marketing business acquired by the Company in
December 1997. The former owners allege that, as part of the negotiations
leading to the acquisition, the Company and the former owners entered into an
oral option agreement, pursuant to which the former owners were granted the
right, for a five-year period, to purchase 6.5% of the student loan business of
Educational Finance Group, Inc. ("EFG") for $5.7 million. The former owners
further allege that the 6.5% percentage is subject to adjustment of up to 50%
based on the relative post-acquisition performance of ELA Corporation to the
performance of EFG (including ELA Corporation) as a whole. Attempts to reach
agreement on the terms of the option over an 18 month period were unsuccessful.
On July 28, 1999, EFG filed a declaratory judgment action in U.S.
District Court in Boston (EFG, Inc. v. Marcus Katz, et al) seeking a finding
that no option existed since there had been no agreement on essential terms. The
former owners have filed a motion to dismiss the action. On July 30, 1999, the
former owners filed an action in California state court (Marcus Katz et al v.
UICI, Educational Finance Group, Inc. et al) seeking a declaration that the
option does exist. The Company and EFG removed the case to federal court and
moved to dismiss the action or, alternatively, to stay the action pending a
decision in the prior filed Federal case. The former owners have moved to remand
the case back to the California state court.
NOTE H--SEGMENT INFORMATION
The Company's operating segments are: (i) Insurance, which includes the
businesses of the Self Employed Agency, Student Insurance, the OKC Division,
Special Risk and National Motor Club; (ii) Financial Services, which includes
the businesses of United CreditServ, Educational Finance Group, Insurdata 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 ("Operating Income"), and identifiable assets is
summarized as follows:
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Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
Revenues
Insurance:
Self Employed Agency .............. $ 139,717 $ 156,222 $ 429,735 $ 460,994
Student Insurance ................. 24,668 23,251 80,462 76,870
OKC Division ...................... 23,844 25,038 71,389 74,729
Special Risk ...................... 14,139 17,344 42,944 52,873
National Motor Club ............... 7,619 7,736 21,961 22,582
---------- ---------- ---------- ----------
209,987 229,591 646,491 688,048
Financial Services:
Credit Services ................... 75,094 30,449 186,253 71,824
Educational Finance Group ......... 27,934 15,048 79,503 35,309
Insurdata ......................... 12,175 10,955 35,010 31,360
Other Business Units .............. 238 1,180 587 33,677
---------- ---------- ---------- ----------
115,441 57,632 301,353 172,170
Other Key Factors ................... 8,847 7,670 26,187 26,083
---------- ---------- ---------- ----------
Inter Segment Eliminations .......... (8,011) (6,361) (25,647) (19,187)
---------- ---------- ---------- ----------
Total Revenues ......................... $ 326,264 $ 288,532 $ 948,384 $ 867,114
========== ========== ========== ==========
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
Operating Income
Insurance:
Self Employed Agency ................ $ 18,507 $ (2,679) $ 35,906 $ (8,728)
Student Insurance ................... 279 3,046 1,782 7,675
OKC Division ........................ 3,807 5,444 14,252 14,977
Special Risk ........................ (471) 869 131 4,269
National Motor Club ................. 1,422 799 3,677 3,527
---------- ---------- ---------- ----------
23,544 7,479 55,748 21,720
Financial Services:
United CreditServ ................... 9,429 11,741 35,776 25,488
Educational Finance Group ........... 123 (490) 2,502 (2,872)
Insurdata ........................... 1,128 345 2,283 2,221
Other Business Units ................ -- 2 -- 21
---------- ---------- ---------- ----------
10,680 11,598 40,561 24,858
Other Key Factors ...................... 2,194 3,285 7,807 14,043
---------- ---------- ---------- ----------
Total Operating Income ................. $ 36,418 $ 22,362 $ 104,116 $ 60,621
========== ========== ========== ==========
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September 30, December 31,
1999 1998
------------ ------------
(In thousands)
Identifiable Assets
Insurance:
Self Employed Agency ................ $ 410,875 $ 444,240
Student Insurance ................... 56,357 87,303
OKC Division ........................ 590,738 585,055
Special Risk ........................ 78,733 51,580
National Motor Club ................. 23,346 26,038
------------ ------------
1,160,049 1,194,216
Financial Services:
United CreditServ ................... 372,099 195,242
Educational Finance Group ........... 1,595,680 773,412
Insurdata ........................... 18,490 22,338
Other Business Units ................ 19,787 19,226
------------ ------------
2,006,056 1,010,218
Other Key Factors ................... 321,340 270,621
------------ ------------
Total assets ........................... $ 3,487,445 $ 2,475,055
============ ============
The increase in United CreditServ's assets is attributable to the increase in
accounts processed from December 31, 1998 to September 30, 1999.
The increase in Educational Finance Group's assets is due to increased loan
origination volume.
NOTE I--SUBSEQUENT EVENTS
On October 5, 1999 the Company and HealthPlan Services Corporation
("HPS") entered into an agreement contemplating the acquisition by the Company
of HPS in a stock-for-stock merger transaction. Assuming an average closing
price per share of the Company's stock at October 5, 1999, the Company would
issue approximately 4.6 million shares of its stock in the merger, and the
purchase price would be approximately $120.2 million plus the assumption of
approximately $93 million of HPS's debt. Upon completion of the merger, HPS will
become a wholly owned, separately operated subsidiary of the Company. Completion
of the merger is subject to several closing conditions, including the approval
of HPS's stockholders. The merger is currently expected to be completed in early
2000.
On October 7, 1999, EFG completed a $344 million capital market
transaction, which included the issuance of $229 million principal amount of
three month LIBOR-indexed floating rate notes and the issuance of $115 million
principal amount of auction rate notes. The $229 million notes were priced with
a spread of 42 basis points over LIBOR with the interest rate resetting
quarterly. The notes mature in April 2009 and have an expected average life of
3.5 years. The $115 million auction rate notes bear interest initially at an
annual rate of 6.38% and the interest rate resets quarterly. The notes mature in
July 2027.
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 $0.51
per share for the three-month period ended September 30, 1999 compared to net
income of $0.29 per share for the comparable period in 1998. There were no gains
per share from the sale of investments for the three-month period ended
September 30, 1999, compared to gains of $0.01 per share for the comparable
period in 1998. For the nine-month period ended September 30, 1999, net income
was $1.49 per share compared to net income of $0.78 per share for the comparable
period in 1998. Included in net income were gains from the sale of investments
of $0.02 per share and $0.06 per share for the nine month period ended September
30, 1999 and September 30, 1998, respectively.
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The Company's business segments are: (i) Insurance, which includes the
businesses of the Self Employed Agency, Student Insurance, the OKC Division,
Special Risk and National Motor Club; (ii) Financial Services, which includes
the businesses of United CreditServ, Educational Finance Group, Insurdata 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 ("Operating Income").
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
Revenues
Insurance:
Self Employed Agency .............. $ 139,717 $ 156,222 $ 429,735 $ 460,994
Student Insurance ................. 24,668 23,251 80,462 76,870
OKC Division ...................... 23,844 25,038 71,389 74,729
Special Risk ...................... 14,139 17,344 42,944 52,873
National Motor Club ............... 7,619 7,736 21,961 22,582
---------- ---------- ---------- ----------
209,987 229,591 646,491 688,048
Financial Services:
Credit Services ................... 75,094 30,449 186,253 71,824
Educational Finance Group ......... 27,934 15,048 79,503 35,309
Insurdata ......................... 12,175 10,955 35,010 31,360
Other Business Units .............. 238 1,180 587 33,677
---------- ---------- ---------- ----------
115,441 57,632 301,353 172,170
Other Key Factors ................... 8,847 7,670 26,187 26,083
---------- ---------- ---------- ----------
Inter Segment Eliminations .......... (8,011) (6,361) (25,647) (19,187)
---------- ---------- ---------- ----------
Total Revenues ......................... $ 326,264 $ 288,532 $ 948,384 $ 867,114
========== ========== ========== ==========
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
Operating Income
Insurance:
Self Employed Agency ................ $ 18,507 $ (2,679) $ 35,906 $ (8,728)
Student Insurance ................... 279 3,046 1,782 7,675
OKC Division ........................ 3,807 5,444 14,252 14,977
Special Risk ........................ (471) 869 131 4,269
National Motor Club ................. 1,422 799 3,677 3,527
---------- ---------- ---------- ----------
23,544 7,479 55,748 21,720
Financial Services:
United CreditServ ................... 9,429 11,741 35,776 25,488
Educational Finance Group ........... 123 (490) 2,502 (2,872)
Insurdata ........................... 1,128 345 2,283 2,221
Other Business Units ................ -- 2 -- 21
---------- ---------- ---------- ----------
10,680 11,598 40,561 24,858
Other Key Factors ...................... 2,194 3,285 7,807 14,043
---------- ---------- ---------- ----------
Total Operating Income ................. $ 36,418 $ 22,362 $ 104,116 $ 60,621
========== ========== ========== ==========
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CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 COMPARED TO 1998
Self Employed Agency ("SEA"). Operating income for the three months
ended September 30, 1999 for the SEA Division increased to $18.5 million from a
loss of $2.7 million in the comparable 1998 period, an increase of $21.2
million, and for the nine months ended September 30, 1999 operating income
increased to $35.9 million from a loss of $8.7 million in the comparable 1998
period. The increases are the result of the continued success in directing a
larger portion of new sales to traditional indemnity products and the improved
loss ratio on the PPO products. Revenue for the three months ended September 30,
1999 for the SEA Division decreased to $139.7 million from $156.2 million for
the same period in 1998, and for the nine months ended September 30, 1999
revenue decreased to $429.7 million compared to $461.0 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 rate increases implemented
starting in 1998.
Student Insurance. Operating income for the three months ended
September 30, 1999 for the Student Insurance Division decreased to $279,000 from
$3.0 million for the same period in 1998, a decrease of $2.7 million, and for
the nine-month period in 1999 operating income decreased to $1.8 million from
$7.7 million in the comparable 1998 period. The reduced earnings reflect lower
margins resulting from increased loss ratios on the 98/99 policy year. Revenue
for the three months ended September 30, 1999 from the Student Insurance
Division increased to $24.7 million from $23.3 million in the corresponding 1998
period, and for the nine month period ended September 30, 1999 revenue increased
to $80.5 million from $76.9 million in the 1998 period.
OKC Division. Operating income for the three months ended September 30,
1999 for the OKC Division decreased to $3.8 million from $5.4 million for the
comparable 1998 period, a decrease of $1.6 million, and for the nine months
ended September 30, 1999 operating income decreased to $14.3 million from $15.0
million in the corresponding 1998 period. The decrease in operating income is
due to lower profit margins in the workers compensation business and an
additional deferred acquisition cost write off due to a higher third quarter
lapse in its College Fund Life Division ("CFLD") business. The Company believes
that the higher lapse will decline in future periods, as changes made early in
the year to its CFLD program take effect. Revenues for the three months ended
September 30, 1999 for the OKC Division decreased to $23.8 million from $25.0
million in the comparable 1998 period, and for the nine month 1999 period
revenues decreased to $71.4 million from $74.7 million in the comparable nine
month period of 1998. This decrease in revenues was primarily due to decreased
premium in the workers compensation business.
Special Risk. Operating income for the three months ended September 30,
1999 for the Special Risk Division decreased to a loss of $471,000 from income
of $869,000 in the comparable 1998 period, and for the nine months ended
September 30, 1999 operating income decreased to $131,000 from $4.3 million in
the 1998 nine-month period. The decrease in operating income is due to higher
loss ratios on closed blocks of business and reserve adjustments on the marine
medical business. Revenue for the three months ended September 30, 1999
decreased to $14.1 million from $17.3 million in the corresponding 1998 period,
and for the nine months ended September 30, 1999 revenue decreased to $42.9
million from $52.9 million in the comparable 1998 period. The decrease in
revenue is primarily due to elimination of unprofitable blocks of business and
implementation of rate increases on stop-loss accounts.
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National Motor Club. Operating income for the three months ended
September 30, 1999 for the National Motor Club increased to $1.4 million from
$799,000 in the 1998 period, an increase of $623,000, and for the nine months
ended September 30, 1999 operating income increased to $3.7 million from $3.5
million in the comparable 1998 period, an increase of $150,000. Operating income
before amortization costs for the nine months ended September 30, 1999 increased
to $4.6 million from $3.7 million in 1998. Revenues for the three and nine month
periods of 1999 are comparable to revenues in the corresponding 1998 periods.
United CreditServ ("UCS"). Operating income for the three months ended
September 30, 1999 for UCS's business decreased to $9.4 million from $11.7
million in the 1998 period, and for the nine months ended September 30, 1999
operating income increased to $35.8 million from $25.5 million in the nine
months ended September 30, 1998. Operating income in the quarter ended September
30, 1999, reflected the sale by the Company to the independent organization that
markets credit cards for the Company of previously charged off accounts for $13
million in cash. This sale was made pursuant to the terms of UCS's ongoing
marketing agreement with the independent organization, which requires such
transactions if certain levels of card performance are not realized. The
decrease in operating income in the three-month period was due to additional
costs incurred to expand facilities, hire personnel and improve collections and
administrative systems. UCS has directed considerable resources to its
collections department to enable it to process the higher volumes generated by a
new credit product introduced in the fourth quarter of 1997 and to anticipate
future needs as marketing programs expand. Revenues for the three months ended
September 30, 1999 increased to $75.1 million from $30.4 million in the
comparable 1998 period, and for the nine months ended September 30, 1999
revenues increased to $186.3 million from $71.8 million in the nine month 1998
period. The increase in revenues in 1999 compared to 1998 was primarily
attributable to a new program introduced in 1997 for which significant sales
were not recognized until the fourth quarter of 1998.
Educational Finance Group ("EFG"). EFG`s operating income for the three
months ended September 30, 1999 increased to $123,000 from a loss of $490,000 in
the 1998 three-month period, and for the nine months ended September 30, 1999
operating income increased to $2.5 million from a loss of $2.9 million for the
same period in 1998. The increase was primarily due to lower "all-in" financing
costs achieved from recent financing activities, as well as growth in student
loans. Revenues for the three months ended September 30, 1999 increased to $27.9
million from $15.0 million in the corresponding 1998 period, and for the nine
months ended September 30, 1999 revenues increased to $79.5 million from $35.3
million in the 1998 period. The increase in revenues for the three and nine
month periods is due to increased origination and interest income derived from
EFG's higher student loan volume.
Insurdata. Operating income for the three months ended September 30,
1999 for Insurdata increased to $1.1 million from $345,000 in the comparable
1998 period, and for the nine months ended September 30, 1999 operating income
was comparable to the 1998 period. The increase in the three-month period in
1999 as compared to 1998 is due to higher than normal expenses in 1998 due to a
cancelled IPO. Revenues in the three months ended September 30, 1999 increased
to $12.2 million from $11.0 million in the corresponding 1998 period, and for
the nine months ended September 30, 1999 revenues increased to $35.0 million
from $31.4 million in the comparable 1998 period. Of Insurdata's total revenue
in the nine months ended September 30, 1999, $17.3 million was attributable to
data processing services provided to the health insurance
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operations of UICI, compared to $15.9 million of such revenue in the nine month
period ended September 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 September
30, 1999 associated with this category decreased to $2.2 million from $3.3
million in the three months ended September 30, 1998, and for the nine months
ended September 30, 1999 such operating income decreased to $7.8 million from
$14.0 million in the comparable 1998 period. The decrease in the three months
and nine months ended September 30, 1999 as compared to 1998 is due to an
increase in amortization of goodwill, interest expense, general corporate
operations and a decrease in realized gains which was partially offset by an
increase in investment income on equity not allocated to the other segments. The
amount of realized gains or losses on the sale of investments is a function of
interest rates, market trends and the timing of sales with losses more likely
during periods of rising interest rates. In addition, due to rising interest
rates, the net unrealized investment gains or losses on securities classified as
"available for sale," reported in accumulated other comprehensive income as a
separate component of stockholders' equity and net of applicable income taxes
and minority interests was a $20.1 million unrealized loss at September 30, 1999
compared to a $13.4 million unrealized gain at December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's invested assets of $1.1 billion at September 30, 1999
were comparable to invested assets at December 31, 1998. The growth in the
assets provided by current operations and corporate borrowings was offset by the
decrease in market values of the fixed maturity securities held as "available
for sale". 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 $280 million at September 30, 1999 was funded using time
deposits at United Credit National Bank ("UCNB"), which deposits increased from
$99 million at December 31, 1998 to $224 million at September 30, 1999, and cash
provided from current operations.
The growth in the student loans from $670 million at December 31, 1998
to $1.2 billion at September 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 $1.2 billion at
September 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.
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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 to 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 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 75 basis points (0.75%) over LIBOR. As
of September 30, 1999, the Company had fully drawn on the line of credit, of
which $50 million was used to repay $50 million of debt outstanding under the
Company's prior bank facility and $50 million was used to fund the UMMG and AMS
acquisitions (completed in May 1999 and July 1999, respectively) and current
operations.
In connection with its AMS acquisition, the Company has $176 million of
restricted cash representing amounts collected under the tuition plan program
and a corresponding liability due to the various educational institutions.
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 completed its Year 2000 project for its IT
Systems during 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 tested such software, hardware and
interfaces for Year 2000 Readiness. In addition, the Company
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polled the third parties that provide software, hardware or data to the Company
regarding each of such third party's Year 2000 readiness plans and state of
readiness. The Company requested 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 expected 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 $9.1
million, cumulatively, was incurred as of September 30, 1999 and $2.9 million
was incurred during the nine -month period ended September 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 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.
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
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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. United
CreditServ 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.
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.
United CreditServ '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.
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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
UICI and Ronald L. Jensen (the Company's Chairman) are involved in
litigation (Sun Communications, Inc. v. SunTech Processing Systems, LLC, UICI,
Ronald L. Jensen, et al) (the "Sun Litigation") with a third party concerning
the distribution of the cash proceeds from the sale and liquidation of SunTech
Processing Systems, LLC ("STP") assets in February 1998. The Dallas County,
Texas District Court ruled in December 1998 that, as a matter of law, a March
1997 agreement governing the distribution of such cash proceeds should be read
in the manner urged by Sun Communications, Inc. ("Sun") and consistent with a
court-appointed liquidator's previous ruling. The District Court entered a
judgment directing distribution of the sales proceeds in the manner urged by
Sun. The District Court also entered a finding that UICI violated Texas
securities disclosure laws and breached a fiduciary duty owed to Sun, and the
District Court awarded the plaintiff $1.7 million in attorneys' fees, which
amount could be increased to $2.1 million under certain circumstances.
UICI believes that the District Court was incorrect in the awarding of
attorneys' fees and in its finding that UICI violated Texas securities laws and
breached a fiduciary duty, and on September 10, 1999 the Company appealed the
District Court's decision as to those issues. The Company has not, however,
appealed the District Court's ruling with regard to the interpretation of the
March 1997 agreement. On September 10, 1999, Mr. Jensen filed an appeal of the
trial court's December 1998 finding in the Sun Litigation that Mr. Jensen was
not entitled to any of the proceeds from the sale of Sun. On October 4, 1999,
Sun filed its brief in opposition to the appeal.
In the brief filed in his appeal of the District Court's December 1998
finding, Mr. Jensen has reasserted that the March 1997 agreement requires that,
before STP can make a distribution to UICI and Sun, it must advance
approximately $10 million to Mr. Jensen in satisfaction of certain creditor and
preferred equity claims. If and to the extent that Mr. Jensen's interpretation
of the March 1997 agreement is ultimately adopted in the Sun Litigation after
all rights to appeal have been exhausted, the amount of such proceeds which UICI
may ultimately receive directly from STP may be reduced. However, in such event
and in accordance with an agreement reached with the Company in June 1998 (the
"Assurances Agreement"), Mr. Jensen has agreed to fully reimburse the Company to
the extent of any reduction in cash proceeds from the amount determined by the
District Court to be due the Company directly from STP.
The Company cannot at this time predict how, when or in what fashion
the appellate court will dispose of the various claims of the Company and Mr.
Jensen on appeal. The appellate court may affirm the District Court's judgment,
may return the case to the District Court for trial, or may reverse the District
Court's decision and render a judgment. In addition, there can be no
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assurances as to the time period during which the appeals filed by Mr. Jensen or
the Company in the Sun Litigation may be heard and a final judgment rendered
which affords no party in the Sun Litigation the right to further appeal.
However, for financial reporting purposes, any cash ultimately received by the
Company from Mr. Jensen pursuant to the Assurances Agreement would be treated as
a capital contribution to the Company, and the Company's pre-tax operating
results would be reduced by a corresponding amount. In such case, however, the
Company's consolidated stockholders' equity would not be adversely affected. In
1998, the Company's results of operations reflected a pre-tax gain from the STP
sale of $9.7 million ($6.7 million after-tax, or $0.15 per share).
On October 8, 1999, Sun filed a motion seeking a partial distribution
of the approximately $19.8 million of STP sales proceeds currently held in the
Court's registry. The trial court entered an order granting relief on October
21, 1999, which order has been stayed pending the Court of Appeals' final
determination with respect to Sun's motion seeking a partial distribution.
The District Court's December 1998 ruling left unresolved the
disposition of approximately $6.0 million of sales proceeds from the sale and
liquidation of STP, to which the Company believes it is entitled in accordance
with the interpretation of the March 1997 agreement adopted by the District
Court. Based on the current caseload in the Texas appellate courts, the Company
does not currently believe that a final judgment in the Sun Litigation will be
rendered prior to 2001. 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 judgement.
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. The U. S.
District Court has yet to rule on the motion to remand.
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
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investigate and assess on behalf of the Company the underlying claims made in
the Shareholder Derivative Litigation.
Mitchell Litigation
The Company and one of its subsidiaries are named defendants in a
purported class action suit filed in 1997 (Dadra Mitchell v. American Fair
Credit Association, United Membership Marketing Group, LLC and UICI) pending in
California state court, in which plaintiffs have alleged that defendants
violated California law regarding unfair and deceptive trade practices by making
misleading representations about, and falsely advertising the nature and quality
of, the benefits of membership in American Fair Credit Association ("AFCA"). The
Company markets credit cards through AFCA.
The California state court in the Mitchell case has certified a class
of all California residents who entered into a membership contract with AFCA
through April 12, 1999. Defendants' motions to compel arbitration and to narrow
the class definition are pending before the court. On September 27, 1999, the
parties met before a mediator in an attempt to resolve the dispute. In that
mediation, the parties reached an agreement in principle to settle the case. The
proposed settlement remains subject to formal documentation and court approval,
and at this time the portion of any cash outlay for which the Company will be
liable is unclear.
The Company does not currently believe that the settlement, if entered
into in accordance with the terms tentatively agreed to in the mediation, will
have a material adverse effect on the results of operations or financial
condition of the Company.
Klinefelter Litigation
The MEGA Life and Health Insurance Company (a wholly-owned subsidiary
of the Company) ("Mega") is a party defendant in a purported class action suit
filed in December 1996 (The Klinefelter Family Revocable Living Trust, et al. v.
First Life Assurance Company, et al.) pending in the District Court of Hidalgo
County, Texas, in which the named plaintiffs have alleged breach of contract,
violations of the Texas Deceptive Trade Practices Act and the Texas Insurance
Code arising from the sale of so-called "vanishing premium" life insurance
policies.
The trial court has certified a nationwide class consisting of all
purchasers of the insurance policies. Mega has appealed what it believes to be
an improper class certification order, and Mega has moved for summary judgment
as to all claims asserted by the representative plaintiffs on an individual
basis and as to the claims asserted by the class as a whole. Defendants' motion
for summary judgment has been stayed pending outcome of the appeal of the class
certification order.
The parties have been engaged in intense settlement negotiations and
multiple mediations. The Company does not currently believe that the outcome of
the Klinefelter case will have a material adverse effect on the results of
operations or financial condition of the Company.
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Alabama Litigation
During the quarter ended September 30, 1999, United Credit National
Bank ("UCNB") (an indirect wholly-owned subsidiary of the Company) was named as
a defendant in two lawsuits in Macon County, Alabama (LaTonya Tarver v. UCNB,
American Credit Educators, L.L.C. ("ACE") and various unnamed defendants and
Wylean Tarver v. UCNB, ACE and unnamed defendants) and two lawsuits in Bullock
County, Alabama (Mandy B. Shell v. UCNB, ACE, Charles P. Ostrowski and unnamed
defendants and Ruby N. Cunningham v. UCNB, ACE, Charles P. Ostrowski and unnamed
defendants) arising from 1999 telemarketing activities undertaken by UCNB and/or
ACE.
UCNB has filed motions to dismiss and motions to compel arbitration in
all four lawsuits, which motions are pending. The Company believes that it has
meritorious defenses to the allegations and intends to vigorously contest the
cases. The telemarketing activities in question were conducted for UCNB by a
third party on an outsourced basis, and the Company believes that UCNB is
entitled to indemnification by the third party in connection with the cases.
Katz Litigation
The Company is currently involved in a dispute with the former owners
of ELA Corporation, a student loan marketing business acquired by the Company in
December 1997. The former owners allege that, as part of the negotiations
leading to the acquisition, the Company and the former owners entered into an
oral option agreement, pursuant to which the former owners were granted the
right, for a five-year period, to purchase 6.5% of the student loan business of
Educational Finance Group, Inc. ("EFG") for $5.7 million. The former owners
further allege that the 6.5% percentage is subject to adjustment of up to 50%
based on the relative post-acquisition performance of ELA Corporation to the
performance of EFG (including ELA Corporation) as a whole. Attempts to reach
agreement on the terms of the option over an 18 month period were unsuccessful.
On July 28, 1999, EFG filed a declaratory judgment action in U.S.
District Court in Boston (EFG, Inc. v. Marcus Katz, et al) seeking a finding
that no option existed since there had been no agreement on essential terms. The
former owners have filed a motion to dismiss the action. On July 30, 1999, the
former owners filed an action in California state court (Marcus Katz et al v.
UICI, Educational Finance Group, Inc. et al) seeking a declaration that the
option does exist. The Company and EFG removed the case to federal court and
moved to dismiss the action or, alternatively, to stay the action pending a
decision in the prior filed Federal case. The former owners have moved to remand
the case back to the California state court.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
NUMBER
(a) Exhibits.
Exhibit 10.1 - Repurchase Agreement dated as of March 27, 1998
as amended between Lehman Commercial Paper, Inc. and
Educational Finance Group
Exhibit 10.2 - Loan Agreement among UICI, Bank of America, as
administrative agent, The First National Bank of Chicago as
documentation agent, and Fleet National Bank as co-agent dated
May 17, 1999
Exhibit 10.3 - Indenture Agreement dated as of August 5, 1999
between EFG-III, LP, as Issuer and The First National Bank of
Chicago, as Indenture Trustee and Eligible Lender Trustee.
Exhibit 10.4 - Indenture Agreement dated as of June 14, 1999
among EFG-II, LP as Issuer and The First National Bank of
Chicago, as Indenture Trustee and Eligible Lender Trustee
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
1. A current report on Form 8-K dated September 10, 1999
regarding an appeal filing in the Sun Litigation.
2. A current report on Form 8-K dated October 5, 1999
regarding the merger between UICI and HealthPlan Services.
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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 15, 1999 /s/Gregory T. Mutz
------------------- -----------------------------------
Gregory T. Mutz, President, Chief
Executive Officer, and Director
Date: November 15, 1999 /s/William P. Benac
------------------- -----------------------------------
William P. Benac, Vice President,
(Chief Financial Officer)
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EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.1 Repurchase Agreement dated as of March 27, 1998 as
amended between Lehman Commercial Paper, Inc. and
Educational Finance Group
10.2 Loan Agreement among UICI, Bank of America, as
administrative agent, The First National Bank of
Chicago as documentation agent, and Fleet National
Bank as co-agent dated May 17, 1999
10.3 Indenture Agreement dated as of August 5, 1999
between EFG-III, LP, as Issuer and The First National
Bank of Chicago, as Indenture Trustee and Eligible
Lender Trustee.
10.4 Indenture Agreement dated as of June 14, 1999 among
EFG-II, LP as Issuer and The First National Bank of
Chicago, as Indenture Trustee and Eligible Lender
Trustee
27 Financial Data Schedule