UICI - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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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 JUNE 30, 2002.

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NO. 001-14953

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UICI
(Exact name of registrant as specified in its charter)

Delaware 75-2044750
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4001 McEwen, Suite 200, Dallas, Texas 75244
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(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code (972) 392-6700

Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. Common Stock, $.01
Par Value, 47,554,362 shares as of August 8, 2002.

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INDEX

UICI AND SUBSIDIARIES

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE: The balance sheet data as of December 31, 2001 have been derived from the
audited financial statements at that date.

See Notes to Consolidated Condensed Financial Statements.

3

UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See Notes to Consolidated Condensed Financial Statements.

4

UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED) (DOLLARS IN THOUSANDS)

See Notes to Consolidated Condensed Financial Statements.

5

UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)

See Notes to Consolidated Condensed Financial Statements.

6

UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2002

NOTE A - BASIS OF PRESENTATION

The accompanying unaudited consolidated condensed financial statements for
UICI and its subsidiaries (the "Company" or "UICI") have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and 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 notes 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, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001. Certain amounts in the 2001 financial statements have been
reclassified to conform to the 2002 financial statement presentation.

Recently Issued Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, superseding Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Statement 144
provides guidance on differentiating between assets held and used, held for
sale, and held for disposal other than by sale. Statement 144 requires a
three-step approach for recognizing and measuring the impairment of assets to be
held and used and also superseded the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, regarding discontinued operations. Effective
January 1, 2002, the Company adopted this pronouncement.

In June 2001, FASB issued Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising from
business combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually, or more frequently if certain indicators arise. The review of goodwill
will be at the reporting unit level, which the Company has determined to be at
one level below its operating segments. Intangible assets with finite lives will
continue to be amortized over their estimated useful lives. Statement 142 also
requires that goodwill included in the carrying value of equity method
investments no longer be amortized.

The Company adopted Statements 141 and 142 on January 1, 2002. In accordance
with Statement No. 142, the Company tested for goodwill impairment effective
January 1, 2002. As a result of the transitional impairment testing, completed
during the quarter ended June 30, 2002, the Company determined that goodwill
recorded in connection with the acquisition of Academic Management Services
Corp. ("AMS") and Barron Risk Management Services ("Barron") was impaired in the
aggregate amount of $6.9 million ($5.1 million net of tax). The Company has
reflected this impairment charge in its financial statements as a cumulative
effect of a change in accounting principle as of January 1, 2002 in accordance
with Statement No. 142.

NOTE B - INVESTMENT IN HEALTHAXIS, INC.

At June 30, 2002, the Company held 23,655,622 shares of common stock of
Healthaxis, Inc. (HAXS: Nasdaq) ("HAI"), which at such date represented
approximately 45% of the issued and outstanding shares

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of HAI. Of such 23,655,622 shares held by the Company, 8,581,714 shares
(representing 16.1% of HAI's total issued and outstanding shares) were through
November 7, 2001 subject to the terms of a Voting Trust Agreement, pursuant to
which trustees unaffiliated with the Company have the right to vote such shares.
In addition, at June 30, 2002, the Company held (a) a warrant to purchase 12,291
shares of HAI common stock at an exercise price of $3.01 per HAI share; (b) a
warrant to purchase 200,100 shares of HAI common stock at an exercise price of
$4.40 per HAI share; (c) a warrant to purchase 10,005 shares of HAI common stock
at an exercise price of $12.00 per share; and (d) $1.67 million aggregate
principal amount of HAI 2% convertible debentures, which are convertible into an
aggregate of 185,185 shares of HAI common stock.

On July 31, 2002, UICI exchanged the $1.67 million principal amount of HAI
2% convertible debentures for cash in the amount of $243,000 and 1,424 shares of
a newly authorized series of HAI 2% convertible preferred stock, which preferred
stock has a stated liquidation value of $1,000 per share and is convertible into
542,476 shares of HAI common stock at a conversion price per common share of
$2.625.

Effective November 7, 2001, (a) Gregory T. Mutz and Patrick J. McLaughlin
(the President and a director of UICI, respectively) resigned from the Board of
Directors of HAI; (b) the Voting Trust Agreement was terminated; and (c) for the
sole purpose of electing directors to the board of directors of HAI, UICI
appointed as its proxies the board of directors of HAI, with power to vote
33-1/3% of the number of HAI shares held of record from time to time by UICI,
with such proxies to vote such in favor of the nominees that a majority of the
directors of HAI shall have recommended stand for election. The authority
granted to such proxies will terminate at the earlier to occur of (i) November
7, 2011, (ii) such date as UICI beneficially holds less than 25% of the
outstanding shares of common stock of HAI on a fully diluted basis, (iii) such
date as any person or persons acting as a "group" beneficially holds a greater
percentage of the outstanding shares of HAI common stock on a fully diluted
basis than the percentage beneficially owned by UICI, or (iv) the filing by HAI
of a voluntary petition in bankruptcy or the filing by a third party of an
involuntary petition in bankruptcy with respect to HAI.

HAI is an emerging technology service firm that provides web-based
connectivity and applications solutions for health benefit distribution and
administration. These solutions, which consist primarily of software products
and related services, are designed to assist health insurance payers, third
party administrators, intermediaries and employers in providing enhanced
services to members, employees and providers through the application of HAI's
flexible technology to legacy systems, either on a fully integrated or on an
application service provider (ASP) basis.

Pursuant to the terms of an information technology services agreement,
amended and restated as of January 3, 2000 (the "Services Agreement"), through
June 15, 2002 HAI formerly provided information systems and software development
services (including administration of the Company's computer data center) to the
Company and its insurance company affiliates at HAI's cost of such services
(including direct costs of HAI personnel dedicated to providing services to the
Company plus a portion of HAI's overhead costs) plus a 10% mark-up. The Services
Agreement had an initial five-year term ending on January 3, 2005, which was
subject to extension by the Company. The Services Agreement was terminable by
the Company or HAI at any time upon not less than 180 days' notice to the other
party.

The Company accounts for its investment in HAI utilizing the equity method
and, accordingly, recognizes its ratable share of HAI income and loss. The
Company's equity in the loss of HAI in the three and six months ended June 30,
2002 was $1.4 million and $1.6 million, respectively, compared to $5.9 million
and $8.0 million for the three and six months ended June 30, 2001. For the three
and six months ended June 30, 2002, results for the HAI segment also reflected a
$6.5 million impairment charge related to the adjustment to the carrying value
of the Company's investment in HAI.

Effective June 15, 2002, UICI and HAI terminated the Services Agreement. As
part of the termination arrangement, UICI made a one-time payment to HAI in the
amount of $6.5 million and tendered 500,000 shares of HAI common stock to HAI.
Substantially all of HAI's technical personnel formerly supporting UICI under
the Services Agreement were hired by UICI on June 17, 2002. Following the
transaction, UICI continues to hold approximately 45% of the issued and
outstanding shares of HAI. Because UICI constitutes a significant shareholder of
HAI, the aggregate amount of consideration paid to HAI by UICI

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for the early termination of the Services Agreement (approximately $6.5 million)
was reflected for financial reporting purposes as a contribution by UICI to the
capital of HAI, the effect of which was to increase the Company's carrying value
of its investment in HAI. Effective June 30, 2002, UICI determined the carrying
value in its investment in HAI was impaired in the amount of $6.5 million and
therefore the investment was written down to an estimated realizable value.
Giving effect to the capital contribution, subsequent write down and equity in
losses at HAI in the three and six months ended June 30, 2002 in the amount of
$1.4 million and $1.6 million, respectively, the Company's carrying value of its
investment in HAI was $6.7 million at June 30, 2002.

Pursuant to the terms of the Services Agreement, UICI paid to HAI $3.7
million and $8.1 million, respectively, in the three and six months ended June
30, 2002, compared to $6.7 million and $10.5 million, respectively, in the three
and six months ended June 30, 2001. In addition, HAI has provided to the Company
and its affiliates certain other information technology services, including
claims imaging and software-related services, for which UICI paid to HAI $1.7
million and $2.5 million, respectively, in the three and six months ended June
30, 2002, compared to $1.4 million and $6.1 million, respectively, in the three
and six months ended June 30, 2001. The aggregate amounts paid by UICI to HAI in
the three and six months ended June 30, 2002 represented 66.0% and 58.6%,
respectively, of HAI's total revenues of $8.2 million and $18.0 million,
respectively, in such periods, compared to 72.7% and 74.0%, respectively, of
HAI's total revenues of $11.1 million and $22.3 million, respectively, in the
three and six months ended June 30, 2001.

Set forth below is summary condensed balance sheet and income statement data
for HAI as of and for the three and six-month periods ended June 30, 2002. This
financial information has been adjusted to exclude the effects of push-down
accounting for the January 7, 2000 merger of Insurdata Incorporated with and
into HealthAxis.com (the subsidiary of HAI that was merged with and into HAI in
January 2001).

NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS

The Company adopted FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets on January 1, 2002. In accordance with
Statement No. 142, the Company tested for goodwill impairment as of January 1,
2002. As a result of the transitional impairment testing, completed during the
quarter ended June 30, 2002, the Company determined that goodwill recorded in
connection with the acquisitions of AMS and Barron was impaired in the aggregate
amount of $6.9 million ($5.1 million net of tax). The Company has reflected this
impairment charge in its financial statements as a cumulative effect of a change
in accounting principle as of January 1, 2002 in accordance with Statement No.
142.

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Set forth in the table below is a summary of the goodwill and other
intangible assets by operating segment as of June 30, 2002 and December 31,
2001:

Following is the impact to the Company's net income for the three and six
months ended June 30, 2002 and 2001 as a result of the non-amortization
provisions of Statement 142:

Other intangible assets consist of present value of future commissions,
customer lists, trademark and non-compete agreements related to the acquisitions
of SeniorsFirst and STAR HRG completed in the three months ended March 31, 2002.
(See Note F).

Set forth in the table below is a summary of the estimated amortization
expense for the next five years and thereafter for other intangible assets:

NOTE D - DEBT

At December 31, 2001 and June 30, 2002, the Company had outstanding
consolidated short and long-term indebtedness (exclusive of indebtedness secured
by student loans) in the amount of $25.3 million and $13.5 million,
respectively, of which $19.4 million and $7.9 million, respectively, constituted
indebtedness of the holding company.

On June 22, 1994, the Company authorized an issue of its 8.75% Senior Notes
due June 2004 in the aggregate amount of $27.7 million. In accordance with the
agreement governing the terms of the notes (the "Note Agreement"), commencing on
June 1, 1998 and on each June 1 thereafter to and including June 1,

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2003, the Company is required to pay approximately $4.0 million aggregate
principal together with accrued interest thereon to the date of such repayment.
The principal amount of the notes outstanding was $11.9 million and $7.9 million
at December 31, 2001 and June 30, 2002, respectively. The Company incurred
$490,000 and $663,000 of interest expense on the notes in the six months ended
June 30, 2002 and 2001, respectively. The Note Agreement contains restrictive
covenants that include certain financial ratios, limitations on additional
indebtedness as a percentage of certain defined equity amounts and the disposal
of certain subsidiaries, including primarily the Company's regulated insurance
subsidiaries.

Effective June 29, 2000, UICI executed and delivered an unsecured promissory
note payable to a systems vendor in the amount of $10.0 million, which note bore
interest at LIBOR plus 150 basis points (1.5%) (3.38% at March 31, 2002), and
was payable as to principal in equal quarterly installments in the amount of
$500,000, commencing October 1, 2000, with a final maturity scheduled for June
30, 2005. The note was delivered to discharge an account payable by United
CreditServ ("UCS") in the amount of $10.0 million owing to the systems vendor,
which payable was reflected in the consolidated balance sheet of the Company.
The Company made its scheduled quarterly $500,000 principal payment on April 1,
2002, and on April 29, 2002, the Company paid in full all remaining outstanding
principal in the amount of $6.5 million and accrued interest on the note. At
December 31, 2001 and June 30, 2002, the outstanding balance on the note was
$7.5 million and $-0-, respectively.

On January 25, 2002, the Company entered into a three-year bank credit
facility with Bank of America, NA and LaSalle Bank National Association. Under
the facility, the Company may borrow from time to time up to $30.0 million on a
revolving, unsecured basis. The Company intends to utilize the proceeds of the
facility for general working capital purposes. At June 30, 2002, the Company had
no borrowings outstanding under the facility.

On July 19, 2002, the Company prepaid in full all outstanding principal in
the amount of $3.9 million and accrued interest on indebtedness owing to the
South Dakota Board of Economic Development.

NOTE E - STUDENT LOAN CREDIT FACILITIES

At December 31, 2001 and June 30, 2002, the Company, through its AMS
subsidiary and the College Fund Life Insurance Division, had outstanding an
aggregate of $1,506.2 million and $1,655.8 million of indebtedness,
respectively, under secured student loan credit facilities, of which $1,242.8
million and $1,547.9 million, respectively, were issued by bankruptcy-remote
special purpose entities (a "Special Purpose Entity"). The accounts of all of
the Company's Special Purpose Entities are included in the Company's
Consolidated Financial Statements. At December 31, 2001 and June 30, 2002,
indebtedness outstanding under secured student loan credit facilities (including
indebtedness issued by Special Purpose Entities) was secured by federally
guaranteed and alternative (i.e., non-federally guaranteed) student loans in the
carrying amount of $1,276.1 million and $1,397.5 million, respectively, and by a
pledge of cash, cash equivalents and other qualified investments in the amount
of $129.4 million and $175.3 million, respectively. All such indebtedness issued
under secured student loan credit facilities is reflected as student loan
indebtedness on the Company's consolidated balance sheet; all such student loans
pledged to secure such facilities are reflected as student loan assets on the
Company's consolidated balance sheet; and all such cash, cash equivalents and
qualified investments specifically pledged under the student loan credit
facilities are reflected as restricted cash on the Company's consolidated
balance sheet.

In January 2002, AMS completed the sale of $335.0 million principal amount
of auction rate notes issued by a Special Purpose Entity. The notes are secured
by a pledge of federally guaranteed student loans, are rated Aaa by Moody's
Investor Service and AAA by Fitch, Inc. and are insured by MBIA. As part of the
transaction, the Special Purpose Entity acquired a $269.1 million portfolio of
student loans from AMS and a loan acquisition fund in the amount of $50.0
million (consisting of cash and cash equivalents) was established to acquire in
the future additional student loans originated by AMS. The notes represent
obligations solely of the Special Purpose Entity and not of the Company, AMS or
any other subsidiary of the Company. However, for financial reporting and
accounting purposes the structured finance facility has been classified as a
financing. Accordingly, in connection with the financing neither AMS nor the
Company recorded any gain on sale of the assets transferred to the Special
Purpose Entity and, on a

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consolidated basis, the Company will continue to carry on its consolidated
balance sheet the student loans and cash and cash equivalents held by the
Special Purpose Entity and the associated indebtedness arising from the
transaction.

On April 10, 2002, the Company completed a $50.0 million securitization of
alternative (i.e., non-federally guaranteed) student loans originated by the
Company's College Fund Life Insurance Division ("CFLD") through its College
First Alternative Loan Program. The securitization consisted of a $50.0 million
series of Student Loan Asset Backed Notes issued by a Special Purpose Entity.
Interest rates on the series of notes reset monthly in a Dutch auction process,
with the initial rate set at 2.10%. The notes are secured by a pledge of
alternative student loans and cash and cash equivalents, are rated Aaa by
Moody's Investor Service and AAA by Fitch, Inc. and are insured by MBIA. As part
of the transaction, the Special Purpose Entity established a loan acquisition
fund in the amount of $49.8 million (consisting of cash and cash equivalents) to
acquire in the future additional student loans originated by the Company's
College Fund Life Insurance Division. The notes represent obligations solely of
the Special Purpose Entity and not of the Company or any other subsidiary of the
Company. For financial reporting and accounting purposes the CFLD structured
finance facility has been classified as a financing.

NOTE F - ACQUISITIONS AND DISPOSALS

On January 17, 2002, the Company completed the sale of UICI Administrators,
Inc., the major component of the Company's Third Party Administration ("TPA")
business unit. The results of operations of UICI Administrators, Inc. are
reflected in discontinued operations for all periods presented. In the three
months ended December 31, 2001, the Company recognized an impairment charge of
$2.3 million to its long-lived assets associated with the UICI Administrators,
Inc. unit, of which $700,000 represented a write-down of fixed assets (which was
reflected in depreciation for the full year and fourth quarter of 2001) and $1.6
million represented a write-down of goodwill (which was reflected in goodwill
amortization for the full year and fourth quarter of 2001). As a result of the
charge in the fourth quarter of 2001, the Company recognized no gain or loss on
the sale of UICI Administrators, Inc. Through January 17, 2002 (the date of
sale), the UICI Administrators, Inc. unit reported net income in the amount of
$67,000.

On April 25, 2002, the Company sold its 50% ownership interest in Resolution
Reinsurance Intermediaries, LLC ("Res Re"), a reinsurance intermediary formerly
constituting a part of the Company's Special Risk business unit. The purchaser
of the 50% interest constituted the remaining 50% equity holder in Res Re and
the unit's chief executive officer. The sale was structured as a liquidation by
Res Re of UICI's 50% ownership interest for a total liquidation price of
$650,000, payable at closing in cash in the amount of $150,000 and by delivery
of a promissory note issued by Res Re in the amount of $500,000. The note bears
interest, payable quarterly, at 5.00% per annum, is payable in annual principal
installments in the amount of $75,000 on each of March 31, 2003; March 31, 2004;
and March 31, 2005, with a final balloon payment of principal due on March 31,
2006, and is secured by a pledge of 100% of the membership interest in Res Re.

On January 17, 2002, the Company completed the purchase, for a cash purchase
price of $8.0 million, of a 50% interest in SeniorsFirst, a Dallas-based career
agency specializing in the sale of long-term care and Medicare supplement
insurance products. In connection with the acquisition, the Company recorded
non-amortizable goodwill in the amount of $5.3 million and amortizable
intangible assets in the amount of $1.6 million.

Effective February 28, 2002, the Company acquired all of the outstanding
capital stock of STAR Human Resources Group, Inc. and STAR Administrative
Services, Inc. (collectively referred to by the Company as its "STAR HRG" unit),
a Phoenix, Arizona based business specializing in the marketing and
administration of limited benefit plans for entry level, high turnover, hourly
employees. Commencing March 1, 2002, health insurance policies offered under the
STAR HRG program have been issued by The MEGA Life and Health Insurance Company,
a wholly-owned subsidiary of UICI. UICI acquired STAR HRG for an initial cash
purchase price of $25.0 million, plus additional contingent consideration based
on the future annualized performance of STAR HRG measured over the three-month
period ending May 31, 2003. The contingent consideration will be in an amount
not to exceed $15.0 million and is payable, at the

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Company's option, by delivery of UICI's 6.0% convertible subordinated notes due
March 1, 2012 or in cash plus interest computed at a rate of 6% from the initial
closing. In connection with the acquisition, the Company recorded
non-amortizable goodwill in the amount of $17.5 million and amortizable
intangible assets in the amount of $8.9 million.

The Company's Consolidated Condensed Statement of Operations for the three
and six months ended June 30, 2002 includes the results of operations of each
acquired company from their respective dates of acquisition. The effect of these
acquisitions on the Company's results of operations was not material.

NOTE G - INCOME TAXES

The Company's effective tax rate on continuing operations for the three and
six month periods ended June 30, 2002 was approximately 42.0% and 35.7%,
respectively, compared to 24.3% and 29.4%, respectively, in the corresponding
2001 periods. The increase in the effective tax rate for the 2002 periods over
the 2001 periods can primarily be attributed to two items. First, the valuation
allowance for AMS decreased during 2001 before AMS joined in the Company's
consolidated tax return. Second, the non-deductible portion of the variable
stock-based compensation expense increased during 2002. This increase in the tax
rate was partially offset by the reduction of the Company's tax liability
following its assessment of potential additional tax obligations recorded in the
first quarter of 2002.

NOTE H - EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted earnings
(loss) per share:

NOTE I - LEGAL PROCEEDINGS

The Company is a party to the following material legal proceedings:

Securities Class Action Litigation

As previously disclosed, in December 1999 and February 2000, the Company and
certain of its executive officers were named as defendants in three securities
class action lawsuits alleging, among other things, that the Company's periodic
filings with the SEC contained untrue statements of material facts

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and/or failed to disclose all material facts relating to the condition of the
Company's credit card business, in violation of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder. The three cases were
subsequently consolidated as Herbert R. Silver, et al. v. UICI et al, which is
pending in U.S. District Court for the Northern District of Texas. Plaintiffs
purport to represent a class of persons who purchased UICI common stock from
February 10, 1999 through December 9, 1999.

Following a mediation held on May 23, 2002, the parties to the litigation
entered into a memorandum of understanding, pursuant to which the parties have
agreed, without admitting or denying liability and provided that certain
conditions are satisfied, to fully and finally resolve the litigation. The
Company believes that the terms of the settlement as contemplated by the
memorandum of understanding will not have a material adverse effect upon the
financial condition or results of operations of the Company. Funding of the
settlement amount was completed on July 15, 2002 in accordance with the terms of
the memorandum of agreement. Final settlement is subject to execution and
delivery of definitive settlement and release documentation (the terms of which
have not yet been negotiated), completion of confirmatory discovery, preliminary
approval by the U.S. District Court of the terms of the settlement, notice of
settlement to the plaintiff class, and final, binding, and non-appealable
approval by the U.S. District Court. There can be no assurance that these
conditions will in fact be satisfied.

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Sun Communications Litigation

As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are parties to 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.

Effective April 2, 2002, the Company and Mr. Jensen entered into an
Assignment and Release Agreement, which is intended to effectively transfer the
Company's 80% interest in STP to Mr. Jensen and to terminate the Company's
active participation in, and limit the Company's financial exposure associated
with, the Sun Litigation. In accordance with the terms of the Assignment and
Release Agreement, on April 2, 2002 Mr. Jensen made a total payment to UICI of
$15.6 million and granted to UICI various indemnities against possible losses
which UICI might incur resulting from the Sun Litigation, including (i) any
losses arising from the breach of fiduciary duty claim asserted by Sun
Communications, Inc. ("Sun") against the Company and Sun's related claim for
attorneys' fees, (ii) Sun's claim for attorneys' fees arising out of the
distribution issue in the Sun Litigation, and (iii) all other claims of any
nature asserted by Sun against the Company in the Sun Litigation arising out of
or relating directly to the March 1997 agreement governing the distribution of
cash proceeds from the sale and liquidation of STP. In exchange therefor, (i)
UICI assigned to Mr. Jensen all of UICI's right, title and interest to the funds
held in the registry of the Court in the Sun Litigation and released Mr. Jensen
from any and all obligations arising under the Jensen 1996 Guaranty and the
Assurance Agreement; (ii) UICI granted to Mr. Jensen an option, exercisable at a
nominal exercise price, to transfer to Mr. Jensen UICI's 80% interest in STP;
and (iii) UICI granted to Mr. Jensen an irrevocable proxy to vote UICI's
membership interest in STP all matters coming before the members of STP for a
vote.

Shareholder Derivative Litigation

As previously disclosed, on June 1, 1999, the Company was named as a nominal
defendant in a shareholder derivative action captioned Richard Schappel v. UICI,
Ronald Jensen, Richard Estell, Vernon Woelke, J. Michael Jaynes, Gary Friedman,
John Allen, Charles T. Prater, Richard Mockler and Robert B. Vlach, which was
filed in the District Court of Dallas County, Texas (the "Shareholder Derivative
Litigation").

On December 21, 2001, the District Court of Dallas County, Texas, approved
the terms of a Settlement Agreement and Mutual Release between UICI and each of
Richard J. Estell, Vernon Woelke, J. Michael Jaynes, Gary L. Friedman, John E.
Allen, Charles T. Prater, Richard T. Mockler, and Robert B. Vlach (collectively,
the "Individual Defendants"), on the one hand, and Richard Schappel and Mr.
Schappel's counsel, on the other hand. Pursuant to the Settlement Agreement, the
parties reached agreement with respect to the payment of attorneys' fees and
expenses on termination of the Shareholder Derivative Action, and the Court also
entered a Modified Final Judgment in the case, vacating certain findings of fact
that formed a part of an earlier ruling by the Court rendered on October 14,
2001. The Settlement Agreement and the Modified Final Judgment had the effect of
fully and finally resolving the matters in dispute in the Shareholder Derivative
Litigation between UICI and the Individual Defendants, on the one hand, and Mr.
Schappel, on the other hand. The terms of the settlement did not have a material
effect on the results of operations or financial condition of UICI.

In accordance with the terms of a Release Agreement, dated as of April 2,
2002, the Company has agreed to release Mr. Jensen from any and all claims that
the derivative plaintiff in the Shareholder Derivative Litigation brought or
could have brought against Mr. Jensen on behalf of UICI in the Shareholder
Derivative Litigation, and Mr. Jensen agreed to waive and release UICI from any
obligation to indemnify Mr. Jensen for any future costs and/or out-of-pocket
expenses associated with any claims that the derivative plaintiff brought or
could have brought against Mr. Jensen in the Shareholder Derivative Litigation.

16

ACE/AFCA and Philip A. Gray Litigation

As previously disclosed, the Company is a party to a lawsuit (the "ACE/AFCA"
Litigation) (American Credit Educators, LLC and American Fair Credit
Association, Inc. v. UICI and United Credit National Bank, pending in the United
States District Court for the District of Colorado), which was initially filed
as separate lawsuits in February 2000 by American Credit Educators, LLC ("ACE")
and American Fair Credit Association, Inc. ("AFCA"), organizations through which
United CreditServ formerly marketed its credit card programs. In the ACE/AFCA
Litigation, plaintiffs initially alleged, among other things, that UCNB breached
its agreements with ACE and AFCA, sought injunctive relief and a declaratory
judgment and claimed money damages in an indeterminate amount. ACE and AFCA are
each controlled by Phillip A. Gray, the former head of UICI's credit card
operations.

On July 26, 2001, the Court issued an order granting UICI's motion to
substitute UICI for UCNB as a party defendant and dismissing a significant
number of plaintiffs' claims. UICI's motion to dismiss was denied by the Court
as to AFCA's claims for breach of contract, declaratory judgment and
interference with contractual relations and ACE's claims for breach of contract
and for an accounting.

In its answer filed on August 15, 2001, the Company asserted numerous
defenses to the plaintiffs' remaining claims. UICI and United CreditServ also
asserted numerous counterclaims against ACE and AFCA, including, among other
things, breach of contract, breach of fiduciary duty, fraud and civil
conspiracy, and UICI and UCS have claimed damages in an indeterminate amount.
ACE and AFCA have filed a partial motion to dismiss the counterclaims, and
UICI's and United CreditServ's response to that motion was filed on October 29,
2001. The Court has not ruled on the motion to dismiss.

Written discovery has commenced in the case. However, the parties have not
conducted any depositions, and no trial date has been set for the case.

In a separate suit filed on March 26, 2001 in the District Court of Dallas
County, Texas (the "Gray Litigation") (UICI, United Membership Marketing Group,
Inc., and UMMG-Colorado, LLC f/k/a United Membership Marketing Group Ltd.
Liability Co. v. Philip A. Gray and PAG Family Partners, LLC, the Company sued
Philip A. Gray individually ("Gray") and a related limited liability company
(the "LLC")), alleging, among other things, fraud, negligent misrepresentation,
and breach of fiduciary duty in connection with the Company's sub prime credit
card business. Gray removed the case to the United States District Court for the
Northern District of Texas, and UICI substituted PAG Family Partners Ltd.
("PAG") and the PAG Family Trust for the LLC as defendants. By order dated May
6, 2002, the Texas Federal Court denied PAG's motion to dismiss the fraud,
negligent misrepresentation and certain other claims, but dismissed certain of
the named defendants from the Gray Litigation. In addition, the Court ordered
the transfer of the Gray Litigation to the United States District Court for the
District of Colorado. On May 31, 2002, in an answer and third-party complaint
Gray denied all allegations and asserted counterclaims against UICI and
third-party claims against certain individuals, including Ronald L. Jensen (the
Company's Chairman) and Gregory T. Mutz (the Company's President and Chief
Executive Officer), in which Gray has alleged, among other things, violations of
Colorado securities laws, fraudulent misrepresentations, breach of fiduciary
duty, unjust enrichment and negligent misrepresentations and has sought a
declaratory judgment and an accounting. Written discovery has not begun in the
Gray Litigation.

The parties agreed to submit both disputes to mediation, which was held on
April 15, 2002. At that mediation, the parties were unable to reach agreement on
a resolution of the ACE/AFCA or the Gray Litigation. The Company intends to
continue to vigorously defend and pursue its counterclaims in the ACE/AFCA
Litigation and defend the counterclaims and pursue its claims in the Gray
Litigation. The Company is not currently in a position to assess its ultimate
exposure, if any, in connection with either case.

Credit Card Marketing Litigation

As previously disclosed, the Company is a party to three disputes arising
out of the marketing of its American Fair Credit Association ("AFCA") credit
card program prior to the termination of the program in January 2000.

17

Mitchell Litigation

The Company is one of three named defendants in a class action suit filed in
1997 (Dadra Mitchell v. American Fair Credit Association, United Membership
Marketing Group, LLC and UICI) pending in California state court (the "Mitchell
case"), in which plaintiffs have alleged that defendants violated California law
regarding unfair and deceptive trade practices by making misleading
representations about, and falsely advertising the nature and quality of, the
benefits of membership in American Fair Credit Association ("AFCA").

In October 2000, the state court in the Mitchell case granted, in part, and
denied, in part the joint motions of UICI, AFCA and United Membership Marketing
Group ("UMMG") to compel arbitration and to narrow the scope of the plaintiff
class. The court severed from the class action the claims for recovery of money
by way of damages or restitution of class members who joined AFCA after January
1, 1998 and who executed signed arbitration agreements. However, the state court
denied UICI's motion to compel arbitration with respect to these class members'
claims for injunctive relief and, as a result, their claims for injunctive
relief remain part of the class action. With respect to class members who were
existing members of AFCA in January of 1998 and who received through the mail an
amendment adding arbitration of disputes to their AFCA membership agreement, the
state court denied UICI's motion to compel arbitration unless the member also
signed a separate arbitration agreement. In addition, the state court clarified
that its prior April 12, 1999 order certified a class with respect to all claims
pleaded in the complaint, not solely claims under the California Credit Services
Act of 1984.

On October 12, 2000, UICI, jointly with defendants AFCA and UMMG, filed a
Notice of Appeal from the state court's October 2000 orders and from its
original class certification order dated April 12, 1999. By letter dated October
12, 2000, defendants notified plaintiffs of the filing of their Notice of Appeal
and, consequently, all trial court proceedings in the Mitchell case were stayed.

UICI has not received notice from plaintiff Mitchell of a motion for any
relief from the stay, and there have been no further proceedings in the state
court. Accordingly, at this time, it is unclear whether or not plaintiffs will
move for relief from the stay of proceedings, and, if so, what relief from the
stay, if any, will be granted to plaintiffs pending the outcome of UICI's
appeal.

On July 10, 2002, the Court of Appeal issued a decision affirming the order
entered by the trial court in October 2000 regarding defendants' motion to
compel arbitration. The Court of Appeal dismissed for want of appellate
jurisdiction the appeal respecting the orders certifying the class and defining
the scope of the class entered by the trial court in April 1999 and October
2000, respectively. Under the applicable court rules, UICI has until August 19,
2002 to file a petition for review of the Court of Appeal's decision of the
appeal with the California Supreme Court.

BankFirst Case

Plaintiffs in the Mitchell case also filed a companion case in federal
district court in San Francisco captioned Dadra Mitchell v. BankFirst, N.A. (the
"BankFirst case"), which alleges violations of the federal Truth in Lending Act
and Regulation Z. on the theory that the 90-day notice period required for
termination of AFCA membership was not properly disclosed. The sole defendant in
BankFirst case is BankFirst, N.A., a bank that issued a VISA credit card made
available through the AFCA program.

On May 4, 2000, the court in the BankFirst case granted BankFirst's motion
for summary judgment and entered a judgment terminating the case in favor of
BankFirst and against plaintiff Mitchell. Plaintiff Mitchell subsequently filed
a notice of appeal to the United States Court of Appeals for the Ninth Circuit.
Oral argument on the appeal was held on November 6, 2001.

By Memorandum dated November 21, 2001, the Ninth Circuit affirmed, in part,
and vacated, in part, the judgment entered by the district court, and remanded
the Bankfirst case to the district court for further proceedings. Among other
things, the Ninth Circuit held that the district court erred in failing to grant
Mitchell's motion for additional discovery pursuant to Rule 56(f) of the Federal
Rules of Civil Procedure.

18

On December 28, 2001, plaintiff Mitchell moved for class certification. By
order entered February 20, 2002, the district court deferred ruling on
Mitchell's motion for class certification pending completion of discovery and
the filing of cross motions for summary judgment. The parties expect to file
their cross-motions for summary judgment in late 2002.

Roe Litigation

On March 8, 2001, UICI and UCNB were named as defendants in a case (Timothy
M. Roe v. Phillip A. Gray, American Fair Credit Association, Inc., UICI, UCNB,
et al) filed in the U.S. District Court for the District of Colorado. On his own
behalf and on behalf of a purported class of similarly situated individuals,
plaintiff in connection with the AFCA credit card program has alleged breach of
contract and violations of the federal Credit Repair Organizations Act and the
Truth-In-Lending Act and seeks certain declaratory relief.

On October 10, 2001, the Court granted the motion of UICI, UCNB and each of
the other named defendants to stay the litigation (the "Colorado action")
pending arbitration pursuant to the Federal Arbitration Act. Accordingly, the
court in the Colorado action entered an order administratively retiring the
Colorado action from its docket subject to reactivation for good cause shown.
The defendants had previously filed a petition to compel arbitration against the
individual named plaintiff in the United States District Court for the Eastern
District of North Carolina, the judicial district wherein the named plaintiff
resides. The petitions to compel arbitration are pending.

Two defendants unaffiliated with UICI timely appealed from the Colorado
District Court's order, arguing that the Colorado court should have decided the
merits of the arbitration controversy rather than defer to the Eastern District
of North Carolina. On April 22, 2002, UICI and the remaining defendants timely
filed their opposition briefs to the unaffiliated defendants' appeal.

On April 8, 2002, a hearing was held in the Eastern District of North
Carolina regarding plaintiff's request for discovery in connection with
plaintiff's contention that the arbitration agreements are unenforceable because
they impose prohibitive costs on plaintiff. By order entered April 9, 2002, the
Eastern District of North Carolina held that cost is not a viable issue to
oppose arbitration in light of UICI's offer to bear the forum-imposed costs
arising from any arbitration between UICI and plaintiff. Further, the Eastern
District of North Carolina ordered the parties to file cross-motions for summary
judgment on or before May 10, 2002, and the Court held in reserve plaintiff's
request for discovery on other issues pending its decision on the contemplated
summary judgment motions. Briefing on the cross-motions was completed on June
17, 2002, though the Eastern District of North Carolina has not entered a
decision on the cross-motions for summary judgment.

The Company intends to pursue arbitration in North Carolina of the
individual plaintiff's claims (as set forth in the complaint in the Colorado
action). The Company believes that it has meritorious defenses to these
allegations and intends to vigorously contest these allegations in the proper
forum.

State of Connecticut Investigation

As previously disclosed, on April 19, 2000, the Connecticut Attorney
General's Office served upon UCNB a Civil Investigative Demand, seeking
information regarding UCNB's credit card fees, disclosures, marketing practices,
affinity relationships and the handling of payments from consumers to UCNB. On
May 26, 2000, UCNB submitted a timely response to the information request.

Comptroller of the Currency Consent Order

As previously disclosed, the Company is subject to a Consent Order,
initially issued by the United States Office of the Comptroller of the Currency
(the "OCC") on June 29, 2000 and as modified on January 29, 2001, confirming the
obligations of the Company to assume all obligations of UCNB. Until January 29,
2001, UCNB was a special purpose national bank headquartered in Sioux Falls,
South Dakota, and an

19

indirect wholly owned (except for directors' qualifying shares) subsidiary of
the Company. On January 29, 2001, the Company completed the voluntary
liquidation of UCNB, in accordance with the terms of a plan of voluntary
liquidation approved by the OCC.

In the event that UICI fails to comply with the terms of the Consent Order,
as modified, such failure could result in sanctions brought against the Company
and its officers and directors, including the assessment of civil money
penalties and enforcement of the Consent Order in Federal District Court.

New Mexico Class Action Litigation

As previously disclosed, on June 1, 2001, UICI and MEGA were served as
parties defendant in a purported class action (Frances C. Chandler, Individually
and as a Representative of a Class of Similarly Situated Persons, vs. PFL Life
Insurance Company, UICI, The MEGA Life and Health Insurance Company, et al.)
initially filed on January 12, 2001 and pending in First Judicial District Court
(Santa Fe, New Mexico). On her own behalf and on behalf of an alleged class of
similarly situated individuals, plaintiff has alleged that sales materials
associated with a group hospital benefit health insurance plan sponsored,
marketed, underwritten, reinsured and/or administered by defendants contained
incomplete, inaccurate, misleading and/or false statements, and that benefits
and treatment were denied plaintiffs with attendant credit damage, pain and
suffering and loss of enjoyment. Plaintiffs have alleged, among other things,
breach of contract, misrepresentation, breach of fiduciary duties, unjust
enrichment, and the violation of the duty of good faith and fair dealing.

Since this class action suit is in a preliminary stage, the Company has
conducted no discovery and the plaintiff has conducted only limited discovery in
the case. The Company is unable at this time to assess its ultimate exposure, if
any, in the case.

United Credit National Bank Shareholder Derivative Litigation

As previously disclosed, various former directors and officers of United
Credit National Bank have been named as defendants in a shareholder derivative
action (William K. Lester, on behalf of United Credit National Bank, v. Ronald
L. Jensen, Gregory T. Mutz, et al), which was filed on June 29, 2001 and is
pending in the District Court of Harris County, Texas. The plaintiff has
asserted on behalf of UCNB various derivative claims brought against the
individual defendants, alleging, among other things, negligence in connection
with the operations of UCNB. In December 2000, plaintiff made a demand on the
Board of Directors of United Credit National Bank to investigate and assess
certain alleged derivative claims. The Board of Directors constituted a special
committee to investigate and assess the asserted derivative claims, and the
special committee determined that the claims were wholly without merit.

On July 15, 2002, plaintiff and the defendants entered into a Settlement
Agreement, pursuant to which the parties agreed to fully and finally settle,
without admitting or denying liability, the matters that were the subject of the
suit. The terms of the settlement will not have a material adverse effect upon
the financial condition or results of operations of the Company.

UICI has agreed to advance the expenses of the individual defendants
incurred in connection with the defense of the case, subject to the defendants'
undertaking to repay such advances unless it is ultimately determined that they
are or would have been entitled to indemnification by UICI under the terms of
the Company's bylaws.

Academic Management Services Corp. Class Action Litigation

As previously disclosed, Academic Management Services Corp. (formerly
Education Finance Group, Inc.) has been named as a party defendant in a
purported class action suit (Timothy A. McCulloch, et al. v. Educational Finance
Group Inc. et al) filed on June 20, 2001 in the United States District Court for
the Southern District of Florida (Miami). On his own behalf and on behalf of an
alleged class of similarly situated individuals, plaintiff has alleged, among
other things, that, in connection with the marketing and origination of
federally-insured Parent Plus student loans, AMS and other defendants violated
certain

20

provisions of the federal Higher Education Act, were negligent, committed mail
and wire fraud, breached a fiduciary duty owed to plaintiffs and made negligent
misrepresentations.

On October 19, 2001, the Court granted defendants' motion to dismiss the
case in its entirety, dismissing with prejudice plaintiffs' claims under the
Higher Education Act and federal mail and wire fraud claims and dismissing
without prejudice plaintiffs' state law claims. The District Court subsequently
denied plaintiffs' motion for reconsideration/rehearing. On December 27, 2001,
plaintiffs appealed the District Court's ruling and filed an appeal with the
United States Court of Appeals for the Eleventh Circuit in Atlanta, Georgia. On
July 17, 2002, the United States Court of Appeals for the Eleventh Circuit
affirmed the District Court's dismissal of the case in its entirety.

Plaintiffs have also filed a parallel state class action complaint in the
Eleventh Judicial Circuit, Dade County, Florida. The state class action
complaint asserts essentially the same tort causes of action previously
dismissed by the federal District Court and adds a claim alleging violations of
the Florida state deceptive trade practices statute. On April 9, 2002, the court
in the Florida state action granted AMS' petition for a stay in the state court
proceedings pending resolution of the federal action.

The Company believes that the claims are wholly without merit, and AMS
intends to vigorously contest the case.

Other Matters

The Company and its subsidiaries are parties to various other pending legal
proceedings arising in the ordinary course of business, including some asserting
significant damages arising from claims under insurance policies, disputes with
agents and other matters. Based in part upon the opinion of counsel as to the
ultimate disposition of such lawsuits and claims, management believes that the
liability, if any, resulting from the disposition of such proceedings will not
be material to the Company's financial condition or results of operations.

NOTE J - SEGMENT INFORMATION

The Company's operating segments included in operations are: (i) Insurance,
which includes the businesses of the Self Employed Agency Division, the Group
Insurance Division (formerly the Company's Student Insurance Division, which
includes the operations of the Company's recently-acquired STAR HRG business
unit effective February 28, 2002), the Life Insurance Division (formerly the
Company's OKC Division, which includes the Company's College Fund Life Division)
and the Senior Market Division, (ii) Financial Services, which includes the
businesses of Academic Management Services Corp. ("AMS") and the Company's
investment in Healthaxis, Inc., and (iii) Other Key Factors.

Other Key Factors includes (a) investment income not allocated to other
business segments, (b) interest expense on non-student loan indebtedness, (c)
general expenses relating to corporate operations, (d) realized gains or losses
on sale of investments (e) the operations of the Company's AMLI Realty Co.
subsidiary, (f) minority interest, (g) variable stock-based compensation, (h)
operations that do not constitute reportable operating segments (consisting
primarily of the remaining portion of the Company's former TPA Division) and (i)
amortization of goodwill (with respect to periods ended prior to January 1,
2002).

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, fees and other income.
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 provide for such transactions generally at cost.

21

Revenues from continuing operations, income from continuing operations
before federal income taxes, and assets by operating segment are set forth in
the tables below:

22

NOTE K - RELATED PARTY TRANSACTIONS

Historically, the Company and its subsidiaries have engaged from time to
time in transactions and joint investments with executive officers and entities
controlled by executive officers, particularly Ronald L. Jensen (the Company's
Chairman) and entities in which Mr. Jensen and his adult children have an
interest.

Transfer of Interest in Sun Litigation

As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are parties to 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.

Effective April 2, 2002, the Company and Mr. Jensen entered into an
Assignment and Release Agreement, which is intended to effectively transfer the
Company's 80% interest in STP to Mr. Jensen and to terminate the Company's
active participation in, and limit the Company's financial exposure associated
with, the Sun Litigation. In accordance with the terms of the Assignment and
Release Agreement, on April 2, 2002 Mr. Jensen made a total payment to UICI of
$15.6 million and granted to UICI various indemnities against possible losses
which UICI might incur resulting from the Sun Litigation, including (i) any
losses arising from the breach of fiduciary duty claim asserted by Sun
Communications, Inc. ("Sun") against the Company and Sun's related claim for
attorneys' fees, (ii) Sun's claim for attorneys' fees arising out of the
distribution issue in the Sun Litigation, and (iii) all other claims of any
nature asserted by Sun against the Company in the Sun Litigation arising out of
or relating directly to the March 1997 agreement governing the distribution of
cash proceeds from the sale and liquidation of STP. In exchange therefor, (i)
UICI assigned to Mr. Jensen all of UICI's right, title and interest to the funds
held in the registry of the Court in the Sun Litigation and released Mr. Jensen
from any and all obligations arising under the Jensen 1996 Guaranty and the
Assurance Agreement; (ii) UICI granted to Mr. Jensen an option, exercisable at a
nominal exercise price, to transfer to Mr. Jensen UICI's 80% interest in STP;
and (iii) UICI granted to Mr. Jensen an irrevocable proxy to vote UICI's
membership interest in STP all matters coming before the members of STP for a
vote.

For financial reporting purposes, the Company recorded no gain or loss in
connection with this transaction and has reflected the transaction on its
consolidated condensed statements of cash flows as a capital contribution from
related party in the amount of $15.6 million.

Release of Ronald L. Jensen

As previously disclosed, on June 1, 1999, the Company was named as a nominal
defendant in a shareholder derivative action captioned Richard Schappel v. UICI,
Ronald Jensen, Richard Estell, Vernon Woelke, J. Michael Jaynes, Gary Friedman,
John Allen, Charles T. Prater, Richard Mockler and Robert B. Vlach, which was
filed in the District Court of Dallas County, Texas (the "Shareholder Derivative
Litigation").

On December 21, 2001, the District Court of Dallas County, Texas, approved
the terms of a Settlement Agreement and Mutual Release between UICI and each of
Richard J. Estell, Vernon Woelke, J. Michael Jaynes, Gary L. Friedman, John E.
Allen, Charles T. Prater, Richard T. Mockler, and Robert B. Vlach (collectively,
the "Individual Defendants"), on the one hand, and Richard Schappel and Mr.
Schappel's counsel, on the other hand. Pursuant to the Settlement Agreement, the
parties reached agreement with respect to the payment of attorneys' fees and
expenses on termination of the Shareholder Derivative Action, and the Court also
entered a Modified Final Judgment in the case, vacating certain findings of fact
that formed a part of an earlier ruling by the Court rendered on October 14,
2001. The Settlement Agreement and the Modified Final Judgment had the effect of
fully and finally resolving the matters in dispute in the Shareholder Derivative
Litigation between UICI and the Individual Defendants, on the one hand, and Mr.
Schappel, on the other hand. The terms of the settlement did not have a material
effect on the results of operations or financial condition of UICI.

23

In accordance with the terms of a Release Agreement, dated as of April 2,
2002, the Company agreed to release Mr. Jensen from any and all claims that the
derivative plaintiff in the Shareholder Derivative Litigation brought or could
have brought against Mr. Jensen on behalf of UICI in the Shareholder Derivative
Litigation, and Mr. Jensen agreed to waive and release UICI from any obligation
to indemnify Mr. Jensen for any future costs and/or out-of-pocket expenses
associated with any claims that the derivative plaintiff brought or could have
brought against Mr. Jensen in the Shareholder Derivative Litigation.

Exercise of Onward and Upward Option

As previously disclosed, effective September 15, 1999, the Company and
Onward & Upward, Inc. ("OUI") entered into a Put/Call Agreement, pursuant to
which, for a thirty day period commencing on July 1 of each year, the Company
was granted an option to purchase from OUI, and OUI was granted a corresponding
right to require the Company to purchase, up to 369,174 shares of Common Stock
at a purchase price per share equal to $28.50 in 2000, $30.25 in 2001, $32.25 in
2002, $34.25 in 2003, $36.25 in 2004, $38.25 in 2005 and $40.25 in 2006. Mr.
Jensen's five adult children hold in the aggregate 100% of the equity interest
in OUI, which is the holder of approximately 6.5% of the Company's outstanding
Common Stock. On July 1, 2002, pursuant to the terms of the Put/Call Agreement,
the Company exercised is option to purchase from OUI 369,174 shares of Common
Stock at the then-effective call price of $32.25 per share, or $11.9 million in
the aggregate.

Termination of Healthaxis, Inc. Services Agreement

Effective June 15, 2002, UICI and HAI (of which UICI holds approximately 45%
of the issued and outstanding shares) terminated a Services Agreement. As part
of the termination arrangement, UICI made a one-time payment to HAI in the
amount of $6.5 million and tendered 500,000 shares of HAI common stock to HAI
See Note B of Notes to Consolidated Condensed Financial Statements. Because UICI
constitutes a significant shareholder of HAI, the aggregate amount of
consideration paid to HAI by UICI for the early termination of the Services
Agreement was reflected for financial reporting purposes as a contribution by
UICI to the capital of HAI, the effect of which was to increase the Company's
carrying value of its investment in HAI. Effective June 30, 2002, UICI
determined the carrying value in its investment in HAI was impaired in the
amount of $6.5 million and therefore the investment was written down to an
estimated realizable value.

NOTE L - EMPLOYEE AND AGENT STOCK ACCUMULATION PLANS

UICI Employee Stock Ownership and Savings Plan

The Company maintains for the benefit of its and its subsidiaries' employees
the UICI Employee Stock Ownership and Savings Plan (the "Employee Plan"). The
Employee Plan through its 401(k) feature enables eligible employees to make
pre-tax contributions to the Employee Plan in an amount not in excess of 15% of
compensation (subject to overall limitations) and to direct the investment of
such contributions among several investment options, including UICI common
stock. A second feature of the Employee Plan constitutes an employee stock
ownership plan (the "ESOP"), contributions to which are invested primarily in
shares of UICI common stock. The ESOP feature allows participants to receive
from UICI and its subsidiaries discretionary matching contributions and to share
in certain supplemental contributions made by UICI and its subsidiaries.
Contributions by UICI and its subsidiaries to the Employee Plan under the ESOP
feature currently vest in prescribed increments over a six-year period.

On August 11, 2000, the Company issued to the Employee Plan 1,610,000 shares
of UICI common stock at a purchase price of $5.25 per share or $8.5 million in
the aggregate. The purchase price for the shares was paid by delivery to UICI of
the Employee Plan's $8.5 million promissory note (the "Plan Note"), which
matures in three years and is secured by a pledge of the purchased shares. The
shares of UICI common stock purchased with the Plan Note (the "$5.25 ESOP
Shares") are held in a suspense account for allocation among participants as and
when the Company's matching and supplemental contributions to the ESOP are made.
It is expected that the Plan Note will be extinguished over a period of
approximately two

24

years by crediting the Company's matching and supplemental contribution
obligations under the ESOP feature of the Employee Plan against principal and
interest due on the Plan Note.

During the three and six months ended June 30, 2002, the Company recorded
compensation expense associated with contributions to the Employee Plan in the
amount of $3.2 million and $6.4 million, respectively, of which $2.2 million and
$4.2 million, respectively, were recorded as non-cash variable stock-based
compensation expense. During the three and six months ended June 30, 2001, the
Company recorded compensation expense associated with contributions to the
Employee Plan in the amount of $1.3 million and $2.9 million, respectively, of
which $420,000 and $847,000, respectively, were recorded as non-cash variable
stock-based compensation expense. The amount classified as variable stock-based
compensation expense with respect to the Employee Plan in the 2002 periods
represented the incremental compensation expense associated with the allocation
during the six months ended June 30, 2002 of 385,000 $5.25 Shares to fund the
Company's matching and supplemental contributions to participants' accounts in
the ESOP. As and when the Company makes matching and supplemental contributions
to the ESOP by allocating to participants' accounts these $5.25 ESOP Shares, the
Company will continue to record additional non-cash compensation expense equal
to the excess, if any, between the fair value of the shares allocated and $5.25
per share. The allocated $5.25 ESOP Shares are considered outstanding for
purposes of the computation of earnings per share. The Company currently
estimates that all of the remaining 245,000 unallocated $5.25 ESOP Shares will
be allocated to participants' ESOP accounts during 2002. At June 30, 2002, the
excess between the fair value of the 245,000 unallocated $5.25 ESOP Shares and
such shares at $5.25 per share totaled $3.7 million.

Agent Stock Accumulation Plans

The Company sponsors a series of stock accumulation plans (the "Agent
Plans") established for the benefit of the independent insurance agents and
independent sales representatives associated with its field force agencies,
including UGA -- Association Field Services, New United Agency, Cornerstone
Marketing of America, Guaranty Senior Assurance, SeniorsFirst and CFL Agency.

The Agent Plans generally combine an agent-contribution feature and a
Company-match feature. The agent-contribution feature generally provides that
eligible participants are permitted to allocate a portion (subject to prescribed
limits) of their commissions or other compensation earned on a monthly basis to
purchase shares of UICI common stock at the fair market value of such shares at
the time of purchase. Under the Company-match feature of the Agent Plans,
participants are eligible to have posted to their respective Agent Plan accounts
book credits in the form of equivalent shares based on the number of shares of
UICI common stock purchased by the participant under the agent-contribution
feature of the Agent Plans. The "matching credits" vest over time (generally in
prescribed increments over a ten-year period, commencing the plan year following
the plan year during which contributions are first made under the
agent-contribution feature), and vested matching credits in a participant's plan
account in January of each year are converted from book credits to an equivalent
number of shares of UICI common stock. Matching credits forfeited by
participants no longer eligible to participate in the Agent Plans are
reallocated each year among eligible participants and credited to eligible
participants' Agent Plan accounts.

The Agent Plans do not constitute qualified plans under Section 401(a) of
the Internal Revenue Code of 1986 or employee benefit plans under the Employee
Retirement Income Security Act of 1974 ("ERISA"), and the Agent Plans are not
subject to the vesting, funding, nondiscrimination and other requirements
imposed on such plans by the Internal Revenue Code and ERISA.

Prior to July 1, 2000, the Company granted matching credits in an amount
equal to the number of shares of UICI common stock purchased by the participant
under the agent-contribution feature of the Agent Plans. Effective July 1, 2000,
the Company modified the formula for calculating the number of matching credits
to be posted to participants' accounts. During the period beginning July 1, 2000
and ending on the earlier of June 30, 2002 or the date that an aggregate of
2,175,000 share equivalents have been granted under this revised formula, the
number of matching credits issued to an individual participant will be the
greater of (a) the number of matching credits determined each month by dividing
the dollar amount of the participant's contribution for that month by $5.25, or
(b) the actual number of shares acquired, at

25

then-current fair market value, by the participant's contribution amount.

Prior to July 1, 2000, the Company purchased UICI shares in the open market
from time to time to satisfy its commitment to issue its shares upon vesting of
matching credits under the Agent Plans. During the period beginning July 1, 2000
and ending July 30, 2002, the Company agreed to utilize up to 2,175,000
newly-issued shares to satisfy its commitment to deliver shares that will vest
under the Company-match feature of the agent plans. Under the arrangement
effective July 1, 2000, the Company's subsidiaries transferred to the holding
company $5.25 per share for any newly issued shares utilized to fund vested
matching credits under the plans. In accordance with such arrangement, during
the period commencing July 1, 2000 and ended on June 30, 2002, the Company's
subsidiaries have transferred to the Company at the holding company level cash
in the aggregate amount of $9.2 million.

For financial reporting purposes, the Company accounts for the Company-match
feature of its Agent Plans under EITF 96-18 "Accounting for Equity Instruments
that are issued to Other Than Employees for Acquiring or in Connection with
Selling Goods and Services," by recognizing commission expense over the vesting
period in an amount equal to the fair market value of vested shares at the date
of their vesting and distribution to the participants. At each quarter-end, the
Company estimates its current liability for unvested matching credits by
reference to the number of unvested credits, the current market price of the
Company's common stock, and the Company's estimate of the percentage of the
vesting period that has elapsed up to the current quarter end. Changes in the
liability from one quarter to the next are accounted for as an increase in, or
decrease to, commission expense, as the case may be. Upon vesting, the Company
releases the accrued liability (equal to the market value of the vested shares
at date of vesting) with a corresponding increase to paid-in capital. Unvested
matching credits are considered share equivalents outstanding for purposes of
the computation of earnings per share. For the three and six months ended June
30, 2002, the Company recorded total commission expense associated with these
agent plans in the amount of $5.5 million and $8.8 million, respectively, of
which $3.9 million and $5.7 million, respectively, represented the non-cash
stock based compensation expense associated with the adjustment to the liability
for future unvested benefits. For the three and six months ended June 30, 2001,
the Company recorded total commission expense associated with these agent plans
in the amount of $1.8 million and $2.0 million, respectively, of which $757,000
and $113,000, respectively, represented the non-cash stock based compensation
expense associated with the adjustment to the liability for future unvested
benefits.

At December 31, 2001, the Company had recorded approximately 1.6 million
unvested matching credits associated with the Agent Plans, of which 596,000
vested in January 2002. At June 30, 2002, the Company had recorded approximately
1.7 million unvested matching credits.

The accounting treatment of the Company's Agent Plans will result in
unpredictable stock-based commission expense charges, dependent upon
fluctuations in the quoted price of UICI common stock. These unpredictable
fluctuations in stock based commission charges may result in material non-cash
fluctuations in the Company's results of operations. In periods of general
decline in the quoted price of UICI common stock, if any, the Company will
recognize less stock based commission expense than in periods of general
appreciation in the quoted price of UICI common stock. In addition, in
circumstances where increases in the quoted price of UICI common stock are
followed by declines in the quoted price of UICI common stock, negative
commission expense may result as the Company adjusts the cumulative liability
for unvested stock-based commission expense.

Other Variable Stock-Based Compensation Plans

Effective August 15, 1998, the Company's Chairman agreed to contribute the
value of 100,000 shares of UICI stock to all agents and employees of UICI and
certain others as of August 15, 1998. The value of these shares vest on August
15, 2002. The value of these shares will be distributed in cash at the time of
vesting to those employees and agents who were employed or engaged by the
Company on August 15, 1998 and remain employed or engaged on the vesting date.
At December 31, 2001 and June 30, 2002, the Company's liability for this future
compensation was $1.1 million and $1.8 million, respectively. During the six
months ended June 30, 2002, the Company recorded non-cash stock based
compensation associated with this plan in the amount of $756,000 million,
compared to non-cash based stock based compensation of $571,000 million in the
corresponding 2001 period.

26

In January 2000, the Company established a plan, pursuant to which 25% of
the cash equivalent value of 100,000 shares of UICI common stock will be
distributed to eligible employees in each of January 2001, 2002, 2003 and 2004.
At December 31, 2001 and June 30, 2002, the Company's liability for this
compensation was $731,000 and $736,000, respectively, and $316,000 was recorded
as non-cash stock based compensation expense in the six months ended June 30,
2002. For the six months ended June 30, 2001 the Company recorded non-cash stock
based compensation expense of $167,000 associated with this plan.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The Company's business segments included in operations are: (i) Insurance,
which includes the businesses of the Self Employed Agency Division, the Group
Insurance Division (formerly the Company's Student Insurance Division, which
includes the operations of the Company's recently acquired STAR HRG business
unit effective February 28, 2002), the Life Insurance Division (formerly the
Company's OKC Division, which includes the operations of the Company's College
Fund Life Division) and the Senior Market Division, (ii) Financial Services,
which includes the businesses of Academic Management Services Corp. ("AMS") and
the Company's investment in Healthaxis, Inc., and (iii) Other Key Factors, which
includes (a) investment income not allocated to other business segments, (b)
interest expense on non-student loan indebtedness, (c) general expenses relating
to corporate operations, (d) realized gains or losses on sale of investments,
(e) the operations of the Company's AMLI Realty Co. subsidiary, (f) minority
interest, (g) variable stock-based compensation, (h) operations that do not
constitute reportable operating segments (consisting primarily of the remaining
portion of the Company's former TPA Division) and (i) amortization of goodwill
(with respect to periods ended prior to January 1, 2002). 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, fees and other income.

On March 17, 2000 the Board of Directors of UICI determined, after a
thorough assessment of the unit's prospects, that the Company would exit from
its United CreditServ sub-prime credit card business. In September 2000, the
Company completed the sale of substantially all of United CreditServ's non-cash
assets, and in January 2001 the Company completed the voluntary liquidation of
UCNB, in accordance with the terms of a plan of voluntary liquidation approved
by the OCC. Accordingly, the United CreditServ unit has been reflected as a
discontinued operation for financial reporting purposes for all periods
presented.

The Company has determined to exit the businesses of its Special Risk
Division by sale, abandonment and/or wind-down and, accordingly, in December
2001 the Company designated and has classified its Special Risk Division as a
discontinued operation for financial reporting purposes for all periods
presented. The Company's Special Risk Division has specialized in certain niche
health-related products (including "stop loss", marine crew accident, organ
transplant and international travel accident products), various insurance
intermediary services and certain managed care services.

On January 17, 2002, the Company completed the sale of UICI Administrators,
Inc., the major component of the TPA Division. In the three months ended
December 31, 2001, the Company recognized an impairment charge of $2.3 million
to its long-lived assets associated with the UICI Administrators, Inc. unit, of
which $700,000 represented a write-down of fixed assets (which was reflected in
depreciation for the full year and fourth quarter of 2001) and $1.6 million
represented a write-down of goodwill (which was reflected in goodwill
amortization for the full year and fourth quarter of 2001). As a result of the
charge in the fourth quarter of 2001, the Company recognized no gain or loss on
the sale of UICI Administrators, Inc. Through January 17, 2002 (the date of
sale), the UICI Administrators, Inc. unit reported net income in the amount of
$67,000.

27

In accordance with FASB Statement 144, the results of operations of UICI
Administrators, Inc. have been reflected in discontinued operations for all
periods presented. The remaining portion of the former TPA Division (consisting
primarily of Barron Risk Management Services) has been reclassified to the
Company's Other Key Factors segment for all periods presented.

Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed into law the Public Accounting
Reform and Investor Protection Act of 2002 -- commonly referred to as the
Sarbanes-Oxley Act of 2002 (the "Act"). The stated purpose of the Act is to
improve the independence and oversight of public accounting firms engaged in
practice before the Securities and Exchange Commission, to expand the scope and
timeliness of certain public disclosures by reporting companies, to strengthen
corporate governance practices by reporting companies, their directors and
executive officers and to increase the accountability of directors and executive
officers for violations of the securities laws. The Act, together with recent
proposals to amend the listing standards imposed by the New York Stock Exchange,
will have a significant impact on the corporate governance obligations of public
companies, including UICI.

In accordance with Section 906 of the Act, and in connection with the
filing of the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002 (the "Report"), each of Gregory T. Mutz (President and Chief Executive
Officer of UICI) and Mark D. Hauptman (Vice President and Chief Financial
Officer of UICI) has submitted to the SEC a statement certifying, to his
knowledge, that the Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and the information contained
in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.

RESULTS OF OPERATIONS

Revenues and income from continuing operations before federal income taxes
("operating income") by business segment are summarized in the tables below:

Three and Six Months ended June 30, 2002 compared to Three and Six Months ended
June 30, 2001

In the three months ended June 30, 2002, the Company generated revenues and
income from continuing operations in the amount of $348.4 million and $5.7
million ($0.12 per diluted share), respectively, compared to revenues and income
from continuing operations of $273.4 million and $13.3 million ($0.28 per
diluted share), respectively, in the second quarter of 2001. For the six months
ended June 30, 2002, the Company generated revenues and income from continuing
operations of $656.7 million and $17.7 million ($0.37 per diluted share),
respectively, compared to revenues and income from continuing operations of
$524.6 million and $26.3 million ($0.55 per diluted share), respectively, in the
six months ended June 30, 2001. In the 2002 periods, the strong performance of
the Company's insurance operations and improved results at its Academic
Management Services Corp. subsidiary were offset by realized losses in the
second quarter associated with a write down in the carrying value of WorldCom,
Inc. fixed income securities, a write down of the Company's investment in
Healthaxis Inc. recorded in connection with the termination of a services
agreement, and a significant increase in non-cash stock-based compensation
expense attributable to the favorable market performance of the Company's stock
in the first six months of 2002.

Overall, for the three and six months ended June 30, 2002, the Company
reported net income in the amount of $5.7 million ($0.12 per diluted share) and
$12.7 million ($0.26 per diluted share), respectively, compared to net income of
$12.6 million ($0.27 per diluted share) and $24.7 million ($0.52 per diluted
share) in the corresponding 2001 periods. Overall results in the six months
ended June 30, 2002 included a goodwill impairment charge in the amount of $5.1
million net of tax ($(0.11) per diluted share), which has been reflected as a
cumulative effect of a change in accounting principle in accordance with
recently adopted Financial Accounting Standards Board ("FASB") Statement No.
142, Goodwill and Other Intangible Assets.

In the six months ended June 30, 2002, the Company's Insurance Segment
reported significant increases in operating income at the Company's Self
Employed Agency, Group Insurance and Life Division, which increases were offset
by an increase in expenses associated with the Company's Senior Market Division
initiative, in each case compared to results the corresponding period of the
prior year. In the first six months of 2002, the Company's AMS unit also
reported a significant period-over-period increase in operating income ($8.6
million of operating income in the first six months of 2002 compared to
operating income of $5.5 million in the comparable 2001 period).

Overall results in the second quarter and first six months of 2002 were
adversely impacted by $5.1 million in net realized losses in the second quarter
associated with the Company's investment portfolio (attributable primarily to a
write down in the amount of $6.1 million in the carrying value of WorldCom, Inc.
fixed income securities held in the portfolios of the Company's insurance
company subsidiaries), a $6.5 million write down of the Company's carrying value
of its investment in Healthaxis, Inc. (which amount corresponds to a capital
contribution to Healthaxis, Inc. recorded in the three months ended June 30,
2002 in the amount of $6.5 million in connection with the previously announced
early termination of a services agreement), and a decrease in unallocated
investment income.

29

Results in the second quarter and first six months of 2002 were also
negatively impacted by a significant increase in non-cash stock-based
compensation expense associated with the Company's employee stock ownership
plan, agent stock accumulation plans and other stock based plans, which increase
was attributable to the favorable market performance of the Company's stock in
the first six months of 2002. In the three and six months ended June 30, 2002,
the Company recorded non-cash stock-based compensation expense in the amount of
$6.8 million and $11.3 million, respectively, compared to non-cash stock based
compensation expense in the amount of $1.9 million and $1.7 million,
respectively, in the comparable periods of 2001.

In accordance with Statement No. 142, the Company tested for goodwill
impairment as of January 1, 2002. As a result of the transitional impairment
testing, completed during the quarter ended June 30, 2002, the Company
determined that goodwill recorded in connection with the acquisitions of AMS and
Barron Risk Management Services ("Barron") was impaired in the aggregate amount
of $6.9 million ($5.1 million net of tax). The Company has reflected this
impairment charge in its financial statements as a cumulative effect of a change
in accounting principle as of January 1, 2002 in accordance with Statement No.
142.

Set forth below is a discussion of results by business segment in the three
and six-month periods ended June 30, 2002:

Self-Employed Agency Division

Operating income at UICI's Self Employed Agency ("SEA") Division increased
to $21.9 million and $40.2 million in the three and six months ended June 30,
2002, respectively, from $18.6 million and $36.2 million in the three and
six-month periods ended June 30, 2001. In the 2002 periods, SEA continued to
experience significant increases in submitted annualized premium volume ($230.8
million in the second quarter of 2002 compared to $128.8 million in the second
quarter of 2001, and $458.0 million in the first six months of 2002 compared to
$252.5 million in the first six months of 2001). Submitted annualized premium
volume in any period is the aggregate annualized premium amount associated with
health insurance applications submitted by the Company's agents in such period
for underwriting by the Company. Earned premium revenue at SEA increased from
$155.4 million in the second quarter of 2001 to $230.2 million in the second
quarter of 2002 (a 48.1% increase) and from $300.0 million in the first six
months of 2001 to $433.4 million in the first six months of 2002 (a 44.5%
increase). Operating income as a percentage of earned premium revenue in the
three and six months ended June 30, 2002 was 9.5% and 9.3%, respectively,
compared to 12.0% and 12.1% in each of the corresponding periods of the prior
year. This decrease in operating margin was attributable primarily to the higher
commission expense associated with the significant increase in first year earned
premium revenue and a slight increase in the loss ratios.

Group Insurance Division

The Company has classified the results of its Student Insurance Division and
its STAR HRG unit (which was acquired on February 28, 2002) as its Group
Insurance Division. For the three and six months ended June 30, 2002, the Group
Insurance Division reported operating income of $3.7 million and $5.7 million,
respectively, compared to operating income of $855,000 and $1.3 million in the
comparable periods of 2001, which increases were primarily attributable to the
incremental operating income associated with the Company's STAR HRG unit. A
moderate increase in earned premium revenue and decrease in administrative
expenses as a percentage of earned premium (offset by a nominal increase in the
loss ratio) at the Company's Student Insurance Division also contributed to the
increases in operating income at the Group Insurance Division in the 2002
periods.

Life Insurance Division

For the three and six months ended June 30, 2002, the Company's Life
Insurance Division (which includes the results of the Company's OKC life
insurance operations and its College Fund Life Division) reported operating
income of $2.9 million and $5.7 million, respectively, compared to an operating
loss of $236,000 and operating income of $3.6 million in the corresponding
periods in 2001. The increase for the

30

three and six months ended June 30, 2002 compared to the corresponding 2001
periods reflects the discontinuation in May 2001 of the Company's workers
compensation business, in connection with which the Company incurred in the
second quarter of 2001 a charge of $8.7 million associated with a strengthening
of reserves. The charge in 2001 was partially offset by a $5.2 million benefit
resulting from an increase in the carrying value of student loans generated by
the College Fund Life Division. Operating income at the Life Insurance Division
in the three and six months ended June 30, 2002 was negatively impacted by
increased administrative expenses associated with the OKC division and decreased
production from the College Fund Life Division, in each case as compared to such
factors in the corresponding 2001 periods.

Senior Market Division

For financial reporting purposes the Company has established a Senior Market
Division to segregate the reporting of expenses incurred in connection with the
development of insurance products for the senior market (including long term
care and Medicare supplement products), and the development of distribution
channels for the products. Through June 30, 2002, the Company has realized
nominal revenues associated with this Division, and the Company has expensed all
expenditures as they have been incurred.

Academic Management Services Corp. ("AMS")

For the three and six months ended June 30, 2002, UICI's AMS unit reported
operating income of $4.4 million and $8.6 million, respectively, compared to
operating income of $5.2 million and $5.5 million for the comparable periods in
2001. The significant improvement in operating results for the six months ended
June 30, 2002 resulted primarily from increased student loan spread income
(i.e., the difference between interest earned on outstanding student loans and
interest expense associated with indebtedness incurred to fund such loans)
attributable to a favorable interest rate environment and a reduction in
interest expense on corporate borrowings. These increases were offset by lower
realized gains on sale of loans and reduced yields on the trust balances
associated with AMS' tuition installment plan business, in each case as compared
to results in the corresponding 2001 period.

During the three and six month periods ended June 30, 2002, AMS continued to
benefit significantly from a favorable prescribed minimum rate earned on its
student loan portfolio. On July 1, 2002, the floor rates on loans made under the
federal FFELP student loan program for the period July 1, 2002 through June 30,
2003 reset 193 basis points lower than the floor rates in effect for the period
July 1, 2001 through June 30, 2002. As a result of this significant decrease in
the prescribed floor rates on its student loan portfolio, AMS believes that
spread income in the second half of 2002 will be significantly less than the
level of spread income experienced in the first half of 2002. In addition,
results at AMS in the fourth quarter of 2002 will be negatively impacted by the
seasonality of its tuition installment business, which historically has
generated its highest levels of fee income (and operating profits) in the second
and third quarters of the calendar year and an operating loss in the fourth
quarter of the calendar year.

Operating income from AMS' tuition payment programs in the three and six
months ended June 30, 2002 was $1.3 million and $1.2 million, respectively,
compared to income in the three and six months ended June 30, 2001 of $690,000
and $2.2 million, respectively. For the six months ended June 30, 2002, an
increase in fees attributable to additional tuition payment accounts and the
imposition of late fees on delinquent accounts were offset by a decline in
investment income from tuition payment program funds held in trust, as a result
of lower prevailing market interest rates. Investment income on funds held in
connection with tuition payment programs declined to $1.7 million in the six
months ended June 30, 2002 from $3.2 million in the year earlier period (despite
a 13% increase in the average trust fund balance). AMS' tuition payment program
business has historically generated its highest levels of fee income (and
operating profits) in the second and third quarters of the calendar year and an
operating loss in the fourth quarter of the calendar year.

Operating expenses at AMS in the three and six months ended June 30, 2002
were $15.0 million and $27.0 million, respectively, compared to $15.9 million
and $29.6 million, respectively in the 2001 periods. These reductions in
operating expenses were primarily attributable to reduced interest expense
associated

31

with non-student loan indebtedness and reduced administrative expenses. For the
three and six months ended June 30, 2002, interest expense on non-student loan
indebtedness was $24,000 and $44,000, respectively compared to interest expense
on non-student loan indebtedness of $769,000 and $1.7 million, respectively, in
the three and six months ended June 30, 2001. On June 28, 2001, AMS paid off its
remaining senior indebtedness in the amount of $14.3 million, the proceeds of
which were utilized in 1999 to fund a portion of the purchase price for AMS'
tuition installment business.

AMS sold student loans in the principal amount of $56.8 million and $114.9
million, respectively, during the three and six months ended June 30, 2002,
compared to sales of student loans in the principal amount of $253.9 million and
$361.9 million during the corresponding 2001 periods. AMS generated net gains on
such student loan sales in the amount of $818,000 and $1.9 million,
respectively, in the three and six months ended June 30, 2002, compared to net
gains of $6.2 million and $8.0 million in the corresponding 2001 periods. Due to
the inherent uncertainty surrounding spread income and the seasonality of its
tuition installment business, in any given financial period AMS may continue to
rely on gains from timely sales of student loans to remain profitable for such
period.

Investment in Healthaxis, Inc.

At June 30, 2002, the Company held approximately 45% of the issued and
outstanding shares of Healthaxis, Inc. (HAXS: Nasdaq) ("HAI"). The Company
accounts for its investment in HAI utilizing the equity method and, accordingly,
recognizes its ratable share of HAI income and loss (computed prior to
amortization of goodwill recorded by HealthAxis.com in connection with the
January 7, 2000 merger of Insurdata Incorporated (formerly a wholly-owned
subsidiary of UICI) with and into HealthAxis.com). See Note B of Notes to
Consolidated Condensed Financial Statements.

During the three and six months ended June 30, 2002, the Company's share of
HAI's operating losses (computed prior to amortization of merger related
goodwill) was $1.4 million and $1.6 million, respectively, compared to its
reported share of operating losses of $5.9 million and $8.0 million,
respectively, in the three and six months ended June 30, 2001. For the three
months ended June 30, 2002, results for the HAI segment also reflected a $6.5
million impairment charge related to the carrying value of the Company's
investment in HAI.

Effective June 15, 2002, UICI and HAI terminated an information technology
services agreement, amended and restated as of January 3, 2000 (the "Services
Agreement"), pursuant to which HAI formerly provided information systems and
software development services (including administration of the Company's
computer data center) to the Company and its insurance company affiliates. See
Note B of Notes to Consolidated Condensed Financial Statements. As part of the
termination arrangement, UICI made a one-time payment to HAI in the amount of
$6.5 million and tendered 500,000 shares of HAI common stock to HAI.
Substantially all of HAI's technical personnel formerly supporting UICI under
the Services Agreement were hired by UICI on June 17, 2002. Following the
transaction, UICI continues to hold approximately 45% of the issued and
outstanding shares of HAI. Because UICI constitutes a significant shareholder of
HAI, the aggregate amount of consideration paid to HAI by UICI for the early
termination of the Services Agreement (approximately $6.5 million) has been
reflected for financial reporting purposes as a contribution by UICI to the
capital of HAI, the effect of which was to increase the Company's carrying value
of its investment in HAI. Effective June 30, 2002, UICI determined the carrying
value in its investment in HAI was impaired in the amount of $6.5 million and
therefore the investment was written down to an estimated realizable value.

Giving effect to the capital contribution in the amount of $6.5 million,
subsequent write down in the amount of $6.5 million and equity in losses at HAI
in the three and six months ended June 30, 2002 in the amount of $1.4 million
and $1.6 million, respectively, the Company's carrying value of its investment
in HAI was $6.7 million at June 30, 2002. The Company's carrying value of its
investment in HAI was $8.3 million at December 31, 2001.

32

Other Key Factors

The Other Key Factors category includes (a) investment income not allocated
to other business segments, (b) interest expense on non-student loan
indebtedness, (c) general expenses relating to corporate operations, (d)
realized gains or losses on investments, (e) the operations of the Company's
AMLI Realty Co. subsidiary, (f) minority interest, (g) variable stock-based
compensation, (h) operations that do not constitute reportable operating
segments (consisting primarily of the remaining portion of the Company's former
TPA Division) and (i), amortization of goodwill (with respect to periods ended
prior to January 1, 2002). For the three and six months ended June 30, 2002,
Other Key Factors reported an operating loss of $13.3 million and $21.3 million,
respectively, compared to an operating loss of $323,000 and $642,000,
respectively, in the comparable 2001 periods. This increase in operating loss
for the quarter was attributable to various factors, including a $3.0 million
decrease in investment income not allocated to other segments (which in turn
resulted from a decrease in yield on invested assets and a decrease in amount
available for investment due to acquisitions made in the first quarter of 2002),
a $5.1 million realized loss on sale of investments (compared to a realized gain
of $2.7 million in the corresponding period in 2001), and an increase in
variable stock-based compensation expense of $4.9 million (see discussion
below). These factors contributing to the increase in Other Key Factors
operating loss in the three months ended June 30, 2002 were offset by a $1.3
million decrease in corporate expenses compared to the corresponding period in
the prior year and the positive impact of the non-amortization of goodwill as
required by FASB Statement 142 for all periods after January 1, 2002. In the
three and six months ended June 30, 2001, the Company recorded amortization of
goodwill in the amount of $1.1 million and $2.3 million, respectively.

At June 30, 2002, UICI's insurance company subsidiaries held an aggregate of
$7.525 million principal amount of WorldCom Inc. bonds, of which $4.0 million
principal amount matures in 2005 and $3.525 million principal amount matures in
2031. As a result of previously announced accounting irregularities at WorldCom,
Inc., in the second quarter of 2002 the Company recorded a $6.1 million
impairment charge associated with the Company's WorldCom, Inc. holdings, which
charge was partially offset by realized gains associated with other securities
in the portfolio.

Variable Stock-Based Compensation

The Company maintains for the benefit of its employees and independent
agents various stock-based compensation plans, in connection with which it
records non-cash variable stock-based compensation expense in amounts that
depend and fluctuate based upon the market performance of the Company's common
stock. See Note L of Notes to Consolidated Condensed Financial Statements.

In the three and six months ended June 30, 2002, the Company recorded
non-cash stock-based compensation expense in the aggregate amount of $6.8
million and $11.3 million, respectively, of which $2.2 million and $4.2 million,
respectively, was attributable to the ESOP feature of the Company's Employee
Stock Ownership and Savings Plan (the "Employee Plan"), $3.9 million and $5.7
million, respectively was attributable to the Company's stock accumulation plans
established for the benefit of its independent agents and $700,000 and $1.4
million, respectively, was attributable to other stock-based plans. In the three
and six months ended June 30, 2001, the Company recorded non-cash stock-based
compensation expense in the aggregate amount of $1.9 million and $1.7 million,
respectively, of which $420,000 and $847,000 million, respectively, was
attributable to the ESOP feature of the Employee Plan, $757,000 and $113,000,
respectively, was attributable to the Company's stock accumulation plans
established for the benefit of its independent agents, and $737,000 and
$737,000, respectively, was attributable to other stock-based plans. The
significant increases in non-cash variable stock-based compensation expense in
the 2002 periods compared to the 2001 periods was attributable to the favorable
market performances of the Company's common stock during the 2002 periods. See
Note L of Notes to Consolidated Condensed Financial Statements.

During the three and six months ended June 30, 2002, the amount classified
as stock appreciation expense with respect to the Employee Plan represented the
incremental compensation expense associated with the allocation during the three
and six months ended June 30, 2002 of 167,000 and 385,000 shares previously
purchased in 2000 by the Employee Plan from the Company at $5.25 per share
("$5.25 ESOP

33

Shares") to fund the Company's matching and supplemental contributions to the
ESOP. As and when the Company makes matching and supplemental contributions to
the ESOP by allocating to participants' accounts these $5.25 ESOP Shares, the
Company will continue to record additional non-cash compensation expense equal
to the excess, if any, between the fair value of the shares allocated and $5.25
per share. The allocated $5.25 ESOP Shares are considered outstanding for
purposes of the computation of earnings per share. The Employee Plan initially
purchased in 2000 an aggregate of 1,610,000 $5.25 ESOP Shares, and the Company
currently estimates that all of the remaining 245,000 unallocated $5.25 ESOP
Shares will be allocated to participants' ESOP accounts during 2002. At June 30,
2002, the excess between the fair value of the 245,000 unallocated $5.25 ESOP
Shares and such shares at $5.25 per share totaled $3.7 million.

The Company also sponsors a series of stock accumulation plans established
for the benefit of the independent insurance agents and independent sales
representatives associated with its independent agent field forces, including
UGA -- Association Field Services, New United Agency, Cornerstone Marketing of
America, Guaranty Senior Assurance, SeniorsFirst and CFL Agency. The agent plans
generally combine an agent-contribution feature and a Company-match feature.
Under EITF 96-18 "Accounting for Equity Instruments that are issued to Other
Than Employees for Acquiring or in Connection with Selling Goods and Services,"
the Company has established a liability for future unvested benefits under the
plans and adjusts the liability based on the market value of the Company's
common stock. For the three and six months ended June 30, 2002, the Company
recorded total commission expense associated with these agent plans in the
amount of $5.5 million and $8.8 million, respectively, of which $3.9 million and
$5.7 million, respectively, represented the non-cash stock based compensation
expense associated with the adjustment to the liability for future unvested
benefits. For the three and six months ended June 30, 2001, the Company recorded
total commission expense associated with these agent plans in the amount of $1.8
million and $2.0 million, respectively, of which $757,000 and $113,000,
respectively, represented the non-cash stock based compensation expense
associated with the adjustment to the liability for future unvested benefits.

The accounting treatment of the Company's agent plans will continue to
result in unpredictable stock-based compensation charges, primarily dependent
upon future fluctuations in the quoted price of UICI common stock. These
unpredictable fluctuations in stock based compensation charges may result in
material non-cash fluctuations in the Company's results of operations. Unvested
benefits under the agent plans vest in January of each year; accordingly, in
periods of general appreciation in the quoted price of UICI common stock, the
Company's cumulative liability, and corresponding charge to income, for unvested
stock-based compensation is expected to be greater in each successive quarter
during any given year.

DISCONTINUED OPERATIONS

The Company's reported results in the three and six months ended June 30,
2002 reflected income from discontinued operations (consisting of the Company's
former sub-prime credit card unit, the Special Risk Division and the Company's
UICI Administrators Inc. unit) in the amount of $-0- and $67,000, respectively,
compared to a loss from discontinued operations in the three and six months
ended June 30, 2001 in the amount of $634,000 and $1.5 million, respectively.

United CreditServ, Inc.

Through the Company's United CreditServ, Inc. subsidiary ("United
CreditServ"), prior to 2000 the Company marketed credit support services to
individuals with no, or troubled, credit experience and assisted such
individuals in obtaining a nationally recognized credit card. The activities of
United CreditServ were conducted primarily through its wholly-owned subsidiaries
United Credit National Bank ("UCNB") (a special purpose national bank, based in
Sioux Falls, South Dakota, chartered solely to hold credit card receivables);
Specialized Card Services, Inc. (provider of account management and collections
services for all of the Company's credit card programs); United Membership
Marketing Group, Inc. ("UMMG") (a Lakewood, Colorado-based provider of
marketing, administrative and support services for the Company's credit card
programs); and UICI Receivables Funding Corporation ("RFC"), a single-purpose,
bankruptcy-remote entity through which certain credit card receivables were
securitized.

34

In March 2000, the Board of Directors of UICI, after a thorough assessment
of the unit's prospects, determined that UICI would exit from its United
CreditServ sub-prime credit card business and, as a result, the United
CreditServ unit is reflected as a discontinued operation for financial reporting
purposes for all periods presented effective December 31, 1999. At December 31,
1999, the Company established a liability for loss on the disposal of the
discontinued operation in the amount of $130.0 million (pre-tax), which
liability was included in net liabilities of discontinued operations. The
liability for loss on disposal established by the Company at December 31, 1999
represented the Company's then-current estimate of all additional losses
(including asset write-downs, the estimated loss on the sale of the business
and/or the assets and continuing operating losses through the date of sale) that
it then believed it would incur as part of any sale of the United CreditServ
unit.

Reflecting the terms of the Company's then-pending sale of its United
CreditServ business, during the quarter ended June 30, 2000 the Company recorded
an additional pre-tax loss, and correspondingly increased the liability for loss
on the disposal of the discontinued operation, in the amount of $36.0 million.
Accordingly, for the full year 2000, the Company reported a pre-tax loss from
discontinued operations in the amount of $36.0 million.

During the year ended December 31, 2000, the discontinued operation incurred
a loss from operations in the amount of approximately $131.9 million, which loss
was charged to the liability for loss on disposal. At December 31, 2000, the
remaining assets of the discontinued operations in the amount of $54.3 million
(consisting of cash and short-term investments in the amount of $27.8 million
and other assets in the amount of $26.5 million) were reclassified to cash and
other assets, respectively, on the Company's consolidated balance sheet, and the
remaining liabilities of the discontinued operations in the amount of $53.0
million (consisting of notes payable in the amount of $4.3 million and other
liabilities in the amount of $48.7 million) were reclassified to notes payable
and other liabilities, respectively, on the Company's consolidated balance
sheet.

On September 29, 2000, the Company completed the sale of substantially all
of the non-cash assets associated with its United CreditServ credit card unit,
including its credit card receivables portfolios and its Sioux Falls, South
Dakota servicing operations, for a cash sales price at closing of approximately
$124.0 million. The Company retained United CreditServ's Texas collections
facility, and UICI continues to hold United CreditServ's building and real
estate in Sioux Falls, South Dakota. The Company has leased the Sioux Falls
facilities to the purchaser of the credit card assets pursuant to a long-term
lease. UICI also retained the right to collect approximately $250.0 million face
amount of previously written off credit card receivables. In connection with the
sale, UICI or certain of its subsidiaries retained substantially all liabilities
and contingencies associated with its credit card business, including liability
for payment of all certificates of deposit issued by UCNB, loans payable and
liabilities associated with pending litigation and other claims.

On January 29, 2001, UCNB completed its voluntary liquidation in accordance
with the terms of a plan of voluntary liquidation approved by the OCC by
surrendering to the OCC its national bank charter and distributing to a
wholly-owned subsidiary of UICI the residual assets of UCNB, including available
cash and cash equivalents in the amount of approximately $26.0 million.

In addition to the cash sales price received at the September 2000 closing
of the sale of the non-cash assets associated with its United CreditServ credit
card unit, the sale transaction contemplated an incentive cash payment
contingent upon the post-closing performance of the ACE credit card portfolio
over a one-year period. The Company's results from discontinued operations in
2001 and the fourth quarter of 2001 included net income after tax in the amount
of $3.7 million, associated with the receipt of a $5.7 million cash payment,
representing the final settlement of the deferred contingent portion of the
purchase price.

Special Risk Division

The Company determined to exit the businesses of its Special Risk Division
by sale, abandonment and/or wind-down and, accordingly, in December 2001 the
Company designated and classified its Special Risk Division as a discontinued
operation for financial reporting purposes. The Company's Special Risk

35

Division has specialized in certain niche health-related products (including
"stop loss", marine crew accident, organ transplant and international travel
accident products), various insurance intermediary services and certain managed
care services.

Effective January 1, 2000, the Company entered into reinsurance and specific
retrocession agreements with an unaffiliated insurance carrier with respect to a
block of special risk business formerly managed by Excess, Inc. ("Excess"), a
managing general underwriter of special health-related coverages acquired by the
Company in 1997. These agreements effectively permitted the Company to transfer
to the unaffiliated insurance carrier the insurance revenue and risk portion of
that business as the business renews over the life of the policies.

UICI Administrators, Inc.

The Company formerly classified the operations of its subsidiaries UICI
Administrators, Inc. (a company engaged in the business of providing third party
benefits administration, including eligibility and billing reconciliation),
Insurdata Marketing Services, LLC (a subsidiary of the Company engaged in the
business of marketing third party benefits administration services) and Barron
Risk Management Services as its Third Party Administration ("TPA") Division.

On January 17, 2002, the Company completed the sale of UICI Administrators,
Inc., the major component of the TPA Division. In the three months ended
December 31, 2001, the Company recognized an impairment charge of $2.3 million
to its long-lived assets associated with the UICI Administrators, Inc. unit, of
which $700,000 represented a write-down of fixed assets (which was reflected in
depreciation for the full year and fourth quarter of 2001) and $1.6 million
represented a write-down of goodwill (which was reflected in goodwill
amortization for the full year and fourth quarter of 2001). As a result of the
charge in the fourth quarter of 2001, the Company recognized no gain or loss on
the sale of UICI Administrators, Inc. Through January 17, 2002 (the date of
sale), the UICI Administrators, Inc. unit reported net income in the amount of
$67,000.

In accordance with FASB Statement 144, the results of operations of UICI
Administrators, Inc. have been reflected in discontinued operations for all
periods presented. The remaining portion of the former TPA Division (consisting
primarily of Barron Risk Management Services) has been reclassified to the
Company's Other Key Factors segment for all periods presented.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company's primary sources of cash on a consolidated basis
have been premium revenues from policies issued, investment income, fees and
other income, and borrowings to fund student loans. The primary uses of cash
have been payments for benefits, claims and commissions under those policies,
operating expenses and the funding of student loans. In the six-month period
ended June 30, 2002, net cash provided by operations totaled approximately $99.4
million. In the six-month period ended June 30, 2001, net cash provided by
operations totaled approximately $37.4 million.

During the six months ended June 30, 2002, the Company reduced its
consolidated short and long-term indebtedness (exclusive of indebtedness
incurred to fund student loans) from $25.3 million at December 31, 2001 to $13.5
million at June 30, 2002.

On July 19, 2002, the Company prepaid in full all outstanding principal in
the amount of $3.9 million and accrued interest on indebtedness owing to the
South Dakota Board of Economic Development.

As previously disclosed, effective September 15, 1999, the Company and OUI
entered into a Put/Call Agreement, pursuant to which, for a thirty day period
commencing on July 1 of each year, the Company was granted an option to purchase
from OUI, and OUI was granted a corresponding right to require the Company to
purchase, up to 369,174 shares of Common Stock at a purchase price per share
equal to $28.50 in 2000, $30.25 in 2001, $32.25 in 2002, $34.25 in 2003, $36.25
in 2004, $38.25 in 2005 and $40.25 in 2006. Mr. Jensen's five adult children
hold in the aggregate 100% of the equity interest in OUI, which is

36

the holder of approximately 6.5% of the Company's outstanding Common Stock. On
July 1, 2002, pursuant to the terms of the Put/Call Agreement the Company
exercised is option to purchase from OUI 369,174 shares of Common Stock at the
then-effective call price of $32.25 per share, or $11.9 million in the
aggregate.

Effective June 15, 2002, UICI and HAI terminated a Services Agreement. See
Note B of Notes to Consolidated Condensed Financial Statements. As part of the
termination arrangement, UICI made a one-time payment to HAI in the amount of
$6.5 million and tendered 500,000 shares of HAI common stock to HAI.

Effective April 2, 2002, the Company and Mr. Jensen entered into a
transaction designed to effectively transfer the Company's 80% interest in a
subsidiary to Mr. Jensen and to terminate the Company's active participation in,
and limit the Company's financial exposure associated with, the Sun Litigation.
See Note I of Notes to Consolidated Condensed Financial Statements -- Sun
Litigation. As part of the transaction, on April 2, 2002, Mr. Jensen made a
total payment to UICI of $15.6 million and granted to UICI various indemnities
against possible losses which UICI might incur resulting from the Sun
Litigation. For financial reporting purposes, the Company recorded no gain or
loss in connection with this transaction and has reflected the transaction on
its consolidated condensed statements of cash flows as a capital contribution
from related party in the amount of $15.6 million.

UICI is a holding company, the principal assets of which are its investments
in its separate operating subsidiaries, including its regulated insurance
subsidiaries. The holding company's ability to fund its cash requirements is
largely dependent upon its ability to access cash, by means of dividends or
other means, from its subsidiaries. The laws governing the Company's insurance
subsidiaries restrict dividends paid by the Company's domestic insurance
subsidiaries in any year. Inability to access cash from its subsidiaries could
have a material adverse effect upon the Company's liquidity and capital
resources.

At June 30, 2002 and December 31, 2001, UICI at the holding company level
held cash and cash equivalents in the amount of $38.2 million and $57.3 million,
respectively, and had short and long-term indebtedness outstanding in the amount
of $7.9 million and $19.4 million, respectively. The Company currently estimates
that, through December 31, 2002, the holding company will have operating cash
requirements in the amount of approximately $39.9 million. The Company currently
anticipates that these cash requirements at the holding company level will be
funded by cash on hand, cash received from interest income, the balance of
dividends to be paid from domestic and offshore insurance companies and tax
sharing reimbursements from subsidiaries (which will be partially offset by
holding company operating expenses).

On January 25, 2002, the Company entered into a three-year bank credit
facility with Bank of America, NA and LaSalle Bank National Association. Under
the facility, the Company may borrow from time to time up to $30.0 million on a
revolving, unsecured basis. The Company intends to utilize the proceeds of the
facility for general working capital purposes. At June 30, 2002, the Company had
no borrowings outstanding under the facility.

STOCK REPURCHASE PLAN

In November 1998, the Company's board of directors authorized the repurchase
of up to 4,500,000 shares of the Company's Common Stock. The shares were
authorized to be purchased from time to time on the open market or in private
transactions. As of December 31, 2000, the Company had repurchased 198,000
shares pursuant to such authorization, all of which were purchased in 1999. At
its regular meeting held on February 28, 2001, the Board of Directors of the
Company reconfirmed the Company's 1998 share repurchase program. Following
reconfirmation of the program, through December 31, 2001, the Company had
purchased an additional 980,400 shares pursuant to the program (with the last
purchase made on December 13, 2001). At its regular meeting held July 31, 2002,
the Board of Directors of the Company reconfirmed the Company's 1998 share
repurchase program. Following reconfirmation of the program, through August 9,
2002, the Company had purchased an additional 57,500 shares pursuant to the
program (with the last purchase made on August 9, 2002). The timing and extent
of additional repurchases, if any,

37

will depend on market conditions and the Company's evaluation of its financial
resources at the time of purchase.

ACCOUNTING FOR AGENT STOCK ACCUMULATION PLANS

The Company sponsors a series of stock accumulation plans (the "Agent
Plans") established for the benefit of the independent insurance agents and
independent sales representatives associated with UGA - Association Field
Services, New United Agency, Cornerstone Marketing of America and CFLD
Association Field Services. Under EITF 96-18 "Accounting for Equity Instruments
that are issued to Other Than Employees for Acquiring or in Connection with
Selling Goods and Services," the Company has established a liability for future
unvested benefits under the Agent Plans and adjusts the liability based on the
market value of the Company's Common Stock. The accounting treatment of the
Company's Agent Plans will result in unpredictable stock-based commission
charges, dependent upon fluctuations in the quoted price of UICI common stock.
These unpredictable fluctuations in stock based commission charges may result in
material non-cash fluctuations in the Company's results of operations. See Note
L of Notes to Consolidated Condensed Financial Statements.

CRITICAL ACCOUNTING PRINCIPLES AND ESTIMATES

The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to health and life insurance claims and
reserves, bad debts, investments, intangible assets, income taxes, financing
operations and contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

The Company believes the critical accounting policies related to claims
reserves, accounting for health policy acquisition costs, goodwill and other
identifiable intangible assets, accounting for agent stock accumulation plans,
investments, deferred taxes, and loss contingencies affect its more significant
judgments and estimates used in the preparation of its consolidated financial
statements.

For a more detailed discussion on the application of these and other
accounting policies, see the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.

PRIVACY INITIATIVES

Recently-adopted legislation and regulations governing the use and security
of individuals' nonpublic personal data by financial institutions, including
insurance companies, may have a significant impact on the Company's business and
future results of operations.

Gramm-Leach-Bliley Act and State Insurance Laws and Regulations

The business of insurance is primarily regulated by the states and is also
affected by a range of legislative developments at the state and federal levels.
The recent Financial Services Modernization Act of 1999 (the so-called
Gramm-Leach-Bliley Act, or "GLBA") includes several privacy provisions and
introduces new controls over the transfer and use of individuals' nonpublic
personal data by financial institutions, including insurance companies,
insurance agents and brokers and certain other entities licensed by state
insurance regulatory authorities. Additional federal legislation aimed at
protecting the privacy of nonpublic personal financial and health information is
proposed and over 400 state privacy bills are pending.

38

GLBA provides that there is no federal preemption of a state's insurance
related privacy laws if the state law is more stringent than the privacy rules
imposed under GLBA. Accordingly, state insurance regulators or state
legislatures will likely adopt rules that will limit the ability of insurance
companies, insurance agents and brokers and certain other entities licensed by
state insurance regulatory authorities to disclose and use non-public
information about consumers to third parties. These limitations will require the
disclosure by these entities of their privacy policies to consumers and, in some
circumstances, will allow consumers to prevent the disclosure or use of certain
personal information to an unaffiliated third party. Pursuant to the authority
granted under GLBA to state insurance regulatory authorities to regulate the
privacy of nonpublic personal information provided to consumers and customers of
insurance companies, insurance agents and brokers and certain other entities
licensed by state insurance regulatory authorities, the National Association of
Insurance Commissioners has recently promulgated a new model regulation called
Privacy of Consumer Financial and Health Information Regulation. Some states
issued this model regulation before July 1, 2001, while other states must pass
certain legislative reforms to implement new state privacy rules pursuant to
GLBA. In addition, GLBA requires state insurance regulators to establish
standards for administrative, technical and physical safeguards pertaining to
customer records and information to (a) ensure their security and
confidentiality, (b) protect against anticipated threats and hazards to their
security and integrity, and (c) protect against unauthorized access to and use
of these records and information. However, no state insurance regulators have
yet issued any final regulations in response to such security and
confidentiality requirements. The privacy and security provisions of GLBA will
significantly affect how a consumer's nonpublic personal information is
transmitted through and used by diversified financial services companies and
conveyed to and used by outside vendors and other unaffiliated third parties.

Due to the increasing popularity of the Internet, laws and regulations may
be passed dealing with issues such as user privacy, pricing, content and quality
of products and services, and those regulations could adversely affect the
growth of the online financial services industry. If Internet use does not grow
as a result of privacy or security concerns, increasing regulation or for other
reasons, the growth of UICI's Internet-based business would be hindered. It is
not possible at this time to assess the impact of the privacy provisions on
UICI's financial condition or results of operations.

Health Insurance Portability and Accountability Act of 1996

The federal Health Insurance Portability and Accountability Act of 1996
("HIPAA") contains provisions requiring mandatory standardization of certain
communications between health plans (including health insurance companies),
electronic clearinghouses and health care providers who transmit certain health
information electronically. HIPAA requires health plans to use specific
data-content standards, mandates the use of specific identifiers (e.g., national
provider identifiers and national employer identifiers) and requires specific
privacy and security procedures. HIPAA authorized the Secretary of the federal
Department of Health and Human Services ("HHS") to issue standards for the
privacy and security of medical records and other individually identifiable
patient data.

In December 2000, HHS issued final regulations regarding the privacy of
individually-identifiable health information. This final rule on privacy applies
to both electronic and paper records and imposes extensive requirements on the
way in which health care providers, health plan sponsors, health insurance
companies and their business associates use and disclose protected information.
Under the new HIPAA privacy rules, the Company will now be required to (a)
comply with a variety of requirements concerning its use and disclosure of
individuals' protected health information, (b) establish rigorous internal
procedures to protect health information and (c) enter into business associate
contracts with other companies that use similar privacy protection procedures.
The final rules do not provide for complete federal preemption of state laws,
but, rather, preempt all contrary state laws unless the state law is more
stringent. These rules must be complied with by April 14, 2003.

Sanctions for failing to comply with standards issued pursuant to HIPAA
include criminal penalties of up to $250,000 per violation and civil sanctions
of up to $25,000 per violation. Due to the complex and controversial nature of
the privacy regulations, they may be subject to court challenge, as well as
further legislative and regulatory actions that could alter their effect.

39

In August 2000, HHS published for comment proposed rules related to the
security of electronic health data, including individual health information and
medical records, for health plans, health care providers, and health care
clearinghouses that maintain or transmit health information electronically. The
proposed rules would require these businesses to establish and maintain
responsible and appropriate safeguards to ensure the integrity and
confidentiality of this information. The standards embraced by these rules
include the implementation of technical and organization policies, practices and
procedures for security and confidentiality of health information and protecting
its integrity, education and training programs, authentication of individuals
who access this information, system controls, physical security and disaster
recovery systems, protection of external communications and use of electronic
signatures. These proposed rules have not yet become final.

UICI is currently reviewing the potential impact of the HIPAA privacy
regulations on its operations, including its information technology and security
systems. The Company cannot at this time predict with specificity what impact
(a) the recently adopted final HIPAA rules governing the privacy of
individually-identifiable health information and (b) the proposed HIPAA rules
for ensuring the security of individually-identifiable health information may
have on the business or results of operations of the Company. However, these new
rules will likely increase the Company's burden of regulatory compliance with
respect to our life and health insurance products and other information-based
products, and may reduce the amount of information the Company may disclose and
use if the Company's customers do not consent to such disclosure and use. There
can be no assurance that the restrictions and duties imposed by the recently
adopted final rules on the privacy of individually-identifiable health
information, or the proposed rule on security of individually-identifiable
health information, will not have a material adverse effect on UICI's business
and future results of operations.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements set forth herein or incorporated by reference herein from
the Company's filings that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
Actual results may differ materially from those included in the forward-looking
statements. These forward-looking statements involve risks and uncertainties
including, but not limited to, the following: changes in general economic
conditions, including the performance of financial markets, and interest rates;
competitive, regulatory or tax changes that affect the cost of or demand for the
Company's products; health care reform; the ability to predict and effectively
manage claims related to health care costs; and reliance on key management and
adequacy of claim liabilities.

The Company's future results will depend in large part on accurately
predicting health care costs incurred on existing business and upon the
Company's ability to control future health care costs through product and
benefit design, underwriting criteria, utilization management and negotiation of
favorable provider contracts. Changes in mandated benefits, utilization rates,
demographic characteristics, health care practices, provider consolidation,
inflation, new pharmaceuticals/technologies, clusters of high-cost cases, the
regulatory environment and numerous other factors are beyond the control of any
health plan provider and may adversely affect the Company's ability to predict
and control health care costs and claims, as well as the Company's financial
condition, results of operations or cash flows. Periodic renegotiations of
hospital and other provider contracts coupled with continued consolidation of
physician, hospital and other provider groups may result in increased health
care costs and limit the Company's ability to negotiate favorable rates.
Recently, large physician practice management companies have experienced extreme
financial difficulties, including bankruptcy, which may subject the Company to
increased credit risk related to provider groups and cause the Company to incur
duplicative claims expense. In addition, the Company faces competitive pressure
to contain premium prices. Fiscal concerns regarding the continued viability of
government-sponsored programs such as Medicare and Medicaid may cause decreasing
reimbursement rates for these programs. Any limitation on the Company's ability
to increase or maintain its premium levels, design products, and implement
underwriting criteria or negotiate competitive provider contracts may adversely
affect the Company's financial condition or results of operations.

40

The Company's Academic Management Services Corp. business could be adversely
affected by changes in the Higher Education Act or other relevant federal or
state laws, rules and regulations and the programs implemented thereunder may
adversely impact the education credit market. In addition, existing legislation
and future measures by the federal government may adversely affect the amount
and nature of federal financial assistance available with respect to loans made
through the U.S. Department of Education. Finally the level of competition
currently in existence in the secondary market for loans made under the Federal
Loan Programs could be reduced, resulting in fewer potential buyers of the
Federal Loans and lower prices available in the secondary market for those
loans.

ITEM 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
policy liabilities. The Company's investment portfolio consists mainly of high
quality, liquid securities that provide current investment returns. The Company
believes that the annuity and universal life-type policies are generally
competitive with those offered by other insurance companies of similar size. The
Company does not anticipate significant changes in the primary market risk
exposures or in how those exposures are managed in the future reporting periods
based upon what is known or expected to be in effect in future reporting
periods.

Profitability of the student loans is affected by the spreads between the
interest yield on the student loans and the cost of the funds borrowed under the
various credit facilities. Although the interest rates on the student loans and
the interest rate on the credit facilities are variable, the gross interest
earned by lenders on Stafford student loans uses the results of 91-day T-bill
auctions as the base rate, while the base rate on the credit facilities is
LIBOR. The effect of rising interest rates on earnings on Stafford loans is
generally small, as both revenues and costs adjust to new market levels. In
addition to Stafford loans, the Company holds PLUS loans on which the interest
rate yield is set annually beginning July 1 through June 30 by regulation at a
fixed rate. The Company had approximately $189.7 million principal amount of
PLUS loans outstanding at June 30, 2002. The fixed yield on PLUS loans was 8.99%
and 6.79% for the twelve months ended June 30, 2001 and 2002, respectively, and
was reset to 4.86% for the twelve months beginning July 1, 2001. These loans are
financed with borrowings whose rates are subject to reset, generally monthly.
During the twelve months beginning July 1, 2002, the cost of borrowings to
finance this portion of the student loan portfolio could rise or fall while the
rate earned on the student loans will remain fixed.

41

PART II. OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

The Company is a party to various material legal proceedings, all of which
are described in Note I of Notes to the Consolidated Condensed Financial
Statements included herein and in the Company's Annual Report on Form 10-K filed
for the year ended December 31, 2001 under the caption "Item 3 - Legal
Proceedings." The Company and its subsidiaries are parties to various other
pending legal proceedings arising in the ordinary course of business, including
some asserting significant damages arising from claims under insurance policies,
disputes with agents and other matters. Based in part upon the opinion of
counsel as to the ultimate disposition of such lawsuits and claims, management
believes that the liability, if any, resulting from the disposition of such
proceedings will not be material to the Company's financial condition or results
of operations.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's Annual Meeting of Stockholders was held on May 16, 2002. The
following members were elected to the Company's Board of Directors to hold
office for the ensuing year.

The results of the voting on the appointment of auditors were as follows:

Ratification of Appointment of Ernst & Young, LLP as the Company's
independent auditors for the fiscal year ending December 31, 2002.

The voters of the stockholders on this item were as follows:

ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED MATTERS

During the six months ended June 30, 2002, the Company issued 3,500 shares
of unregistered common stock pursuant to its 2001 Restricted Stock Plan.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

EXHIBIT NO. DESCRIPTION OF EXHIBIT

10.69 Second Supplemental Indenture, dated as of April 1,
2002, between CFLD-I, Inc. and Zions First National
Bank, as Trustee, relating to $50,000,000 CFLD-I,
Inc. Student Loan Asset Backed Notes, Senior Series
2002A-1 (Auction Rate Certificates)

10.70 Third Supplemental Indenture, dated as of April 1,
2002, between CFLD-I, Inc. and Zions First National
Bank, as Trustee, amending General Indenture, dated
as of April 1, 2001, relating to CFLD-I, Inc. Student
Loan Asset Backed Notes

42

ASSET BACKED NOTES

(b) Reports on Form 8-K.

1. Current Report on Form 8-K dated May 24, 2002

2. Current Report on Form 8-K dated June 28, 2002

3. Current Report on Form 8-K dated July 22, 2002

4. Current Report on Form 8-K dated July 31, 2002

43

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: August 14, 2002 /s/ Gregory T. Mutz
------------------------------------
Gregory T. Mutz, President,
Chief Executive Officer and Director

Date: August 14, 2002 /s/ Mark D. Hauptman
------------------------------------
Mark D. Hauptman, Vice President
and Chief Financial Officer

44

INDEX TO EXHIBITS