3. BUSINESS COMBINATION

1999 Acquisition

On July 30, 1999, Universal American acquired all of the outstanding shares of common stock of certain direct and indirect subsidiaries of PennCorp Financial Group ("PFG"), including six insurance companies (the "Acquired Companies") and certain other assets as follows (the "1999 Acquisition"). The Acquired Companies are:

                                         State or Province
Name of Insurance Company                  of Domicile      
Pennsylvania Life Insurance Company  . . . Pennsylvania
Peninsular Life Insurance Company  . . . . Florida
Union Bankers Insurance Company  . . . . . Texas
Constitution Life Insurance Company  . . . Texas
Marquette National Life
   Insurance Company . . . . . . . . . . . Texas
PennCorp Life Insurance
   Company of Canada . . . . . . . . . . . Ontario, Canada

The purchase price of $130.5 million in cash was financed with $92.8 million of proceeds generated from the UA Purchase Agreement described in Note 7 and from the term loan portion of an $80 million credit facility entered into on July 30, 1999 consisting of a $70 million term loan and a $10 million revolving loan facility (see Note 12). None of the revolving loan facility was drawn at closing. The proceeds of the financing in excess of the $130.5 million purchase price were used to pay transaction costs of the acquisition and the financing, to retire an existing Universal American bank loan, to contribute to the surplus of Pennsylvania Life and for working capital.

The 1999 Acquisition was accounted for using the purchase method and, accordingly, the operating results generated by the Acquired Companies after July 30, 1999 are included in Universal American's consolidated financial statements. In addition to the purchase price, the Company incurred costs totaling $18.3 million, including a restructuring accrual of $11.1 million and $3.8 million of stock compensation cost related to shares purchased by agents and certain members of management at prices discounted from the market. At the time of closing, the fair value of net assets of the acquired companies amounted to $151.7 million resulting in a negative goodwill amount of $2.9 million, which is being amortized on a straight line basis over a ten year period (see Note 2o).

The consolidated pro forma results of operations, assuming that the companies described above were purchased on January 1, 1999 is as follows:

                                                          Year Ended
                                                       December 30, 1999 
                                                        (In thousands)
Total revenue . . . . . . . . . . . . . . . . . . . . . . $  274,805
Operating income before taxes . . . . . . . . . . . . . . $   32,279
Net income  . . . . . . . . . . . . . . . . . . . . . . . $   18,763

Earnings per common share:
   Basic  . . . . . . . . . . . . . . . . . . . . . . . . $     0.44
   Diluted  . . . . . . . . . . . . . . . . . . . . . . . $     0.41

In January 2000, the Company announced that it had approved a plan to consolidate the Raleigh location acquired in the 1999 Acquisition into its locations in Toronto (Canada), Pensacola (Florida) and Orlando (Florida) in order to improve operating efficiencies and capabilities. The plan to consolidate this location was being formed at the date of the acquisition and was approved by the Board of Directors. Accordingly, the Company recorded an $11.1 million restructuring liability in its accounting for the 1999 Acquisition. These restructuring costs were accounted for under EITF No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination" ("EITF 95-3").

As of December 31, 2000, the remaining liability consisted of employee separation costs ($1.6 million), employee relocation costs ($1.0 million) and other relocation and exit costs ($0.4 million).