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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 13E-3
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
INVESTORS HERITAGE LIFE INSURANCE COMPANY
(Name of the Issuer)
KENTUCKY INVESTORS, INC.
(Name of the Person(s) Filing Statement)
Common Stock $1.00 Par Value Per Share
(Title of Class of Securities)
461560104
(Cusip Number of Class of Securities)
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Robert M. Hardy, Jr.
200 Capital Avenue
Frankfort, Kentucky 40601
Telephone: (502) 223-2361
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of Person(s) Filing Statement)
---------------
Copy To:
Alex P. Herrington, Jr.
Stites & Harbison
400 West Market Street, Suite 1800
Louisville, Kentucky 40202-3352
Telephone: (502) 587-3400
This statement is filed in connection with (check the appropriate
box):
(a) [ ] The filing of solicitation materials or an information
statement subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c)
under the Securities Exchange Act of 1934.
(b) [X] The filing of a registration statement under the
Securities Act of 1933.
(c) [ ] A tender offer.
(d) [ ] None of the above.
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies.
[ ]
CALCULATION OF FILING FEE:
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TRANSACTION VALUATION* AMOUNT OF FILING FEE**
---------------------- ----------------------
$5,821,943 $1,164
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* For purposes of calculating the fee only. The amount assumes the
exchange of 235,230 shares of Common Stock, par value $1.00 per
share, of Investors Heritage Life Insurance Company for 291,685
shares of Common Stock, par value $1.00 per share, of Kentucky
Investors, Inc. at $24.75 per share, as computed based upon the
average of the bid and asked per share prices of Investors
Heritage common stock as reported on the OTC Bulletin Board on
September 22, 1999, for shares not owned by the persons filing
this statement.
**The amount of the filing fee calculated in accordance with
Regulation 240.0-11 of the Securities Exchange Act of 1934 equals
1/50th of 1% of the value of the shares to be exchanged.
[X] Check box if any part of the fee is offset as provided by
Rule 0-11(a)(2) and identify the filing with which the offsetting
fee was previously paid. Identify the previous filing by
registration statement number, or the Form or Schedule and the
date of its filing.
Amount previously paid: $1,619 Filing party: Kentucky Investors, Inc.
Form or registration no.: Form S-4 Date filed: September 28, 1999
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INTRODUCTION
This Rule 13E-3 Transaction Statement (the "Schedule 13E-3")
relates to a Share Exchange Agreement, dated as of September 24,
1999 (as amended from time to time, the "Share Exchange
Agreement"), between Investors Heritage Life Insurance Company, a
Kentucky corporation ("Investors Heritage"), and Kentucky
Investors, Inc., a Kentucky corporation ("Kentucky Investors"),
pursuant to which Kentucky Investors will exchange 1.24 shares of
its common stock for one share of Investors Heritage common stock
(the "Share Exchange"). A copy of the Share Exchange Agreement is
filed as Annex A to the Proxy Statement/Prospectus (the "Proxy
Statement") filed as part of Form S-4 Registration Statement by
Kentucky Investors with the Securities and Exchange Commission (the
"Commission") on the date hereof. This Schedule 13E-3 is being
filed by Kentucky Investors.
The following responses and cross-references are being
supplied pursuant to General Instruction F to Schedule 13E-3 and
show the locations in (1) the Proxy Statement (including all
annexes thereto); (2) the 1998 Investors Heritage Life Insurance
Company and Kentucky Investors, Inc. Annual Report (the "1998
Annual Report"); (3) the Kentucky Investors, Inc. Annual Report on
Form 10-K for the year ended December 31, 1998 (the "1998 Kentucky
Investors Form 10-K"); (4) the Proxy Statement for the Investors
Heritage Life Insurance Company Meeting of Stockholders on May 13,
1999 (the "1999 Investors Heritage Proxy Statement"); (5) the Proxy
Statement for the Annual Meeting of Stockholders of Kentucky
Investors, Inc. on May 13, 1999 (the "1999 Kentucky Investors Proxy
Statement"); and (6) the Investors Heritage Life Insurance Company
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999
(the "Investors Heritage June 30, 1999 Form 10-Q") (collectively,
the "Disclosure Documents"), of the information required to be
included in response to the items of this Schedule 13E-3. The
information set forth in the Disclosure Documents is hereby
expressly incorporated herein by reference and the responses to
each item of this Schedule 13E-3 are qualified in their entirety by
reference to the information contained in the Disclosure Documents.
CROSS REFERENCE SHEET
Item in Schedule 13E-3 Disclosure Documents
- ---------------------- --------------------
Item 1(a)............. Proxy Statement: Summary--The
Companies
Item 1(b)............. Not contained in the Proxy Statement
Item 1(c)-(d)......... Proxy Statement: Comparative Per
Share Market Price and Dividend
Information
Item 1(e)............. Not applicable
Item 1(f)............. Not contained in the Proxy Statement
Item 2(a)-(g)......... Proxy Statement: Share Exchange
Proposed--Your Vote is Very Important;
Summary--The Companies; 1998 Kentucky
Investors Form 10-K: Directors and
Executive Officers; 1999 Kentucky
Investors Proxy Statement: Election of
Directors
1
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Item 3(a)(1).......... Not applicable
Item 3(a)(2).......... Proxy Statement: The Share Exchange-
-Background of the Share Exchange
Item 3(b)............. Proxy Statement: The Share Exchange-
-Background of the Share Exchange
Item 4(a)-(b)......... Proxy Statement: Share Exchange
Proposed--Your Vote is Very Important;
Questions and Answers about the Kentucky
Investors/Investors Heritage Share
Exchange; Summary--The Share Exchange; The
Share Exchange--General; Annex A--Share
Exchange Agreement
Item 5(a)-(e) and (g). Not applicable
Item 5(f)............. Proxy Statement: Effect of Share
Exchange on OTC Bulletin Board Listings
Item 6(a)............. Proxy Statement: Share Exchange
Proposed-Your Vote is Very Important;
Questions and Answers about the Kentucky
Investors/Investors Heritage Share
Exchange; Summary--The Share Exchange; The
Share Exchange Agreement--General; Opinion
of Financial Advisor
Item 6(b)............. Not contained in Proxy Statement
Item 6(c)-(d)......... Not applicable
Item 7(a)-(c)......... Proxy Statement: Questions and
Answers about the Kentucky
Investors/Investors Heritage Share
Exchange; The Share Exchange--Background
of the Share Exchange; The Share Exchange-
-Kentucky Investors' Reasons for the Share
Exchange; The Share Exchange--Investor
Heritage's Reasons for the Share Exchange;
Recommendation of the Investors Heritage
Board
Item 7(d)............. Proxy Statement: Share Exchange
Proposed--Your Vote is Very Important;
Questions and Answers about the Kentucky
Investors/Investors Heritage Share
Exchange; Summary--Ownership of Kentucky
Investors Following the Share Exchange;
Summary--The Share Exchange; Comparative
Historical and Pro Forma Per Share Data;
The Share Exchange--United States Federal
Tax Considerations; Opinion of Financial
Advisor
2
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Item 8(a)............. Proxy Statement: Summary--The Share
Exchange; The Share Exchange--Background
of the Share Exchange; Opinion of
Financial Advisor
Item 8(b)............. Proxy Statement: The Share Exchange-
-Kentucky Investors' Reasons for the Share
Exchange; The Share Exchange--Investors
Heritage's Reasons for the Share Exchange;
Recommendation of the Investors Heritage
Board; Opinion of Financial Advisor
Item 8(c)............. Proxy Statement: Summary--Vote
Required to Approve the Share Exchange;
The Special Meeting--Voting Rights; Votes
Required for Approval
Item 8(d)............. Proxy Statement: Summary--The Share
Exchange; The Share Exchange--Background
of the Share Exchange; Opinion of
Financial Advisor
Item 8(e)............. Proxy Statement: The Share Exchange-
-Background of the Share Exchange
Item 8(f)............. Not applicable
Item 9(a)............. Proxy Statement: Summary--The Share
Exchange; The Share Exchange--Background
of the Share Exchange; Opinion of
Financial Advisor
Item 9(b)(1)-(5)...... Proxy Statement: Summary--The Share
Exchange; The Share Exchange--Background
of the Share Exchange; Opinion of
Financial Advisor
Item 9(b)(6).......... Proxy Statement: Opinion of
Financial Advisor
Item 9(c)............. Proxy Statement: Where You Can Find
More Information
Item 10(a)............ 1999 Investors Heritage Proxy
Statement: Voting Securities; Election of
Directors
Item 10(b)............ Not applicable
Item 11............... Proxy Statement: The Share Exchange
Agreement--Investors Heritage Board and
Stockholders Meeting; Annex A--Share
Exchange Agreement
Item 12(a)............ Proxy Statement: Summary--The Share
Exchange; The Share Exchange--Background
of the Share Exchange; The Share Exchange-
-Kentucky Investors' Reasons for the Share
Exchange; Interests of Certain Persons in
the Share Exchange
3
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Item 12(b)............ Not contained in the Proxy Statement
Item 13(a)............ Proxy Statement: Summary--The Share
Exchange; The Share Exchange--Dissenters'
Rights of Investors Heritage Stockholders;
and Annex C--Subtitle 13 of Chapter 271B
of the Kentucky Revised Statutes
Item 13(b)-(c)........ Not applicable
Item 14(a)(1)......... 1998 Annual Report: Consolidated
Financial Statements and Notes appearing
on pages 30 to 47
Item 14(a)(2)......... Investors Heritage June 30, 1999 Form
10-Q: Part I, Item 1, Unaudited
Consolidated Financial Statements
Item 14(a)(3)......... Not applicable
Item 14(a)(4)......... Proxy Statement: Comparative
Historical and Pro Forma Per Share Data
Item 14(b)(1)-(2)..... Proxy Statement: Comparative
Historical and Pro Forma Per Share Data;
Unaudited Pro Forma Financial Data
Item 14(b)(3)......... Proxy Statement: Comparative
Historical and Pro Forma Per Share Data
Item 15(a)............ Proxy Statement: Questions and
Answers about the Kentucky
Investors/Investors Heritage Share
Exchange; The Special Meeting--Voting of
Proxies
Item 15(b)............ Not applicable
Item 16............... Proxy Statement
Item 17............... Separately included herewith
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) Investors Heritage is the issuer of the securities
subject to this Schedule 13E-3. The information set forth in the
section entitled "Summary--The Companies" in the Proxy Statement is
incorporated herein by reference.
(b) Investors Heritage has 904,784 shares of Common Stock,
$1.00 par value, outstanding as of September 24, 1999. The
approximate number of holders of record is 2,525 as of September
24, 1999.
4
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(c)-(d) The information set forth in the section entitled
"Comparative Per Share Market Price and Dividend Information" in
the Proxy Statement is incorporated herein by reference.
(e) Not applicable.
(f)
NUMBER OF AVERAGE
SHARES RANGE OF PURCHASE
QUARTER ENDED PURCHASED PRICES PAID PRICE
------------- --------- ----------- -----
1997
First Quarter.............. 69 $26.00 - $26.00 $26.00
Second Quarter............. 7 $26.00 - $26.00 $26.00
Third Quarter.............. 60 $26.00 - $26.00 $26.00
Fourth Quarter............. 2 $26.00 - $26.00 $26.00
1998
First Quarter.............. 1,573 $26.00 - $26.00 $26.00
Second Quarter............. 6,298 $26.50 - $28.00 $27.724
Third Quarter.............. 4,659 $27.00 - $28.00 $27.635
Fourth Quarter............. 1,010 $25.00 - $26.00 $25.406
1999
First Quarter.............. 0 0 - 0 0
Second Quarter............. 33 $23.50 - $25.00 $23.773
Third Quarter (through
September 27, 1999)...... 162 $23.50 - $23.50 $23.50
ITEM 2. IDENTITY AND BACKGROUND.
(a)-(g) This Statement is being filed by Kentucky Investors.
The information set forth in the sections entitled "Share Exchange
Proposed-Your Vote is Very Important" and "Summary--The Companies"
in the Proxy Statement, in Item 10 Directors and Executive Officers
of the Registrant in the 1998 Kentucky Investors Form 10-K and in
the section entitled "Election of Directors" in the 1999 Kentucky
Investors Proxy Statement is incorporated herein by reference.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a)(1) Not applicable.
(2) The information set forth in the section entitled
"The Share Exchange--Background of the Share Exchange" in the Proxy
Statement is incorporated herein by reference.
(b) The information set forth in the section entitled "The
Share Exchange--Background of the Share Exchange" in the Proxy
Statement is incorporated herein by reference.
ITEM 4. TERMS OF THE TRANSACTION.
(a)-(b) The information set forth in the sections entitled
"Share Exchange Proposed--Your Vote is Very Important," "Questions
and Answers about the Kentucky Investors/Investors Heritage Share
Exchange," "Summary--The Share Exchange," "The Share Exchange--
General" in the
5
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Proxy Statement, and in Annex A--Share Exchange Agreement to the
Proxy Statement is incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a)-(e) and (g) Not applicable.
(f) The information set forth in "Effect of Share Exchange on
OTC Bulletin Board Listings" in the Proxy Statement is incorporated
herein by reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in the sections entitled "Share
Exchange Proposed--Your Vote is Very Important," "Questions and
Answers about the Kentucky Investors/Investors Heritage Share
Exchange," "Summary--The Share Exchange," "The Share Exchange
Agreement--General" and "Opinion of Financial Advisor" in the Proxy
Statement, and in Annex A--Share Exchange Agreement to the Proxy
Statement is incorporated herein by reference.
(b) The following is an estimate of fees and expenses to be
incurred in connection with the share exchange:
Legal Fees and Expenses of Kentucky Investors Counsel... $ 80,000
Accountants' Fees and Expenses.......................... 200,000
Financial Advisor to Special Committee.................. 75,000
Printing................................................ 25,000
Filing Fees............................................. 3,000
Mailing................................................. 7,500
Miscellaneous........................................... 10,000
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Total......................................... $400,500
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(c)-(d) Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a)-(c) The information set forth in the sections entitled
"Questions and Answers about the Kentucky Investors/Investors
Heritage Share Exchange," "The Share Exchange--Background of the
Share Exchange," "The Share Exchange--Kentucky Investors' Reasons
for the Share Exchange" and "The Share Exchange--Investor
Heritage's Reasons for the Share Exchange; Recommendation of the
Investors Heritage Board" in the Proxy Statement is incorporated
herein by reference.
(d) The information set forth in the sections entitled "Share
Exchange Proposed-Your Vote is Very Important," "Questions and
Answers about the Kentucky Investors/Investors Heritage Share
Exchange," "Summary--Ownership of Kentucky Investors Following the
Share Exchange," "Summary--The Share Exchange," "Comparative
Historical and Pro Forma Per Share Data," "The Share Exchange--
United States Federal Tax Considerations" and "Opinion of Financial
Advisor" in the Proxy Statement is incorporated herein by
reference.
6
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ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) The information set forth in the sections entitled
"Summary--The Share Exchange," "The Share Exchange--Background of
the Share Exchange" and "Opinion of Financial Advisor" in the Proxy
Statement is incorporated herein by reference.
(b) The information set forth in the sections entitled "The
Share Exchange--Kentucky Investors' Reasons for the Share
Exchange," "The Share Exchange--Investors Heritage's Reasons for
the Share Exchange; Recommendation of the Investors Heritage Board"
and "Opinion of Financial Advisor" in the Proxy Statement is
incorporated herein by reference.
(c) The information set forth in the sections entitled
"Summary--Vote Required to Approve the Share Exchange" and "The
Special Meeting--Voting Rights; Votes Required for Approval" in the
Proxy Statement is incorporated herein by reference.
(d) The information set forth in the sections entitled
"Summary--The Share Exchange," "The Share Exchange--Background of
the Share Exchange" and "Opinion of Financial Advisor" in the Proxy
Statement is incorporated herein by reference.
(e) The information set forth in the section entitled "The
Share Exchange--Background of the Share Exchange" in the Proxy
Statement is incorporated herein by reference.
(f) Not applicable.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) The information set forth in the sections entitled
"Summary--The Share Exchange," "The Share Exchange--Background of
the Share Exchange" and "Opinion of Financial Advisor" in the Proxy
Statement is incorporated herein by reference.
(b)(1)-(5) The information set forth in the sections
entitled "Summary--The Share Exchange," "The Share Exchange--
Background of the Share Exchange" and "Opinion of Financial
Advisor" in the Proxy Statement is incorporated herein by
reference.
(b)(6) The information set forth in the section entitled
"Opinion of Financial Advisor" in the Proxy Statement is
incorporated herein by reference.
(c) The information set forth in the section entitled "Where
You Can Find More Information" in the Proxy Statement is
incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) The information set forth in the sections entitled
"Voting Securities" and "Election of Directors" in the 1999
Investors Heritage Proxy Statement is incorporated herein by
reference.
(b) Not applicable.
7
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ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO
THE ISSUER'S SECURITIES.
The information set forth in the section entitled "The Share
Exchange Agreement--Investors Heritage Board and Stockholders
Meeting" in the Proxy Statement, and in Annex A--Share Exchange
Agreement to the Proxy Statement is incorporated herein by
reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS
WITH REGARD TO THE TRANSACTION.
(a) The information set forth in the sections entitled
"Summary--The Share Exchange," "The Share Exchange--Background of
the Share Exchange," "The Share Exchange--Kentucky Investors'
Reasons for the Share Exchange" and "Interests of Certain Persons
in the Share Exchange" in the Proxy Statement is incorporated
herein by reference.
(b) No persons identified in Item 12(a) have made any
recommendations in support of or opposed to the Rule 13e-3
transaction.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in the sections entitled
"Summary--The Share Exchange" and "The Share Exchange--Dissenters'
Rights of Investors Heritage Stockholders" in the Proxy Statement
and in Annex C--Subtitle 13 of Chapter 271B of the Kentucky Revised
Statutes to the Proxy Statement is incorporated herein by
reference.
(b)-(c) Not applicable.
ITEM 14. CONSOLIDATED FINANCIAL STATEMENTS.
(a)(1) The consolidated financial statements and notes
appear on pages 30-47 in the 1998 Annual Report and are
incorporated herein by reference.
(2) The unaudited consolidated financial statements in
Part I, Item 1 of the Investors Heritage June 30, 1999 Form 10-Q
are incorporated herein by reference.
(3) Not applicable.
(4) The information set forth in the section entitled
"Comparative Historical and Pro Forma Per Share Data" in the Proxy
Statement is incorporated herein by reference.
(b)(1)-(2) The information set forth in the sections entitled
"Comparative Historical and Pro Forma Per Share Data" and
"Unaudited Pro Forma Financial Data" in the Proxy Statement is
incorporated herein by reference.
(3) The information set forth in the section entitled
"Comparative Historical and Pro Forma Per Share Data" in the Proxy
Statement is incorporated herein by reference.
8
<PAGE>
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) The information set forth in the sections entitled
"Questions and Answers about the Kentucky Investors/Investors
Heritage Share Exchange" and "The Special Meeting--Voting of
Proxies" in the Proxy Statement is incorporated herein by
reference.
(b) Not applicable.
ITEM 16. ADDITIONAL INFORMATION.
Additional information is set forth in the Proxy Statement
which is incorporated herein by reference in its entirety.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
The Exhibit Index attached to this Transaction Statement is
incorporated herein by reference.
9
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SIGNATURE
---------
AFTER DUE INQUIRY AND TO THE BEST OF ITS KNOWLEDGE AND BELIEF,
THE UNDERSIGNED CERTIFIES THAT THE INFORMATION SET FORTH IN THIS
STATEMENT IS TRUE, COMPLETE AND CORRECT.
Dated: September 28, 1999 KENTUCKY INVESTORS, INC.
By: /s/ Harry Lee Waterfield II
-------------------------------
Title: President
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10
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
17(a) Not Applicable
17(b)(1) Fairness Opinion of The Robinson-Humphrey Company, LLC
(incorporated herein by reference to Annex B to the Proxy
Statement/Prospectus filed as Exhibit 17(d)(1) hereto).
17(c)(1) Share Exchange Agreement, dated as of September 24, 1999,
between Investors Heritage Life Insurance Company and
Kentucky Investors, Inc. (incorporated herein by
reference to Annex A to the Proxy Statement/Prospectus
filed as Exhibit 17(d)(1) hereto).
17(d)(1) Proxy Statement/Prospectus (filed herewith).
17(d)(2) The 1998 Investors Heritage Life Insurance Company and
Kentucky Investors, Inc. Annual Report (filed herewith).
17(d)(3) The Kentucky Investors, Inc. Annual Report on Form 10-K
for the year ended December 31, 1998 (filed herewith).
17(d)(4) The Proxy Statement for the Investors Heritage Life
Insurance Company Meeting of Stockholders on May 13, 1999
(filed herewith).
17(d)(5) The Proxy Statement for the Annual Meeting of
Stockholders of Kentucky Investors, Inc. on May 13, 1999
(filed herewith).
17(d)(6) The Investors Heritage Life Insurance Company Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999
(filed herewith).
17(e) Subtitle 13 of Chapter 271B of the Kentucky Revised
Statutes (incorporated herein by reference to Annex C to
the Proxy Statement/Prospectus filed as Exhibit 17(d)(1)
hereto).
17(f) Not applicable.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Consent of The Robinson-Humphrey Company, LLC.
[LOGO - two circles, one within the other. The name Investors
Heritage Life Insurance Company is within the first circle. The
second smaller circle contains the entranceway to the Investors
Heritage headquarters with the words "Doorway to Your Heritage"
beneath the entranceway]
INVESTORS HERITAGE LIFE INSURANCE COMPANY
SHARE EXCHANGE PROPOSED - YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Kentucky
Investors, Inc. and Investors Heritage Life
Insurance Company have agreed on a share
exchange and are seeking your vote on this
important transaction. As a result of the
share exchange Kentucky Investors will be
the owner of all of the outstanding common
stock of Investors Heritage. We think that
it will result in significant benefits to
you in connection with your ownership of our
stocks.
If we complete the share exchange,
Investors Heritage stockholders, except for
Kentucky Investors and its subsidiary, will
receive 1.24 shares of Kentucky Investors
common stock for each share of Investors
Heritage they own. We estimate that
approximately 292,000 shares of Kentucky
Investors common stock will be issued to
Investors Heritage stockholders. These
shares will represent approximately 20.1% of
the outstanding common stock of Kentucky
Investors after the share exchange.
Likewise, the shares of Kentucky Investors
common stock held by Kentucky Investors
stockholders prior to the share exchange
will represent approximately 79.9% of the
outstanding Kentucky Investors common stock
after the share exchange. Kentucky Investors
stockholders will continue to own their
existing shares after the share exchange.
The share exchange cannot be completed
unless Investors Heritage stockholders
approve the share exchange pursuant to the
share exchange agreement. We have scheduled
a meeting for you to vote on this important
matter. YOUR VOTE IS VERY IMPORTANT.
Whether or not you plan to attend the
special meeting, please take the time to
vote by completing and mailing the enclosed
proxy card to us. If you sign, date and mail
your proxy card without indicating how you
want to vote, your proxy will be counted as
a vote in favor of the proposals submitted
at your meeting. IF YOU ARE AN INVESTORS
HERITAGE STOCKHOLDER AND FAIL TO RETURN YOUR
PROXY CARD, THE EFFECT WILL BE THE SAME AS A
VOTE AGAINST THE SHARE EXCHANGE UNLESS YOU
APPEAR AT THE MEETING AND VOTE IN FAVOR OF
THE SHARE EXCHANGE. YOUR VOTE IS VERY
IMPORTANT.
The date, time and place of the meeting is
as follows:
, 1999, a.m., local time
- --------- ---- ----
Investors Heritage Life Insurance Company
auditorium
Second and Shelby Streets
Frankfort, KY 40601
This Proxy Statement/Prospectus provides
you with detailed information about the
proposed share exchange. In addition, you
may obtain information about Investors
Heritage and Kentucky Investors from
documents that we have filed with the
Securities and Exchange Commission. We
encourage you to read this entire document
carefully.
We urge Investors Heritage stockholders to vote "FOR" the share
exchange.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES REGULATORS HAVE APPROVED THE KENTUCKY INVESTORS COMMON
STOCK TO BE ISSUED UNDER THIS PROXY STATEMENT/ PROSPECTUS OR
DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Proxy Statement/Prospectus dated , 1999,
--------- ----
and first mailed to stockholders on , 1999
----------- ----
<PAGE>
INVESTORS HERITAGE LIFE INSURANCE COMPANY
200 CAPITAL AVENUE
FRANKFORT, KENTUCKY 40601
(502) 223-2361
-----------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1999
-------- ----
-----------------------------------------
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
Investors Heritage Life Insurance Company, a Kentucky corporation,
will be held on , 1999, at a.m., local time, at
--------- ---- -----
Investors Heritage Life Insurance Company auditorium, Second and
Shelby Streets, Frankfort, Kentucky 40601, for the following
purposes:
1.To consider and vote upon the approval and adoption of the
share exchange agreement, dated as of September 24, 1999, between
Investors Heritage Life Insurance Company and Kentucky Investors,
Inc., a Kentucky corporation. Upon consummation of the share
exchange, Investors Heritage will become a wholly owned subsidiary
of Kentucky Investors.
2.To transact such other business as may properly come before
the special meeting or any adjournment or postponement of the
meeting.
We have attached a proxy statement/prospectus to assist you in
consideration of the matters you are to vote upon at the special
meeting of Investors Heritage stockholders. We also direct your
attention to the following documents which accompany this notice:
- the 1998 Investors Heritage Life Insurance Company and
Kentucky Investors, Inc. Annual Report;
- the Investors Heritage Life Insurance Company Annual Report on
Form 10-K for the year ended December 31, 1998;
- the Kentucky Investors, Inc. Annual Report on Form 10-K for
the year ended December 31, 1998;
- the Proxy Statement for the Investors Heritage Life Insurance
Company Meeting of Stockholders on May 13, 1999;
- the Proxy Statement for the Annual Meeting of Stockholders of
Kentucky Investors, Inc. on May 13, 1999;
- the Investors Heritage Life Insurance Company Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999; and
- the Kentucky Investors, Inc. Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999.
The Investors Heritage Board has fixed the close of business on
, 1999, as the record date for the determination of
- ------- -- ----
stockholders entitled to notice of, and to vote at, the Investors
Heritage special meeting.
A majority of the votes present in person or by proxy at the
Investors Heritage special meeting must be voted in favor of the
proposal to exchange shares of Investors Heritage common stock
pursuant to the share exchange agreement in order to approve the
proposal.
You are cordially invited to attend the special meeting in
person. Whether or not you expect to attend, WE URGE YOU TO SIGN
AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE
ENVELOPE PROVIDED.
THE BOARD OF DIRECTORS OF INVESTORS HERITAGE UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND ADOPTION OF THE SHARE
EXCHANGE AGREEMENT AND THE SHARE EXCHANGE.
BY ORDER OF THE BOARD OF DIRECTORS
Harry Lee Waterfield II
Chairman of the Board
Frankfort, Kentucky
, 1999
- ---------- ---
<PAGE>
TABLE OF CONTENTS
Page
----
Questions and Answers about the
Kentucky Investors/Investors Heritage
Share Exchange 1
Summary 3
The Companies 3
Vote Required to Approve the Share
Exchange 3
Ownership of Kentucky Investors
Following the Share Exchange 3
The Share Exchange 3
Selected Financial Data 6
Kentucky Investors 6
Investors Heritage 7
Comparative Historical and Pro Forma
Per Share Data 8
Unaudited Pro Forma Financial Data 9
Risk Factors 13
The Share Exchange 14
General 14
Background of the Share Exchange 15
Kentucky Investors' Reasons for the
Share Exchange 16
Investors Heritage's Reasons for the
Share Exchange; Recommendation of
the Investors Heritage Board 17
United States Federal Income Tax
Consequences 18
Accounting Treatment 19
Regulatory Matters 19
Insurance Ratings 20
Dissenters' Rights of Investors
Heritage Stockholders 20
Stock Transfer Restriction
Agreements 22
Comparative Per Share Market Price and
Dividend Information 22
Opinion of Financial Advisor 24
1999 Stock Option and Stock
Appreciation Rights Plan 27
Interests of Certain Persons in the
Share Exchange 28
The Share Exchange Agreement 28
Introduction 28
Terms of the Share Exchange 29
Closing and the Effective Date 29
Exchange of Investors Heritage
Certificates 29
Representations and Warranties 30
Covenants 30
Investors Heritage Board and
Stockholders Meetings 31
Kentucky Investors Indemnification
of Investors Heritage Directors and
Officers 31
Conditions to Completion of Share
Exchange 31
Amendment, Waiver and Termination 32
The Special Meeting 33
Time and Place; Purpose 33
Voting Rights; Votes Required for
Approval 33
Voting of Proxies 33
Comparison of Stockholder Rights 34
Business Combination Statutes 38
Effect of Share Exchange on OTC
Bulletin Board Listings 39
Legal Matters and Tax Opinions 39
Experts 39
Where You Can Find More Information 39
Annex A Share Exchange Agreement, dated as
of September 24, 1999, by and
between Kentucky Investors, Inc.
and Investors Heritage Life
Insurance Company
Annex B Opinion of The Robinson-Humphrey
Company, LLC
Annex C Subtitle 13 of Chapter 271B of the
Kentucky Revised Statutes
i
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE KENTUCKY INVESTORS/INVESTORS HERITAGE
SHARE EXCHANGE
Q. WHY ARE THE TWO COMPANIES PROPOSING THE SHARE
EXCHANGE? HOW WILL I BENEFIT?
A. Kentucky Investors currently owns approximately
74% of the common stock of Investors Heritage.
This share exchange will result in the creation
of a holding company structure with Kentucky
Investors becoming the sole shareholder of
Investors Heritage. With the restructuring, we
believe that greater operating and financial
flexibility will occur in connection with our
investments, business operations and financing
activities. This operating and financial
flexibility should result in more acquisition
opportunities for Kentucky Investors which
should accrue to the benefit of the
stockholders' investment in Kentucky Investors.
Q. AS A HOLDER OF INVESTORS HERITAGE COMMON STOCK,
WHAT WILL I RECEIVE IN THE SHARE EXCHANGE?
A. You will receive 1.24 shares of Kentucky
Investors common stock in exchange for each
share of Investors Heritage common stock that
you own. For example, if you own 100 shares of
Investors Heritage common stock, you will
receive 124 shares of Kentucky Investors common
stock in exchange for your shares. Kentucky
Investors will issue fractional shares.
Q. WHAT ARE THE TAX CONSEQUENCES OF THE SHARE
EXCHANGE?
A. The share exchange is intended to be a tax-free
reorganization for United States federal income
tax purposes. Generally, Investors Heritage
stockholders will not recognize taxable gain or
loss on the exchange of their stock. Tax
matters, however, are complicated, and the tax
consequences of the share exchange to you will
depend on the facts of your particular
situation. We encourage you to contact your
tax advisors to determine the tax consequences
of the share exchange to you. To review the
tax consequences to Investors Heritage
stockholders in greater detail, see pages 18
through 19 of this proxy statement/prospectus.
Q. WHAT DO I NEED TO DO NOW?
A. Please mail your signed proxy card in the
enclosed postage prepaid return envelope as
soon as possible, so that your shares may be
represented and voted at the special meeting,
which we have scheduled for ,
--------- ----
1999. Since a favorable vote of a majority of
the outstanding shares of Investors Heritage
must approve the share exchange, it is
especially important that Investors Heritage
stockholders return their signed proxy cards.
YOUR VOTE IS VERY IMPORTANT.
Q. WHAT DO I DO IF I WANT TO CHANGE MY VOTE AFTER
I HAVE MAILED MY PROXY CARD?
A. There are three ways in which you may revoke
your proxy. First, you may submit a written
notification stating that you would like to
revoke your proxy. Second, you may complete and
submit a new proxy card to the Investors
Heritage corporate secretary. As a third
method, you may attend the Investors Heritage
special meeting and vote in person. If you hold
your shares in "street name" or through a
nominee or broker, you must follow directions
received from your broker to cast or change
your vote.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. No. After the share exchange is completed, we
will send Investors Heritage stockholders
written instructions for exchanging their share
certificates.
<PAGE>
Q. WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A. Neither Kentucky Investors nor Investors
Heritage expects to change its current dividend
practices before the share exchange. After the
share exchange, we expect that Kentucky
Investors will continue to pay cash dividends
as determined by the Kentucky Investors board.
On April 9, 1999, Kentucky Investors paid an
annual dividend of $0.38 per share to holders
of Kentucky Investors common stock. Assuming
an exchange ratio of 1.24 and assuming that we
completed the share exchange on January 1,
1999, a holder of one share of Investors
Heritage common stock would have received a
total cash dividend of $0.47 from Kentucky
Investors during 1999. On April 9, 1999,
Investors Heritage paid an annual dividend of
$0.76 per share to holders of Investors
Heritage common stock.
Q. IF MY BROKER HOLDS MY SHARES IN STREET NAME,
WILL MY BROKER VOTE MY SHARES FOR ME?
A. If you are an Investors Heritage stockholder,
your broker is not permitted to vote your
shares of Investors Heritage common stock on
the share exchange proposal unless you provide
instructions on how to vote. All stockholders
of Investors Heritage should instruct their
brokers to vote their shares following
directions provided by their brokers.
Q. WHEN DO YOU EXPECT TO COMPLETE THE SHARE
EXCHANGE?
A. We are working towards quickly completing the
share exchange. In addition to stockholder
approval, we must also obtain approval from the
Kentucky Department of Insurance. We hope to
complete the share exchange by ,
--------- ----
1999.
Q. WHOM SHOULD STOCKHOLDERS CALL WITH QUESTIONS?
A. Investors Heritage stockholders who have
questions about the share exchange should call
Jane S. Jackson at (502) 223-2361, extension
305.
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS
DOCUMENT AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU TO UNDERSTAND THE SHARE EXCHANGE FULLY. FOR A
MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE SHARE EXCHANGE,
YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE DOCUMENTS TO
WHICH WE HAVE REFERRED YOU. SEE "WHERE YOU CAN FIND MORE
INFORMATION."
THE COMPANIES
KENTUCKY INVESTORS, INC.
200 Capital Avenue
Frankfort, Kentucky 40601
(502) 223-2361
Kentucky Investors is a holding company with
assets of approximately $291,000,000 whose
subsidiaries are a printing company, an insurance
marketing company, and Investors Heritage, a life
insurance company. The total assets and
stockholders' equity of Investors Heritage as of
June 30, 1999 comprised in excess of 99% of total
assets and stockholders' equity of Kentucky
Investors. Kentucky Investors and its
subsidiaries have approximately 110 employees.
INVESTORS HERITAGE LIFE INSURANCE COMPANY
200 Capital Avenue
Frankfort, Kentucky 40601
(502) 223-2361
Investors Heritage is a life insurance company
focused primarily on traditional life and group
life insurance products and annuities and pre-
need and final expense insurance products sold
by funeral directors and affiliated agents. Investors
Heritage also markets credit related insurance
products through financial institutions. Investors
Heritage has 106 employees. Investors Heritage
gross written premiums for 1998 were approximately
$62,000,000.
VOTE REQUIRED TO APPROVE
THE SHARE EXCHANGE
(see page 33)
The favorable vote of the holders of at least a
majority of the outstanding shares of Investors
Heritage common stock is required to approve the
share exchange. YOUR FAILURE TO VOTE YOUR SHARES
OF INVESTORS HERITAGE COMMON STOCK WILL HAVE THE
EFFECT OF A VOTE AGAINST THE SHARE EXCHANGE.
OWNERSHIP OF KENTUCKY INVESTORS
FOLLOWING THE SHARE EXCHANGE
(see cover page)
The shares of Kentucky Investors common stock
that Kentucky Investors will issue to Investors
Heritage stockholders in the share exchange will
constitute approximately % of the outstanding
---
Kentucky Investors common stock after the share
exchange based on the number of shares of
Kentucky Investors and Investors Heritage common
stock outstanding on , the record date
--------
for the Investors Heritage Special Meeting.
THE SHARE EXCHANGE
WHAT INVESTORS HERITAGE STOCKHOLDERS WILL RECEIVE
IN THE SHARE EXCHANGE (SEE PAGES 14 AND 29)
You will receive 1.24 Kentucky Investors shares
for each Investors Heritage share you hold,
including fractional shares.
RECOMMENDATION TO STOCKHOLDERS (SEE PAGE 17)
The Investors Heritage board of directors
believes that the share exchange is in your best
interests and unanimously recommends that you
vote FOR the proposal to approve and adopt the
share exchange agreement.
OPINION OF FINANCIAL ADVISOR (SEE PAGE 24)
In connection with the share exchange,
Investors Heritage's board of directors received
an opinion from its financial advisor, The
Robinson-Humphrey Company, LLC. This opinion
discusses the fairness from a financial point of
view of the consideration to be received by
Investors Heritage's stockholders. We have
attached the full text of this opinion as Annex B
to this document. This opinion describes the
procedures followed, assumptions made, matters
considered and limitations on the review
undertaken in connection with the opinion. We
encourage you to read and consider the opinion in
its entirety. The opinion is directed to
Investors Heritage's board of directors and does
not constitute a recommendation to any
stockholder as to how that stockholder should
vote in connection with the proposed share
exchange.
3
<PAGE>
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
(SEE PAGE 18)
The receipt of Kentucky Investors common stock
in the share exchange generally will be tax free
to Investors Heritage stockholders for United
States federal income tax purposes.
Tax matters are very complicated, and the tax
consequences of the share exchange to you will
depend on the facts of your particular situation.
You are urged to consult your own tax advisor as
to the specific tax consequences to you of the
share exchange, including the applicable federal,
state, local and foreign tax consequences.
SHARE OWNERSHIP OF MANAGEMENT AND DIRECTORS
(SEE PAGE 28)
Directors and executive officers of Investors
Heritage and their affiliates, including Kentucky
Investors, owned and were entitled to vote
approximately shares of the Investors
-----
Heritage common stock, or approximately % of
----
the Investors Heritage common stock outstanding
on the record date for the special meeting. The
holders of these shares of Investors Heritage
common stock are expected to vote in favor of the
share exchange.
DISSENTERS' RIGHTS (SEE PAGE 20)
As holder of shares of Investors Heritage
common stock you may, in lieu of the
consideration you would otherwise receive in the
share exchange, exercise your right to dissent
from the share exchange agreement and to demand
payment of the fair value of your shares in cash
if the share exchange is consummated. You must
follow certain procedures set forth in the
Kentucky statutes, the text of the applicable
portions of which we have attached as Annex C to
this proxy statement/prospectus. If you receive
such a cash payment, you may recognize taxable
income. Failure to follow the procedures may
result in a loss of your dissenters' rights. If
you return a blank executed proxy card you will
be deemed to have approved the share exchange
agreement, thereby waiving your dissenters'
rights.
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND
INFORMATION (SEE PAGE 22)
Investors Heritage common stock is reported on
the OTC Bulletin Board under the symbol "INLF."
Kentucky Investors common stock is reported on
the OTC Bulletin Board under the symbol "KINV."
On September 27, 1999, the last full trading day
prior to the public announcement of the proposed
share exchange, the bid price quoted per share of
Investors Heritage common stock was $23.50 and
the bid price quoted per share of Kentucky
Investors common stock was $23.00. On
----------
, 1999, the most recent date prior to the
- ---
printing of this document, the bid price quoted
per share of Investors Heritage common stock was
$ and the bid price quoted per share of
-----
Kentucky Investors common stock was $ .
-----
REGULATORY APPROVAL (SEE PAGE 19)
The insurance department of the Commonwealth of
Kentucky must approve the share exchange on
behalf of Investors Heritage in order to close
the share exchange.
INTERESTS OF KENTUCKY INVESTORS AND INVESTORS
HERITAGE OFFICERS AND DIRECTORS IN THE SHARE
EXCHANGE (SEE PAGE 28)
Stockholders should note that a number of
Kentucky Investors and Investors Heritage
directors and executive officers may have
interests in the share exchange that are
different from, or in addition to, the interests
of the Kentucky Investors and Investors Heritage
stockholders generally.
4
<PAGE>
CONDITIONS TO THE SHARE EXCHANGE (SEE PAGE 31)
The consummation of the share exchange is
subject to a number of conditions, including:
- approval of the share exchange agreement by
the Investors Heritage stockholders;
- receipt of regulatory approval and the
absence of restraints;
- confirmation from A.M. Best that the share
exchange does not have an adverse affect on
the rating of Investors Heritage;
- receipt by Kentucky Investors and Investors
Heritage of an opinion as to the treatment
of the share exchange as a "reorganization"
within the meaning of Section 368(a) the
Internal Revenue Code; and
- receipt of opinions as to the enforceability
of the share exchange agreement.
TERMINATION OF THE SHARE EXCHANGE AGREEMENT
(SEE PAGE 32)
Kentucky Investors and Investors Heritage can
jointly agree to terminate the share exchange
agreement at any time before completing the share
exchange. In addition, either Kentucky Investors
or Investors Heritage can terminate the share
exchange agreement if:
- the share exchange is not completed by
December 31, 1999;
- prohibition of the share exchange by any
governmental entity;
- Investors Heritage stockholders fail to
approve the share exchange;
- one party materially breaches any of the
representations or warranties it made or
fails to materially comply with any of its
covenants under the share exchange agreement
and that breach is not or cannot be cured
within 30 days after notice;
- the holders of five percent of the
outstanding Investors Heritage common stock
exercise their dissenters' rights in
connection with the share exchange;
- the bid price quoted per share of Kentucky
Investors common stock immediately prior to
the effective date of the share exchange is
$17.00 or less; or
- the bid price quoted per share of Investors
Heritage common stock immediately prior to
the effective date of the share exchange is
$25.00 or more.
5
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below should be read in
conjunction with the financial statements and the notes thereto
incorporated by reference for Kentucky Investors and Investors
Heritage from the 1998 Annual Report to Stockholders of Kentucky
Investors and Investors Heritage delivered with this proxy
statement/prospectus, the Kentucky Investors Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 and the Investors
Heritage Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999.
KENTUCKY INVESTORS
The following selected historical financial data for, and as
of the end of, each of the five years in the period ended December
31, 1998 have been derived from Kentucky Investors' consolidated
financial statements, which have been audited by Ernst & Young LLP,
Kentucky Investors' independent auditors. The data as of June 30,
1999 and 1998 and for the six months ended June 30, 1999 and 1998
have been derived from Kentucky Investors' unaudited consolidated
financial statements which include, in the opinion of Kentucky
Investors' management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the results of
operations and financial position of Kentucky Investors for the
periods and dates presented. Stockholders should read this data
together with the audited and unaudited consolidated financial
statements of Kentucky Investors, including the notes thereto,
incorporated herein by reference. We have listed the documents that
we are delivering together with this proxy statement/prospectus and
which we are incorporating by reference under the heading "Where
You Can Find More Information" on page 39.
<TABLE>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenue $ 30,444$ 29,138 $ 57,708 $ 52,707 $ 47,962$ 44,005$ 46,656
Total Benefits
and Expenses 28,416 27,401 53,698 49,863 46,320 43,191 44,039
Net Income 995 929 1,975 1,523 1,147 555 1,523
Earnings Per Share 1.17 1.11 2.34 1.84 1.41 0.71 1.97
Total Assets 290,899 271,276 288,369 256,872 224,997 208,045 191,367
Total Liabilities 251,735 229,903 243,673 217,543 190,997 173,288 164,902
Debt 337 - 407 - - - -
Cash Dividends
Per Share 0.38 0.38 0.38 0.38 0.38 0.38 0.37
</TABLE>
6
<PAGE>
INVESTORS HERITAGE
The following selected historical financial data for, and as
of the end of, each of the five years in the period ended December
31, 1998 have been derived from Investors Heritage's consolidated
financial statements, which have been audited by Ernst & Young LLP,
Investors Heritage's independent auditors. The data as of June 30,
1999 and 1998 and for the six months ended June 30, 1999 and 1998
have been derived from Investors Heritage's unaudited consolidated
financial statements which include, in the opinion of Investors
Heritage's management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the results of
operations and financial position of Investors Heritage for the
periods and dates presented. Stockholders should read this data
together with the audited and unaudited consolidated financial
statements of Investors Heritage, including the notes thereto,
incorporated herein by reference. We have listed the documents that
we are delivering together with this proxy statement/prospectus and
which we are incorporating by reference under the heading "Where
You Can Find More Information" on page 39.
<TABLE>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Premiums $ 22,675$ 21,840 $ 42,638 $ 39,129 $ 36,354$ 33,061$ 36,444
Net Investment
Income 7,540 6,948 14,264 13,083 11,654 10,815 10,011
Total Revenue 30,330 29,080 57,461 52,497 47,780 44,076 46,804
Net Income 1,425 1,361 2,766 2,127 1,602 917 2,401
Earnings Per Share 1.58 1.50 3.06 2.36 1.78 1.02 2.66
Total Assets 292,297 272,810 289,825 258,654 227,140 210,490 194,262
Policy Reserves 237,653 215,772 227,185 203,858 180,377 161,695 155,179
Debt 337 - 407 - - - -
Cash Dividends
Per Share 0.76 0.76 0.76 0.76 0.76 0.76 0.74
</TABLE>
7
<PAGE>
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The following table sets forth:
- the historical earnings per share, historical book value
per share and dividends per share of both Kentucky
Investors and Investors Heritage;
- the Kentucky Investors unaudited pro forma earnings per
share, unaudited pro forma book value per share and
unaudited pro forma dividends per share after giving effect
to the share exchange using generally accepted accounting
principles. Kentucky Investors' management anticipates its
dividends per share to continue as determined by its board.
Therefore, the unaudited pro forma dividends per share for
Kentucky Investors remain the same as historical dividends
per share of $0.38; and
- the Investors Heritage unaudited equivalent pro forma
earnings per share, unaudited equivalent pro forma book
value per share and unaudited equivalent pro forma
dividends per share based on the share exchange ratio of
1.24 to 1.
The information presented in the table should be read in
conjunction with the separate historical audited and unaudited
consolidated financial statements of Kentucky Investors and
Investors Heritage and the notes thereto incorporated by reference
herein.
The actual per share data might have differed from the pro
forma results if Kentucky Investors and Investors Heritage had
actually been combined during the periods presented. You should
not rely on the pro forma information as being indicative of either
the historical results that we would have had or the future results
that we will experience after the share exchange is completed.
<TABLE>
Kentucky Investors Investors Heritage
------------------ ------------------
Equivalent
Pro Pro
Historical Forma Historical Forma
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Book value per share as of:
June 30, 1999 $33.10 $30.48 $46.75 $37.80
December 31, 1998 38.00 34.72 52.89 43.05
Earnings per share:
June 30, 1999 1.17 1.61 1.58 2.00
December 31, 1998 2.34 3.27 3.06 4.05
Cash dividends per share:
June 30, 1999 0.38 0.38 0.76 0.47
December 31, 1998 0.38 0.38 0.76 0.47
</TABLE>
8
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma financial data gives effect to the
share exchange as a purchase under generally accepted accounting
principles. The following unaudited pro forma financial data has
been prepared using the historical consolidated financial
statements incorporated by reference in Kentucky Investors' Annual
Report on Form 10-K for the year ended December 31, 1998.
Approximately 99% of Kentucky Investors' operations are comprised
of the operations of Investors Heritage. For the pro forma
presentation of the purchase of the minority interest of Investors
Heritage by Kentucky Investors, only Kentucky Investors' historical
financial data has been presented.
The accompanying unaudited pro forma balance sheet gives
effect to the share exchange as if it had occurred as of June 30,
1999. Furthermore, the unaudited pro forma statements of income
include the impact of the share exchange as if it had occurred on
January 1, 1999 and 1998 for the unaudited pro forma statements of
income for the six months ending June 30, 1999 and the year ending
December 31, 1998, respectively.
The unaudited pro forma income per share data is based upon
the historical average number of outstanding shares of Kentucky
Investors common stock, adjusted to include the number of Kentucky
Investors shares of common stock that would be issued in the share
exchange based upon an exchange ratio of 1.24 to 1. The unaudited
pro forma per share data and the unaudited equivalent pro forma per
share data for Kentucky Investors do not include any cost savings
or other financial or operational benefits from the share exchange.
Stockholders should read the information set forth below in
conjunction with the historical consolidated financial data of
Kentucky Investors and Investors Heritage incorporated by reference
herein.
The actual operating results might have differed from the pro
forma results if Kentucky Investors and Investors Heritage had
actually been combined during the periods presented. You should
not rely on the pro forma information as being indicative of either
the historical results that we would have had or the future results
that we will experience after the share exchange is completed.
9
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1999
<TABLE>
HISTORICAL PRO KENTUCKY
KENTUCKY FORMA INVESTORS
INVESTORS ADJUSTMENTS AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
Assets(1)
Investments
Securities available-
for-sale at fair value:
Fixed maturities $192,324,585 $ - $192,324,585
Equity securities 3,385,180 - 3,385,180
Mortgage loans on real
estate 14,986,939 120,372(2) 15,107,311
Policy loans 7,234,759 - 7,234,759
Other long-term
investments 490,315 52,056(2) 542,371
Short-term investments 1,048,169 - 1,048,169
------------ ------------- ------------
Total investments 219,469,947 172,428 219,642,375
Cash and cash equivalents 3,318,278 - 3,318,278
Accrued investment income 3,170,726 - 3,170,726
Due and deferred premiums 4,056,339 - 4,056,339
Deferred acquisition costs 29,254,790 (8,043,944)(2)(4) 21,210,846
Leased property under
capital leases 330,129 - 330,129
Property and equipment 1,612,120 563,778 (2) 2,175,898
Goodwill 1,816,166 (383,312)(2) 1,432,854
Other assets 1,563,504 - 1,563,504
Amounts recoverable
from reinsurers 26,306,933
(317,619)(2) 25,989,314
------------ ------------- ------------
$290,898,932 ($8,008,669) $282,890,263
============ ============= ============
Liabilities and Stockholders' Equity
Liabilities
Policy liabilities:
Benefit reserves $215,224,527 $ - $215,224,527
Unearned premium reserves 22,428,481 (291,234)(2) 22,137,247
Policy claims 1,879,534 - 1,879,534
Other policyholders' funds:
Dividend & endowment
accumulations 1,010,744 - 1,010,744
Reserves for dividends
& endowments & other 806,292 - 806,292
------------ ------------- ------------
Total policy
liabilities 241,349,578 (291,234) 241,058,344
Federal income taxes 5,443,452 (3,848,085)(2)(6) 1,595,367
Obligations under capital
leases 336,963 336,963
Other liabilities 4,604,941 400,000 (2) 5,004,941
------------ ------------- ------------
Total liabilities 251,734,934 (3,739,319) 247,995,615
------------ ------------- ------------
Minority interest in
subsidiary 10,903,769 (10,903,769)(2) -
------------ ------------- ------------
Stockholders' Equity
Common stock 853,685 291,216(2) 1,144,901
Paid-in surplus 3,471,824 4,551,853(2) 8,023,677
Accumulated other
comprehensive income 1,700,448 - 1,700,448
Retained earnings 22,234,272 1,791,350(2) 24,025,622
------------ ------------- ------------
Total stockholders' equity 28,260,229 6,634,419 34,894,648
------------ ------------- ------------
$290,898,932 ($8,008,669) $282,890,263
============ ============= ============
</TABLE>
See Notes to Unaudited Pro Forma Financial Data on page 13.
10
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
HISTORICAL PRO KENTUCKY
KENTUCKY FORMA INVESTORS
INVESTORS ADJUSTMENTS AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
Revenues
Premiums and other
considerations $ 22,674,887 $ - $22,674,887
Investment income,
net of expenses 7,445,920 (192,766)(3) 7,253,154
Realized loss on
investments, net (149,072) - (149,072)
Other income 472,310 - 472,310
------------ ----------- -----------
Total revenue 30,444,045 (192,766) 30,251,279
Benefits and Expenses
Death and other benefits 11,763,951 - 11,763,951
Guaranteed annual endowments 426,076 - 426,076
Dividends to policyholders 377,433 - 377,433
Increase on benefit reserves
and unearned premiums 9,246,572 - 9,246,572
Acquisition costs deferred (4,170,980) - (4,170,980)
Amortization of deferred
acquisition costs 3,298,349 (868,983)(4) 2,429,366
Commissions 3,037,880 - 3,037,880
Other insurance expense 4,436,811 (23,805)(5) 4,413,006
------------ ----------- -----------
Total benefits and
expenses 28,416,092 (892,788) 27,523,304
------------ ----------- -----------
Income from operations before
federal income tax and minority
interest in net income of
subsidiary 2,027,953 700,022 2,727,975
Provision for income taxes 665,391 238,007 (6) 903,398
------------ ----------- -----------
Income from operations before
minority interest in net
income of subsidiary 1,362,562 462,015 1,824,577
Minority interest in net
income of subsidiary 367,583 (367,583)(7) -
------------ ----------- -----------
Net Income $994,979 $829,598 $1,824,577
============ =========== ===========
Weighted average number of
common shares outstanding 849,466 1,136,714
============ ===========
Earnings per share $ 1.17 $ 1.61
============ ===========
</TABLE>
See Notes to Unaudited Pro Forma Financial Data on page 13.
11
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
HISTORICAL PRO KENTUCKY
KENTUCKY FORMA INVESTORS
INVESTORS ADJUSTMENTS AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
Revenues
Premiums and other
considerations $42,638,289 $ - $42,638,289
Investment income,
net of expenses 14,167,232 (203,823)(3) 13,963,409
Realized gain on
investments, net 126,179 - 126,179
Other income 776,612 - 776,612
----------- ----------- -----------
Total revenue 57,708,312 (203,823) 57,504,489
Benefits and Expenses
Death and other benefits 20,767,497 - 20,767,497
Guaranteed annual endowments 800,041 - 800,041
Dividends to policyholders 626,325 - 626,325
Increase on benefit reserves
and unearned premiums 18,400,657 - 18,400,657
Acquisition costs deferred (7,006,366) - (7,006,366)
Amortization of deferred
acquisition costs 6,497,263 (1,712,143)(4) 4,785,120
Commissions 5,231,882 - 5,231,882
Other insurance expense 8,380,727 (52,805)(5) 8,327,922
----------- ----------- -----------
Total benefits and
expenses 53,698,026 (1,764,948) 51,933,078
----------- ----------- -----------
Income from operations before
federal income tax and minority
interest in net income of
subsidiary 4,010,286 1,561,125 5,571,411
Provision for income taxes 1,314,000 530,783 (6) 1,844,783
----------- ----------- -----------
Income from operations before
minority interest in net
income of subsidiary 2,696,286 1,030,343 3,726,629
Minority interest in net
income of subsidiary 721,149 (721,149)(7) -
----------- ----------- -----------
Net Income $1,975,137 $1,751,492 $3,726,629
=========== =========== ===========
Weighted average number of
common shares outstanding 843,251 1,141,154
=========== ===========
Earnings per share $ 2.34 $ 3.27
=========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Financial Data on page 13.
12
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
In connection with the share exchange, the following pro forma
adjustments are being made to the historical consolidated balance
sheet and consolidated statements of income of Kentucky Investors.
The objective of these adjustments is to illustrate the possible
scope of the change in Kentucky Investors' historical consolidated
financial position and results of operations as a result of the
share exchange.
The following describes the pro forma adjustments reflected in
the accompanying unaudited pro forma financial statements.
(1) Kentucky Investors' total assets as of December 31, 1998, on a
pro forma basis, would have been approximately $278,965,000.
(2) Reflects the share exchange whereby Kentucky Investors
acquired 234,852 Investors Heritage shares held by minority
stockholders through an exchange of Kentucky Investors stock
at an exchange rate of 1.24 to 1. This transaction is treated
as a purchase whereby the minority interest in Investors
Heritage's assets and liabilities is recorded at fair value.
The fair value of the minority interest assets and liabilities
exceeded the purchase price by $7,591,534, which represents
negative goodwill. The resulting negative goodwill was
applied primarily against the present value of future profits
and the minority interest portion of goodwill. The portion of
the assets and liabilities representing the historical
ownership interest of Kentucky Investors will continue to be
carried at historical book value. The effect of the purchase
adjustments on operations for each of the next five years
beginning with the year ended December 31, 1999 is to increase
annual net income by approximately $278,500.
(3) The cost bases of Investors Heritage's fixed maturities have
been increased to current market values at the pro forma
purchase dates to the extent the fixed maturities were part of
the minority interest's asset ownership. Amortization of the
net premium on fixed maturities has been adjusted to reflect
the change in amortized cost basis assuming an average
duration of the portfolio of 9.05 years for 1998 and 8.10
years for 1999.
(4) The portion of deferred acquisition costs owned by the
minority interest has been eliminated. The amortization
related to the eliminated deferred acquisition costs has been
reflected as a pro forma adjustment.
(5) Other insurance expense was decreased to eliminate the
minority interest portion of goodwill amortization recognized.
Additionally, depreciation was adjusted for increases in cost
basis for real estate owned and home office property held
using an average estimated useful life of 30 years.
(6) Income tax effects resulting from the pro forma adjustments
have been reflected at a rate of 34%.
(7) The minority interest portion in net income of subsidiary has
been eliminated to reflect the 100% ownership by Kentucky
Investors of Investors Heritage subsequent to the share
exchange.
RISK FACTORS
Investors Heritage stockholders should consider the following
matters in deciding whether to vote in favor of the share exchange
agreement. Stockholders should consider these matters in
conjunction with the other information included or incorporated by
reference in this document.
POTENTIAL FLUCTUATION IN VALUE OF INVESTORS HERITAGE COMMON
STOCK AND KENTUCKY INVESTORS COMMON STOCK THAT KENTUCKY INVESTORS
WILL ISSUE IN THE SHARE EXCHANGE MAY RESULT IN INVESTORS HERITAGE
STOCKHOLDERS RECEIVING KENTUCKY INVESTORS COMMON STOCK THE MARKET
VALUE OF WHICH IS LESS THAN THE INVESTORS HERITAGE COMMON STOCK
BEING EXCHANGED.
The number of shares of Kentucky Investors common stock to be
received in the share exchange for each Investors Heritage common
stock is fixed at 1.24. Therefore, because the market price of
Kentucky Investors and Investors Heritage shares fluctuate, the
value at the time of the share exchange of the consideration that
Investors Heritage stockholders receive will depend on the market
price of Kentucky Investors and Investors Heritage shares at that
time. Since we will not know the market value of either the
Kentucky Investors common stock or the Investors Heritage common
stock until the time of the share exchange, we do not know whether
the value of the Kentucky Investors stock that Investors Heritage
stockholders will receive will be equivalent to the Investors
Heritage common stock being exchanged. For historical and current
market prices of Kentucky Investors shares, see "Comparative Per
Share Market Price and Dividend Information."
13
<PAGE>
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.
Statements in this proxy statement/prospectus may be
considered to be forward looking statements, as the Private
Securities Litigation Reform Act of 1995 defines that term.
Statements that include words or phrases "will result," "are
expected to," "will continue," "is anticipated," "estimate," or
similar expressions may be forward-looking statements. These
statements are subject to risks and uncertainties. The factors
which could cause actual results to differ from those suggested by
any of those statements include, but are not limited to, those
discussed or identified from time to time in Kentucky Investors' or
Investors Heritage's public filings with the SEC and specifically
include:
- risks or uncertainties associated with Kentucky Investors'
or Investors Heritage's expectations with respect to
timing, completion or tax status of the share exchange or
with respect to the value of the share exchange
consideration;
- growth prospects;
- market positions;
- distribution channels;
- premiums;
- earnings per share;
- cost savings;
- revenue enhancements; and
- profitability resulting from the share exchange
transaction.
More general factors include:
- general economic conditions including changes in interest
rates and the performance of the financial markets;
- changes in domestic laws, regulations and taxes;
- changes in competition and pricing environments;
- regional or general changes in asset valuations;
- the occurrence of significant natural disasters;
- the development of major Year 2000 liabilities;
- the inability to reinsure certain risks economically;
- the adequacy of loss reserves;
- competition;
- pricing; and
- restructurings.
THE SHARE EXCHANGE
GENERAL
Investors Heritage and Kentucky Investors are furnishing this
document to holders of Investors Heritage common stock in
connection with the solicitation of proxies by Investors Heritage's
board of directors at a special meeting of its stockholders, and at
any adjournments or postponements of the meeting.
At the special meeting, the Investors Heritage stockholders
will be asked to vote upon a proposal to approve and adopt the
share exchange agreement, dated as of September 24, 1999, between
Kentucky Investors and Investors Heritage, and the transactions
contemplated thereby.
The share exchange agreement provides for the exchange of 1.24
Kentucky Investors shares of common stock for each share of
Investors Heritage common stock, except for the Investors Heritage
common stock held by Kentucky Investors and its subsidiary,
resulting in Investors Heritage becoming the wholly owned
subsidiary of Kentucky Investors. The share exchange will become
effective in accordance with the articles of share exchange to be
filed with the Secretary of State of the Commonwealth of Kentucky.
We anticipate that the parties will make this filing as soon as
practicable after the last of the conditions precedent to the share
exchange contained in the share exchange agreement has been
satisfied or waived. We have attached a copy of the share exchange
agreement as Annex A to this document.
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<PAGE>
BACKGROUND OF THE SHARE EXCHANGE
On February 8, 1999, senior management of Investors Heritage
and Kentucky Investors held a strategic planning session to discuss
the outlook for each company's business. As a result of that
meeting, management of Investors Heritage and Kentucky Investors
decided to explore a possible reorganization involving the two
companies.
On March 2, 1999, senior management of Investors Heritage and
Kentucky Investors met to further discuss the possibilities of a
reorganization involving the two companies.
Throughout March and April 1999, Kentucky Investors and
Investors Heritage management continued to explore the possibility
of a reorganization, assessing their continued compatibility with
one another, examining the potential tax consequences of a
reorganization, the potential costs savings, market efficiencies
and business efficiencies of a combination involving the two
companies.
On May 12, 1999, Harry Lee Waterfield II, Chairman and Chief
Executive Officer of Investors Heritage, advised the Investors
Heritage board that preliminary discussions were ongoing with
Kentucky Investors regarding a possible reorganization. At that
meeting the Investors Heritage board authorized management to
continue to explore the feasibility of a reorganization with
primary emphasis on a tax-free reorganization.
On May 12, 1999, Harry Lee Waterfield II, Chairman and Chief
Executive Officer of Kentucky Investors, advised the Kentucky
Investors board that preliminary discussions were ongoing with
Investors Heritage regarding a possible reorganization. At that
meeting the Kentucky Investors board authorized management to
continue to explore the feasibility of a reorganization with
primary emphasis on a tax-free reorganization.
On July 6, 1999, the Kentucky Investors board authorized the
chairman to appoint a special committee comprised of three of its
board members to review the feasibility of a reorganization with
Investors Heritage whereby Kentucky Investors would exchange its
common stock for the Investors Heritage common stock, to negotiate
the terms and conditions of any reorganization with the Investors
Heritage special committee and to make a recommendation to the
Kentucky Investors board. The chairman appointed David Reed, Helen
Wagner and Jerry Howell, Jr. to the Kentucky Investors special
committee. This special committee met on July 6, 1999 for the
purpose of discussing a potential exchange ratio for a
reorganization involving the companies. Among other items, the
special committee discussed the synergies between the two
companies, the cost savings achieved by reorganization, the
potential to enhance market efficiencies, and the ratio of market
values, book values and dividends between the companies. The
Kentucky Investors special committee voted to make a preliminary
proposal to Investors Heritage to enter into a share exchange
agreement whereby Kentucky Investors would exchange its shares of
common stock for the outstanding shares of Investors Heritage
common stock not owned by Kentucky Investors. The Kentucky
Investors special committee authorized David Reed, chairman of its
special committee, to convey the preliminary proposal to Investors
Heritage.
On July 6, 1999, the Investors Heritage board authorized the
chairman to form an Investors Heritage special committee comprised
of four of its board members to consider the feasibility of a
reorganization with Kentucky Investors, to negotiate the terms and
conditions of any reorganization with the Kentucky Investors
special committee and to make a recommendation to the Investors
Heritage board. The chairman appointed Adron Doran, Gordon Duke,
Jerry Howell and Glenn Doran to serve on the Investors Heritage
special committee. On July 6, 1999, the Investors Heritage special
committee received a preliminary proposal from the Kentucky
Investors special committee to enter into a share exchange
agreement whereby all Investors Heritage stockholders other than
Kentucky Investors would receive Kentucky Investors common stock in
exchange for their shares of Investors Heritage common stock.
Investors Heritage special committee voted to consider the
preliminary proposal further and to engage The Robinson-Humphrey
Company, LLC to provide financial advice and a fairness opinion
with regard to the share exchange.
On July 27, 1999, members of Investors Heritage management and
Gordon Duke, a member of the Investors Heritage special committee,
met with representatives of Robinson-Humphrey to review materials
and information regarding the historical, financial and market data
on Investors Heritage and Kentucky Investors, as well as other
recent transactions involving unaffiliated companies. During this
meeting, Robinson-Humphrey also performed its due diligence in
order to provide financial advice and on which it could render a
fairness opinion, from a financial point of view, with regard to
the transaction.
On August 5, 1999, the Investors Heritage special committee
recommended for approval to the Investors Heritage board an
exchange ratio of 1.24 to 1 whereby Investors Heritage stockholders
would receive 1.24 shares of Kentucky Investors common stock for
each share of Investors Heritage common stock. The recommendation
of the Investors Heritage special committee was subject to the
approval of the terms and conditions of a definitive share exchange
agreement as well as receipt of all regulatory approvals.
15
<PAGE>
On August 18, 1999, the Kentucky Investors special committee
reviewed materials and information regarding the historical
financial and market data on Investors Heritage and Kentucky
Investors, as well as other recent transactions involving
unaffiliated companies. The Kentucky Investors special committee
discussed the exchange ratio and unanimously recommended for
approval to the Kentucky Investors board an exchange ratio of 1.24
to one subject to negotiation and approval of a definitive share
exchange agreement as well as receipt of all regulatory approvals.
On August 18, 1999, the Kentucky Investors board approved the
Kentucky Investors special committee recommendation with respect to
the share exchange ratio. All Kentucky Investors non-employee
directors voted in favor of the recommendation. Kentucky Investors
board members who serve on the Investors Heritage special committee
abstained from voting.
On August 18, 1999, the Investors Heritage board approved the
Investors Heritage special committee recommendation with respect to
the share exchange ratio, subject to negotiation of a definitive
share exchange agreement and related regulatory and stockholder
approvals. All Investors Heritage non-employee directors voted in
favor of the recommendation. Investors Heritage board members who
serve on the Kentucky Investors special committee abstained from
voting. Representatives of Robinson-Humphrey were present at that
meeting to provide financial advice and to render a fairness
opinion, from a financial point of view, regarding the share
exchange ratio.
On September 16, 1999, the Investors Heritage special
committee met to review and discuss the terms and conditions of the
definitive share exchange agreement and unanimously recommended
that the Investors Heritage board approve the share exchange
agreement for approval by its stockholders.
On September 16, 1999, the Kentucky Investors special
committee met to review and discuss the terms and conditions of the
definitive share exchange agreement and unanimously recommended
that the Kentucky Investors board approve the share exchange
agreement.
On September 16, 1999, the Investors Heritage board approved
the Investors Heritage special committee recommendation with
respect to the definitive share exchange agreement, subject to the
changes as may be approved by the officers executing the agreement
on behalf of Investors Heritage and recommended that its
stockholders vote to approve the share exchange agreement. All
Investors Heritage non-employee directors voted in favor of the
recommendation. Investors Heritage board members who serve on the
Kentucky Investors special committee abstained from voting.
On September 16, 1999, the Kentucky Investors board approved
the Kentucky Investors special committee recommendation with
respect to the definitive share exchange agreement, subject to the
changes as may be approved by the officers executing the share
exchange agreement on behalf of Kentucky Investors. All Kentucky
Investors non-employee directors voted in favor of the
recommendation. Kentucky Investors board members who serve on the
Investors Heritage special committee abstained from voting.
On September 24, 1999, the officers of Investors Heritage and
Kentucky Investors executed the definitive share exchange agreement
and authorized for issuance on September 28, 1999 a joint press
release stating that Kentucky Investors and Investors Heritage had
formally approved a definitive share exchange agreement pursuant to
which Kentucky Investors would acquire all of the outstanding
Investors Heritage common stock, other than the Investors Heritage
common stock owned by Kentucky Investors and its subsidiary, at the
exchange ratio.
KENTUCKY INVESTORS' REASONS FOR THE SHARE EXCHANGE
The Kentucky Investors special committee engaged in an
investigation of the proposed share exchange with the assistance of
independent counsel. After the evaluation, the Kentucky Investors
special committee unanimously approved the share exchange agreement
and recommended to the Kentucky Investors board that the Kentucky
Investors board approve and adopt the share exchange agreement.
In reaching its conclusion to approve the share exchange
agreement, the Kentucky Investors special committee and the board
considered a number of factors, including the following:
- information regarding the financial condition, results of
operations, competitive position, business and prospects of
Investors Heritage and Kentucky Investors, both on a
historical and future basis and on a stand-alone and
combined basis, including an improvement in earnings that
will inure to the benefit of Kentucky Investors
stockholders after the share exchange;
- the terms of the share exchange agreement, including the
parties' representations, warranties and covenants and the
conditions to their obligations;
16
<PAGE>
- the relative trading prices and volumes as well as
prospects for future growth and value of Kentucky Investors
common stock and Investors Heritage common stock;
- the relative and intrinsic values of Investors Heritage
common stock and Kentucky Investors common stock and the
implied premium which the exchange ratio represents
thereto;
- the combined financial condition of Kentucky Investors and
Investors Heritage following the share exchange;
- the structure of the share exchange, which permits
Investors Heritage stockholders to exchange their Investors
Heritage common stock for Kentucky Investors common stock
on a tax-free basis, as described in United States Federal
Income Tax Consequences elsewhere in this proxy
statement/prospectus; and
- the share exchange will be dilutive to book value and
dividends.
Potential benefits of the share exchange include:
- a single, publicly traded entity with a consolidated
stockholder base;
- enhancement of the Kentucky Investors capital structure;
- simplification of Investors Heritage's and Kentucky
Investors' financial reporting structures;
- the creation of economies of scale thereby reducing
administrative costs; and
- increasing opportunities for growth through mergers and
acquisitions, including the possible use of Kentucky
Investors equity securities in those transactions.
In view of the variety of factors considered in connection
with its evaluation of the proposed share exchange and the terms of
the share exchange agreement, the Kentucky Investors board of
directors did not deem it practicable to, and did not, quantify or
otherwise assign relative weights to the specific factors
considered in reaching its conclusion. Individual directors may
have given different weights to different factors.
INVESTORS HERITAGE'S REASONS FOR THE SHARE EXCHANGE; RECOMMENDATION
OF THE INVESTORS HERITAGE BOARD
The Investors Heritage special committee engaged in an
investigation of the proposed share exchange with the assistance of
independent counsel and an independent financial advisor. After
the evaluation, the Investors Heritage special committee
unanimously approved the share exchange agreement and recommended
to the Investors Heritage board that the Investors Heritage board
approve and adopt the share exchange agreement and recommend to
Investors Heritage's stockholders that they approve the share
exchange agreement.
In reaching its decision to approve the share exchange
agreement and recommend approval to the Investors Heritage
stockholders, the Investors Heritage special committee and the
board considered a number of factors, including the following:
- the presentations by, and the advice and views of, Robinson-
Humphrey, on August 18, 1999, to the effect that the
exchange ratio pursuant to the share exchange agreement was
fair from a financial point of view to the holders of
Investors Heritage common stock;
- the terms of the share exchange agreement, including the
parties' representations, warranties and covenants and the
conditions to their obligations;
- the relative trading prices and volumes as well as
prospects for future growth and value of the Investors
Heritage common stock and Kentucky Investors common stock;
- information regarding the financial condition, results of
operations, competitive position, business and prospects of
Kentucky Investors and Investors Heritage, both on a
historical and future basis and on a stand-alone and
combined basis, including an improvement in earnings that
will inure to the benefit of holders of Kentucky Investors
common stock after the share exchange;
- the dilution of book value and dividends that will result
for Investors Heritage stockholders;
- the relative and intrinsic values of Investors Heritage
common stock and Kentucky Investors common stock and the
implied premium which the exchange ratio represents
thereto;
- the opportunity for holders of Investors Heritage common
stock to become stockholders of Kentucky Investors; and
17
<PAGE>
- the combined financial condition of Investors Heritage and
Kentucky Investors following the share exchange.
Potential benefits of the share exchange include:
- a single, publicly traded entity with a consolidated
stockholder base;
- the creation of an ownership interest for former Investors
Heritage stockholders in Kentucky Investors to permit them
to share in the continued growth of Investors Heritage in
which Kentucky Investors has participated since 1963;
- simplification of the financial reporting structure of
Investors Heritage and Kentucky Investors; and
- the creation of economies of scale thereby reducing
administrative expenses.
In view of the variety of factors considered in connection
with its evaluation of the proposed share exchange and the terms of
the share exchange agreement, the Investors Heritage board of
directors did not deem it practicable to, and did not, quantify or
otherwise assign relative weights to the specific factors
considered in reaching its conclusion. Individual directors may
have given different weights to different factors.
The Investors Heritage board unanimously recommends that its
stockholders vote "FOR" approval and adoption of the share exchange
agreement.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TAX OPINION. It is a condition to the obligations of Investors
Heritage and Kentucky Investors to consummate the share exchange
that Ernst & Young LLP will render an opinion to the effect that
the share exchange will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986. In
rendering its opinion, Ernst & Young LLP will rely upon
representations contained in certificates of representations from
Investors Heritage and Kentucky Investors delivered for purposes of
the opinion and will assume that such representations are true as
of the effective time of the share exchange. The parties do not
currently intend to waive the condition that Ernst & Young LLP will
render its opinion. In the unlikely event that the parties do
decide to waive this condition, however, Investors Heritage will
recirculate this proxy statement/prospectus to disclose the waiver
of this condition and all related disclosures, including the risks
to Investors Heritage stockholders resulting from the waiver, and
will resolicit proxies from the Investors Heritage stockholders.
TAX CONSEQUENCES. The following United States federal income
tax consequences are anticipated to result from the share exchange
and the exchange of Investors Heritage common stock for Kentucky
Investors common stock:
- the share exchange will qualify as a tax-deferred
reorganization described in Section 368(a)(1)(B) of the
Internal Revenue Code;
- an Investors Heritage stockholder who receives solely
shares of Kentucky Investors common stock upon the exchange
of the stockholder's shares of Investors Heritage common
stock will not recognize any gain or loss;
- the tax basis of the shares of Kentucky Investors common
stock received by an Investors Heritage stockholder
pursuant to the share exchange will be the same as the
stockholder's tax basis in the shares of Investors Heritage
common stock surrendered in the share exchange;
- the holding period of the shares of Kentucky Investors
common stock received by an Investors Heritage stockholder
pursuant to the share exchange will include the holder's
holding period with respect to the shares of Investors
Heritage common stock surrendered in the share exchange,
provided that the Investors Heritage stockholder held the
Investors Heritage common stock as a capital asset;
- an Investors Heritage stockholder who receives cash upon
exercising dissenter's rights will, subject to the
limitations and provisions of Section 302 of the Internal
Revenue Code, receive capital treatment for the recognized
gain or loss, provided that the Investors Heritage
stockholder held the Investors Heritage common stock as a
capital asset; and
- neither Kentucky Investors nor Investors Heritage will
recognize any gain or loss upon the exchange of Kentucky
Investors common stock for Investors Heritage common stock.
The foregoing discussion is a summary of United States federal
income tax consequences of the share exchange to a United States
stockholder who holds Investors Heritage common stock as a capital
asset, but it is not, and does not purport to be a complete
analysis or description of all potential tax effects of the share
exchange. In addition,
18
<PAGE>
the discussion does not address all of the tax consequences that
may be relevant to particular taxpayers in light of their personal
circumstances or to taxpayers subject to special treatment under
the Internal Revenue Code. The taxpayers subject to special
treatment include:
- insurance companies;
- financial institutions;
- dealers in securities;
- traders that mark to market;
- tax-exempt organizations;
- stockholders who hold their shares as part of a hedge,
appreciated financial position, straddle or conversion
transaction;
- stockholders who acquired the Investors Heritage common
stock as compensation or through a tax-qualified retirement
plan;
- foreign corporations, foreign partnerships or other foreign
entities; and
- individuals who are not citizens or residents of the United
States.
We have not provided any information with respect to the tax
consequences, if any, of the share exchange under applicable
foreign, state, local and other tax laws. The foregoing discussion
is based upon the provisions of the Internal Revenue Code, the
Treasury regulations, and IRS rulings and judicial decisions, as in
effect as of the date of this proxy statement/prospectus. There can
be no assurance that future legislative, administrative or judicial
changes or interpretations will not affect the accuracy of the
statements or conclusions set forth herein. Any change could apply
retroactively and could affect the accuracy of this discussion. No
rulings have been or will be sought from the IRS concerning the tax
consequences of the share exchange and the opinion of Ernst & Young
LLP as to the federal income tax consequences set forth above will
not be binding on the IRS.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE
ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE
SHARE EXCHANGE. THUS, INVESTORS HERITAGE STOCKHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES
TO THEM OF THE SHARE EXCHANGE, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY
PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
The share exchange will be accounted for by Kentucky Investors
under the purchase method of accounting. Under this method of
accounting, Kentucky Investors will record the minority interest's
assets and liabilities of Investors Heritage at their fair value.
The fair value of the minority interest to be acquired is expected
to exceed the purchase price on the consummation date; therefore,
the share exchange will initially result in the creation of
negative goodwill which will be applied principally against the
present value of future profits. The portion of the assets and
liabilities representing Kentucky Investors' ownership interests of
Investors Heritage will continue to be carried at their historical
book values in the consolidated financial statements of Kentucky
Investors.
REGULATORY MATTERS
The insurance laws and regulations of all U.S. jurisdictions
generally require that, prior to the acquisition of an insurance
company doing business in a jurisdiction, the acquiring company
obtain the prior approval of, or file notification with and meet
waiting period requirements imposed by, the insurance commissioners
of those jurisdictions.
In connection with the state approval and notification
process, Kentucky Investors will file an application, called a Form
A filing, for approval of the share exchange with the insurance
commissioner of Kentucky, the state in which Investors Heritage is
domiciled. It is anticipated that the Kentucky Department of
Insurance will hold a hearing on the Form A filing.
Following the consummation of the share exchange, Investors
Heritage will continue to be a Kentucky-domiciled insurance company
and as such, will be subject to regulation and examination by the
Insurance Commissioner of the Commonwealth of Kentucky. Investors
Heritage will also continue to be subject to regulation by
19
<PAGE>
the insurance commissioners or other insurance regulatory
authorities in the other jurisdictions in which it transacts
insurance business.
Kentucky Investors and Investors Heritage as Kentucky
corporations will also be governed by the general corporate laws of
the Commonwealth of Kentucky.
INSURANCE RATINGS
Investors Heritage currently has a financial condition rating
from A. M. Best Company of B+. A. M. Best ratings are based upon a
comprehensive review of a company's financial performance which is
supplemented by certain data, including:
- responses to A. M. Best questionnaires;
- quarterly filings with the National Association of
Insurance Commissioners;
- state insurance department examination reports;
- loss reserve reports;
- annual reports; and
- reports filed with the SEC.
A. M. Best undertakes a quantitative evaluation based upon:
- profitability;
- leverage/capitalization and liquidity and a qualitative
evaluation based upon a company's book of business or
spread of risk;
- appropriateness and quality of reinsurance;
- the quality, diversification and estimated market value of
its assets;
- the adequacy of its loss reserves and policyholders'
surplus;
- the capital structure of a company and its holding company,
if present;
- the experience and integrity of its management; and
- the company's market presence.
A. M. Best rating classifications are as follows: A++ and A+
(superior), A and A- (excellent), B++ and B+ (very good), B and B-
(adequate), C++ and C+ (fair), C and C- (marginal), D (very
vulnerable), E (under state supervision) and F (in liquidation).
Based on discussions with officials at A. M. Best, management
of Investors Heritage does not believe that A. M. Best will alter
its current rating of Investors Heritage as a result of the share
exchange. However, until A. M. Best completes its normal rating
process of Investors Heritage in the first quarter of 2000, the
effect of the share exchange on its B+ rating is not known.
An A. M. Best rating is not a recommendation to buy, sell or
hold securities. A. M. Best may withdraw or revise its rating at
any time.
DISSENTERS' RIGHTS OF INVESTORS HERITAGE STOCKHOLDERS
Under Kentucky law, a stockholder entitled to vote on the
share exchange may dissent and demand payment of the fair value of
the stockholder's shares in cash if the share exchange is
consummated. Generally, dissenters' rights are a stockholder's
sole remedy for objecting to the share exchange agreement. The
following summary does not constitute a complete statement or
summary of each provision of the Kentucky statutes relating to the
rights of dissenting stockholders and we qualify this discussion in
its entirety by reference to Kentucky statutes which we have
attached as Annex C hereto. Accordingly, we urge any holder of
Investors Heritage common stock intending to exercise dissenters'
rights to review Annex C carefully and to consult legal counsel. A
dissenting Investors Heritage stockholder must take each step in
strict compliance with the applicable provisions of the statutes in
order to perfect dissenters' rights.
An Investors Heritage stockholder wishing to exercise
dissenters' rights must deliver to Investors Heritage, prior to the
vote on the share exchange at the special meeting, a written notice
of intent to demand payment for that stockholder's shares if the
share exchange is consummated and must refrain from voting in favor
of the share exchange.
20
<PAGE>
An Investors Heritage stockholder intending to exercise dissenters'
rights must give the written notice of intent in addition to and
separate from any vote, in person or by proxy, against approval of
the share exchange agreement. A vote, in person or by proxy,
against approval of the share exchange agreement will not
constitute a written notice. An Investors Heritage stockholder
intending to exercise dissenters' rights should send the written
notice of intent to Investors Heritage Life Insurance Company, 200
Capital Avenue, Frankfort, Kentucky 40601, Attention Corporate
Secretary. We recommend that all required documents that you
deliver by mail be sent registered or certified mail with return
receipt requested.
INVESTORS HERITAGE STOCKHOLDERS ELECTING TO EXERCISE THEIR
DISSENTERS' RIGHTS UNDER KENTUCKY LAW MUST NOT VOTE FOR APPROVAL OF
THE SHARE EXCHANGE AGREEMENT. A VOTE BY A STOCKHOLDER AGAINST
APPROVAL OF THE SHARE EXCHANGE AGREEMENT IS NOT REQUIRED IN ORDER
FOR THAT STOCKHOLDER TO EXERCISE DISSENTERS' RIGHTS. HOWEVER, IF A
STOCKHOLDER RETURNS A SIGNED PROXY FORM BUT DOES NOT SPECIFY A VOTE
AGAINST APPROVAL OF THE SHARE EXCHANGE AGREEMENT OR A DIRECTION TO
ABSTAIN, THEN THE PROXY FORM, IF NOT REVOKED, WILL BE VOTED FOR
APPROVAL OF THE SHARE EXCHANGE AGREEMENT, WHICH WILL HAVE THE
EFFECT OF WAIVING THAT STOCKHOLDER'S DISSENTERS' RIGHTS.
If the share exchange is approved, within ten days after the
special meeting or any adjournment thereof, Investors Heritage will
send to all stockholders exercising their dissenters' rights a
dissenters' notice which:
- states where the stockholder must send a demand for payment
and where and when the stockholder must deposit stock
certificates;
- encloses a form for demanding payment that the dissenter
must complete and return to Investors Heritage;
- informs holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment
demand is received;
- establishes the date by which Investors Heritage must
receive the demand for payment from the stockholder; and
- encloses a copy of the relevant Kentucky statutes.
After a stockholder receives the dissenters' notice, the
dissenter must deliver the demand for payment to Investors Heritage
and deposit the dissenters' shares in accordance with the
dissenters' notice.
Upon its receipt of the demand for payment, Investors Heritage
will send to each dissenting stockholder a statement containing an
estimate by Investors Heritage of the fair value of the dissenter's
shares as of the day before the date of the special meeting,
excluding any appreciation or depreciation in anticipation of the
share exchange unless exclusion would be inequitable, and payment
based on that estimate plus accrued interest. Investors Heritage
will include with the payment an explanation of how Investors
Heritage calculated interest along with the balance sheet of
Investors Heritage as of the end of the most recent fiscal year, an
income statement, a statement of changes in stockholders' equity
and the latest available interim financial statement. In addition,
Investors Heritage will inform the dissenter of the right to demand
payment according to the dissenters' own estimate of the fair
value.
Kentucky law does not require Investors Heritage to send
payment with the statement of its estimate of fair value to a
dissenter who was not a beneficial owner of the shares at the time
of the first public announcement of the share exchange agreement,
but rather may offer to purchase the shares based on the estimate.
The stockholder must either accept that amount in full satisfaction
or proceed with the exercise of dissenters' rights.
Within 30 days after Investors Heritage has delivered its
estimate of fair value, a dissenting stockholder may notify
Investors Heritage of the dissenting stockholder's estimate of the
fair value of the shares and demand payment of the balance due
under the estimate. If Investors Heritage and the stockholder do
not agree as to the fair value of the shares, then within 60 days
after receiving the dissenter's payment demand, Investors Heritage
must file a petition in the appropriate Kentucky county circuit
court requesting the court to determine the fair value of the
shares and the accrued interest.
If Investors Heritage fails to institute this proceeding,
Kentucky law requires Investors Heritage to pay each dissenter
whose demand remains unsettled the amount demanded. Each
dissenting Investors Heritage stockholder who is a party to the
proceeding is entitled to the amount, if any, by which the court
finds the
21
<PAGE>
fair value of the dissenting stockholder's shares, plus interest,
exceeds the amount paid by Investors Heritage. In an appraisal
proceeding, the county circuit court will determine all costs of
the proceeding, including the reasonable compensation and expenses
of appraisers appointed by the court. The court will assess costs
against Investors Heritage, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds
equitable, to the extent the court finds the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment.
The court may also assess the fees and expenses of counsel and
experts for the parties, in amounts the court finds equitable as
follows:
- against Investors Heritage and in favor of dissenters, if
the court finds Investors Heritage did not substantially
comply with the Kentucky statutory requirements for
dissenters' rights; or
- against either Investors Heritage or a dissenter, in favor
of any other party, if the court finds that the party
against whom the fees and expenses are assessed acted
arbitrarily, vexatiously or not in good faith with respect
to dissenters' rights provided by Kentucky law.
If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly
situated, and that the fees for those services should not be
assessed against Investors Heritage, the court may award to counsel
reasonable fees that the dissenters who benefited must pay from the
amounts awarded.
If Investors Heritage does not consummate the share exchange
within 60 days after the deadline for demanding payment and
depositing certificates, it must return all deposited shares and
release any transfer restrictions imposed on uncertificated shares.
If Investors Heritage fails to do so, the dissenter may
nevertheless proceed with the exercise of dissenters' rights, and
Investors Heritage will have no further right to terminate the
dissenters' rights by returning deposited shares.
An Investors Heritage stockholder of record may dissent as to
less than all of the stock registered in the stockholder's name
only if the stockholder dissents with respect to all of the shares
beneficially owned. The Investors Heritage stockholder must notify
Investors Heritage in writing of the name and address of each
person on whose behalf the stockholder is asserting dissenters'
rights. In that event, the dissenters' rights shall be determined
as if the shares as to which the stockholder has dissented and the
stockholder's other shares were registered in the names of
different stockholders. A beneficial stockholder may assert
dissenters' rights as to shares held on that stockholder's behalf
only if the stockholder submits to Investors Heritage the record
stockholder's written consent to the dissent no later than the time
the beneficial stockholder asserts dissenters' rights, and dissents
as to all shares of which the stockholder is the beneficial owner
or over which the stockholder has the power to direct the vote.
INVESTORS HERITAGE STOCKHOLDERS SHOULD BE AWARE THAT FAILURE
TO PROCEED IN ACCORDANCE WITH THE PROVISIONS OF KENTUCKY LAW FOR
DISSENTERS' RIGHTS MAY RESULT IN A LOSS OF ALL DISSENTERS' RIGHTS
AND RESULT IN THEIR BEING BOUND BY THE SHARE EXCHANGE AGREEMENT AND
THE SHARE EXCHANGE.
STOCK TRANSFER RESTRICTION AGREEMENTS
This document does not cover any resales of the Kentucky
Investors common stock that Investors Heritage's stockholders
receive upon consummation of the share exchange, and no person is
authorized to make any use of this document in connection with any
resale.
All shares of Kentucky Investors common stock that Investors
Heritage stockholders receive in the share exchange will be freely
transferable, with the exception of the Kentucky Investors common
stock received by persons who are deemed to be affiliates of
Investors Heritage under the Securities Act of 1933, at the time of
the Investors Heritage special meeting. Affiliates may only re-
sell their Kentucky Investors common stock in transactions
permitted by Rule 145 under the Securities Act of 1933 or as
otherwise permitted under that act. Persons who may be deemed to
be affiliates of Investors Heritage generally include individuals
or entities that control, are controlled by, or are under common
control with, Investors Heritage and may include designated
officers, directors and principal stockholders of Investors
Heritage.
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
The price per share of Kentucky Investors common stock is
traded on the OTC Bulletin Board under the symbol "KINV." The
price per share of Investors Heritage common stock is traded on the
OTC Bulletin Board under the symbol "INLF."
For the calendar quarters indicated, the table below sets
forth, (1) the high and low bid quotations per share of Kentucky
Investors common stock and Investors Heritage common stock, in each
case as reported on the OTC Bulletin Board and based on published
financial sources and (2) the cash dividends per share of Kentucky
Investors common stock and Investors Heritage common stock declared
during the first quarter
22
<PAGE>
and paid in the second quarter. The high and low bid quotations
reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
<TABLE>
KENTUCKY INVESTORS COMMON STOCK
-------------------------------
MARKET PRICE
------------
HIGH LOW CASH
BID BID DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
1997
First Quarter $13.50 $13.00 -
Second Quarter 13.75 13.50 $0.38
Third Quarter 14.75 13.75 -
Fourth Quarter 16.00 14.75 -
1998
First Quarter 16.75 16.00 -
Second Quarter 20.00 17.00 0.38
Third Quarter 22.00 20.00 -
Fourth Quarter 20.00 18.00 -
1999
First Quarter 18.00 18.00 0.38
Second Quarter 21.00 18.00
Third Quarter (through
September 27, 1999) 24.00 21.00
</TABLE>
<TABLE>
INVESTORS HERITAGE COMMON STOCK
-------------------------------
MARKET PRICE
------------
HIGH LOW CASH
BID BID DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
1997
First Quarter $26.00 $26.00 -
Second Quarter 26.00 26.00 $0.76
Third Quarter 26.00 26.00 -
Fourth Quarter 26.50 26.00 -
1998
First Quarter 26.50 26.00 -
Second Quarter 28.00 26.50 0.76
Third Quarter 28.00 26.00 -
Fourth Quarter 26.00 25.00 -
1999
First Quarter 25.00 24.00 -
Second Quarter 23.50 23.50 0.76
Third Quarter (through
September 27, 1999) 23.50 23.50
</TABLE>
On September 27, 1999, the last full trading day prior to the
public announcement of the proposed share exchange, the bid price
quoted per share of Kentucky Investors common stock traded on the
OTC Bulletin Board was $23.00 and the bid price quoted per share of
Investors Heritage common stock traded on the OTC Bulletin Board
was $23.50. On , 1999, the most recent date prior to
--------- ----
the printing of this document, the bid price quoted per share of
Kentucky Investors common stock reported on the OTC Bulletin Board
was $ and the bid price quoted per share of Investors Heritage
-----
common stock traded on the OTC Bulletin Board was $ .
-----
Stockholders are urged to obtain current market quotations prior to
making any decision with respect to the share exchange.
Kentucky Investors and Investors Heritage do not expect to
change their dividend policies before the share exchange. After the
share exchange, we expect Kentucky Investors will continue to pay
cash dividends as determined by the Kentucky Investors board.
23
<PAGE>
OPINION OF FINANCIAL ADVISOR
The Investors Heritage special committee retained Robinson-
Humphrey to render a fairness opinion, from a financial point of
view, of the consideration Investors Heritage stockholders are to
receive in connection with the proposed purchase by Kentucky
Investors of the approximately 26% of Investors Heritage's
outstanding common stock that Kentucky Investors does not currently
own. In addition, as part of its engagement, Robinson-Humphrey was
to provide the Investors Heritage special committee with financial
information and valuation analyses relating to the Investors
Heritage special committee's consideration and negotiation of the
share exchange.
On August 18, 1999, Robinson-Humphrey delivered its written
opinion to the Investors Heritage board that the consideration
Kentucky Investors is to pay the Investors Heritage stockholders,
excluding Kentucky Investors as a stockholder of Investors
Heritage, in the share exchange, is fair from a financial point of
view. The text of the opinion is set forth in Annex B to this
proxy statement/prospectus and Investors Heritage stockholders
should read it in its entirety.
The special committees for Investors Heritage and Kentucky
Investors agreed upon the share exchange. In their discussions,
they determined the consideration that Kentucky Investors would pay
to the Investors Heritage stockholders under the share exchange.
The special committee, the board and management of Investors
Heritage did not limit Robinson-Humphrey in its investigations or
procedures to render its opinion. In arriving at its opinion,
Robinson-Humphrey did not ascribe a specific range of values to
Investors Heritage or Kentucky Investors, but rather made its
determination as to fairness, from a financial point of view, of
the 1.24 to one exchange ratio that Kentucky Investors is to pay
the Investors Heritage stockholders on the basis of the financing
and comparative analysis described below. Robinson-Humphrey's
opinion is not intended to be and does not constitute a
recommendation to any Investors Heritage stockholder as to how such
stockholders should vote with respect to the share exchange. The
Investors Heritage special committee did not request Robinson-
Humphrey to opine as to, and its opinion does not address,
Investors Heritage's underlying business decision to proceed with
or effect the share exchange.
To render its opinion to the Investors Heritage special
committee, Robinson-Humphrey performed a variety of financial
analyses. However, the preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods
to the particular circumstances, and, therefore, such an opinion is
not readily susceptible of a summary description. Robinson-
Humphrey, in conducting its analysis and in arriving at its
opinion, has not conducted a physical inspection of any of the
properties or assets of either Investors Heritage or Kentucky
Investors, and has not made or obtained any independent valuation
or appraisals of any properties, assets or liabilities of either
Investors Heritage or Kentucky Investors. Robinson-Humphrey has
assumed and relied upon the accuracy and completeness of the
financial and other information that Investors Heritage and
Kentucky Investors provided to it or that was publicly available.
Its opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to
it as of the date of, its analyses.
In arriving at its opinion, Robinson-Humphrey reviewed and
analyzed:
- publicly available information concerning Investors
Heritage and Kentucky Investors which it believed relevant
to its analysis;
- financial and operating information with respect to the
business, operations and prospects of Investors Heritage
and Kentucky Investors furnished to Robinson-Humphrey;
- a comparison of the historical financial results and
present financial condition of Investors Heritage and
Kentucky Investors with other companies that it deemed
relevant;
- the trading history of Investors Heritage common stock and
Kentucky Investors common stock for the period of June 1,
1995 to August 16, 1999;
- the range of multiples of stock price to earnings per share
and stock price to generally accepted accounting principles
stockholders' equity per share at which Investors Heritage
and Kentucky Investors have traded since March 31, 1997;
and
- a comparison of the financial terms of the share exchange
with terms of other recent transactions which it deemed
relevant.
In addition, Robinson-Humphrey had discussions with the
management of Investors Heritage concerning its business,
operations, assets, present condition and future prospects and
undertook other studies, analyses and investigations as it deemed
appropriate.
24
<PAGE>
In connection with the preparation of its fairness opinion,
Robinson-Humphrey performed financial and comparative analyses,
portions of which are summarized below. The summary includes the
financial analyses used by Robinson-Humphrey and deemed to be
material, but is not a complete description of the analyses
performed by Robinson-Humphrey in arriving at its opinion. Robinson-
Humphrey believes that its analyses must be considered as an
integrated whole, and selecting portions of these analyses and the
factors considered by it, without considering all of the analyses
and factors, could create a misleading or an incomplete view of the
process underlying its analyses set forth in the opinion. In
performing its analyses, Robinson-Humphrey made numerous
assumptions about industry performance, general business and
economic conditions and other matters, many of which are beyond the
control of Investors Heritage or Kentucky Investors. Any estimates
contained in the analyses are not necessarily indicative of actual
past or future results or values, which may be significantly more
or less favorable than as set forth in the analyses. Estimates of
values of companies or parts of companies are not appraisals or
necessarily reflective of the price at which companies or parts of
companies may actually be sold, and the estimates are subject to
uncertainty. No public company used as a comparison is identical
to Investors Heritage or Kentucky Investors. An analysis of the
results of a comparison is not mathematical; rather, it involves
complex considerations and judgments concerning differences in
financial and operating characteristics of the comparable companies
and other factors that could affect the public trading values of
companies to which Robinson-Humphrey is comparing Investors
Heritage or Kentucky Investors.
The following is a summary of certain analyses performed by
Robinson-Humphrey to render its opinion.
HISTORICAL TRADING MULTIPLES ANALYSIS. Robinson-Humphrey
performed an analysis of the multiples of stock price to earnings
per share and stock price to GAAP stockholders' equity per share at
which Investors Heritage and Kentucky Investors have traded at the
end of each quarter since March 31, 1997. During this period,
Investors Heritage traded in the range of 8.0x to 12.1x the latest
twelve months earnings and 0.49x to 0.68x the GAAP stockholders'
equity.
<TABLE>
1997 1998 1999
------------------------ ----------------------- -----------
Quarter
Ended: 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31 3/31 6/30
---- ---- ---- ----- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Price/earnings
per share 11.0x 12.1x 11.2x 11.5x 10.5x 9.6x 9.3x 8.9x 8.1x 8.0x
Price/GAAP
stockholders'
equity 0.68 0.66 0.61 0.58 0.55 0.59 0.50 0.49 0.50 0.53
Investors Heritage
share price as a
multiple of
Kentucky Investors
share price 1.94x 1.94x 1.80x 1.68x 1.47x 1.29x 1.26x 1.44x 1.33x 1.14x
</TABLE>
The share exchange translates to a latest twelve months, for
the period ended June 30, 1999, earnings multiple of 8.3x and
0.56x June 30, 1999 GAAP stockholders' equity multiple.
Additionally the ratio of the price of Investors Heritage
common stock to the price of Kentucky Investors common stock
ranged from 1.14x to 1.94x. In the share exchange, this
ratio is set at 1.24x.
COMPARABLE TRANSACTION ANALYSIS. Robinson-Humphrey performed
two analyses of premiums paid for selected comparable acquisitions.
- Based on the premiums paid in selected acquisitions of
minority interests in which the consideration paid was
common stock and the participants announced the transaction
since January 1, 1998, the analysis yielded a range of
purchase price premiums of the following:
<TABLE>
Purchase Price Premium
Prior to Announcement
----------------------
1 Day 1 Week 4 Weeks
----- ------ -------
<S> <C> <C> <C>
Average 13.3% 16.2% 20.3%
Median 5.9 10.0 15.6
High 71.6 61.5 71.6
Low (8.5) (11.6) (40.8)
</TABLE>
The share exchange represents a 10.8% premium to Investors
Heritage common stock as of August 17, 1999, one day prior to
the opinion; a 10.8% premium to Investors Heritage common
stock as of August 10, 1999, one week prior to the opinion;
and a 7.4% premium to Investors Heritage common stock as of
July 20, 1999, four weeks prior to the opinion.
25
<PAGE>
- Based on the premiums paid in selected acquisitions of
minority interests in which the consideration paid was in
either cash or common stock and the participants announced
the transaction since January 1, 1998, the analysis yielded
a range of purchase price premiums of the following:
<TABLE>
Purchase Price Premium
Prior to Announcement
----------------------
1 Day 1 Week 4 Weeks
----- ------ -------
<S> <C> <C> <C>
Average 24.9% 28.6% 28.9%
Median 23.3 24.5 22.1
High 100.0 112.5 78.9
Low (11.1) (11.6) (40.8)
</TABLE>
The share exchange represents a 10.8% premium to Investors
Heritage common stock as of August 17, 1999, one day prior to
the opinion; a 10.8% premium to Investors Heritage common
stock as of August 10, 1999, one week prior to the opinion;
and a 7.4% premium to Investors Heritage common stock as of
July 20, 1999, four weeks prior to the opinion.
No company or transaction used in the comparable transaction
analyses is identical to Investors Heritage. Accordingly, an
analysis of the foregoing necessarily involves complex
consideration and judgments, as well as other factors that affect
the public trading value or the acquisition value of the company to
which it is being compared.
TRADING HISTORY. Robinson-Humphrey analyzed the historical
price and volume trading history of Investors Heritage and Kentucky
Investors from June 1, 1995 to August 16, 1999. During this period
Investors Heritage common stock closed as high as $29.50 in June
1998 and as low as $23.50 in August 1999. During this same period
Kentucky Investors common stock closed as high as $24.50 in May
1999 and as low as $12.50 in August 1995. Robinson-Humphrey placed
particular emphasis on trading activity during the most recent six
months. For the six month period ended August 16, 1999, Investors
Heritage common stock had closed as high as $25.50 and as low as
$23.50 and Kentucky Investors common stock had closed as high as
$22.00 and as low as $18.00.
PRO FORMA SHARE EXCHANGE ANALYSIS. Robinson-Humphrey analyzed
the impact of the share exchange on Investors Heritage's earnings
per share and the GAAP stockholders' equity per share based on the
financial data for the latest twelve months ended June 30, 1999 and
for the latest twelve months ended December 31, 1998.
- Based on the latest twelve months ended June 30, 1999, the
share exchange is dilutive to GAAP stockholders' equity per
share by 20.3%, accretive to earnings per share by 33.3%
and dilutive to dividends per share by 38.0%.
- Based on the latest twelve months ended December 31, 1998,
the share exchange is dilutive to GAAP stockholders' equity
per share by 20.6%, accretive to earnings per share by
14.4% and dilutive to dividends per share by 38.0%.
COMPENSATION OF ROBINSON-HUMPHREY. Pursuant to an engagement
letter dated July 27, 1999 between the Investors Heritage special
committee and Robinson-Humphrey, Investors Heritage agreed to pay
Robinson-Humphrey a retainer fee of $15,000 and an additional fee
of $60,000 upon delivery of the opinion by Robinson-Humphrey. The
engagement letter with Robinson-Humphrey also provides that
Investors Heritage will reimburse Robinson-Humphrey for its
reasonable out-of-pocket expenses and indemnify Robinson-Humphrey
and certain related persons and entities against liabilities,
including liabilities under securities laws, incurred in connection
with its services thereunder.
As part of its investment banking business, Robinson-Humphrey
is regularly engaged in the valuation of securities in connection
with share exchanges and acquisitions, negotiated underwritings,
secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes.
The Investors Heritage special committee decided to retain Robinson-
Humphrey based on its experience as a financial advisor in mergers
and acquisitions of financial institutions and its knowledge of the
life insurance industry in particular. Robinson-Humphrey does not
currently make a market in the common stock of either Investors
Heritage or Kentucky Investors.
26
<PAGE>
1999 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
The Kentucky Investors 1999 stock option and stock
appreciation rights plan became effective as of September 16, 1999.
The purpose of the 1999 stock option plan is to promote an
increased interest in and a greater incentive to expand and improve
profits, prosperity and welfare of Kentucky Investors. Kentucky
Investors authorized for issuance a total of 250,000 shares of
common stock under the 1999 stock option plan. The Kentucky
Investors board granted options to purchase 75,000 shares of common
stock at $23.00 per share.
STOCK OPTIONS. Each stock option granted under the 1999 stock
option plan entitles the holder to purchase the number of shares of
common stock specified in the grant at the purchase price
specified.
The 1999 stock option plan authorizes the Kentucky Investors
board or an option committee appointed by the Kentucky Investors
board to grant non-qualified stock options under the Internal
Revenue Code to Kentucky Investors' and its subsidiaries' key
employees and non-employee directors.
If an option granted under the 1999 stock option plan expires,
is cancelled or is exchanged for a new option before a holder
exercises the option in full, the shares reserved for the
unexercised portion of the option will become available again for
use under the 1999 stock option plan.
The 1999 stock option plan contains a change in control
provision, which will permit the Kentucky Investors board or option
committee to terminate existing options. Kentucky Investors will
then pay to the holders of the terminated options cash equal to the
difference between the fair market value of the terminated options
prior to the change in control and the exercise price of the
options. A change in control occurs at the time either a person
becomes the beneficial owner of a greater percentage of the
combined voting power of Kentucky Investors common stock than the
Waterfield family members have, or the Waterfield family members'
percentage ownership of Kentucky Investors common stock for voting
purposes falls below 20%. The Waterfield family members mean Rose
Gayle Waterfield Hardy, Nancy Waterfield Walton, Harry Lee
Waterfield II, Chairman and President of Kentucky Investors, and
any of their lineal descendants.
STOCK APPRECIATION RIGHTS. Any stock appreciation right
awarded under the 1999 stock option plan shall entitle the
recipient to the number of shares, cash or combination of cash and
shares equal to the product of the excess of the fair market value
of one share over the exercise price per share specified in the
stock appreciation right or related option times the number of
shares for which the recipient shall exercise the right.
GRANTS TO DIRECTORS AND EXECUTIVE OFFICERS. On September 24,
1999, the Kentucky Investors board granted to the following
directors and executive officers of Kentucky Investors options to
purchase 65,250 shares of the Kentucky Investors common stock, all
of which vest on September 24, 2001.
<TABLE>
Number of
securities Percentage
underlying of Per
options total share
Name of Executive granted options exercise Expiration
Officer or Director (# shares) granted price date
------------------- ---------- ------- ----- ----
<S> <C> <C> <C> <C>
Harry Lee Waterfield II 16,200 21.6% $23.00 September 24, 2009
Chairman of the Board,
President and Chief Executive
Officer, Investors Heritage,
and Chairman of the Board and
President, Kentucky Investors
Howard L. Graham 8,100 10.8 23.00 September 24, 2009
Vice President - Corporate
Services
Raymond L. Carr 8,100 10.8 23.00 September 24, 2009
Vice President -
Administrative Services
Robert M. Hardy, Jr. 8,100 10.8 23.00 September 24, 2009
Director, Vice President and
General Counsel, Investors
Heritage, and Director and
General Counsel, Kentucky
Investors
Michael F. Dudgeon 3,750 5.0 23.00 September 24, 2009
Director and Vice President -
Financial Services, Investors
Heritage
Dr. Adron Doran 3,000 4.0 23.00 September 24, 2009
Director, Investors Heritage
H. Glenn Doran 3,000 4.0 23.00 September 24, 2009
Director, Investors Heritage
and Kentucky Investors
Gordon C. Duke 3,000 4.0 23.00 September 24, 2009
Director, Investors Heritage
and Kentucky Investors
Jerry F. Howell 3,000 4.0 23.00 September 24, 2009
Director, Investors Heritage
and Kentucky Investors
Dr. Jerry F. Howell, Jr. 3,000 4.0 23.00 September 24, 2009
Director, Investors Heritage
and Kentucky Investors
David W. Reed 3,000 4.0 23.00 September 24, 2009
Director, Kentucky Investors
Helen S. Wagner 3,000 4.0 23.00 September 24, 2009
Director, Investors Heritage
and Kentucky Investors
</TABLE>
INTERESTS OF CERTAIN PERSONS IN THE SHARE EXCHANGE
In considering the recommendation of the Investors Heritage
board with respect to the share exchange proposal, Investors
Heritage's stockholders should be aware that directors and members
of management of Investors Heritage may be deemed to have interests
in the share exchange that are in addition to their interests as
Investors Heritage stockholders generally. On the record date for
the Investors Heritage special meeting, directors and executive
officers of Investors Heritage and their affiliates, including
Kentucky Investors, owned and were entitled to vote shares
--------
of Investors Heritage common stock representing approximately
% of the outstanding common stock of Investors Heritage. The
- ------
holders of these shares are expected to vote in favor of the share
exchange. The Investors Heritage board was aware of such interests
and considered them, among other matters, in approving the share
exchange.
The share exchange agreement provides that the Kentucky
Investors and affiliated companies 401(k) savings plan and the
Kentucky Investors and affiliated companies deferred compensation
plan will be adjusted to be exercisable for shares of Kentucky
Investors' common stock only. The 401(k) savings plan is available
to all employees of Kentucky Investors and Investors Heritage who
satisfy the vesting requirements of the 401(k) savings plan. The
deferred compensation plan is available to eligible executive
officers of Kentucky Investors and Investors Heritage.
THE SHARE EXCHANGE AGREEMENT
This section of the proxy statement/prospectus describes
certain aspects of the share exchange agreement. The following
discussion does not purport to be a complete description of the
share exchange agreement and is qualified in its entirety by
reference to the share exchange agreement, which is attached as
Annex A. We encourage all holders of Investors Heritage common
stock to read the share exchange agreement carefully in its
entirety.
INTRODUCTION
The share exchange agreement provides for a share exchange
between Kentucky Investors and Investors Heritage under Kentucky
law in which Kentucky Investors will issue its common stock to
holders of Investors Heritage common stock in exchange for their
common stock, except for the Investors Heritage common stock held
by Kentucky Investors and its subsidiary. The share exchange is
intended to qualify as a tax-free reorganization within the meaning
of Section 368(a) of the Internal Revenue Code.
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TERMS OF THE SHARE EXCHANGE
At the time the share exchange becomes effective, each share
of Investors Heritage common stock, other than the common stock
held by Kentucky Investors, will become exchangeable for 1.24
shares of Kentucky Investors common stock, which will include any
fractional shares. Upon the closing of the share exchange,
Investors Heritage will become a wholly owned subsidiary of
Kentucky Investors.
If at any time during the period between the date of the
signing of the share exchange agreement and the date the share
exchange becomes effective a change occurs in the number of
outstanding shares of Investors Heritage common stock or Kentucky
Investors common stock as a result of a reclassification, stock
split, stock dividend or distribution, recapitalization, merger,
subdivision, issuer tender or exchange offer, or other similar
transaction, we will make an equitable adjustment to the exchange
ratio.
We will issue fractional shares of Kentucky Investors common
stock in the share exchange.
CLOSING AND THE EFFECTIVE DATE
After the execution of the share exchange agreement and
approval by the Investors Heritage stockholders of the share
exchange, together with satisfaction or waiver of the other
conditions of the share exchange agreement, we will file Articles
of Share Exchange with the Kentucky Secretary of State. The share
exchange will become effective upon the filing with the Kentucky
Secretary of State. Kentucky Investors and Investors Heritage have
the right to terminate the share exchange agreement if they do not
complete the share exchange by December 31, 1999.
EXCHANGE OF INVESTORS HERITAGE CERTIFICATES
The share exchange agreement provides that promptly after the
share exchange becomes effective, Kentucky Investors will deposit
in a separate account for the benefit of the Investors Heritage
stockholders, certificates representing the shares of Kentucky
Investors common stock and, if applicable, any dividends or other
distributions with respect to Kentucky Investors common stock to be
issued or paid pursuant to the terms of the share exchange
agreement. Kentucky Investors will mail to each holder of record
of Investors Heritage common stock, other than Kentucky Investors,
a transmittal letter, specifying instructions concerning the
exchange of Investors Heritage common stock certificates for
Kentucky Investors common stock certificates and any unpaid
dividends and other distributions to which the holder of the
Investors Heritage common stock would be entitled. Once Kentucky
Investors receives Investors Heritage stock certificates for
cancellation together with a duly executed letter of transmittal,
the holder of the Investors Heritage stock certificates will be
entitled to receive a Kentucky Investors stock certificate
representing that number of shares of Kentucky Investors common
stock that the holder is entitled to receive pursuant to the terms
of the share exchange agreement, plus any unpaid dividends or other
distributions that the holder has the right to receive pursuant to
the terms of the share exchange agreement.
The share exchange agreement further provides that whenever
Kentucky Investors declares a dividend or other distribution on its
common stock, the record date for which is on or after the date the
share exchange becomes effective, that declaration will include
dividends or other distributions for all shares issuable pursuant
to the share exchange agreement. Kentucky Investors will not pay
any dividends or other distributions for its common stock to any
holder of any unsurrendered Investors Heritage stock certificate
until the Investors Heritage stockholder surrenders the stock
certificate for exchange in accordance with the share exchange
agreement.
Subject to the effect of applicable laws, following the
surrender of any Investors Heritage stock certificates, Kentucky
Investors will issue and pay to the holder of the Kentucky
Investors certificates issued in exchange therefor, without
interest, at the time of the surrender, the dividends or other
distributions not previously paid. In addition, Kentucky Investors
will pay at the appropriate payment date, the dividends or other
distributions payable on the Kentucky Investors common stock with a
record date after the date the share exchange is effective but with
a payment date subsequent to surrender. Neither Kentucky Investors
nor Investors Heritage anticipates the declaration or payment of
any dividends or distributions during this period unless an
Investors Heritage stockholder does not surrender stock
certificates beyond April 2000.
In addition, pursuant to the share exchange agreement, holders
of unsurrendered Investors Heritage stock certificates who were the
registered holders of the shares of Investors Heritage common stock
at the time the share exchange became effective will be entitled to
vote at any Kentucky Investors stockholders meeting after the
effective date of the share exchange. The holders of unsurrendered
Investors Heritage stock certificates will be entitled to vote the
number of shares of Kentucky Investors common stock represented by
their Investors Heritage stock certificates after the share
exchange, regardless of whether they have exchanged their Investors
Heritage stock certificates.
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REPRESENTATIONS AND WARRANTIES
The share exchange agreement contains various representations
and warranties made by Investors Heritage and Kentucky Investors,
some of which they qualify as to materiality, regarding the
following matters, among others:
- the corporate existence and capitalization of Kentucky
Investors and its three subsidiaries and Investors Heritage
and its subsidiary;
- Investors Heritage's due licensing and authorization as an
insurance company;
- the corporate power and the authority of Kentucky Investors
and Investors Heritage to enter into and perform their
obligations under the share exchange agreement;
- the share exchange agreement and the related transactions
will not result in a violation of Kentucky Investors' or
Investors Heritage's organizational documents or contracts
to which Kentucky Investors or Investors Heritage, or any
of their subsidiaries, is a party, or violate any law, rule
or regulation;
- compliance of Kentucky Investors and Investors Heritage
with laws and required licenses and permits;
- documents filed by Kentucky Investors and Investors
Heritage with the SEC, including financial statements, and
the accuracy of information contained in them;
- employee benefit plans of Kentucky Investors and Investors
Heritage;
- no claims for brokerage or finder's fees from either
Kentucky Investors or Investors Heritage except for
financial advisory fees to Robinson-Humphrey from Investors
Heritage in connection with the share exchange;
- the existence of any pending or threatened actions, suits,
proceedings, arbitrations or investigations against
Kentucky Investors or Investors Heritage;
- good and marketable title to all assets of Kentucky
Investors and Investors Heritage;
- material contracts of Kentucky Investors and Investors
Heritage, including insurance and reinsurance agreements of
Investors Heritage;
- maintenance of insurance policies and indemnity bonds for
Kentucky Investors and Investors Heritage;
- environmental matters of Kentucky Investors and Investors
Heritage;
- tax matters for Kentucky Investors and Investors Heritage,
including the absence of any action by Investors Heritage
that would prevent the share exchange from qualifying as a
tax free reorganization under the Internal Revenue Code;
- dissemination of all materials to stockholders of Investors
Heritage related to the share exchange; and
- no restriction on the share exchange due to anti-takeover
laws or similar charter or bylaw provisions of Kentucky
Investors and Investors Heritage.
COVENANTS
The following is a general summary of the agreements between
Kentucky Investors and Investors Heritage regarding their actions
prior to the share exchange. Investors Heritage and Kentucky
Investors have agreed, from the date of the share exchange
agreement to the date the share exchange becomes effective, that
each will:
- conduct its business in the ordinary course;
- not merge or exchange shares with any other corporation,
sell all or substantially all of its assets or acquire all
or substantially all of the stock, business or assets of
any other corporation;
- comply with applicable laws and deliver to Kentucky
Investors a copy of any application, report or other
document it files with any governmental agency;
- use its best efforts to obtain consents from third parties
in connection with the share exchange agreement;
- use its best efforts to preserve its business organization
intact, to keep available the services of its present
officers and employees and to preserve the goodwill of its
customers and others having business relations with it;
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- not enter into any employment agreement with any person or
grant any material increase in the compensation of its
employees without the prior written consent of the other
party;
- not amend its articles of incorporation or by-laws without
the prior written consent of the other party;
- not issue any shares of authorized capital stock, except
for the Kentucky Investors common stock issued in the share
exchange, or securities convertible into the shares and not
purchase, redeem, retire or otherwise acquire any of its
outstanding shares, or sell or give any option or right to
purchase, hypothecate, pledge or otherwise encumber or
dispose of any of its outstanding shares or any shares held
in treasury, or make or effect any other change in the
structure or composition of its capital stock, or agree to
do any of the foregoing, without the prior written consent
of the other party;
- not declare or pay any dividends or otherwise make
distributions with respect to its capital stock, other than
the dividends permitted under the share exchange agreement;
- not borrow or agree to borrow any material amount of funds
or incur any obligation or liability except in the ordinary
course of business or guarantee any material obligations of
others except for letters of credit and guarantees of
signatures in the ordinary course of business;
- except in the ordinary course of business, not place or
suffer to exist on its assets any mortgage, pledge, lien,
charge or other encumbrance or cancel any indebtedness
owing to it or any claims that it might have or waive any
material rights of substantial value;
- not commit any act or commit to do any act which would
cause a material breach of any lease, agreement, contract
or commitment to which it is a party or by which its
property or business is bound or affected; or which would
have a material adverse effect on its financial condition,
operations or assets; and
- not enter into or agree to enter into any material lease,
agreement, contract or commitment out of the ordinary
course of business without the prior written consent of the
other party.
INVESTORS HERITAGE BOARD AND STOCKHOLDERS MEETINGS
Pursuant to the share exchange agreement, Investors Heritage
has agreed to take all action necessary to convene a meeting of its
stockholders as promptly as practicable after the registration
statement is declared effective. In addition, the Investors
Heritage board has agreed, subject to its fiduciary obligations
under applicable law, that it will recommend approval of the share
exchange, will not withdraw or modify the recommendation and will
take all lawful action to solicit the approval.
KENTUCKY INVESTORS INDEMNIFICATION OF INVESTORS HERITAGE DIRECTORS
AND OFFICERS
From and after the effective date of the share exchange,
Kentucky Investors has agreed to indemnify each present and former
director or officer of Investors Heritage against all losses,
claims, damages, costs, expenses, liabilities, or judgments or
amounts that are paid in settlement with the approval of Kentucky
Investors of any claim, action, suit, proceeding or investigation
arising out of the fact that the person claiming indemnification is
or was a director or officer of Investors Heritage. This indemnity
excludes any claim, action, suit, proceeding or investigation
involving a matter which would have constituted a breach of the
representations and warranties of Investors Heritage in the share
exchange agreement. Kentucky Investors extends the indemnification
to claims based on the share exchange agreement to the extent
Investors Heritage would have been permitted under Kentucky law to
indemnify the person.
CONDITIONS TO COMPLETION OF SHARE EXCHANGE
The obligations of Kentucky Investors and Investors Heritage
to consummate the share exchange are subject to the satisfaction or
written waiver prior to the effective date of the share exchange of
the following conditions:
- a majority of the Investors Heritage stockholders have
approved the share exchange;
- the SEC has declared the registration statement of which
this document constitutes a part effective and has not
issued or threatened to issue a stop order suspending the
registration statement;
- receipt of all approvals and authorizations from
governmental authorities necessary to effect the share
exchange;
- the representations and warranties of Kentucky Investors
and Investors Heritage in the share exchange agreement are
true and correct in all material respects at the closing of
the share exchange;
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- Kentucky Investors and Investors Heritage in all material
respects have performed and observed their obligations and
covenants in the share exchange agreement by the closing of
the share exchange;
- no threatened, instituted or pending material action or
proceeding before any court or governmental or other
regulatory agency, or by any other person, exists
challenging or prohibiting the share exchange. The
occurrence of an action or proceeding shall not prevent the
closing of the share exchange unless the Investors Heritage
board or the Kentucky Investors board determines that the
occurrence of the event makes the closing unwise in its
opinion, and if the outcome of any action or proceeding
does not result in damages or restrain, prohibit or declare
illegal the closing of the share exchange, then the action
or proceeding will not prevent the closing;
- receipt by Investors Heritage of an opinion of counsel of
Kentucky Investors satisfactory to Investors Heritage
relating to Kentucky Investors' authorization, corporate
power, enforceability and other items concerning the share
exchange;
- receipt by Kentucky Investors of an opinion of counsel of
Investors Heritage satisfactory to Kentucky Investors
relating to Investors Heritage's authorization, corporate
power, enforceability and other items concerning the share
exchange;
- receipt by Kentucky Investors and Investors Heritage of the
opinion of Ernst & Young LLP that the share exchange will
be treated for United States federal income tax purposes as
a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code;
- no material adverse change will have occurred in the
business, financial condition or results of operations of
Investors Heritage as reflected in the June 30, 1999
Investors Heritage financial statements in comparison to
the December 31, 1998 Investors Heritage financial
statements;
- the share exchange has not adversely affected the A. M.
Best Company rating of Investors Heritage.
AMENDMENT, WAIVER AND TERMINATION
Termination of the share exchange agreement may result from
the following events:
- mutual consent of the Kentucky Investors and Investors
Heritage boards;
- breach in any material respect of the share exchange
agreement representations and warranties and failure to
cure the breach within 30 days after notice to the party
violating the share exchange agreement;
- failure to satisfy the conditions in the share exchange
agreement by December 31, 1999;
- failure of the Investors Heritage stockholders to approve
the share exchange;
- prohibition of the share exchange by any governmental
entity;
- delay in closing the share exchange beyond December 31,
1999. An extension of the share exchange agreement for 90
days automatically occurs if the delay in closing is the
result of not receiving insurance regulatory approval
caused by other than violations of the share exchange
agreement;
- by Investors Heritage in the event the bid price per share
of Kentucky Investors common stock quoted immediately prior
to the effective date is $17.00 or less, or by Kentucky
Investors in the event the bid price per share of Kentucky
Investors common stock quoted immediately prior to the
effective date is $25.00 or more; or
- by Kentucky Investors or Investors Heritage if the holders
of 5% of the issued and outstanding shares of Investors
Heritage common stock, other than Kentucky Investors,
exercise their right to dissent from the share exchange
agreement.
If the share exchange agreement terminates, a party breaching
the share exchange agreement will be responsible for the other
party's expenses in the transaction. Except for a breach of the
share exchange agreement, Kentucky Investors and Investors Heritage
will pay their own fees and expenses.
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THE SPECIAL MEETING
The Investors Heritage board has furnished this document in
connection with the solicitation of proxies from the holders of
Investors Heritage common stock for use at the special meeting.
Investors Heritage is first mailing this document, the accompanying
form of proxy and other materials to the Investors Heritage
stockholders on or about , 1999.
--------- ----
TIME AND PLACE; PURPOSE
We will hold the Investors Heritage special meeting at the
Investors Heritage Life Insurance Company auditorium, Second and
Shelby Streets, Frankfort, Kentucky 40601 on , 1999,
--------- ----
starting at 10:00 a.m., local time. At the special meeting, we
will ask the Investors Heritage stockholders to consider and vote
upon the share exchange agreement proposal.
We expect representatives of Ernst & Young LLP to be present
at the Investors Heritage special meeting, where they will have the
opportunity to make a statement, if they so desire, and will be
available to respond to appropriate questions.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The Investors Heritage board has fixed the close of business
on , 1999 as the record date for Investors Heritage
--------- ----
stockholders entitled to notice of and to vote at the special
meeting.
Currently, the only outstanding voting securities of Investors
Heritage are shares of the Investors Heritage common stock. Only
holders of record of Investors Heritage common stock on the
Investors Heritage record date are entitled to notice of the
Investors Heritage special meeting, and to vote at the special
meeting. Each holder of record, as of the record date, of
Investors Heritage common stock is entitled to cast one vote per
share on the share exchange agreement proposal.
On the record date, there were approximately shares of
-----
Investors Heritage common stock outstanding and entitled to vote at
the special meeting, held by approximately shareholders of
-----
record.
The favorable vote of a majority of all outstanding shares of
Investors Heritage common stock outstanding on the record date is
required to approve the share exchange agreement.
On the record date, the directors and executive officers of
Investors Heritage and their affiliates beneficially owned and were
entitled to vote shares of Investors Heritage common stock,
-----
or approximately % of the shares of Investors Heritage common
------
stock outstanding on the Investors Heritage record date.
VOTING OF PROXIES
All shares of Investors Heritage common stock represented by
proxies properly received prior to or at the special meeting and
not revoked will be voted in accordance with the instructions
indicated in the proxies. If an Investors Heritage stockholder
does not indicate instructions on a properly executed returned
proxy, the proxies will be voted FOR the approval of the share
exchange agreement.
If a proposal to adjourn the Investors Heritage special
meeting is properly presented, the persons named in the enclosed
form of proxy will not have discretion to vote shares voted against
the share exchange agreement, in favor of the adjournment proposal.
Investors Heritage is not aware of any matters expected to be
presented at its meeting other than as described in its notice of
special meeting.
A person granting a proxy pursuant to this solicitation may
revoke it at any time before it is voted. A person may revoke a
proxy by:
- filing, including by telecopy, with the Secretary of
Investors Heritage, before taking the vote at the special
meeting, a written notice of revocation bearing a later
date than the date of the proxy or a later-dated proxy
relating to the same shares; or
- attending the relevant meeting and voting in person.
In order to vote in person at the Investors Heritage special
meeting, Investors Heritage stockholders must attend the meeting
and cast their votes in accordance with the voting procedures
established for the meeting. Attendance at a meeting will not in
and of itself constitute a revocation of a proxy. A person must
send a written notice of revocation or subsequent proxy that will
be delivered at or before the taking of the vote at the meeting as
follows:
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- to Investors Heritage Life Insurance Company, 200 Capital
Avenue, Frankfort, Kentucky 40601, Telecopy: (502) 875-
7084, Attention: Secretary.
Investors Heritage stockholders who require assistance in
changing or revoking a proxy should contact Jane S. Jackson at
(502) 223-2361, extension 305.
A stockholder may abstain from voting on the share exchange
agreement proposal. Since the favorable vote of holders of a
majority of the outstanding shares of Investors Heritage common
stock on the share exchange agreement proposal is required to
approve such proposal, a proxy marked "ABSTAIN" with respect to any
such proposal will have the effect of a vote against the proposal.
In addition, the failure of an Investors Heritage stockholder to
return a proxy will have the effect of a vote against the share
exchange agreement proposal.
It is the policy of Investors Heritage to keep proxy cards,
ballots and voting tabulations that identify individual
stockholders confidential, except where disclosure is mandated by
law and in other limited circumstances.
Kentucky Investors will pay the cost of solicitation of
proxies. Kentucky Investors expects the cost of solicitation to be
approximately $32,500. In addition to solicitation by mail,
Investors Heritage will make arrangements with brokerage houses and
other custodians, nominees and fiduciaries to send the proxy
materials to beneficial owners; however, Kentucky Investors will,
upon request, reimburse the brokerage houses and custodians for
their reasonable expenses in so doing. To the extent necessary in
order to ensure sufficient representation at its meeting, Investors
Heritage may request by telephone or telecopy the return of proxy
cards. The extent to which Investors Heritage will undertake
telephone or telecopy communications with its stockholders depends
entirely upon how promptly you return your proxy card. We urge
stockholders to send in their proxies without delay.
Investors Heritage stockholders should not send in any stock
certificates with their proxy cards. Kentucky Investors will mail
a transmittal form with instructions for the surrender of
certificates representing Investors Heritage common stock to former
Investors Heritage stockholders as soon as practicable after the
consummation of the share exchange.
COMPARISON OF STOCKHOLDER RIGHTS
Holders of shares of Investors Heritage common stock will,
upon the exchange of their shares pursuant to the share exchange,
become holders of shares of Kentucky Investors common stock, and
Kentucky law and Kentucky Investors' articles of incorporation will
govern their rights. We have summarized below the material
differences between the rights of holders of shares of Investors
Heritage common stock and the rights of holders of shares of
Kentucky Investors common stock, which result from differences in
their governing corporate documents:
KENTUCKY INVESTORS INVESTORS HERITAGE
GENERAL
- - Kentucky Investors is a - Investors Heritage is a
Kentucky corporation subject Kentucky corporation subject
to the provisions of the to the provisions of the
Kentucky Business Corporation Kentucky Business Corporation
Act. Act.
- - The rights of Kentucky - The rights of Investors
Investors stockholders are Heritage stockholders are
governed by Kentucky governed by Investors
Investors' articles of Heritage's articles of
incorporation and by-laws, in incorporation and by-laws, in
addition to Kentucky law. addition to Kentucky law.
- Investors Heritage
stockholders will, upon
consummation of the share
exchange, become Kentucky
Investors' stockholders.
AUTHORIZED CAPITAL
- - The authorized and outstanding - The authorized and outstanding
capital stock of Kentucky capital stock of Investors
Investors consists of: Heritage consists of:
- 4,000,000 shares of common - 2,000,000 shares of
stock, $1.00 par value, of Investors Heritage common
which shares are stock, $1.00 par value, of
-------- which shares are
outstanding as of the -------
Investors Heritage record outstanding as of the
date. Investors Heritage record
date.
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AMENDMENT OF GOVERNING DOCUMENTS
Articles of Incorporation
- - The following is required to - The following is required to
amend the Kentucky Investors amend the Investors Heritage
articles of incorporation: articles of incorporation:
- The board shall first - The board shall first
approve a proposed approve a proposed
amendment and submit it to amendment and submit it to
the stockholders; and the stockholders; and
- The approval of a majority - The approval of a majority
of the votes cast by of the votes cast by
stockholders entitled to stockholders entitled to
vote is required. vote is required.
- To amend article X of the
articles of incorporation
that establishes nine
directors for staggered
terms requires an
affirmative vote of the
holders of at least two-
thirds of the outstanding
shares entitled to vote.
BYLAWS
- - The Kentucky Investors by- - The Investors Heritage by-
laws may be amended, adopted laws may be amended by:
or repealed by: - The affirmative vote of the
- The affirmative vote of holders of a majority of
the holders of a majority the shares of Investors
of the shares of Kentucky Heritage common stock
Investors common stock entitled to vote; or
entitled to vote; or - Two-thirds vote of the
- Two-thirds vote of the board of directors.
board of directors.
DIRECTORS
Number
- - The number of directors must - The number of directors must
be 9. be 9 directors, as fixed from
- - The current number of time to time by resolution of
directors is 8. the board of directors.
- The current number of
directors is 9.
Classification
- - The Kentucky Investors board - The Investors Heritage board
of directors is divided into of directors is divided into
three classes, each as nearly three classes, each as nearly
equal in number as possible, equal in number as possible,
with one class being elected with one class being elected
annually to a 3-year term. annually to a 3-year term.
Removal
- - Directors may be removed with - Directors may be removed with
or without cause with the or without cause with the
approval of a majority of the approval of a majority of the
votes cast by stockholders votes cast by stockholders
entitled to vote. entitled to vote.
Vacancies
- - Any vacancy which occurs - Any vacancy which occurs
during the year may be filled during the year may be filled
by a majority vote of the by a majority vote of the
directors then in office for directors then in office for
the balance of the term. the balance of the term.
- - The Kentucky Investors - The Investors Heritage
articles of incorporation articles of incorporation
contain a provision that contain a provision that
eliminates the personal eliminates the personal
liability of directors to the liability of directors to the
corporation or to its corporation or to its
stockholders for damages for stockholders for damages for
breaches of duties as a breaches of duties as a
director, except for director, except for
liability for: liability for:
- Any transaction with - Any transaction with
Kentucky Investors in Investors Heritage in which
which the interest of the the interest of the
director is not disclosed director is not disclosed
or known to the board of or known to the board of
directors or its directors or its
stockholders; stockholders;
- Acts or omissions not in - Acts or omissions not in
good faith, involving good faith, involving
intentional misconduct or intentional misconduct or a
a knowing violation of knowing violation of law;
law; - Any vote for an unlawful
- Any vote for an unlawful stockholder distribution as
stockholder distribution prohibited by law; or
as prohibited by law; or
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- Any transaction from which - Any transaction from which
the director derived an the director derived an
improper personal benefit. improper personal benefit.
Indemnification
- - The Kentucky Investors by- - The Investors Heritage by-
laws provide that the laws provide that the
corporation shall indemnify corporation shall indemnify
its officers and directors its officers and directors
for any costs and expenses for any costs and expenses
incurred in any action, suit incurred in any action, suit
or proceeding to which the or proceeding to which the
director or officer is made a director or officer is made a
party by reason of his party by reason of his
position with Kentucky position with Investors
Investors. The Kentucky Heritage. The Investors
Investors' by-laws provide Heritage's by-laws provide
that indemnification is not that indemnification is not
available to a director or available to a director or
officer adjudged liable for officer adjudged liable for
negligence or misconduct in negligence or misconduct in
the performance of his or her the performance of his or her
duties. The right of duties. The right of
indemnification contained in indemnification contained in
the by-laws is not exclusive the by-laws is not exclusive
of indemnification rights of indemnification rights
provided by statute or provided by statute or
otherwise. otherwise.
- - Under Kentucky law, a - Under Kentucky law, a
corporation may indemnify any corporation may indemnify any
director, officer, employee director, officer, employee
and agent made, or threatened and agent made, or threatened
to be made, a party to any to be made, a party to any
action or proceeding by action or proceeding by
reason of his or her position reason of his or her position
in the corporation. In order in the corporation. In order
to be indemnified, the to be indemnified, the
director, officer, employee director, officer, employee
or agent must have acted: or agent must have acted:
- In good faith; - In good faith;
- In a manner which he - In a manner which he
reasonably believed to be reasonably believed to be
in or not opposed to the in or not opposed to the
best interests of the best interests of the
corporation; and corporation; and
- With respect to any - With respect to any
criminal proceeding, with criminal proceeding, with
no reasonable cause to no reasonable cause to
believe that his conduct believe that his conduct
was unlawful. was unlawful.
- - Kentucky law provides - Kentucky law provides
mandatory indemnification mandatory indemnification
against reasonable expenses against reasonable expenses
for a director, officer, for a director, officer,
employee or agent in a employee or agent in a
proceeding when the person is proceeding when the person is
wholly successful in the wholly successful in the
defense of the proceeding. defense of the proceeding.
- - Kentucky law provides for - Kentucky law provides for
payment of the expenses payment of the expenses
incurred by a director, incurred by a director,
officer, employee or agent in officer, employee or agent in
connection with any connection with any
proceeding in advance of its proceeding in advance of its
final disposition upon the final disposition upon the
receipt of an undertaking by receipt of an undertaking by
or on behalf of the director, or on behalf of the director,
officer, employee or agent to officer, employee or agent to
repay any advanced amounts if repay any advanced amounts if
it shall be determined that it shall be determined that
he or she is not entitled to he or she is not entitled to
be indemnified under Kentucky be indemnified under Kentucky
law. law.
STOCKHOLDERS
Annual Meetings of Stockholders
- - The annual meeting of - The annual meeting of
stockholders shall be held at stockholders shall be held on
200 Capital Avenue, the second Thursday in May
Frankfort, Kentucky or at any and at 200 Capital Avenue,
other place and at the time Frankfort, Kentucky or at any
fixed by the Kentucky other place fixed by the
Investors board of directors. Investors Heritage board of
directors.
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Special Meetings of Stockholders
- - Special meetings may be - Special meetings may be
called at any time and for called at any time and for
any purpose by: any purpose by:
- A majority of the board; - A majority of the board; or
- The executive committee of - The holders of 33-1/3% or
the board; or more of the outstanding
- The holders of 50% or more common stock.
of the outstanding common
stock.
Stockholder Action Without Meeting
- - Under Kentucky law, any - Under Kentucky law, any
stockholder action required stockholder action required
or permitted to be taken by or permitted to be taken by
stockholder vote can be taken stockholder vote can be taken
without a meeting upon the without a meeting upon the
written consent of all written consent of all
stockholders entitled to vote stockholders entitled to vote
on the action. on the action.
- - The Kentucky Investors' - The Investors Heritage's
articles of incorporation and articles of incorporation and
by-laws do not provide for by-laws do not provide for
stockholder action without a stockholder action without a
meeting, therefore Kentucky meeting, therefore Kentucky
statutory law controls. statutory law controls.
Cumulative Voting
- - Kentucky law provides for the - Kentucky law provides for the
right of stockholders to vote right of stockholders to vote
cumulatively in the election cumulatively in the election
of directors, permitting each of directors, permitting each
stockholder to vote the stockholder to vote the
numbers of shares owned on numbers of shares owned on
the record date multiplied by the record date multiplied by
the number of directors to be the number of directors to be
elected for one or more elected for one or more
nominees for director. nominees for director.
Dividends and Distributions
- - Kentucky law provides that - Kentucky law provides that
dividends may be paid in dividends may be paid in
cash, property or shares of a cash, property or shares of a
corporation's capital stock. corporation's capital stock.
Subject to any restrictions Subject to any restrictions
contained in the articles of contained in the articles of
incorporation, a Kentucky incorporation, a Kentucky
corporation may make corporation may make
distributions to its distributions to its
stockholders so long as, stockholders so long as,
after giving effect thereto, after giving effect thereto,
the corporation would be able the corporation would be able
to pay its debts as they to pay its debts as they
become due in the usual become due in the usual
course of business. In course of business. In
addition, the corporation's addition, the corporation's
total assets must be equal to total assets must be equal to
or greater than the sum of or greater than the sum of
its total liabilities plus its total liabilities plus
the amount that would be the amount that would be
needed, if the corporation needed, if the corporation
were to be dissolved, to were to be dissolved, to
satisfy the preferential satisfy the preferential
rights of stockholders whose rights of stockholders whose
preferential rights are preferential rights are
subject to those receiving subject to those receiving
the distribution. the distribution.
Stockholder Preemptive Rights
- - Kentucky law provides that no - Kentucky law provides that no
stockholder shall have any stockholder shall have any
preemptive rights to purchase preemptive rights to purchase
additional securities of the additional securities of the
corporation unless the corporation unless the
articles of incorporation articles of incorporation
expressly grant the rights. expressly grant the rights.
- - The Kentucky Investors' - The Investors Heritage's
articles of incorporation do articles of incorporation do
not provide for preemptive not provide for preemptive
rights. rights.
Dissenters' Rights
Dissenters' rights are those rights granted to stockholders to
dissent from corporate transactions contained in the Kentucky
statutes, including the share exchange, and to obtain payment for
their shares.
- - Under Kentucky law, Kentucky - Under Kentucky law, Investors
Investors' stockholders do Heritage's stockholders have
not have the right to dissent the right to dissent and
and demand payment of the demand payment of the value
value of their shares of of their shares of capital
capital stock as a result of stock as described in "The
the share exchange. Share Exchange-Dissenters'
Rights of Investors Heritage
Stockholders."
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Share Exchanges, Mergers and Other Transactions
- - Other than as required for - Other than as required for
business combinations, business combinations,
Kentucky law requires Kentucky law requires
approval of mergers other approval of mergers other
than parent-subsidiary than parent-subsidiary
mergers, consolidations, mergers, consolidations,
dispositions of all or dispositions of all or
substantially all of a substantially all of a
corporation's assets and corporation's assets and
share exchanges by a majority share exchanges by a majority
of voting power of the of voting power of the
corporation, unless the corporation, unless the
articles of incorporation articles of incorporation
specify a different specify a different
percentage. percentage.
- - The Kentucky Investors' - The Investors Heritage's
articles of incorporation do articles of incorporation do
not provide for a different not provide for a different
percentage for approval of percentage for approval of
these transactions. these transactions.
- - Kentucky Investors has
elected in its articles of
incorporation to be subject
to sections 271B.12-200
through 271B.12-230 of the
Kentucky Business Corporation
Act. These statutes regulate
business combinations
requiring supermajority
approval of the transactions
subject to these statutes.
BUSINESS COMBINATION STATUTES
Kentucky law provides that an interested stockholder, defined
as a person beneficially owning, either directly or indirectly, 10%
or more of the voting power of the outstanding voting stock of a
Kentucky corporation, cannot engage in a business combination with
that corporation unless the transaction takes place at least five
years after the interested stockholder first became an interested
stockholder. In addition, either a majority of the independent
board members who are also continuing directors must approve the
business combination or at least 80% of the votes entitled to be
cast by voting stockholders of a corporation voting as a single
group and two-thirds of the votes entitled to be cast by holders of
a corporation's stock not beneficially owned by an interested
stockholder must approve the business combination.
A business combination includes mergers, sales and leases of
assets, issuances of securities or similar transactions by a
corporation or a subsidiary with an interested stockholder.
A business combination does not require the votes described
if:
- the aggregate of cash and market value of a corporation's
stock on the valuation date of the business combination,
exclusive of cash common stockholders are to receive in the
business combination, is equal to the highest of the
following:
- the highest price the interested stockholder paid for a
corporation's common stock in the five years before the
announcement of the business combination or in a
transaction in which the stockholder became an interested
stockholder;
- the corporation's per share market value on the
announcement date or the date the stockholder became an
interested stockholder, whichever is higher; or
- the corporation's per share market value on the
announcement date or the date the stockholder became an
interested stockholder, whichever is higher, multiplied
by the fraction of the highest per share price paid by
the interested stockholder during the five years before
the announcement date over the market value per share on
the first day of the five-year period that the interested
stockholder acquired the corporation's common stock;
- the aggregate of cash and market value of the corporation's
stock on the valuation date of the business combination,
exclusive of cash stockholders other than common
stockholders are to receive in the business combination, is
equal to the highest of the following:
- the highest price the interested stockholder paid for a
corporation's stock in the five year period before the
announcement date or in the transaction in which the
stockholder became an interested stockholder;
- the highest preferential amount per share to which a
stockholder is entitled in the event of any liquidation
or similar transaction;
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- the market value per share on the announcement date or on
the date the stockholder became an interested
stockholder, whichever is higher; or
- the price per share equal to the market value per share,
determined on the announcement date or the date the
stockholder became an interested stockholder, whichever
is higher, multiplied by a fraction of the highest per
share price paid by the interested stockholder during the
five years before the announcement date, over the market
value per share on the first day of the five year period
that the interested stockholder acquired the
corporation's stock.
Kentucky Investors has elected in its articles of
incorporation to be included under and be subject to the business
combination statutes without qualification or limitation.
EFFECT OF SHARE EXCHANGE ON OTC BULLETIN BOARD LISTINGS
It is a condition to the share exchange that the shares of
Kentucky Investors common shares issuable in the share exchange be
reported on the OTC Bulletin Board on or prior to the consummation
of the share exchange. If the share exchange is consummated,
Investors Heritage common stock will cease to be reported on the
OTC Bulletin Board.
LEGAL MATTERS AND TAX OPINIONS
The validity of the shares of Kentucky Investors common stock
that Kentucky Investors is issuing to Investors Heritage
stockholders pursuant to the share exchange will be passed upon by
Stites & Harbison, counsel to Kentucky Investors. It is a condition
to the consummation of the share exchange that Investors Heritage
and Kentucky Investors receive an opinion from Ernst & Young LLP,
to the effect that, among other things, the share exchange will be
a reorganization for United States federal income tax purposes.
EXPERTS
Ernst & Young LLP, independent auditors, has audited the
consolidated financial statements of Kentucky Investors and
Investors Heritage, included in their 1998 Annual Report to
Stockholders, and the schedules of Kentucky Investors and Investors
Heritage included in Kentucky Investors' and Investors Heritage's
respective Annual Reports on Form 10-K for the year ended December
31, 1998, as set forth in their report, which is incorporated by
reference in this prospectus and elsewhere in the registration
statement. Kentucky Investors' and Investors Heritage's financial
statements and schedules are incorporated by reference in reliance
on Ernst & Young LLP's reports, given on their authority as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Kentucky Investors and Investors Heritage file annual,
quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports,
statements or other information we file at the SEC's public
reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Kentucky
Investors' and Investors Heritage's SEC filings are also available
to the public from commercial document retrieval services and at
the web site maintained by the SEC at http://www.sec.gov.
Kentucky Investors filed a registration statement on Form S-4
to register with the SEC the Kentucky Investors common stock to be
issued to Investors Heritage stockholders in the share exchange.
This document is a part of that registration statement and
constitutes a prospectus of Kentucky Investors in addition to being
a proxy statement of Investors Heritage for its special meeting.
As permitted by SEC rules, this document does not contain all the
information you can find in the registration statement or the
exhibits to the registration statement.
The SEC allows Kentucky Investors and Investors Heritage to
incorporate by reference information into this document, which
means that Kentucky Investors and Investors Heritage can disclose
important information to you by
39
<PAGE>
referring you to another document filed separately with the SEC.
The information incorporated by reference is deemed to be part of
this document, except for any information superseded by information
in this document. This document incorporates by reference the
documents set forth below that Kentucky Investors and Investors
Heritage have previously filed with the SEC. These documents
contain important information about Kentucky Investors and
Investors Heritage and their financial performance. The SEC
requires Investors Heritage to deliver copies of this material to
stockholders receiving this proxy statement/prospectus.
Kentucky Investors SEC Filings Period or Date Filed
------------------------------ --------------------
Annual Report on Form 10-K............. Fiscal year ended December
31, 1998
Annual Report to Stockholders of
Investors Heritage and Kentucky
Investors............................ Fiscal year ended December
31, 1998
Proxy Statement for Annual Meeting
held on May 13, 1999................. Filed on April 16, 1999
Quarterly Report on Form 10-Q.......... Quarter ended June 30, 1999
Investors Heritage SEC Filings Period or Date Filed
------------------------------ --------------------
Annual Report on Form 10-K............. Fiscal year ended December
31, 1998
Proxy Statement for Annual Meeting
held on May 13, 1999................. Filed on April 16, 1999
Quarterly Report on Form 10-Q.......... Quarter ended June 30, 1999
Kentucky Investors has supplied all information contained or
incorporated by reference in this document relating to Kentucky
Investors, and Investors Heritage has supplied all information
contained or incorporated by reference in this document relating to
Investors Heritage.
You may have received previously some of the documents
incorporated by reference in accordance with SEC rules, however, we
will be delivering these documents to you once again together with
this proxy statement/prospectus. In addition, you can obtain any
of these documents from Kentucky Investors or Investors Heritage,
as appropriate, or the SEC. Documents incorporated by reference
are available from Kentucky Investors or Investors Heritage, as
appropriate, without charge, excluding all exhibits unless an
exhibit has been specifically incorporated by reference in this
document. Stockholders may obtain documents incorporated by
reference in this document by Kentucky Investors by requesting them
in writing or by telephone at the following address:
Kentucky Investors, Inc.
200 Capital Avenue
Frankfort, Kentucky 40601
Tel: (502) 223-2361
Stockholders may obtain documents incorporated by reference in
this document by Investors Heritage by requesting them in writing
or by telephone at the same address and phone number listed
immediately above.
If you would like to request documents from Kentucky Investors
or Investors Heritage, please do so by , 1999 to
-------------
receive them before the Investors Heritage special stockholder
meeting. These documents include the opinion of Robinson-
Humphrey, a copy of which is attached as Annex B to this proxy
statement/prospectus. Kentucky Investors or Investors Heritage
will send these documents by first-class mail within one business
day of receiving any such request.
You should rely only on the information contained or
incorporated by reference in this document to vote on the share
exchange agreement proposal. We have not authorized anyone to
provide you with information that is different from what is
contained in this document. This document is dated ,
------------
1999. You should not assume that the information contained in this
document is accurate as of any date other than this date, and
neither the mailing of this document to Investors Heritage
stockholders nor the issuance of Kentucky Investors common stock in
the share exchange shall create any implication to the contrary.
40
<PAGE>
ANNEX A
SHARE EXCHANGE AGREEMENT
------------------------
THIS SHARE EXCHANGE AGREEMENT (the "Agreement") is made and
entered into as of the 24th day of September, 1999, by and between
KENTUCKY INVESTORS, INC., a Kentucky corporation ("Kentucky
Investors"), and INVESTORS HERITAGE LIFE INSURANCE COMPANY, a
Kentucky insurance corporation ("Investors Heritage").
PRELIMINARY STATEMENTS
The respective Boards of Directors of each of Kentucky
Investors and Investors Heritage have determined that the exchange
of shares of Investors Heritage common stock by the Investors
Heritage shareholders for shares of Kentucky Investors common stock
pursuant to the terms and subject to the conditions set forth in
this Agreement (the "Share Exchange") is consistent with and in
furtherance of their respective business strategies and goals and
believe that the Share Exchange is in the best interest of their
respective shareholders and therefore have approved the Share
Exchange.
It is intended that, for federal income tax purposes, the
Share Exchange shall qualify as a reorganization under the
provisions of Section 368(a) of the Internal Revenue Code of 1986,
as amended (the "Code"), and the rules and regulations promulgated
thereunder.
Kentucky Investors and Investors Heritage desire to make
certain representations, warranties, covenants and agreements in
connection with this Agreement.
NOW, THEREFORE, in consideration of these premises and of the
mutual representations, warranties, covenants and agreements herein
contained, the parties hereby agree as follows:
AGREEMENT
ARTICLE 1
THE SHARE EXCHANGE
1.1 The Share Exchange. Upon the terms and conditions set
------------------
forth in this Agreement, on the Effective Date (hereinafter
defined), Kentucky Investors shall deliver to each Investor
Heritage shareholder 1.24 shares of Kentucky Investors Common Stock
(as defined in Section 4.2(d)(1) herein) in exchange for 1 share
of Investors Heritage Common Stock (as defined in Section 4.1(d)(1)
herein) outstanding (the "Shares"), other than those owned by
Kentucky Investors and its subsidiaries (the "Excluded Shares"),
pursuant to the provisions of Subtitle 11 of Section 271B of the
Kentucky Business Corporation Act (the "KBCA"). The Share Exchange
shall have the effects specified in the KBCA.
1.2 Closing. The closing of the Share Exchange (the
-------
"Closing") shall take place at the offices of Kentucky Investors,
200 Capital Avenue, Frankfort, Kentucky on the first business day
after the day on which the satisfaction or waiver of all conditions
set forth in Article 5 (other than those conditions that by their
nature are to be satisfied at Closing, but subject to fulfillment
or waived in accordance with this Agreement), or at such other
place and time and/or on such other date as Kentucky Investors and
Investors Heritage may agree in writing ("Closing Date"). At the
Closing, each party shall execute and deliver all documents
required by this Agreement, and such other documents as the other
party may reasonably request in order to satisfy each party's
covenants and agreements hereunder.
1.3 Articles of Share Exchange. Subject to the provisions of
--------------------------
Article 6 hereof, as soon as practical after the Closing, Kentucky
Investors and Investors Heritage will cause Articles of Share
Exchange (the "Articles"), substantially in the form attached
hereto as Exhibit A to be executed, verified and filed with and
---------
accepted by the Secretary of State of the Commonwealth of Kentucky
as provided in Section 271B.11-050 of the KBCA.
1.4 Effective Date. The Effective Date shall be the date and
--------------
time of the filing of said Articles with the Secretary of State of
the Commonwealth of Kentucky, or such later date and time as may be
stated in said Articles, but no later than 30 days after the
Articles are accepted for record by the Secretary of State of the
Commonwealth of Kentucky (the "Effective Date").
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<PAGE>
ARTICLE 2
EFFECT OF SHARE EXCHANGE ON STOCK AND
EXCHANGE OF CERTIFICATES
2.1 (a) Share Exchange Consideration. Each Share issued and
----------------------------
outstanding immediately prior to the Effective Date (other than the
Excluded Shares) shall be converted into and become exchangeable
for the right to receive 1.24 fully paid and nonassessable shares
of Kentucky Investors Common Stock .
(b) Kentucky Investors Common Stock. Each share of
-------------------------------
Kentucky Investors Common Stock issued and outstanding immediately
prior to the Effective Date shall remain issued and outstanding.
2.2 Exchange Procedure.
------------------
(a) Kentucky Investors as Exchange Agent. At or
------------------------------------
immediately prior to the Effective Date, Kentucky Investors shall
deposit, in a separate account, for the benefit of the holders of
the Shares, certificates representing the shares of Kentucky
Investors Common Stock and, after the Effective Date, any dividends
or other distributions, if applicable, with respect to the Kentucky
Investors Common Stock to be issued and/or paid in exchange for the
Shares outstanding immediately prior to the Effective Date upon due
surrender of the stock certificates representing the Shares (the
"Certificates") (or affidavits of loss in lieu thereof) pursuant to
the provisions of this Article 2 (such certificates for shares of
Kentucky Investors Common Stock, together with the amount of any
dividends or other distributions payable with respect to the
Kentucky Investors Common Stock being held on deposit with Kentucky
Investors shall be referred to as the "Exchange Fund").
(b) Exchange Procedures. Promptly after the Effective
-------------------
Date, Kentucky Investors shall mail to each former holder of record
of the Shares (other than holders of Excluded Shares) (i) a
transmittal letter specifying that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates (or affidavits of loss in lieu
thereof) to Kentucky Investors, such transmittal letter to be in
such form and have such other provisions as the parties may
reasonably agree prior to the Effective Date, and (ii) instructions
for use in effecting the surrender of the Certificates in exchange
for (A) certificates representing shares of Kentucky Investors
Common Stock and (B) any unpaid dividends and other distributions.
Subject to Section 2.2(g), upon surrender of a Certificate for
cancellation to Kentucky Investors together with such transmittal
letter, duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor (x) a certificate
representing that number of shares of Kentucky Investors Common
Stock (including factional shares) that such holder is entitled to
receive pursuant to this Article 2, and (y) any unpaid dividends or
other distributions that such holder has the right to receive
pursuant to the provisions of this Article 2, and the Certificate
so surrendered shall be assigned to Kentucky Investors. No
interest will be paid or accrued on any amount payable upon due
surrender of the Certificates. In the event of a transfer of
ownership of Shares that are not registered in the transfer records
of Investors Heritage, a certificate representing the proper number
of shares of Kentucky Investors Common Stock, and any other
dividends or distributions in respect thereof, may be issued and/or
paid to such a transferee if the Certificate formerly representing
such Shares is presented to Kentucky Investors, accompanied by all
documents required to evidence and effect such transfer and to
evidence that any applicable stock transfer taxes have been paid.
If any certificate for shares of Kentucky Investors Common Stock is
to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Person (as defined below)
requesting such exchange shall pay any transfer or other taxes
required by reason of the issuance of certificates for shares of
Kentucky Investors Common Stock in a name other than that of the
registered holder of the Certificate surrendered, or shall
establish to the satisfaction of Kentucky Investors that such tax
has been paid or is not applicable. For purposes of this
Agreement, the term "Person" shall mean any individual, corporation
(including not-for-profit), general or limited partnership, limited
liability company, joint venture, estate, trust, association,
organization, Governmental Entity (as defined in Section 4.1(u)
herein) or other entity of any kind or nature.
(c) Distributions with Respect to Unexchanged Shares;
-------------------------------------------------
Voting.
- ------
(1) All shares of Kentucky Investors Common Stock
to be issued pursuant to the Share Exchange shall be deemed issued
and outstanding, fully paid and non-assessable, as of the Effective
Date and whenever a dividend or other distribution is declared by
Kentucky Investors in respect of the Kentucky Investors Common
Stock, the record date for which is at or after the Effective Date,
that declaration shall include dividends or other distributions in
respect of all shares issuable pursuant to this Agreement. No
dividends or other distributions in respect of the Kentucky
Investors Common Stock shall be paid to any holder of any
unsurrendered Certificate until such Certificate is
A-2
<PAGE>
surrendered for exchange in accordance with this Article 2.
Subject to the effect of applicable laws, following surrender of
any such Certificate, there shall be issued to the holder
certificates representing shares of Kentucky Investors Common Stock
issued in exchange therefor. Additionally, at the time of such
surrender, the dividends or other distributions with a record date
after the Effective Date and a payment date on or prior to such
time of surrender payable with respect to such shares of Kentucky
Investors Common Stock and not paid shall be paid and, at the
appropriate payment date, the dividends or other distributions
payable with respect to such shares of Kentucky Investors Common
Stock with a record date after the Effective Date but with a
payment date subsequent to surrender shall be paid.
(2) Holders of unsurrendered Certificates who were
the registered holders at the Effective Date shall be entitled to
vote after the Effective Date at any meeting of Kentucky Investors'
stockholders (or consent in connection with any consent in lieu of
meeting) the number of shares of Kentucky Investors Common Stock
represented by such Certificates, regardless of whether such
holders have exchanged their Certificates.
(d) Transfers. After the Effective Date, other than the
---------
transfers to Kentucky Investors, there shall be no transfers on the
stock transfer books of Investors Heritage of the Shares that were
outstanding immediately prior to the Effective Date.
(e) Fractional Shares. Notwithstanding any other
-----------------
provision of this Agreement, fractional shares of Kentucky
Investors Common Stock will be issued and any holder of Shares
entitled to receive a fractional share of Kentucky Investors Common
Stock will receive such shares.
(f) Termination of Exchange Fund. Any portion of the
----------------------------
Exchange Fund (including the proceeds of any investments thereof
and any Kentucky Investors Common Stock) that remains unclaimed by
the stockholders of Investors Heritage for 180 days after the
Effective Date shall be returned to Kentucky Investors. Any
stockholders of Investors Heritage who have not theretofore
complied with this Article 2 shall thereafter look only to Kentucky
Investors for payment of their shares of Kentucky Investors Common
Stock and any cash, dividends and other distributions in respect
thereof payable and/or issuable pursuant to Section 2.1 and Section
2.2(c) upon due surrender of their Certificates (or affidavits of
loss in lieu thereof), in each case, without any interest thereon.
Notwithstanding the foregoing, neither Kentucky Investors, nor any
other Person, shall be liable to any former holder of Shares for
any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(g) Lost, Stolen or Destroyed Certificates. In the
--------------------------------------
event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the Person claiming
such Certificate to be lost, stolen or destroyed and, if required
by Kentucky Investors, the posting by such Person of a bond in
customary amount as indemnity against any claim that may be made
against it with respect to such Certificate, Kentucky Investors
will issue in exchange for such lost, stolen or destroyed
Certificate the shares of Kentucky Investors Common Stock and any
unpaid dividends or other distributions in respect thereof pursuant
to Section 2.2(c) upon due surrender of and deliverable in respect
of the Shares represented by such Certificate pursuant to this
Agreement.
(h) Dissenters' Rights. In accordance with Subtitle 13
------------------
of Section 271B of the KBCA, dissenters' rights shall be available
to holders of Shares in connection with the Share Exchange.
(i) Anti- Dilution Provisions. In the event that after
-------------------------
the date hereof and prior to the Effective Date, Investors Heritage
changes the number of Shares or securities convertible or
exchangeable into or exercisable for Shares, or Kentucky Investors
changes the number of shares of Kentucky Investors Common Stock or
securities convertible or exchangeable into or exercisable for
shares of Kentucky Investors Common Stock, issued and outstanding
prior to the Effective Date as a result of a reclassification,
stock split (including a reverse split), stock dividend or
distribution, recapitalization, merger, subdivision, issuer tender
or exchange offer, or other similar transaction, the Share Exchange
consideration in Section 2.1 shall be equitably adjusted.
ARTICLE 3
COVENANTS
3.1 Access and Inspection. From the date hereof through the
---------------------
Effective Date, each of Investors Heritage and Kentucky Investors
will permit authorized representatives of the other, including its
accountants and counsel, to inspect its facilities, books, records,
files, agreements, books of account, tax returns and other
corporate and business documents (other than those documents deemed
confidential under federal or state insurance laws) and confer with
any
A-3
<PAGE>
of its officers or employees. On or prior to the date hereof, each
of Investors Heritage and Kentucky Investors, as the case may be,
has provided the other with a true and complete copy of the list of
its shareholders as of this date and will, until the Effective
Date, promptly provide the other with copies of any changes to that
list of shareholders. Investors Heritage and Kentucky Investors,
as the case may be, will supply all information to the other which
the other deems reasonably necessary to evaluate the business,
properties and operation of each other. Notwithstanding the
foregoing, no investigation or inspection by either party in
accordance with this Section 3.1 shall affect or otherwise diminish
any of the representations and warranties of the other party. Each
party acknowledges and agrees that such information is confidential
and shall not be disclosed to any third party without the prior
written consent of the other party.
3.2 Cooperation. Kentucky Investors and Investors Heritage
-----------
shall proceed expeditiously, and cooperate fully, to prepare the
materials of Kentucky Investors and Investors Heritage to be
delivered to shareholders of Investors Heritage in connection with
the Investors Heritage shareholder meeting, to make application for
all necessary regulatory approvals (including, but not limited to,
Form A for the Kentucky Department of Insurance), and to take any
other action and to satisfy all other requirements, prescribed by
law or otherwise, necessary for consummation of the Share Exchange
on the terms herein provided. Kentucky Investors and Investors
Heritage shall use their best efforts to obtain all necessary
regulatory approvals and shall promptly provide each other with
copies of all filings, applications, comment letters and other
material correspondence sent or received in connection therewith.
3.3 Conduct of Business Prior to Effective Date. During the
-------------------------------------------
period from the date of this Agreement to the Effective Date, each
of Kentucky Investors and Investors Heritage shall:
(a) Ordinary Course. Conduct its business only in the
---------------
ordinary course; and not merge or exchange shares or interests with
any other Person or sell all or substantially all of its assets or
business or acquire all or substantially all of the stock or
interests or business or assets of any other Person or agree to do
any of the foregoing and use its best efforts to preserve its
business organization intact, to keep available the services of its
present officers and employees and to preserve the goodwill of its
customers and others having business relations with it;
(b) Compliance With Laws. Comply with all applicable
--------------------
laws and regulations which relate to the conduct of its business;
and promptly deliver to the other party to this Agreement a copy of
any application, report or other document filed by it with any
local, state or federal governmental agency;
(c) Consents. Use its best efforts to obtain any and
--------
all consents by third parties, including governmental agencies,
required to be obtained with respect to the performance of this
Agreement and cooperate fully with the other party to this
Agreement in connection with its requests and applications for
consents and government approvals, licenses or permits, if any,
which are necessary for the ownership and operation of the business
following the Closing;
(d) Compensation; Employment Agreements, Etc. Not enter
-----------------------------------------
into any employment agreement or compensation arrangements with any
person or grant any material increase in the compensation of its
employees without the prior written consent of the other party;
(e) Corporate Documents. Not amend its Articles of
-------------------
Incorporation or By-laws without the prior written consent of the
other party;
(f) Capital Stock. Not issue any shares of authorized
-------------
capital stock (other than that issued in connection with the Share
Exchange) or securities convertible into such shares and not
purchase, redeem, retire or otherwise acquire any of its
outstanding shares, or sell or give any option or right to
purchase, hypothecate, pledge or otherwise encumber or dispose of
any such shares or any shares held in treasury, or make or effect
any other change in the structure or composition of its capital
stock, or agree to do any of the foregoing, without the prior
written consent of the other party;
(g) Dividends, Etc. Not declare or pay any dividends or
---------------
otherwise make distributions with respect to its capital stock;
(h) Indebtedness. Except in the ordinary course of
------------
business, not place or suffer to exist on any of its assets any
mortgage, pledge, lien, charge or other encumbrance, or cancel any
indebtedness owing to it or any claims that it might have possessed
or waive any material rights of substantial value; and not borrow
or agree to borrow any material amount of funds or incur any
obligation or liability except in the ordinary course of business,
or guarantee
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<PAGE>
or agree to guarantee any material obligations of others except for
letters of credit and guarantees of signatures in the ordinary
course of business;
(i) Commitments. Not commit any act or commit to do any
-----------
act which would cause a material breach of any lease, agreement,
contract or commitment to which it is a party or by which its
property or business is bound or affected, or which would have a
material adverse effect on its financial condition, operations or
assets; and
(j) Contracts. Not enter into or agree to enter into
---------
any material lease, agreement, contract or commitment out of the
ordinary course of business without the prior written consent of
the other party.
3.4 Shareholders' Meetings. Investors Heritage will take, in
----------------------
accordance with its Articles of Incorporation and By-laws, all
action necessary to convene a meeting of holders of Shares (the
"Shareholders' Meeting"), as promptly as practicable after the S-4
Registration Statement (as defined in Section 3.5 herein) is
declared effective, to consider and vote upon the approval of the
Share Exchange, and Investors Heritage's board of directors,
subject to fiduciary obligations under applicable law, will
recommend such approval by its shareholders, will not withdraw or
modify such recommendation and shall take all lawful action to
solicit such approval. Kentucky Investors is not required by
applicable law to submit the Share Exchange to Kentucky Investors
shareholders.
3.5 S-4 Registration Statement.
--------------------------
(a) Kentucky Investors and Investors Heritage shall
promptly prepare and file with the Securities and Exchange
Commission (the "SEC"), in preliminary form, the S-4 Registration
Statement in connection with the Share Exchange, including the
joint proxy and prospectus and other proxy materials and related
documents ("S-4 Registration Statement") as promptly as
practicable. Kentucky Investors and Investors Heritage each shall
use its reasonable best efforts to have the S-4 Registration
Statement declared effective under the Securities Act of 1933, as
amended (the "Securities Act"), as promptly as practicable after
such filing, and promptly thereafter shall mail the S-4
Registration Statement to the shareholders of Investors Heritage.
Kentucky Investors shall also use its reasonable best efforts to
obtain, prior to the Effective Date of the S-4 Registration
Statement, all necessary state securities law or "Blue Sky" permits
and approvals required in connection with the Share Exchange and to
consummate the other transactions contemplated by this Agreement
and shall pay all expenses incident thereto.
(b) Kentucky Investors and Investors Heritage each
shall, upon request by the other, furnish the other with all
information concerning itself, its subsidiaries, directors,
executive officers and stockholders and such other matters as may
be reasonably necessary or advisable in connection with the S-4
Registration Statement or any other statement, filing, notice or
application made by or on behalf of Kentucky Investors, Investors
Heritage or any of their respective subsidiaries to any third party
and/or any Governmental Entity in connection with the Share
Exchange and the transactions contemplated by this Agreement. Each
of Kentucky Investors and Investors Heritage agrees as to itself
and its subsidiaries that none of the information supplied or to be
supplied by it for inclusion or incorporation by reference in the S-
4 Registration Statement contains any untrue statement of material
fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(c) Kentucky Investors and Investors Heritage shall
promptly prepare and file Form A with the Kentucky Department of
Insurance and each shall use its reasonable best efforts to obtain
approval from the Kentucky Department of Insurance prior to the
Effective Date.
3.6 Press Releases. Kentucky Investors and Investors Heritage
--------------
agree that any press release or other public announcement by either
party pertaining to the Share Exchange shall be coordinated with
the other party hereto, provided, however, that either party,
without the consent of the other, may issue a press release or make
such public statement as may be required by law, upon the advice of
outside counsel.
3.7 Limitation. Notwithstanding anything to the contrary
----------
contained in this Article 3, the directors of Investors Heritage
shall not be required to take any action contrary to the fiduciary
duties owed by them to the shareholders of Investors Heritage.
3.8 Dividends. Prior to the Effective Date, neither party
---------
will declare or pay any dividends, or make any other distributions
to its shareholders.
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3.9 Indemnification.
---------------
(a) Indemnification. From and after the Effective Date,
---------------
Kentucky Investors shall indemnify, defend and hold harmless each
Person who is now, or has been at any time prior to the date hereof
or who becomes prior to the Effective Date, a director or officer
of Investors Heritage (each, an "Indemnified Party" and,
collectively, the "Indemnified Parties") against (i) all losses,
claims, damages, costs, expenses, liabilities, or judgments or
amounts that are paid in settlement with the approval of Kentucky
Investors (which approval shall not be unreasonably withheld) of or
in connection with any claim, action, suit, proceeding or
investigation based in whole or in part on or arising, in whole or
in part, out of, the fact that such person is or was a director or
officer of Investors Heritage, whether pertaining to any matter
existing or occurring at or prior to the Effective Date, and
whether asserted or claimed prior to, or at or after, the Effective
Date, excluding any claim, action, suit, proceeding or
investigation which is related to any matter which, on the
Effective Date, would have constituted or resulted in a breach of
any of the representations and warranties of Investors Heritage set
forth in Article 4 hereof ("Indemnified Liabilities") and (ii) all
Indemnified Liabilities based in whole or in part on, or arising in
whole or in part out of, or pertaining to this Agreement or the
transactions contemplated hereby, in each case to the full extent
Investors Heritage would have been permitted under the KBCA to
indemnify such Indemnified Party (and Kentucky Investors shall pay
expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the full extent permitted
by law upon receipt of any undertaking required by Section 271B.8-
530(1)(b) of the KBCA). Without limiting the foregoing, in the
event any such claim, action, suit, proceeding or investigation is
brought against Indemnified Parties (whether arising before or
after the Effective Date), (i) after the Effective Date, Kentucky
Investors shall pay all reasonable fees and expenses of counsel for
the Indemnified Parties promptly as statements therefor are
received; and (ii) after the Effective Date, Kentucky Investors
will use all reasonable efforts to assist in the vigorous defense
of any such matter, provided that Kentucky Investors shall not be
liable for any settlement of any claim effected without its written
consent, which consent shall not be unreasonably withheld. Any
Indemnified Party wishing to claim indemnification under this
Section 3.9, upon learning of any such claim, action, suit,
proceeding or investigation, shall notify Kentucky Investors (but
the failure to notify Kentucky Investors shall not relieve it from
any liability which it may have under this Section 3.9 except to
the extent such failure materially prejudices Kentucky Investors),
and shall deliver to Kentucky Investors the undertaking, if any,
required by Section 271B.8-530(1)(b) of the KBCA. The Indemnified
Parties as a group may retain only one law firm to represent them
with respect to each such matter unless there is under applicable
standards of professional conduct, a conflict on any significant
issue between the positions of any two or more Indemnified Parties.
(b) Binding Effect. If Kentucky Investors or any of its
--------------
successors or assigns (i) shall consolidate with or merge into any
other Person and shall not be the continuing or surviving Person of
such consolidation or merger or (ii) shall transfer all or
substantially all of its properties and assets to any Person, then
and in each such case, proper provision shall be made so that the
successors and assigns of Kentucky Investors shall assume the
obligations set forth in this Section 3.9.
(c) Benefit. The provisions of this Section 3.9 are
-------
intended to be for the benefit of, and shall be enforceable by,
each Indemnified Party, his or her heirs and personal
representatives.
3.10 Acquisition Proposals. Each of Kentucky Investors and
---------------------
Investors Heritage agree that it shall not, and shall cause its
subsidiaries not to, solicit or encourage inquiries or proposals
with respect to or encourage any negotiations concerning or provide
any confidential information to or have any discussions with any
person relating to any tender or exchange offer, proposal for
merger consolidation or other business combination involving either
Kentucky Investors or Investors Heritage, or any proposal or offer
to acquire in any manner a substantial equity interest in or
substantial portion of the assets of Kentucky Investors or
Investors Heritage, as the case may be, other than the transactions
contemplated herein by this Agreement.
3.11 Takeover Law. No party shall take any action that would
------------
cause the transactions contemplated by this Agreement to be subject
to the requirements imposed by Sections 271B.12-200 through
271B.12-230 of the KBCA (the "Takeover Law") and each of them will
take all necessary steps within its control to exempt the
transaction contemplated by this Agreement from the Takeover Law.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1 Investors Heritage Representations and Warranties.
-------------------------------------------------
Investors Heritage hereby represents and warrants to Kentucky
Investors as follows:
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(a) Organization, Existence and Qualification.
-----------------------------------------
Investors Heritage is an insurance corporation organized and
validly existing under the laws of the Commonwealth of Kentucky, is
duly chartered to conduct business as an insurance company in
Kentucky by the Kentucky Department of Insurance, and has full and
requisite corporate power and authority to own or hold under lease
the properties it now owns or holds under lease and to carry on the
businesses presently being conducted by it. It is qualified to do
business as a foreign corporation in all jurisdictions requiring
such qualification. It has all federal, state, local and foreign
governmental authorizations necessary for it to own or lease its
properties and assets and to carry on its businesses as they are
now being conducted, the absence of which authorizations, either
individually or in the aggregate, would have a material adverse
effect on its financial condition, operations or assets. Investors
Heritage has one subsidiary, and is not a partner or joint venturer
with any other person or entity.
(b) Corporate Authority, Approval and Fairness.
------------------------------------------
(1) Upon approval of this Agreement by its
shareholders, Investors Heritage will have all requisite corporate
power and authority to enter into and perform all of its
obligations under this Agreement. Except for such shareholder
approval, the execution, delivery and performance of this Agreement
and all of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of
Investors Heritage. This Agreement constitutes the legal, valid
and binding obligation of Investors Heritage and, subject to the
conditions set forth herein, is enforceable in accordance with its
terms.
(2) The execution, delivery and performance of this
Agreement by Investors Heritage and, upon approval of this
Agreement by its shareholders, the consummation of the transactions
contemplated by this Agreement will not constitute a breach,
violation or default under the Articles of Incorporation or By-laws
of Investors Heritage, any judgment, decree, order or governmental
permit, franchise, license, order, approval or authority, or any
agreement, indenture or instrument to which Investors Heritage is a
party or by which its assets are currently affected or bound, which
breach, violation or default could reasonably be expected to have a
material adverse effect on Investors Heritage.
(3) The Board of Directors of Investors Heritage
(A) has approved this Agreement and the other transactions
contemplated hereby, (B) has declared that the Share Exchange and
the other transactions contemplated by this Agreement are
advisable, and (C) has received the opinion of The Robinson-
Humphrey Company, LLC, its financial advisor, to the effect that as
of the date of such opinion, the Share Exchange is fair from a
financial point of view to the holders of the Shares.
(c) Articles of Incorporation and By-laws. Investors
-------------------------------------
Heritage has made available to Kentucky Investors, prior to the
execution and delivery of this Agreement, true and correct copies
of its Articles of Incorporation and By-laws. These Articles, By-
laws and, to the best knowledge of Investors Heritage, all of the
corporate minutes and stock transfer records of Investors Heritage
are current and complete in all respects.
(d) Capitalization.
--------------
(1) The authorized capital stock of Investors
Heritage consists of 2,000,000 shares of common stock, with a par
value of $1.00 per share ("Investors Heritage Common Stock"), of
which 904,784 shares are currently issued and outstanding as of the
close of business on September 24, 1999 and of which 32,216 shares
are currently held in treasury. All of the outstanding shares of
Investors Heritage Common Stock have been duly authorized and
validly issued, fully paid and non-assessable.
(2) There are no preemptive or other outstanding
rights, options, warrants, conversion rights, stock appreciation
rights, redemption rights, repurchase rights, agreements,
arrangements or commitments to issue or sell any shares of capital
stock or other securities of Investors Heritage or any securities
or obligations convertible or exchangeable into or exercisable for,
or giving any Person a right to subscribe for or acquire, any
securities of Investors Heritage or any of its subsidiaries, and no
securities or obligations evidencing such rights are authorized,
issued or outstanding. Investors Heritage does not have
outstanding any bonds, debentures, notes or other obligations the
holders of which have the right to vote (or, except as referred to
in this subsection (2), convertible into or exercisable for
securities having the right to vote) with the stockholders of
Investors Heritage.
(e) Financial Statements and Regulatory Filings.
-------------------------------------------
Investors Heritage has made available to Kentucky Investors a copy
of each registration statement, report, proxy statement or
information statement prepared by
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<PAGE>
it since December 31, 1998 ("Regulatory Filings"), and the
consolidated balance sheets, together with related consolidated
statements of income, shareholders' equity, and cash flows of
Investors Heritage for the years ended December 31, 1997 and 1998
(the "Annual Financial Statements"). Investors Heritage has also
delivered or made available to Kentucky Investors a copy of its
unaudited statements for the six-month period ended June 30, 1999
(the "6-Month Interim Financial Statements"). The Annual Financial
Statements were compiled in accordance with generally accepted
accounting principles, applied on a consistent basis except as may
be indicated in any notes thereto, and present fairly and
accurately the financial condition of Investors Heritage at the
respective dates indicated therein, the results of operations of
Investors Heritage for the periods covered thereby and the other
financial information purported to be shown. The 6-Month Interim
Financial Statements were compiled in accordance with generally
accepted accounting principles, applied on a consistent basis
except as may be indicated in any notes thereto, and present fairly
and accurately the financial condition of Investors Heritage at the
date indicated, the results of operations of Investors Heritage for
the period covered thereby and other financial information reported
to be shown. The business of Investors Heritage has been conducted
only in the ordinary course since December 31, 1998. Investors
Heritage has no material liabilities, obligations or commitments
except those disclosed in the Annual Financial Statements, the 6-
Month Interim Financial Statements and those entered into in the
ordinary course of business since December 31, 1998. All loans
reflected on the books and records of Investors Heritage have been
(i) made for good, valuable and adequate consideration in the
ordinary course of business of Investors Heritage; (ii) to the best
knowledge of Investors Heritage, evidenced by notes or other
evidences of indebtedness that are true and genuine; and (iii)
fully reserved against an amount sufficient to provide for all
chargeoffs which could be reasonably anticipated in the ordinary
course of business. As of their respective dates, the Annual
Financial Statements and the 6-Month Interim Statements do not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Investors Heritage has made available to Kentucky
Investors true and complete copies of the annual and quarterly
statements of Investors Heritage as filed with the applicable
insurance regulatory authorities for the years ended December 31,
1996, 1997, and 1998, and the quarterly periods ended March 31,
1999, and June 30, 1999, including all exhibits, interrogatories,
notes, schedules and any actuarial opinions, affirmations or
certifications or other supporting documents filed in connection
therewith (collectively, the "Investors Heritage SAP Statements").
The Investors Heritage SAP Statements were prepared in conformity
with statutory accounting practices prescribed or permitted by the
applicable insurance regulatory authority consistently applied for
the periods covered thereby and present fairly the statutory
financial position of Investors Heritage as at of respective dates
thereof and the results of operations of Investors Heritage for the
respective periods then ended. The Investors Heritage SAP
Statements complied in all material respects with all applicable
laws, rules and regulations when filed, and no material deficiency
has been asserted with respect to any Investors Heritage SAP
Statements by the applicable insurance regulatory body or any other
governmental agency or body. The annual statutory balance sheets
and income statements included in the Investors Heritage SAP
Statements have been audited by Ernst & Young LLP, and the Company
has made available to Kentucky Investors true and complete copies
of all audit opinions related thereto. Investors Heritage has made
available to Kentucky Investors true and complete copies of all
examination reports of insurance departments and any insurance
regulatory agencies since January 1, 1996, relating to Investors
Heritage.
(f) Litigation, Pending Proceedings and Compliance with
---------------------------------------------------
Laws. There are no material claims of any kind or any material
- ----
actions, suits, proceedings, arbitrations or investigations pending
or, to the best knowledge of Investors Heritage, threatened against
Investors Heritage nor does Investors Heritage have knowledge of a
basis for any material claim, in any court or before any
governmental agency or instrumentality or arbitration panel or
otherwise against, by or affecting Investors Heritage or any of its
business, prospects, conditions (financial or otherwise) or assets
or which would prevent the performance of the Agreement or any of
the transactions contemplated hereby or declare the same unlawful
or cause the rescission thereof. Investors Heritage has complied
with and is not in any material default in any respect under (and
has not been charged nor, to the best knowledge of Investors
Heritage, threatened with or under investigation with respect to
any charge concerning any material violation of any provision of)
any federal, state or local law, regulation, ordinance, rule or
order (whether executive, judicial, legislative or administrative)
or any order, writ, injunction or decree of any court, agency or
instrumentality, except for possible defaults that do not and,
insofar as can be reasonably foreseen in the future will not, have
a material adverse effect on Investors Heritage. There are no
material incurred violations or violations with respect to which
material refunds or restitution may be required that have been
cited in any compliance report to Investors Heritage as a result of
examination by any insurance regulatory authority.
(g) Employee Benefit Plans. All employee pension
----------------------
benefit plans (the "Plans") maintained by Investors Heritage are
qualified under Code Section 401(a) and the related trusts are
exempt under Code Section 501(a).
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<PAGE>
True and complete copies of the plans, related trust agreements and
any communications to or from the Internal Revenue Service, the
Pension Benefit Guaranty Corporation or the United States
Department of Labor have been made available by Investors Heritage
to Kentucky Investors. Investors Heritage states that neither it
nor any of the administrators of any of the Plans or of the related
trusts or any trustee thereof, has engaged in a prohibited
transaction which would subject Investors Heritage, any of the
Plans or any administrator, trustee or party dealing with any of
the Plans or any such trust, to a material tax or penalty on
prohibited transactions imposed by the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Code Section 4975.
None of the Plans has an accumulated funding deficiency (as defined
in Section 302 of ERISA and Section 412 of the Code), whether or
not waived, and all contributions to the Plans necessary to satisfy
the minimum funding requirements have been and will be made prior
to the date they are due. No material liability to the Pension
Benefit Guaranty Corporation has been, or is expected by Investors
Heritage, to be incurred with respect to any of the Plans and there
has been no reportable event (as described in Section 4043(b) of
ERISA), and no event or condition has occurred which presents a
material risk of termination of any of the Plans by the Pension
Benefit Guaranty Corporation. All reports, statements, returns and
other information required to be furnished or filed with respect to
any of the Plans have been furnished or filed, or both, in
accordance with Sections 101 through 105 of ERISA, and Code
Sections 6057 through 6059, and they are true, correct and
complete. Records with respect to the Plans have been maintained
in accordance with Section 107 of ERISA. Neither Investors
Heritage nor any other fiduciary (as defined in Section 3 of ERISA)
with respect to any of the Plans has any material liability for any
breach of any fiduciary duties under Sections 404, 405 or 409 of
ERISA. Each of the Plans is in material compliance with the
applicable provisions of ERISA, the Code and all other applicable
laws. Investors Heritage knows of no fact which would adversely
affect the qualified status of any of the Plans. The present value
of all accrued benefits, whether nonforfeitable or not, under the
Plans subject to Title IV of ERISA did not as of December 31, 1990,
and will not, at the Effective Date, exceed the value of the assets
of such Plans allocable to such accrued benefits. Investors
Heritage does not maintain or contribute to any employee benefit
plan which is a group health plan (within the meaning of Code
Section 162(i)(3)) which is not in material compliance with the
applicable provisions of Public Law 99-272, the Consolidated
Omnibus Budget Reconciliation Act of 1986 ("COBRA"). As used in
this Agreement, the terms "employee benefit plans" and "employee
pension benefit plans" shall have the respective meanings assigned
to such terms in Section 3 of ERISA.
(h) Brokers. No Person is entitled to any brokerage or
-------
finder's fee or commission or other like payment in connection with
the negotiations relating to or the transactions contemplated by
this Agreement. Investors Heritage shall be responsible for the
payment of fees for investment advisory services rendered in
connection with such transactions.
(i) Assets. Investors Heritage has good and marketable
------
title to all of its assets that are material to its business,
including those assets included within the Annual Financial
Statements and the accompanying and supporting schedules and
documents, free and clear of all liens, charges, encumbrances and
claims except (i) as disclosed in said Financial Statements,
schedules and documents, (ii) those assets disposed of in the
ordinary course of business prior to the Closing, (iii) statutory
liens securing payments not yet due, (iv) liens on assets incurred
in the ordinary course of its business, and (v) such imperfections
or irregularities of title, claims, liens, charges, security
interests or encumbrances as do not materially affect the use of
the properties or assets subject thereto or affected thereby, or
otherwise materially impair business operations at such properties.
Except as disclosed in said Annual Financial Statements, none of
the assets are owned by any director, officer or affiliate of
Investors Heritage.
With respect to each agreement by which Investors Heritage
leases real or personal property as lessee or lessor (other than
leases that are the equivalent of extensions of credit): (i) such
lease or other agreement is in full force and effect in accordance
with its terms; (ii) all rents due under such agreements have been
paid; (iii) Investors Heritage has been in peaceable possession
since the commencement of the original term of the lease or other
agreement; and (iv) there is no material event of default, or
event, occurrence, condition or act, which with the giving of
notice, the lapse of time or the happening of any additional event,
occurrence, condition or act would become, and the consummation of
the transactions contemplated by this Agreement will not cause, a
default under such lease or agreement.
(j) Material Contracts. Except for this Agreement or
------------------
any agreement contemplated hereby, Investors Heritage is not a
party to any:
(1) written employment agreement that provides for
compensation in excess of $20,000 per year, written bonus,
incentive, deferred compensation, severance pay, profit sharing,
retirement, stock purchase, stock option agreement or arrangement
or employee benefit plan for or in respect of any employee or
former employee;
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<PAGE>
(2) collective bargaining agreement or other
agreement with any labor union or labor organization;
(3) agreement, indenture or other instrument
relating to the borrowing of money by Investors Heritage (other
than borrowings incurred in the ordinary course of business,
including, without limitation, the creation of deposit liabilities,
purchases of federal funds, sales of certificates of deposit and
entering into repurchase agreements), or the guaranty by Investors
Heritage of any obligation for the borrowing of money or any
agreement that involves a potential material liability for
Investors Heritage (other than letters of credit issued by
Investors Heritage in the ordinary course of its business);
(4) agreement, contract or commitment with any
director, officer or other affiliate of Investors Heritage; or
(5) agreement, arrangement or commitment that is
material to the financial condition or results of operation of
Investors Heritage.
(k) Good Standing of Contracts. To the best knowledge
--------------------------
of Investors Heritage, no event or condition has occurred or
exists, or is alleged by any of the other parties hereto to have
occurred or existed, which constitutes, or with lapse of time or
giving of notice or both might constitute, and the transactions
contemplated by this Agreement will not cause, a default or breach
under material contracts, leases, agreements or understandings to
which Investors Heritage is a party which would have a material
adverse effect on Investors Heritage.
(l) Governmental Matters. Investors Heritage has and
--------------------
maintains all licenses, permits and authorizations that are
material to the operation of its businesses as those businesses are
now being conducted by it. Investors Heritage will cause such
licenses, permits and other governmental authorizations to continue
in effect through, including and after the Effective Date. There
are no citations or other notices alleging a violation of any such
licenses, permits or authorizations which have not been finally
resolved or settled. The operation of Investors Heritage is being
conducted in substantial compliance with all applicable state and
federal laws and regulations.
(m) Insurance. Investors Heritage maintains insurance
---------
and bonds in such coverages and amounts of coverage as is
consistent with sound business practices. Investors Heritage has
made available to Kentucky Investors all insurance policies and
bonds it presently has in effect. Investors Heritage will keep
such policies and bonds in effect so long as such policies and
bonds are available at reasonable cost in the sole discretion of
Investors Heritage's Board of Directors. Investors Heritage is not
liable for any material retroactive premium adjustments. All such
policies are valid and enforceable and in full force and effect and
Investors Heritage has not received any notice of premium increases
or cancellations with respect to any such policies and bonds.
(n) Tax Matters. Investors Heritage has timely filed
-----------
all federal, state, foreign and local income, franchise, excise,
real and personal property, employment and other tax returns, tax
information returns and reports required to be filed, and has paid,
or made adequate provisions for the payment of, all material taxes,
interest payments and penalties (whether or not reflected in its
returns as filed) due and payable (and/or accruable for all periods
ending on or before the date of this Agreement) to any city,
county, state, foreign country, the United States or any other
taxing authority and is not delinquent in the payment of any
material amount of tax or governmental charge of any nature. No
audit, examination or investigation is presently being conducted
or, to the best of Investors Heritage's knowledge, threatened by
any taxing authority; no material unpaid tax deficiencies or
additional material liabilities of any sort have been proposed by
any governmental representative; and no agreements for the
extension of time for the assessment of any amounts of tax have
been entered into by or on behalf of Investors Heritage. Investors
Heritage has withheld (and timely paid to the appropriate
governmental entity) proper and accurate amounts from its employees
for all periods and is in material compliance with all tax
withholding provisions (including, without limitation, income,
social security and employment tax withholding for all forms of
compensation) of applicable federal, state, foreign and local laws.
(o) Accuracy. No representation or warranty of
--------
Investors Heritage herein, nor any statement, list, report,
certificate or other document furnished or to be furnished by
Investors Heritage to Kentucky Investors contains or will contain
any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statement contained
herein or therein not misleading.
(p) Dividends. Since May 1, 1999, Investors Heritage
---------
has not declared or paid any dividends or otherwise made
distributions with respect to it's the Investors Heritage Common
Stock.
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<PAGE>
(q) Information Supplied by Investors Heritage.
------------------------------------------
Investors Heritage shall disseminate to its shareholders all
materials required by it under law to be disseminated in connection
with the consideration by the shareholders of this Agreement and
the related transactions contemplated thereby. None of the
information supplied or to be supplied by Investors Heritage about
Investors Heritage Common Stock or Investors Heritage's business
for inclusion, or included in (i) S-4 Registration Statement and
(ii) any other documents to be filed with the Kentucky Department
of Insurance or any other regulatory agency (including any state
securities department or agency) in connection with this Agreement
and the related transactions contemplated thereby, will, at the
respective times such documents are filed, and with respect to the
S-4 Registration Statement, or any amendment thereof or supplement
thereto, both at the time of mailing and at the time of the
meeting, be false or misleading with respect to any material fact,
or omit to state any material fact necessary in order to (x) make
the statements therein not misleading or (y) correct any statement
in any earlier communication made, whether with respect to the
meeting in connection with which the S-4 Registration Statement
shall be mailed or otherwise.
(r) Insider Loans. All loans, loan commitments and any
-------------
other extensions of credit and commitments to extend credit that
have been made by Investors Heritage, to directors, officers, or
principal shareholders of Investors Heritage, or any of their
related interests, were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and
substantially comply with all applicable provisions of state and
federal law. Such loans, extensions and commitments do not involve
more than a normal risk of collectability.
(s) Intellectual Property. Investors Heritage has no
---------------------
patents, patent applications, trademarks, trademark registrations
or applications therefor, trade names, copyrights, copyright
registrations or applications therefor, patent, trademark or trade
name licenses, assignments, know-how or royalty agreements,
contracts with employees or others relating in whole or in part to
disclosure, assignment or patenting of any inventions, discoveries,
improvements, processes, formulae, or other know-how or any other
similar agreements relating in whole or in part to any of the
assets or properties of Investors Heritage. To the best of its
knowledge, Investors Heritage is not infringing any patent,
trademark, trade name or copyright and, to conduct its business as
such business is currently conducted. To the best of its
knowledge, Investors Heritage does not require rights under any
patent, trademark, trade name, copyright (or any application or
registration respecting any thereof) or any discovery, improvement,
process, formula, know-how, data, plan, specification, drawing or
the like which it does not have.
(t) Environmental Matters.
---------------------
(1) Investors Heritage: (i) is in compliance with
all environmental laws, regulations, permits and orders applicable
to it, and with all laws, regulations, permits and orders governing
or relating to asbestos removal and abatement; (ii) has not
transported, stored, treated or disposed, or allowed or arranged
for any third parties to transport, store, treat or dispose, of any
Hazardous Substances or other waste to or at any location other
than a site lawfully permitted to receive such Hazardous Substances
or other waste for such purposes, or had performed, arranged for or
allowed by any method or procedure such transportation, storage,
treatment or disposal in contravention of any laws or regulations,
nor has Investors Heritage disposed, or allowed or arranged for any
third parties to dispose, of any Hazardous Substances or other
waste upon property owned or leased by Investors Heritage; (iii)
has no knowledge that there has occurred, or is presently
occurring, a Release of any Hazardous Substance on, into or beneath
the surface of any parcel of real property in which Investors
Heritage has an ownership interest or any leasehold interest; (iv)
has not transported or disposed, or allowed or arranged for any
third parties to transport or dispose, of any Hazardous Substance
or other waste to or at a site, which, pursuant to the U.S.
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA") or any similar law, (A) has been
placed on the National Priorities List or its state equivalent, or
(B) the Environmental Protection Agency or the relevant state
agency has proposed or is proposing to place on the National
Priorities List or its state equivalent; (v) has not received
notice, and has no knowledge of any facts which could give rise to
any notice, that Investors Heritage is a potentially responsible
party for a federal or state environmental cleanup site or for
corrective action under CERCLA or any other applicable law or
regulation or notice of any other Environmental Claim; (vi) has not
received any written or oral request for information in connection
with any federal or state environmental cleanup site and Investors
Heritage has not undertaken (or been requested to undertake) any
response or remedial actions or cleanup actions of any kind at the
request of any federal, state or local governmental entity, or at
the request of any other person or entity; and (vii) is not aware
of any laws, regulations, ordinances, licenses, permits or orders
relating to environmental matters requiring any work, repairs,
construction or capital expenditures with respect to the assets or
properties of Investors Heritage.
A-11
<PAGE>
(2) For the purposes of this Agreement,
"Environmental Claim" shall mean any demand, claim, governmental
notice or threat of litigation or the actual institution of any
action, suit or proceeding at any time by a person other than the
parties which asserts that an Environmental Condition constitutes a
violation of, or otherwise may give rise to any liability or
obligation under, any statute, ordinance, regulation, or other
governmental requirement or the common law, including, without
limitation, any such statute, ordinance, regulation, or other
governmental requirement relating to the emission, discharge or
release of any Hazardous Substance into the environment or the
generation, treatment, storage, transportation, or disposal of any
Hazardous Substance. "Environmental Condition" shall mean the
presence on the Closing Date, whether discovered or undiscovered on
the Closing Date, in surface water, ground water, drinking water
supply, land surface, subsurface strata or ambient air of any
pollutant, contaminant, industrial solid waste or Hazardous
Substance arising out of or otherwise relating to the operations or
other activities of Investors Heritage, or of any predecessor in
interest to Investors Heritage's properties or any predecessor of
the business to Investors Heritage, conducted or undertaken prior
to the Closing Date. "Hazardous Substance" shall mean any
substance defined in the manner set forth in Section 101(14) of the
U.S. Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, and shall include any additional
substances designated under Section 102(a) thereof. "Release"
shall mean releasing, spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching,
dumping or disposing into the environment.
(u) Governmental Filings. Other than the filings and/or
--------------------
notices (a) under the Securities Exchange Act of 1934 (the
"Securities Exchange Act") and the Securities Act, (b) to comply
with state securities or "blue-sky" laws, (c) required to be made
with the OTC Bulletin Board, and (d) of appropriate documents with,
and approval of, the respective Commissioner of the Kentucky
Department of Insurance and such notices and consents as may be
required under the insurance laws of any jurisdiction in which
Investors Heritage, Kentucky Investors or any of their respective
subsidiaries is domiciled or does business or is licensed or
authorized as an insurance company, no notices, reports or other
filings are required to be made by Investors Heritage with, nor are
any consents, registrations, approvals, permits or authorizations
required to be obtained by Investors Heritage from, any
governmental or regulatory authority, agency, commission, body or
other governmental entity ("Governmental Entity"), in connection
with the execution and delivery of this Agreement.
(v) Takeover Statute. No restrictive provision of any
----------------
fair price, moratorium, control share acquisition or similar anti-
takeover statute or regulation (including Section 271B.12-200 et al
of the KBCA) or restrictive provision of any applicable anti-
takeover provision in the Articles of Incorporation or By-laws of
Investors Heritage is, or at the Effective Date will be, applicable
to Investors Heritage, the Share Exchange or other transactions
contemplated by this Agreement.
(w) Accounting and Tax Matters. As of the date hereof,
--------------------------
Investors Heritage has not taken any action, nor do the executive
officers of Investors Heritage have any knowledge of any fact or
circumstance, that would prevent Kentucky Investors from accounting
for the business combination to be affected by the Share Exchange
as a "purchase" or prevent the Share Exchange from qualifying as a
"reorganization" within the meaning of Code Section 368(a).
(x) Insurance Matters.
-----------------
(1) Except as otherwise would not, individually or
in the aggregate, be reasonably likely to have a material adverse
effect, all policies, binders, slips, certificates, annuity
contracts and participation agreements and other agreements of
insurance, whether individual or group, in effect as of the date
hereof (including all applications, supplements, endorsements,
riders and ancillary agreements in connection therewith) that are
issued by Investors Heritage and any and all marketing materials
are, to the extent required under applicable law, on forms approved
by applicable insurance regulatory authorities or which have been
filed and not objected to by such authorities within the period
provided for objection, and such forms comply in all material
respects with the insurance statutes, regulations and rules
applicable thereto and, as to premium rates established by
Investors Heritage which are required to be filed with or approved
by insurance regulatory authorities, the rates have been so filed
or approved, the premiums charged conform thereto in all material
respects, and such premiums comply in all materials respects with
the insurance statutes, regulations and rules applicable thereto.
(2) All reinsurance and coinsurance treaties or
agreements, including retrocessional agreements to which Investors
Heritage is a party or under which Investors Heritage has any
existing rights, obligations or liabilities are in full force and
effect except for such treaties or agreements the failure to be in
full force and effect as individually or in the aggregate are not
reasonably likely to have a material adverse effect on Investors
Heritage. To the
A-12
<PAGE>
knowledge of Investors Heritage, no other party to a reinsurance or
coinsurance treaty or agreement to which Investors Heritage is a
party, is in default in any material respect as to any provision
thereof, and no such agreement contains any provision providing
that the other party thereto may terminate such agreement by reason
of the transactions contemplated by this Agreement. Investors
Heritage has not received any notice to the effect that the
financial condition of any other party to any such agreement is
impaired with the result that a default thereunder may reasonably
be anticipated, whether or not such default may be cured by the
operation of any offset clause in such agreement.
(3) Prior to the date hereof, Investors Heritage
has made available to Kentucky Investors a true and complete copy
of any actuarial reports prepared by Investors Heritage with
respect to Investors Heritage since December 31, 1998, and all
attachments, addenda, supplements and modifications thereto (the
"Investors Heritage Actuarial Analyses"). To the best knowledge of
Investors Heritage, the information and data utilized by Investors
Heritage's actuary in connection with the preparation of the
Investors Heritage Actuarial Analyses were accurate in all material
respects. Furthermore, to the best knowledge of Investors
Heritage, each Investors Heritage Actuarial Analysis was based upon
an accurate inventory of policies in force for Investors Heritage
at the relevant time of preparation, was prepared using appropriate
modeling procedures accurately applied and in conformity with
generally accepted actuarial standards consistently applied, and
the projections contained therein were properly prepared in
accordance with the assumptions stated therein.
(4) As of the date hereof, Investors Heritage has
no reason to believe that any rating presently held by Investors
Heritage is likely to be modified, qualified, lowered or placed
under surveillance for a possible downgrade for any reason.
(5) Except as would not reasonably be expected to
have a material adverse effect, all annuity contracts and life
insurance policies issued by Investors Heritage meet all
definitional or other requirements for qualification under the Code
section applicable (or intended to be applicable) to such annuity
contracts or life insurance policies, including, without
limitation, the following: (A) each life insurance policy meets
the requirements of Code Sections 101(f), 817(h) or 7702, as
applicable; (B) no life insurance contract issued by Investors
Heritage is a "modified endowment contract" within the meaning of
Code Section 7702A unless and to the extent that the holders of the
policies have been notified of their classification; (C) each
annuity contract issued, entered into or sold by any company
insurance subsidiary qualifies as an annuity under federal tax law;
(D) each annuity contract meets the requirements of, and has been
administered consistent with Code Sections 817(h) and 72 including
but not limited to Code Section 72(s) (except for those contracts
specifically excluded from such requirement pursuant to Section
72(s)(5)); (E) each annuity contract intended to qualify under
Sections 130, 403(a), 403(b) or 408(b) of the Code contains all
provisions required for qualification under such sections of the
Code; (F) each annuity contract marketed as, or in connection with,
plans that are intended to qualify under Sections 401, 403, 408 or
457 of the Code complies with the requirements of such section.
There are no "hold harmless" indemnification agreements respecting
the tax qualification or treatment of any product or plan sold,
issued, entered into or administered by Investors Heritage, and
there have been no claims asserted by any Person under such "hold
harmless" indemnification agreements so set forth.
(y) Liabilities and Reserves.
------------------------
(1) The reserves carried on Investors Heritage's
SAP Statements for the year ended December 31, 1998, for future
insurance policy benefits, losses, claims and similar purposes
(including claims litigation) are in compliance in all material
respects with the requirements for reserves established by the
insurance departments of the state of domicile Investors Heritage,
were determined in all material respects in accordance with
generally accepted actuarial standards and principles consistently
applied, and are fairly stated in all material respects in
accordance with sound actuarial and statutory accounting
principles. Such reserves were adequate in the aggregate to cover
the total amount of all reasonably anticipated liabilities of
Investors Heritage under all outstanding insurance, reinsurance and
other applicable agreements as of the respective dates of such
Investors Heritage SAP Statements. The admitted assets of
Investors Heritage as determined under applicable laws are in an
amount at least equal to the minimum amounts required by applicable
laws.
(2) Except for regular periodic assessments in the
ordinary course of business or assessments based on developments
which are publicly known within the insurance industry, to the best
knowledge of Investors Heritage, no claim or assessment is pending
or threatened against Investors Heritage which is peculiar or
unique to Investors Heritage by any state insurance guaranty
associations in connection with such association's fund relating to
insolvent insurers which if determined adversely would,
individually or in the aggregate, be reasonably likely to have a
material adverse effect.
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<PAGE>
4.2 Kentucky Investors Representations and Warranties.
-------------------------------------------------
Kentucky Investors hereby represents and warrants to Investors
Heritage as follows:
(a) Organization, Existence and Qualification. Kentucky
-----------------------------------------
Investors is a corporation duly organized and validly existing
under the laws of the Commonwealth of Kentucky and has full and
requisite corporate power and authority to own or hold under lease
properties it now owns or holds under lease and to carry on
businesses presently being conducted by it. It is duly qualified
to do business and is in good standing in these states where its
ownership or leasing of property or assets or the conduct of
business requires it to be so qualified. It has all federal,
state, local and foreign governmental authorizations necessary for
it to own or lease its properties and assets and to carry on its
businesses as they are now being conducted, the absence of which
authorizations, either individually or in the aggregate, would have
a material adverse effect on its financial condition, operations or
assets. Kentucky Investors has three subsidiaries, and is not a
partner in joint ventures with any other person or entity.
(b) Corporate Authority and Approval.
--------------------------------
(1) Kentucky Investors has all requisite corporate
power and authority to enter into and perform all of its
obligations under this Agreement. The execution, delivery and
performance of this Agreement and all of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of Kentucky Investors. This Agreement
constitutes the legal, valid and binding obligation of Kentucky
Investors and, subject to the conditions set forth herein, is
enforceable in accordance with its terms.
(2) The execution, delivery and performance of this
Agreement by Kentucky Investors, and the consummation of the
transactions contemplated by this Agreement will not constitute a
breach, violation or default under the Articles of Incorporation or
By-laws of Kentucky Investors, any judgment, decree, order or
governmental permit, franchise, license, order, approval or
authority, or any agreement, indenture or instrument to which
Kentucky Investors is a party or by which its assets are currently
affected or bound, which breach, violation or default could
reasonably be expected to have a material adverse effect on
Kentucky Investors..
(3) The Board of Directors of Kentucky Investors
(A) has approved this Agreement, and (B) has declared that the
Share Exchange and other transactions contemplated by this
Agreement advisable.
(c) Articles of Incorporation and By-laws. Kentucky
-------------------------------------
Investors has made available to Investors Heritage, prior to the
execution and delivery of this Agreement, true and correct copies
of its Articles of Incorporation and By-laws. There has been no
change in these Articles or By-laws since such delivery.
(d) Capitalization.
--------------
(1) The authorized capital stock of Kentucky
Investors consists of 4,000,000 shares of common stock, with a par
value of $1.00 per share ("Kentucky Investors Common Stock"), of
which 857,886 shares are currently issued and outstanding as of the
close of business on September 24, 1999 and of which 3,859 shares
are currently held in treasury. All of the outstanding shares of
Kentucky Investors Common Stock have been duly authorized and
validly issued, fully paid and non-assessable. Kentucky Investors
has not issued nor is a party to any currently outstanding
subscription, option, warrant, call or commitment of any character
relating to shares of Kentucky Investors Common Stock or any
instruments that can be converted into shares of Kentucky Investors
Common Stock.
(2) There are no preemptive or other outstanding
rights, options, warrants, conversion rights, stock appreciation
rights, redemption rights, repurchase rights, agreements,
arrangements or commitments to issue or sell any shares of capital
stock or other securities of Kentucky Investors or any securities
or obligations convertible or exchangeable into or exercisable for,
or giving any Person a right to subscribe for or acquire, any
securities of Kentucky Investors or any of its Subsidiaries, and no
securities or obligations evidencing such rights are authorized,
issued or outstanding. Kentucky Investors does not have
outstanding any bonds, debentures, notes or other obligations the
holders of which have the right to vote (or, except as referred to
in this subsection (2), convertible into or exercisable for
securities having the right to vote) with the stockholders of
Kentucky Investors.
(e) Litigation, Pending Proceedings and Compliance with
---------------------------------------------------
Laws. There are no material claims of any kind or any material
- ----
actions, suits, proceedings, arbitrations or investigations
pending or, to the best knowledge of Kentucky Investors, threatened
against Kentucky Investors nor does Kentucky Investors have
knowledge of a basis for any material claim, in any court or before
any governmental agency or instrumentality or arbitration panel or
otherwise
A-14
<PAGE>
against, by or affecting Kentucky Investors or any of its business,
prospects, conditions (financial or otherwise) or assets or which
would prevent the performance of the Agreement or any of the
transactions contemplated hereby or declare the same unlawful or
cause the rescission thereof. Kentucky Investors has complied with
and is not in any material default in any respect under (and has
not been charged nor threatened with or under investigation with
respect to any charge concerning any material violation of any
provision of) any federal, state or local law, regulation,
ordinance, rule or order (whether executive, judicial, legislative
or administrative) or any order, writ, injunction or decree of any
court, agency or instrumentality, except for possible defaults that
do not and insofar as can be reasonably foreseen in the future will
not have a material adverse effect on Kentucky Investors.
(f) Financial Statements. Kentucky Investors has made
--------------------
available to Investors Heritage a copy of the consolidated balance
sheets, together with related consolidated statements of income,
shareholders' equity, and cash flows of Kentucky Investors for the
years ended December 31, 1997 and 1998 (the "Kentucky Investors
Annual Financial Statements"). Kentucky Investors has also made
available to Investors Heritage a copy of its unaudited statements
for the six month period ended June 30, 1999 (the "Kentucky
Investors 6-Month Interim Financial Statement"). The Kentucky
Investors Annual Financial Statements were compiled in accordance
with generally accepted accounting principles applied on a
consistent basis except as may be indicated in any notes thereto,
and present fairly and accurately the financial condition of
Kentucky Investors at the respective dates indicated therein, the
results of operations of Kentucky Investors for the periods covered
thereby and the other financial information purported to be shown.
The Kentucky Investors 6-Month Interim Financial Statements were
compiled in accordance with generally accepted accounting
principles, applied on a consistent basis except as may be
indicated in any notes thereto, and present fairly and accurately
the financial condition of Kentucky Investors at the date
indicated, the results of operations of Kentucky Investors for the
period covered thereby and other financial information reported to
be shown. The business of Kentucky Investors has been conducted
only in the ordinary course since December 31, 1998. Kentucky
Investors has no material liabilities, obligations or commitments
except those disclosed in the Kentucky Investors Annual Financial
Statements, the Kentucky Investors 6-Month Interim Financial
Statements and those entered into in the ordinary course of
business since December 31, 1998. All loans reflected on the books
and records of Kentucky Investors have been (i) made for good,
valuable and adequate consideration in the ordinary course of
business of Kentucky Investors; (ii) to the best knowledge of
Kentucky Investors, evidenced by notes or other evidences of
indebtedness that are true and genuine; and (iii) fully reserved
against in an amount sufficient to provide for all chargeoffs which
could be reasonably anticipated in the ordinary course of business.
As of their respective dates, the Kentucky Investors Annual
Financial Statements and the Kentucky Investors 6-Month Interim
Statements do not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(g) Employee Benefit Plans. All employee pension
----------------------
benefit plans (the "Kentucky Investors Plans") maintained by
Kentucky Investors are qualified under Code Section 401(a) and the
related trusts are exempt under Code Section 501(a), except for the
nonqualified deferred compensation plan. True and complete copies
of the plans, related trust agreements and any communications to or
from the Internal Revenue Service, the Pension Benefit Guaranty
Corporation or the United States Department of Labor have been made
available by Kentucky Investors to Investors Heritage. Kentucky
Investors states that neither it nor any of the administrators of
any of the Kentucky Investors Plans or of the related trusts or any
trustee thereof, has engaged in a prohibited transaction which
would subject Investors Heritage, any of the Kentucky Investors
Plans or any administrator, trustee or party dealing with any of
the Kentucky Investors Plans or any such trust, to a material tax
or penalty on prohibited transactions imposed by ERISA or Code
Section 4975. None of the Kentucky Investors Plans has an
accumulated funding deficiency (as defined in Section 302 of ERISA
and Code Section 412), whether or not waived, and all contributions
to the Kentucky Investors Plans necessary to satisfy the minimum
funding requirements have been and will be made prior to the date
they are due. No material liability to the Pension Benefit
Guaranty Corporation has been, or is expected by Kentucky
Investors, to be incurred with respect to any of the Kentucky
Investors Plans and there has been no reportable event (as
described in Section 4043(b) of ERISA), and no event or condition
has occurred which presents a material risk of termination of any
of the Kentucky Investors Plans by the Pension Benefit Guaranty
Corporation. All reports, statements, returns and other
information required to be furnished or filed with respect to any
of the Kentucky Investors Plans have been furnished or filed, or
both, in accordance with Sections 101 through 105 of ERISA, and
Code Sections 6057 through 6059, and they are true, correct and
complete. Records with respect to the Kentucky Investors Plans
have been maintained in accordance with Section 107 of ERISA.
Neither Kentucky Investors nor any other fiduciary (as defined in
Section 3 of ERISA) with respect to any of the Kentucky Investors
Plans has any material liability for any breach of any fiduciary
duties under Sections 404, 405 or 409 of ERISA. Each of the
Kentucky Investors Plans is in material compliance with the
applicable provisions of ERISA, the Code and all other applicable
laws. Kentucky Investors knows of no fact which would adversely
affect the qualified status of any of the Kentucky Investors Plans.
A-15
<PAGE>
The present value of all accrued benefits, whether nonforfeitable
or not, under the Plans subject to Title IV of ERISA did not as of
December 31, 1990, and will not, at the Effective Date, exceed the
value of the assets of such Kentucky Investors Plans allocable to
such accrued benefits. Kentucky Investors does not maintain or
contribute to any employee benefit plan which is a group health
plan (within the meaning of Code Section 162(i)(3)) which is not in
material compliance with the applicable provisions of COBRA.
(h) Brokers. No Person is entitled to any brokerage or
-------
finder's fee or commission or other like payment in connection with
the negotiations relating to or the transactions contemplated by
this Agreement.
(i) Assets. Kentucky Investors has good and marketable
------
title to all of its assets that are material to its business,
including those assets included within the Annual Financial
Statements and the accompanying and supporting schedules and
documents, free and clear of all liens, charges, encumbrances and
claims except (i) as disclosed in said financial statements,
schedules and documents, (ii) those assets disposed of in the
ordinary course of business prior to the Closing, (iii) statutory
liens securing payments not yet due, (iv) liens on assets incurred
in the ordinary course of its business, and (v) such imperfections
or irregularities of title, claims, liens, charges, security
interests or encumbrances as do not materially affect the use of
the properties or assets subject thereto or affected thereby, or
otherwise materially impair business operations at such properties.
Except as disclosed in said Kentucky Investors Annual Financial
Statements, none of the assets are owned by any director, officer
or affiliate of Kentucky Investors.
With respect to each agreement by which Kentucky Investors
leases real or personal property as lessee or lessor (other than
leases that are the equivalent of extensions of credit): (i) such
leases or other agreements are in full force and effect in
accordance with its terms; (ii) all rents due under such agreements
have been paid; (iii) Kentucky Investors has been in peaceable
possession since the commencement of the original term of the lease
or other agreement; and (iv) there is no event of default, or
event, occurrence, condition or act, which with the giving of
notice, the lapse of time or the happening of any additional event,
occurrence, condition or act would become, and the consummation of
the transactions contemplated by this Agreement will not cause, a
default under such lease or agreement.
(j) Material Contracts. Except for this Agreement or
------------------
any agreement contemplated hereby, and the existing stock option
agreements made available to Investors Heritage, Kentucky Investors
is not a party to any:
(1) written employment agreement that provides for
compensation in excess of $20,000 per year, written bonus,
incentive, deferred compensation, severance pay, profit sharing,
retirement, stock purchase, or arrangement or employee benefit plan
for or in respect of any employee or former employee;
(2) collective bargaining agreement or other
agreement with any labor union or labor organization;
(3) agreement, indenture or other instrument
relating to the borrowing of money by Kentucky Investors (other
than borrowings incurred in the ordinary course of business,
including, without limitation, the creation of deposit liabilities,
purchases of federal funds, sales of certificates of deposit and
entering into repurchase agreements), or the guaranty by Kentucky
Investors of any obligation for the borrowing of money or any
agreement that involves a potential material liability for Kentucky
Investors (other than letters of credit issued by Kentucky
Investors in the ordinary course of its business);
(4) agreement, contract or commitment with any
director, officer or other affiliate of Kentucky Investors; or
(5) agreement, arrangement or commitment that is
material to the financial condition or results of operation of
Kentucky Investors.
(k) Good Standing of Contracts. To the best knowledge
--------------------------
of Kentucky Investors, no event or condition has occurred or
exists, or is alleged by the other party hereto to have occurred or
existed, which constitutes, or with lapse of time or giving of
notice or both might constitute, and the transactions contemplated
by this Agreement will not cause, a default or breach under
material contracts, leases, agreements or understandings to which
Kentucky Investors is a party which would have a material adverse
effect on Kentucky Investors.
A-16
<PAGE>
(l) Governmental Matters. Kentucky Investors has and
--------------------
maintains all licenses, permits and authorizations that are
material to the operation of its businesses as those businesses are
now being conducted by it. Kentucky Investors will cause such
licenses, permits and other governmental authorizations to continue
in effect through and including the Effective Date. There are no
citations or other notices alleging a violation of any such
licenses, permits or authorizations which have not been finally
resolved or settled. The operation of Kentucky Investors is being
conducted in substantial compliance with all applicable state and
federal laws and regulations.
(m) Insurance. Kentucky Investors maintains insurance
---------
and bonds in such coverages and amounts of coverage as is
consistent with sound business practices. Kentucky Investors has
made available to Investors Heritage all insurance policies and
bonds it presently has in effect. Kentucky Investors will keep
such policies and bonds in effect so long as such policies and
bonds are available at reasonable cost in the sole discretion of
Kentucky Investors' Board of Directors. Kentucky Investors is not
liable for any material retroactive premium adjustments. All such
policies are valid and enforceable and in full force and effect and
Kentucky Investors has not received any notice of premium increases
or cancellations with respect to any such policies and bonds.
(n) Tax Matters. Kentucky Investors is a member of a
-----------
consolidated group for purposes of the Code. Kentucky Investors
has timely filed all federal, state, foreign and local income,
franchise, excise, real and personal property, employment and other
tax returns, tax information returns and reports required to be
filed, and has paid, or made adequate provisions for the payment
of, all material taxes, interest payments and penalties (whether or
not reflected in its returns as filed) due and payable (and/or
accruable for all periods ending on or before the date of this
Agreement) to any city, county, state, foreign country, the United
States or any other taxing authority and is not delinquent in the
payment of any material amount of tax or governmental charge of any
nature. No audit, examination or investigation is presently being
conducted or, to the best of Kentucky Investors knowledge,
threatened by any taxing authority; no material unpaid tax
deficiencies or additional material liabilities of any sort have
been proposed by any governmental representative; and no agreements
for the extension of time for the assessment of any amounts of tax
have been entered into by or on behalf of Kentucky Investors.
Kentucky Investors has withheld (and timely paid to the appropriate
governmental entity) proper and accurate amounts from its employees
for all periods and is in material compliance with all tax
withholding provisions including, without limitation, income,
social security and employment tax withholding for all forms of
compensation) of applicable federal, state, foreign and local laws.
(o) Accuracy. No representation or warranty of Kentucky
--------
Investors herein, nor any statement, list, report, certificate or
other document furnished or to be furnished by Kentucky Investors
to Investors Heritage contains or will contain any untrue statement
of a material fact or omits or will omit to state a material fact
necessary to make the statement contained herein or therein not
misleading.
(p) Dividends. Since May 1, 1999, Kentucky Investors
---------
has not declared or paid any dividends or otherwise made
distributions with respect to the Kentucky Investors Common Stock.
(q) Information Supplied by Kentucky Investors. None of
------------------------------------------
the information supplied or to be supplied by Kentucky Investors
about Kentucky Investors Common Stock or Kentucky Investors
business for inclusion, or included in (i) S-4 Registration
Statement and (ii) any other documents to be filed with any
regulatory agency (including any state securities department or
agency) in connection with this Agreement and the related
transactions contemplated thereby, will, at the respective times
such documents are filed and with respect to the S-4 Registration
Statement, or any amendment thereof or supplement thereto, both at
the time of mailing and at the time of the meeting, be false or
misleading with respect to any material fact, or omit to state any
material fact necessary in order to (x) make the statements therein
not misleading or (y) correct any statement in any earlier
communication made, whether with respect to the meeting in
connection with which the S-4 Registration Statement shall be
mailed or otherwise.
(r) Insider Loans. All loans, loan commitments and any
-------------
other extensions of credit and commitments to extend credit that
have been made by Kentucky Investors, to directors, officers, or
principal shareholders of Kentucky Investors, or any of their
related interests, were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and
substantially comply with all applicable provisions of state and
federal law. Such loans, extensions and commitments do not involve
more than a normal risk of collectability.
(s) Intellectual Property. Kentucky Investors has no
---------------------
patents, patent applications, trademarks, trademark registrations
or applications therefor, trade names, copyrights, copyright
registrations or applications therefor, patent, trademark or trade
name licenses, assignments, know-how or royalty agreements,
contracts with employees or
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<PAGE>
others relating in whole or in part to disclosure, assignment or
patenting of any inventions, discoveries, improvements, processes,
formulae, or other know-how or any other similar agreements
relating in whole or in part to any of the assets or properties of
Kentucky Investors. To the best of its knowledge, Kentucky
Investors is not infringing any patent, trademark, trade name or
copyright and, to conduct its business as such business is
currently conducted. To the best of its knowledge, Kentucky
Investors does not require rights under any patent, trademark,
trade name, copyright (or any application or registration
respecting any thereof) or any discovery, improvement, process,
formula, know-how, data, plan, specification, drawing or the like
which it does not have.
(t) Environmental Matters. Kentucky Investors: (i) is
---------------------
in compliance with all environmental laws, regulations, permits and
orders applicable to it, and with all laws, regulations, permits
and orders governing or relating to asbestos removal and abatement;
(ii) has not transported, stored, treated or disposed, or allowed
or arranged for any third parties to transport, store, treat or
dispose, of any Hazardous Substances or other waste to or at any
location other than a site lawfully permitted to receive such
Hazardous Substances or other waste for such purposes, or had
performed, arranged for or allowed by any method or procedure such
transportation, storage, treatment or disposal in contravention of
any laws or regulations, nor has Kentucky Investors disposed, or
allowed or arranged for any third parties to dispose, of any
Hazardous Substances or other waste upon property owned or leased
by Kentucky Investors; (iii) has no knowledge that there has
occurred, or is presently occurring, a Release of any Hazardous
Substance on, into or beneath the surface of any parcel of real
property in which Investors Heritage has an ownership interest or
any leasehold interest; (iv) has not transported or disposed, or
allowed or arranged for any third parties to transport or dispose,
of any Hazardous Substance or other waste to or at a site, which,
pursuant to CERCLA or any similar law, (A) has been placed on the
National Priorities List or its state equivalent, or (B) the
Environmental Protection Agency or the relevant state agency has
proposed or is proposing to place on the National Priorities List
or its state equivalent; (v) has not received notice, and has no
knowledge of any facts which could give rise to any notice, that
Kentucky Investors is a potentially responsible party for a federal
or state environmental cleanup site or for corrective action under
CERCLA or any other applicable law or regulation or notice of any
other Environmental Claim; (vi) Kentucky Investors has not received
any written or oral request for information in connection with any
federal or state environmental cleanup site and Kentucky Investors
has not undertaken (or been requested to undertake) any response or
remedial actions or cleanup actions of any kind at the request of
any federal, state or local governmental entity, or at the request
of any other person or entity; and (vii) is not aware of any laws,
regulations, ordinances, licenses, permits or orders relating to
environmental matters requiring any work, repairs, construction or
capital expenditures with respect to the assets or properties of
Kentucky Investors
(u) Takeover Statute. No restrictive provision of any
----------------
fair price, moratorium, control share acquisition or similar anti-
takeover statute or regulation (including Section 271B.12-200 et al
of the KBCA) or restrictive provision of any applicable anti-
takeover provision in the Articles of Incorporation or By-laws of
Kentucky Investors is, or at the Effective Date will be applicable
to Kentucky Investors, the Share Exchange or other transactions
contemplated by this Agreement.
(v) Accounting and Tax Matters. As of the date hereof,
--------------------------
Kentucky Investors has not taken, nor do the executive officers of
Kentucky Investors have any knowledge of any fact or circumstance
that would prevent Kentucky Investors from accounting for the
business combination to be affected by the Share Exchange as a
"purchase" or prevent the Share Exchange from qualifying as a
"reorganization within the meaning of Code Section 368(a).
4.3 Non-Survival of Representations and Warranties. All
----------------------------------------------
warranties and representations contained in this Agreement by any
party hereto and any certificate or other instrument delivered by
or on behalf of the parties pursuant to this Agreement shall expire
at the Closing, except as they relate to the obligations of the
parties to provide indemnification for liabilities arising under
federal or state securities laws, as set forth in Article 7 of this
Agreement.
ARTICLE 5
CONDITIONS PRECEDENT
5.1 Conditions to Obligations of Investors Heritage. The
-----------------------------------------------
obligation of Investors Heritage to consummate the transactions
contemplated by this Agreement, including the Share Exchange is
subject to the satisfaction of the following conditions precedent
on or before the Closing, any of which may be waived by Investors
Heritage to the extent permitted by law and in the manner set out
in Section 6.4 below:
(a) Approval of this Agreement by vote at the meeting of
at least a majority of all the votes entitled to be cast by
shareholders of Investors Heritage;
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<PAGE>
(b) The S-4 Registration Statement shall have become
effective under the Securities Act, no stop order suspending the
effectiveness of the S-4 Registration Statement shall have been
issued and no proceeding for that purpose shall have been initiated
or threatened by the SEC;
(c) Receipt of all approvals and authorizations from
federal and state governmental authorities and regulatory agencies,
including, but not limited to, the Kentucky Department of
Insurance, necessary to effect the Share Exchange (including the
expiration of all applicable waiting periods) and the other
transactions contemplated herein, and the satisfaction of all other
requirements prescribed by law which are necessary to the
consummation of the Share Exchange;
(d) The representations and warranties of Kentucky
Investors as set forth in this Agreement shall be true and correct
in all material respects at the Closing as if made at the Closing,
and Kentucky Investors shall have furnished to Investors Heritage a
certificate, dated as of the Closing, of the President of Kentucky
Investors to that effect;
(e) Kentucky Investors shall have performed and observed
its obligations and covenants as set forth in the Agreement in all
material respects prior to or on the Closing and shall have
delivered to Investors Heritage evidence in form reasonably
satisfactory to counsel for Investors Heritage that the
transactions contemplated by this Agreement were duly authorized by
all necessary corporate action of Kentucky Investors;
(f) There shall not be threatened, instituted or pending
any material action or proceeding before any domestic or foreign
court or governmental agency or other regulatory or administrative
agency or commission, or by any other Person (i) challenging the
Share Exchange contemplated by this Agreement or (ii) seeking to
prohibit the Share Exchange contemplated by this Agreement;
provided, however, that (x) the occurrence of an event described in
this paragraph shall not be deemed to create a condition pursuant
hereto, unless the Board of Directors of Investors Heritage or
Kentucky Investors shall have determined, and given written notice
to the other of its determination that the occurrence of the event
makes consummation unwise in its opinion, and (y) if any action or
proceeding described in this paragraph has been concluded, with an
outcome which would not result in damages, or restrain, prohibit or
declare illegal the consummation of the transaction contemplated by
this Agreement, then the action or proceeding shall not be deemed
to create a condition pursuant hereto;
(g) There shall not have been any material adverse
change in the business, financial condition, or results of
operations of Kentucky Investors (i) as reflected on the 1998
Kentucky Investors Annual Financial Statements when compared with
the Kentucky Investors 6-Month Interim Financial Statements and
(ii) since December 31, 1998; and
(h) Receipt of the opinion of counsel of Kentucky
Investors, dated as of the Closing, in form and substance
reasonably satisfactory to Investors Heritage and its counsel to
the effect that:
(1) Kentucky Investors is a corporation organized
and validly existing under the laws of the Commonwealth of
Kentucky.
(2) Kentucky Investors has all requisite corporate
power and authority to enter into and perform all of its
obligations under this Agreement. The execution, delivery and
performance of this Agreement and all of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of Kentucky Investors. This Agreement
constitutes the legal, valid, binding and enforceable obligation of
Kentucky Investors except as enforceability may be limited by
bankruptcy, insolvency, reorganization, or similar laws affecting
the rights of creditors generally and the discretion of a court to
compel specific performance.
(3) The execution, delivery and performance of this
Agreement by Kentucky Investors and the consummation of the
transactions contemplated by this Agreement will not constitute a
breach, violation or default under the Articles of Incorporation or
By-laws of Kentucky Investors or, to the best of counsel's
knowledge, under any judgment, decree, order or governmental
permit, franchise, license, order, approval of authority, or any
agreement, indenture or instrument to which Kentucky Investors is a
party or by which it or its assets are currently affected or bound.
(4) The authorized capital stock of Kentucky
Investors consists of 4,000,000 shares of common stock, with a par
value of $1.00 per share, 857,886 shares of which are issued and
outstanding. All capital
A-19
<PAGE>
stock of Investors Heritage issued prior to the Share Exchange has
been duly authorized and is validly issued. There are outstanding
no securities convertible into or exchangeable for or having the
right to acquire from Kentucky Investors (i) any shares of Kentucky
Investors Common Stock; or (ii) any other equity securities of
Kentucky Investors. Except as disclosed to Investors Heritage, to
the best of counsel's knowledge, there are outstanding no
subscriptions, warrants, options or other agreements, arrangements
or commitments obligating Kentucky Investors to issue or dispose of
any shares of its capital stock.
(5) To the best of counsel's knowledge, all
authorizations, approvals, registrations or consents of, or notices
to or filing with any federal or state governmental department,
commission, bureau or agency or other public body or authority or
any other third party, whether public or private, which are
required for the execution, delivery or performance of this
Agreement, or for the consummation by Kentucky Investors of the
transactions contemplated hereby have been received or made.
(6) To the best of counsel's knowledge, there is no
material litigation, proceeding, investigation, arbitration or
claim pending or threatened against Kentucky Investors, at law or
in equity, or before or by any court or federal, state or municipal
or other governmental department, agency or instrumentality.
(i) Receipt of the opinion of Ernst & Young LLP, dated
as of the Closing Date to the effect that the Share Exchange will
qualify for federal income tax purposes as a tax-deferred
reorganization within the meaning of Code Section 368(a);
(j) Receipt of notification from A.M. Best Company that
its financial condition rating will not be adversely effected in a
material respect by the Share Exchange; and
(k) No Person is entitled to any brokerage or finder's
fee or commission or other like payment in connection with the
negotiations relating to or the transactions contemplated by this
Agreement.
5.2 Conditions to Obligations of Kentucky Investors. The
-----------------------------------------------
obligation of Kentucky Investors to consummate the transactions
contemplated by this Agreement, including the Share Exchange, is
subject to the satisfaction of the following conditions precedent
on or before the Closing, any of which may be waived by Kentucky
Investors to the extent permitted by law and in the manner set out
in Section 6.4 below:
(a) Approval of this Agreement by vote at the meeting of
at least a majority of all of the votes entitled to be cast by
shareholders of Investors Heritage;
(b) The S-4 Registration Statement shall have become
effective under the Securities Act. No stop order suspending the
effectiveness of the S-4 Registration Statement shall have been
issued and no proceeding for that purpose shall have been initiated
or threatened by the SEC;
(c) Receipt of all approvals and authorizations on terms
and conditions satisfactory to Kentucky Investors from federal and
state governmental authorities and regulatory agencies necessary to
effect the Share Exchange (including the expiration of all
applicable waiting periods) and the other transactions contemplated
herein (including, without limitation, the approval of the Kentucky
Department of Insurance), and the satisfaction of all other
requirements prescribed by law which are necessary to the carrying
out of the Share Exchange;
(d) The representations and warranties of Investors
Heritage set forth in this Agreement shall be true and correct in
all material respects on the Closing as if made at and on the
Closing, and Investors Heritage shall have furnished to Kentucky
Investors a certificate, dated as of the Closing, of the President
of Investors Heritage to that effect;
(e) Investors Heritage shall have performed and observed
its covenants and agreements as set forth in this Agreement in all
material respects prior to or on the Closing and shall have
delivered to Kentucky Investors evidence in form reasonably
satisfactory to counsel for Kentucky Investors that the
transactions contemplated by this Agreement were duly authorized by
all necessary corporate action of Investors Heritage;
(f) There shall not be threatened, instituted or pending
any action or proceeding before any domestic or foreign court or
governmental agency or other regulatory or administrative agency or
commission, or by any other Person (i) challenging the Share
Exchange contemplated by this Agreement; or (ii) seeking to
prohibit the
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<PAGE>
Share Exchange contemplated by this Agreement; provided, however,
that (x) the occurrence of an event described in this paragraph
shall not be deemed to create a condition pursuant hereto, unless
the Board of Directors of Investors Heritage or Kentucky Investors
shall have determined, and given written notice to the other of its
determination that the occurrence of the event makes consummation
unwise in its opinion, and (y) if any action or proceeding
described in this paragraph has been concluded, with an outcome
which would not result in damages, restrain, prohibit or declare
illegal the consummation of the transactions contemplated by this
Agreement, then the action or proceeding shall not be deemed to
create a condition pursuant hereto;
(g) There shall not have been any material adverse
change in the business, financial condition, or results of
operations of Investors Heritage (i) as reflected on the 1998
Investors Heritage Annual Financial Statements when compared with
the 6-Month Interim Financial Statements and (ii) since December
31, 1998;
(h) Receipt of the opinion of counsel for Investors
Heritage dated as of the Closing, in form and substance reasonably
satisfactory to Kentucky Investors, and its counsel, to the effect
that:
(1) Investors Heritage is an insurance company
organized and validly existing under the laws of the Commonwealth
of Kentucky and is chartered to conduct its insurance business in
Kentucky by the Kentucky Department of Insurance.
(2) Investors Heritage has all requisite corporate
power and authority to enter into and perform all of its
obligations under this Agreement. The execution, delivery and
performance of this Agreement and all of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of Investors Heritage. This Agreement
constitutes the legal, valid, binding and enforceable obligation of
Investors Heritage except as enforceability may be limited by
bankruptcy, insolvency, reorganization, or similar laws affecting
the rights of creditors generally and the discretion of a court to
compel specific performance.
(3) The execution, delivery and performance of this
Agreement by Investors Heritage and the consummation of the
transactions contemplated by this Agreement will not constitute a
breach, violation or default under the Articles of Incorporation or
By-laws of Investors Heritage or, to the best of counsel's
knowledge, under any judgment, decree, order or governmental
permit, franchise, license, order, approval of authority, or any
agreement, indenture or instrument to which Investors Heritage is a
party or by which it or its assets are currently affected or bound.
(4) The authorized capital stock of Investors
Heritage consists of 2,000,000 shares of common stock, with a par
value of $1.00 per share, 904,784 shares of which are issued and
outstanding. All capital stock of Investors Heritage issued prior
to the Share Exchange has been duly authorized and is validly
issued. There are no outstanding securities convertible into or
exchangeable for or having the right to acquire from Investors
Heritage (i) any shares of Investors Heritage Common Stock; or (ii)
any other equity securities of Investors Heritage. To the best of
counsel's knowledge, there are no outstanding subscriptions,
warrants, options or other agreements, arrangements or commitments
obligation Investors Heritage to issue or dispose of any shares of
its capital stock.
(5) To the best of counsel's knowledge, all
authorizations, approvals, registrations or consents of, or notice
to or filing with any federal or state governmental department,
commission, bureau or agency or other public body or authority or
any other third party, whether public or private, which are
required for the execution, delivery or performance of this
Agreement by Investors Heritage or for the consummation by
Investors Heritage of the transactions contemplated hereby have
been received or made.
(6) To the best of counsel's knowledge, there is no
material litigation, proceeding, investigation, arbitration or
claim pending or threatened against Investors Heritage, at law or
in equity, or before or by any court or federal, state or municipal
or other governmental department, agency, or instrumentality.
(i) Receipt of the opinion of Ernst & Young LLP dated as
of the Closing Date to the effect that the Share Exchange will for
federal income tax purposes as a tax-deferred reorganization within
the meaning of Code Section 368(a).
(j) No Person is entitled to any brokerage or finder's
fee or commission or other like payment in connection with the
negotiations relating to or the transactions contemplated by this
Agreement; and
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<PAGE>
(k) Receipt of notification from A. M. Best Company that
Investors Heritage's financial condition rating has not been
adversely effected by the Share Exchange.
5.3 Waiver. The conditions of this Article 5 may be modified
------
or waived in any respect by the parties hereto, in the manner and
to the extent set out in Section 6.4, below.
ARTICLE 6
TERMINATION
6.1 Termination. This Agreement may be terminated and the
-----------
transactions contemplated herein may be abandoned at any time prior
to the Effective Date, upon notice by the terminating party to the
other party:
(a) Mutual Consent. By the mutual written agreement of
--------------
Kentucky Investors and Investors Heritage if their respective
Boards of Directors so determines by vote of a majority of its
entire Board;
(b) Breach. At any time by Investors Heritage or
------
Kentucky Investors if any of the covenants set forth in Article 3
or representations and warranties set forth in Article 4, as the
case may be, shall have been breached or shall not have been
performed or complied with, in any material respect, at or before
the Closing Date and such breach, nonperformance, or noncompliance
has not been cured or eliminated within 30 calendar days after
written notice thereof has been given to the breaching party, or if
a condition under Sections 5.1 or 5.2 to the Investors Heritage or
Kentucky Investors obligations hereunder cannot be satisfied prior
to Closing;
(c) No Approval. By Investors Heritage, if this
-----------
Agreement and the Share Exchange shall have failed to receive the
requisite approval of the shareholders of Investors Heritage at the
Investors Heritage special meeting;
(d) Prohibition. Automatically, if prohibited by any
-----------
Governmental Entity;
(e) Delay. By either party if the transactions
-----
contemplated by this Agreement have not been consummated on or
before December 31, 1999, provided, that this Agreement shall be
extended not more than 90 days thereafter if the Share Exchange
shall not have occurred as a result of the failure to receive the
governmental approvals set forth in Section 5.1(c) or 5.2(c) of the
hereto, and such failure to obtain approval is not caused by a
breach of this Agreement (or any representation, warranty,
covenant, or agreement included herein) by the party electing to
terminate pursuant to this clause (e);
(f) Variations in Stock Price. By Investors Heritage in
-------------------------
the event the bid price per share of Kentucky Investors Common
Stock quoted immediately prior to the Effective Date is $17.00 or
less, or by Kentucky Investors in the event the bid price per share
of Kentucky Investors Common Stock quoted immediately prior to the
Effective Date is $25.00 or more.
(g) Dissenters Rights. By either party, if the holders
-----------------
of 5% or more of the issued and outstanding shares of Investors
Heritage Common Stock (other than the Excluded Shares) exercise
their right to dissent from the Share Exchange Agreement and demand
payment of the fair value of their Investors Heritage Common Stock.
6.2 Effect of Termination and Abandonment. If this Agreement
-------------------------------------
and the Share Exchange are validly terminated pursuant to Section
6.1 hereof, this Agreement will forthwith become null and void, and
no party to this Agreement will have any liability or further
obligation to the other, except that (i) the provisions relating to
confidentiality in Section 3.1 hereof will continue to apply
following any such termination, (ii) any such termination shall be
without prejudice to any claim which either party may have against
the other for breach of this Agreement (or any representation,
warranty, covenant, or agreement included herein), and (iii)
Section 8.5 and Article 7 shall survive the termination of this
Agreement. Without limitation on remedies, all reasonable out-of-
pocket expenses incurred in connection with this Agreement and the
transactions contemplated hereby by a nonbreaching party who
terminates this Agreement pursuant to Section 6.1 hereof will be
reimbursed promptly by the breaching party.
6.3 Amendment. This Agreement may be amended by the parties
---------
at any time before or after the Investors Heritage shareholder
approval; provided, however, that after the Investors Heritage
shareholder approval, there shall be made no amendment that by law
requires further approval by such shareholders without the further
approval of such
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<PAGE>
shareholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties.
6.4 Extension; Waiver. At any time prior to the Effective
-----------------
Date, the parties may (a) extend the time for the performance of
any of the obligations or other acts of the other parties, or (b)
waive any inaccuracies in the representations and warranties
contained in this Agreement or in any document delivered pursuant
to this Agreement, waive compliance with any of the covenants or
conditions contained in this Agreement. Any agreement on the part
of a party to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such
party. The failure of any party to this Agreement to assert any of
its rights under this Agreement or otherwise shall not constitute a
waiver of such rights.
6.5 Procedure for Termination, Amendment, Extension or
---------------------------------------------------
Waiver. A termination of this Agreement pursuant to Section 6.1,
- ------
an amendment of this Agreement pursuant to Section 6.3 or an
extension or waiver pursuant to Section 6.4 shall, in order to be
effective, require, in the case of Kentucky Investors or Investors
Heritage, action by their respective Board of Directors or, in the
case of an extension or waiver pursuant to Section 6.4, the duly
authorized designee of their Board of Directors.
ARTICLE 7
INDEMNIFICATION
Investors Heritage shall indemnify, defend and hold Kentucky
Investors harmless, and Kentucky Investors shall indemnify, defend
and hold Investors Heritage harmless against and in respect of, any
willful misrepresentation or breach of warranty or any
nonfulfillment of any covenant or agreement on the part of the
Indemnifying Party under this Agreement or any liability arising
under federal or state securities laws as a result of an act or
failure to act on the part of, or information provided or omitted
by, the Indemnifying Party, and any claim, action, suit,
proceeding, demand, judgment, assessment, cost and expense,
including reasonable counsel fees, incident to any of the
foregoing. An action for indemnification pursuant to this Article
7 must be brought, if at all, not later than one (1) year following
the Effective Date. A party seeking indemnification shall use its
best efforts to minimize any liabilities, damages, deficiencies,
claims, judgments, assessments, costs and expenses in respect of
which indemnity may be sought hereunder. The obligations of the
parties under this Article 7 shall survive a termination of this
Agreement.
ARTICLE 8
GENERAL PROVISIONS
8.1 Law and Section Headings. This Agreement shall be
------------------------
construed and interpreted in accordance with the laws of the
Commonwealth of Kentucky, without regard to conflict of law
principles. Section headings are used in this Agreement for
convenience only and are to be ignored in the construction of the
terms of this Agreement.
8.2 Modifications. The parties hereto, by resolution of
-------------
their respective Boards of Directors or their respective officers
authorized by their respective Boards of Directors, may waive any
condition precedent set out in this Agreement, or may amend, modify
or supplement this Agreement, before or after approval thereof by
the shareholders of Investors Heritage at the special meeting, in
such manner as may be agreed by them in writing; provided, however,
that subsequent to the meeting, no amendment, modification or
supplement of this Agreement shall be made or become effective
which shall affect the rights of the shareholders of Investors
Heritage in a manner which, in the judgment of the Board of
Directors of Investors Heritage, is materially adverse to such
shareholders.
8.3 Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or
enforceability of the remaining provisions.
8.4 Notices. All notices hereunder shall be in writing and
-------
shall be deemed to have been given or made when delivered or
mailed, first class, registered or certified mail, postage prepaid,
addressed as follows, until notice of another address or additional
addresses have been received by the other parties:
If to Kentucky Investors, to:
David Reed, Chairman Special Committee
200 Capital Avenue
Frankfort, KY 40601
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<PAGE>
With a copy to:
Alex P. (Mike) Herrington, Esq.
Stites & Harbison
400 W. Market St., Suite 1800
Louisville, KY 40202
If to Investors Heritage, to:
Adron Doran, Chairman - Special Committee
200 Capital Avenue
Frankfort, KY 40601
With a copy to:
Howard Sturm, Esq.
Sturm, Paletti & Wilson
455 S. Fourth Ave., Suite. 1551
Louisville, KY 40202
8.5 Expenses; Risk of Loss. Each of the parties hereto will
----------------------
pay its own fees and expenses incurred in connection with the Share
Exchange and the other transactions contemplated by this Agreement,
except as provided by Article 7 and Kentucky Investors may pay fees
and expenses that are solely and directly related to the Share
Exchange. This Section 8.5 shall survive the termination of this
Agreement.
8.6 Amendment to Kentucky Investors Benefit Plans. After the
---------------------------------------------
Effective Date, Kentucky Investors shall amend the Kentucky
Investors and Affiliated Companies 401(k) Savings Plan and the
Kentucky Investors and Affiliated Companies Deferred Compensation
Plan to provide for the purchase of Kentucky Investors Common Stock
only.
8.7 Counterparts. This Agreement may be executed in any
------------
number of counterparts, each of which shall be an original, but
such counterparts shall together constitute one and the same
instrument.
8.8 Time of Essence; Best Efforts. Time is of the essence to
-----------------------------
the performance of the obligations set forth in this Agreement.
Subject to the terms and conditions herein provided, Kentucky
Investors and Investors Heritage agree to use their best efforts to
take, as soon as reasonably practicable, all action, and to do, or
cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective
the transactions, contemplated by this Agreement, including,
without limitation, using reasonable efforts to lift or rescind any
injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the transactions
contemplated hereby. Kentucky Investors and Investors Heritage also
agree to use their best efforts to obtain or cause to be obtained
consents of all third parties and governmental authorities
necessary or desirable for consummation of the transactions
contemplated by the Agreement.
8.9 Records and Further Assurances. After the Closing, each
------------------------------
party shall make available to the other on reasonable request such
books and records of that party as may be appropriate for use in
connection with their respective tax returns, including any review
thereof, and for any other reasonable purpose. Such books and
records shall be retained for a reasonable time after the Effective
Date; provided, however, the same may be destroyed, in whole or in
part, by the party in possession thereof upon 30 days notice to the
other party, unless the party to whom such notice is given shall
object, in which event the objecting party shall be given such
records in lieu of destruction thereof. Either party shall, at the
other party's request, execute and deliver such other instruments
of conveyance or transfer and take such other actions as may be
reasonably requested to effectively carry out the terms and
provisions of this Agreement.
8.10 Parties in Interest. All covenants and agreements
-------------------
contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of their respective
successors and assigns, whether so expressed or not. No party to
this Agreement may, however, assign its rights hereunder or
delegate its obligations hereunder to any other person or entity
without the express prior written consent of the other parties
hereto.
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<PAGE>
8.11 Entire Agreement. This Agreement, including the exhibits
----------------
and schedules hereto, constitutes and contains the entire agreement
between Kentucky Investors and Investors Heritage with respect to
the Share Exchange, and supersedes any prior agreement by the
parties concerning the subject matter addressed herein, whether
written or oral.
8.12 Best Knowledge. Whenever the term "best knowledge" is
--------------
used in this Agreement, it shall mean knowledge of Kentucky
Investors or Investors Heritage after a reasonable investigation of
its respective executive officers as to the matters that are the
subject the representations and warranties.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in counterparts by their duly authorized
officers as of the date first above written.
ATTEST: KENTUCKY INVESTORS, INC.
By: /s/ Wilma Yeary By: /s/ Harry Lee Waterfield II
----------------------- -------------------------------
Secretary President
ATTEST: INVESTORS HERITAGE LIFE INSURANCE
COMPANY
By: /s/ Wilma Yeary By: /s/ Harry Lee Waterfield II
----------------------- -------------------------------
Secretary President
ANNEX B
THE ROBINSON-HUMPHREY COMPANY, LLC
Atlanta Financial Center
333 Peachtree Road, NE
Atlanta, Georgia 30326
Telephone: (404) 266-6000
Corporate Finance Investment Bankers
Department Since 1894
August 18, 1999
Mr. Adron Doran
Chairman of the Special Committee of
the Board of Directors
Investors Heritage Life Insurance Company
200 Capital Avenue
Frankfort, KY 40601
Members of the Board of Directors:
We understand that Kentucky Investors Inc. ("Kentucky
Investors"), which currently owns approximately 74% of the
outstanding common stock of Investors Heritage Life Insurance
Company ("Investors Heritage"), has made a proposal to purchase the
remaining Investors Heritage common stock that is currently held by
the public by exchanging 1.24 shares of Kentucky Investors common
stock for each share of Investors Heritage common stock not owned
by Kentucky Investors (the "Proposed Transaction"). The terms and
conditions of the Proposed Transaction are set forth in more detail
in the Agreement of Share Exchange (the "Agreement").
We have been requested by the Company to render our opinion
with respect to the fairness, from a financial point of view, of
the consideration to be paid to the shareholders of Investors
Heritage (excluding Kentucky Investors) in the Proposed
Transaction.
In arriving at our opinion, we reviewed and analyzed: (1)
publicly available information concerning the Investors Heritage
and Kentucky Investors which we believe to be relevant to our
inquiry, (2) financial and operating information with respect to
the business, operations and prospects of Investors Heritage and
Kentucky Investors furnished to us by the Investors Heritage, (3)
the trading history of the Investors Heritage common stock and
Kentucky Investors common stock for the period June 1, 1995 to the
present, (4) the range of multiples of stock price to earnings per
share and stock price to shareholders equity per share at which
Investors Heritage and Kentucky Investors have traded during the
prior three years, (5) a comparison of the historical financial
results and present financial condition of the Investors Heritage
and Kentucky Investors with those of other companies which we
deemed relevant, and (4) a comparison of the financial terms of the
Proposed Transaction with the terms of certain other recent
transactions which we deemed relevant. In addition, we have had
discussions with the management of the Company concerning its
business, operations, assets, present condition and future
prospects and undertook such other studies, analyses and
investigations as we deemed appropriate.
We have assumed and relied upon the accuracy and completeness
of the financial and other information used by us in arriving at
our opinion without independent verification. With respect to the
financial projections of Investors Heritage and Kentucky Investors,
we have assumed that such projections have been reasonably prepared
on bases reflecting the best currently available estimates and
judgments of the Investors Heritage and Kentucky Investors. In
arriving at our opinion, we have not conducted a physical
inspection of the properties and facilities of Investors Heritage
and Kentucky Investors and have not made nor obtained any
evaluations or appraisals of the assets or liabilities of Investors
Heritage or Kentucky Investors. Our opinion is necessarily based
upon market, economic and other conditions as they exist on, and
can be evaluated as of, the date of this letter.
B-1
<PAGE>
Mr. Adron Doran
Investors Heritage Life Insurance Company
August 18, 1999
Page Two
We have acted as financial advisor to the Company in
connection with the Proposed Transaction and will receive a fee for
our services. In addition, the Company has agreed to indemnify us
for certain liabilities arising out of the rendering of this
opinion.
Based upon and subject to the forgoing, we are of the opinion
that, as of the date hereof, the consideration to be paid to the
shareholders of Investors Heritage (excluding Kentucky Investors)
in the Proposed Transaction is fair from a financial point of view.
Very truly yours,
THE ROBINSON-HUMPHREY COMPANY, LLC
The Robinson-Humphrey Company, LLC
B-2
<PAGE>
ANNEX C
KENTUCKY REVISED STATUTES
CHAPTER 271B
BUSINESS CORPORATIONS
SUBTITLE 13. DISSENTERS' RIGHTS
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
271B.13-010. Definitions for subtitle.
------------------------
As used in this subtitle:
(1) "Corporation" means the issuer of the shares held by a
dissenter, except that in the case of a merger where the
issuing corporation is not the surviving corporation, then,
after consummation of the merger, "corporation" shall mean the
surviving corporation.
(2) "Dissenter" means a shareholder who is entitled to dissent
from corporate action under KRS 271B.13-020 and who exercises
that right when and in the manner required by KRS 271B.13-200
to 271B.13-280.
(3) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the
corporate action to which the dissenter objects, excluding any
appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable. In any
transaction subject to the requirements of KRS 271B.12-210 or
exempted by KRS 271B.12-220(2), "fair value" shall be at least
an amount required to be paid under KRS 271B.12-220(2) in
order to be exempt from the requirements of KRS 271B.12-210.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average
rate currently paid by the corporation on its principal bank
loans or, if none, at a rate that is fair and equitable under
all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial
owner of shares to the extent of the rights granted by a
nominee certificate on file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the
record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
271B.13-020. Right to dissent.
----------------
(1) A shareholder shall be entitled to dissent from, and obtain
payment of the fair value of his shares in the event of, any
of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation
is a party:
1. If shareholder approval is required for the merger
by KRS 271B.11-030 or the articles of incorporation
and the shareholder is entitled to vote on the
merger; or
2. If the corporation is a subsidiary that is merged
with its parent under KRS 271B.11-040;
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares
will be acquired, if the shareholder is entitled to vote
on the plan;
(c) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation
other than in the usual and regular course of business,
if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not
including a sale pursuant to court order or a sale for
cash pursuant to a plan by which all or substantially all
of the net proceeds of the sale will be distributed to
the shareholders within one (1) year after the date of
sale;
(d) An amendment of the articles of incorporation that
materially and adversely affects rights in respect of a
dissenter's shares because it:
1. Alters or abolishes a preferential right of the
shares to a distribution or in dissolution;
2. Creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a
sinking fund for the redemption or repurchase, of
the shares;
C-1
<PAGE>
3. Excludes or limits the right of the shares to vote
on any matter other than a limitation by dilution
through issuance of shares or other securities with
similar voting rights; or
4. Reduces the number of shares owned by the
shareholder to a fraction of a share if the
fractional share so created is to be acquired for
cash under KRS 271B.6-040;
(e) Any transaction subject to the requirements of KRS
271B.12-210 or exempted by KRS 271B.12-220(2); or
(f) Any corporate action taken pursuant to a shareholder vote
to the extent the articles of incorporation, bylaws, or a
resolution of the board of directors provides that voting
or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for his
shares under this chapter shall not challenge the corporate
action creating his entitlement unless the action is unlawful
or fraudulent with respect to the shareholder or the
corporation.
271B.13-030. Dissent by nominees and beneficial owners.
-----------------------------------------
(1) A record shareholder may assert dissenters' rights as to fewer
than all the shares registered in his name only if he shall
dissent with respect to all shares beneficially owned by any
one (1) person and notify the corporation in writing of the
name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under
this subsection shall be determined as if the shares as to
which he dissents and his other shares were registered in the
names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
(a) He submits to the corporation the record shareholder's
written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights;
and
(b) He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to
direct the vote.
271B.13-200. Notice of dissenters' rights.
----------------------------
(1) If proposed corporate action creating dissenters' rights under
KRS 271B.13-020 is submitted to a vote at a shareholders'
meeting, the meeting notice must state that shareholders are
or may be entitled to assert dissenters' rights under this
subtitle and the corporation shall undertake to provide a copy
of this subtitle to any shareholder entitled to vote at the
shareholders' meeting upon request of that shareholder.
(2) If corporate action creating dissenters' rights under KRS
271B.13-020 is taken without a vote of shareholders, the
corporation shall notify in writing all shareholders entitled
to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in KRS 271B.13-220.
271B.13-210. Notice of intent to demand payment.
----------------------------------
(1) If proposed corporate action creating dissenters' rights under
KRS 271B.13-020 is submitted to a vote at a shareholders'
meeting, a shareholder who wishes to assert dissenters'
rights:
(a) Shall deliver to the corporation before the vote is taken
written notice of his intent to demand payment for his
shares if the proposed action is effectuated; and
(b) Shall not vote his shares in favor of the proposed
action.
(2) A shareholder who does not satisfy the requirements of
subsection (1) of this section shall not be entitled to
payment for his shares under this chapter.
271B.13-220. Dissenters' notice.
------------------
(1) If proposed corporate action creating dissenters' rights under
KRS 271B.13-020 is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all
shareholders who satisfied the requirements of KRS 271B.13-
210.
(2) The dissenters' notice shall be sent no later than ten (10)
days after the date the proposed corporate action was
authorized by the shareholders, or, if no shareholder
authorization was obtained, by the board of directors, and
shall:
(a) State where the payment demand must be sent and where and
when certificates for certificated shares must be
deposited;
(b) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the
payment demand is received;
C-2
<PAGE>
(c) Supply a form for demanding payment that includes the
date of the first announcement to news media or to
shareholders of the terms of the proposed corporate
action and requires that the person asserting dissenters'
rights certify whether or not he acquired beneficial
ownership of the shares before that date;
(d) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than thirty
(30), nor more than sixty (60) days after the date the
notice provided in subsection (1) of this section is
delivered; and
(e) Be accompanied by a copy of this subtitle.
271B.13-230. Duty to demand payment.
----------------------
(1) A shareholder who is sent a dissenters' notice described in
KRS 271B.13-220 shall demand payment, certify whether he
acquired beneficial ownership of the shares before the date
required to be set forth in the dissenters' notice pursuant to
subsection (2)(c) of KRS 271B.13-220, and deposit his
certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his share
certificates under subsection (1) of this section shall retain
all other rights of a shareholder until these rights are
cancelled or modified by the taking of the proposed corporate
action. (3) A shareholder who does not demand payment or
deposit his share certificates where required, each by the
date set in the dissenters' notice, shall not be entitled to
payment for his shares under this subtitle.
271B.13-240. Share restrictions.
------------------
(1) The corporation may restrict the transfer of uncertificated
shares from the date the demand for their payment is received
until the proposed corporate action is taken or the
restrictions released under KRS 271B.13-260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares shall retain all other rights of a
shareholder until these rights are cancelled or modified by
the taking of the proposed corporate action.
271B.13-250. Payment.
-------
(1) Except as provided in KRS 271B.13-270, as soon as the proposed
corporate action is taken, or upon receipt of a payment
demand, the corporation shall pay each dissenter who complied
with KRS 271B.13-230 the amount the corporation estimates to
be the fair value of his shares, plus accrued interest.
(2) The payment shall be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal
year ending not more than sixteen (16) months before the
date of payment, an income statement for that year, a
statement of changes in shareholders' equity for that
year, and the latest available interim financial
statements, if any;
(b) A statement of the corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated; and
(d) A statement of the dissenter's right to demand payment
under KRS 271B.13-280.
271B.13-260. Failure to take action.
----------------------
(1) If the corporation does not take the proposed action within
sixty (60) days after the date set for demanding payment and
depositing share certificates, the corporation shall return
the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing
transfer restrictions, the corporation takes the proposed
action, it shall send a new dissenters' notice under KRS
271B.13-220 and repeat the payment demand procedure.
271B.13-270. After-acquired shares.
---------------------
(1) A corporation may elect to withhold payment required by KRS
271B.13-250 from a dissenter unless he was the beneficial
owner of the shares before the date set forth in the
dissenters' notice as the date of the first announcement to
news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed
corporate action, it shall estimate the fair value of the
shares, plus accrued interest, and shall pay this amount to
each dissenter who agrees to accept it in full satisfaction of
his demand. The corporation shall send
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<PAGE>
with its offer a statement of its estimate of the fair value
of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand
payment under KRS 271B.13-280.
271B.13-280. Procedure if shareholder dissatisfied with payment or
-----------------------------------------------------
offer.
- -----
(1) A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of
interest due, and demand payment of his estimate (less any
payment under KRS 271B.13-250), or reject the corporation's
offer under KRS 271B.13-270 and demand payment of the fair
value of his shares and interest due, if:
(a) The dissenter believes that the amount paid under KRS
271B.13-250 or offered under KRS 271B.13-270 is less than
the fair value of his shares or that the interest due is
incorrectly calculated;
(b) The corporation fails to make payment under KRS 271B.13-
250 within sixty (60) days after the date set for
demanding payment; or
(c) The corporation, having failed to take the proposed
action, does not return the deposited certificates or
release the transfer restrictions imposed on
uncertificated shares within sixty (60) days after the
date set for demanding payment.
(2) A dissenter waives his right to demand payment under this
section unless he shall notify the corporation of his demand
in writing under subsection (1) of this section within thirty
(30) days after the corporation made or offered payment for
his shares.
JUDICIAL APPRAISAL OF SHARES
271B.13-300. Court action.
------------
(1) If a demand for payment under KRS 271B.13-280 remains
unsettled, the corporation shall commence a proceeding within
sixty (60) days after receiving the payment demand and
petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the
proceeding within the sixty (60) day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit
court of the county where a corporation's principal office
(or, if none in this state, its registered office) is located.
If the corporation is a foreign corporation without a
registered office in this state, it shall commence the
proceeding in the county in this state where the registered
office of the domestic corporation merged with or whose shares
were acquired by the foreign corporation was located.
(3) The corporation shall make all dissenters (whether or not
residents of this state) whose demands remain unsettled
parties to the proceeding as in an action against their shares
and all parties shall be served with a copy of the petition.
Nonresidents may be served by registered or certified mail or
by publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is
commenced under subsection (2) of this section shall be
plenary and exclusive. The court may appoint one (1) or more
persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have
the powers described in the order appointing them, or in any
amendment to it. The dissenters shall be entitled to the same
discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding shall be
entitled to judgment:
(a) For the amount, if any, by which the court finds the fair
value of his shares, plus interest, exceeds the amount
paid by the corporation; or
(b) For the fair value, plus accrued interest, of his after-
acquired shares for which the corporation elected to
withhold payment under KRS 271B.13-270.
271B.13-310. Court costs and counsel fees.
----------------------------
(1) The court in an appraisal proceeding commenced under KRS
271B.13-300 shall determine all costs of the proceeding,
including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the
costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in amounts
the court finds equitable, to the extent the court finds the
dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under KRS 271B.13-280.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds
equitable:
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<PAGE>
(a) Against the corporation and in favor of any or all
dissenters, if the court finds the corporation did not
substantially comply with the requirements of KRS 271B.13-
200 to 271B.13-280; or
(b) Against either the corporation or a dissenter, in favor
of any other party, if the court finds that the party
against whom the fees and expenses are assessed acted
arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this subtitle.
(3) If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters
similarly situated, and that the fees for those services
should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
C-5
<PAGE>
1998 ANNUAL REVIEW
INVESTORS HERITAGE
LIFE INSURANCE COMPANY
KENTUCKY INVESTORS, INC.
TABLE OF CONTENTS
Frankfort's Historical Sites 2
Mission and Strategy Statement 4
Letter to our Shareholders 5
Management's Discussion and Analysis 10
Board of Directors 22
Corporate Officers 23
Kentucky Investors, Inc.
Consolidated Financial Statements 24
Selected Financial Data 28
Report of Independent Auditors 28
Investors Heritage Life Insurance Company
Selected Financial Data 29
Report of Independent Auditors 29
Consolidated Financial Statements 30
Notes to Consolidated Financial Statement 34
Stock Prices and Annual Meeting 48
Photos by Lucy Carol Johnson
<PAGE>
Many of the Investors Heritage Life Insurance Company employees are shown in
pictures taken at eleven points of interest in Frankfort, Kentucky. These
historical sites are briefly described in order of appearance in the Annual
Review. When in Frankfort we hope you will visit these and many other sites of
interest and historical significance.
Old State Capitol
The Old State Capitol building was designed by Gideon Shyrock and built between
1827-1830, introducing the Greek Revival style west of the Appalachians. Inside
stands a self-supporting stone stairway. It served as the state capitol from
1830-1910. This was the only pro-Union state capitol occupied by the
Confederate Army. After a bitterly contested election, Governor William Goebel
was shot and killed by an assassin on the Capitol lawn in 1899. Garth K.
Ferguson, the maternal grandfather of Harry Lee Waterfield II, Nancy Waterfield
Walton, and RoseGayle Waterfield Hardy, was a Senate page and his father a
Senator at the time of the assassination.
Old Governor's Mansion
When Kentucky was admitted to the Union in 1792 there was no executive
residence. Isaac Shelby, the first Kentucky Governor, lived in a log cabin.
Construction on this home was begun in 1797 and finished in time for the second
governor, James Garrard. In 1956 the house was designated as the official
residence of the Lieutenant Governor of Kentucky. The patio and rose garden
were added during the early 1970's. Our founder, Harry Lee Waterfield was the
first Lt. Governor to reside in the Old Mansion. He and his family lived there
during his two terms from 1956 - 1959 and 1963 -1967. The Old Mansion is the
oldest executive residence still in use in the United States. It was occupied
two years before the White House.
Liberty Hall
This Federalist style house was built in 1796 for Kentucky's first Senator, John
Brown. Brown was a member of the Virginia Legislature and the Old Congress
before statehood. He served in the U.S. Senate from 1792-1805. He was a
soldier under Washington and an aide to Lafayette. In 1810 his wife,
Margaretta, started the first Sunday School west of the Alleghenies in the
garden which became the First Presbyterian Church. Four generations of Browns
lived in the house.
First Presbyterian Church
The Church was organized in 1815 as an outgrowth of the Sunday School begun in
1810 by Margaretta Brown. The present Gothic building was built in 1849.
Although the building was not completed, it was opened for service for visiting
President-elect, Zachary Taylor.
Orlando Brown House
This Greek Revival house was designed by Kentucky architect, Gideon Shyrock, for
the second son of John Brown. The house was built in 1835 and three generations
of Browns lived in the house until 1945.
Singing Bridge
The Singing Bridge spans the Kentucky River linking Bridge Street and St. Clair
in downtown Frankfort. The steel bridge was built in 1893 to replace a covered
wooden bridge. The open grate floor creates a variety of musical pitches
depending on the weight and speed of traffic; thus the St. Clair Street Bridge
is known as the "Singing Bridge".
Executive Mansion
The Executive Mansion was built in 1912 and the exterior was modeled after Marie
Antoinette's villa near the Palace of Versailles. Twenty-two Kentucky Governors
have lived in the Mansion. It was renovated to its original Beaux-Arts style
between 1980-1984, including the formal garden in front.
Kentucky Military History Museum
Kentucky constructed the Old State Arsenal in 1850. It stands on a cliff
overlooking the Kentucky River. The Arsenal was converted to Military History
Museum in 1973.
Daniel Boone Memorial
Daniel Boone was born in Pennsylvania in 1734 and raised in Yadkin County, North
Carolina. He explored Eastern Kentucky and the Bluegrass Region between 1767-
1771. He worked to open a road between Holston Valley, Tennessee, and
Boonesborough, Kentucky, to aid in immigration promoted by the Transylvania
Company. He moved to Missouri with his wife in 1799 where he died in 1820. He
and Rebecca were re-interred in the Frankfort Cemetery in 1845. The Frankfort
Cemetery was incorporated in 1844 and is Kentucky's original rural cemetery.
Kentucky Vietnam Memorial
The Memorial was built in 1988 to honor the more than 125,000 Kentuckians who
served in Vietnam. The name of each of the 1,065 Kentuckians who died in the
war is located so that the shadow of the sundial touches each name on the actual
anniversary of his death. The names of the 22 missing in action or prisoners of
war are placed in front of the sundial where the shadow never falls, paying
special tribute to their personal agony and symbolizing our continued vigil for
their return.
Bibb-Burnley House
This house stands on the site of the first house lived in on Wapping Street. It
was built in 1786. Lt. John B. Bibb, who served during the War of 1812, bought
the property and built the present house in 1845. He served as representative
from Logan County from 1827-1828 and in the Senate from 1830-1834. Bibb was an
amateur horticulturist and developed the Bibb variety of lettuce here.
Executive Department pictured at the Old Capitol.
Jill Greenlief '89, Rob Hardy '87, Harry Lee Waterfield II '61, Whitney
Waterfield '94, Jane Jackson '74;
Howard Graham '65, Mary Reynolds '90, Raymond Carr '72, Ron Johnson '84 and
Wilma Yeary '63.
Financial Services Group & the Actuarial Department pictured at the Old
Governor's Mansion.
Alan Davis '88, Kenya Eastman '84, Rob Goodin '88;
Julie Hunsinger '92, Will Graham '90, Bobby Russell '74, and Michael Dudgeon
'94.
<PAGE>
Mission and Strategy
Statements
OUR MISSION
The mission of Investors Heritage Life Insurance Company is to provide quality
life insurance products and services, and maintain financial strength for the
benefit of our insureds, stockholders, agents and employees.
Investors Heritage Life Insurance Company is committed to achieving long-term
financial objectives by implementing strategies to increase the volume and
quality of insurance in force. We will improve the quality of the delivery
system with programs to enhance the skills and timely response of marketing and
support service functions.
OUR STRATEGY
The strategic plan focuses on timely product development, technology, education,
communication, human resources practices, and market concentration as key
elements to the attainment of financial objectives.
The overall strategy is to provide competitive products and superior quality
services while improving productivity and job enrichment.
Benefits Department and Office Services pictured at Liberty Hall.
Missy West '99, Roland Herzel '91, Robin Bowman '83, Tammy Kull '89, Debbie
Beach '76, Alice Taylor '93, Steve Wise '98,
Norman Dickerson '97, Thelma Vitug '96, Harold Minnis '61 and Suzanne Schodorf
'93. Absent from picture Rodney Brooks '97, and Pat Porter '93.
<PAGE>
LETTER TO OUR
SHAREHOLDERS
Agency Department pictured at the First Presbyterian Church.
Don Philpot '72, Marlene Terrell '84, Bob Ockerman '91, Lori Cook '96, David
Clark '98, Stephanie Houghlin '98 and Louellen Stivers '87.
Investors Heritage Printing and the Accounting Department pictured at the
Orlando Brown House.
Rick Calvert '94, Steve Riddle '78, Dale Cox '95, Phyllis Cornett '95; Cara
Ballinger '88, Toni Hornback '88,
Dianne Rogers '82, Doug Hippe '65, Jimmy McIver '72, Susie Jones '84. Absent
from picture Epp Williamson '78.
Hard work and successful implementation of our Business Plan over the past
several years resulted in another successful year during 1998. Kentucky
Investors, Inc. ("Kentucky Investors") and Investors Heritage Life Insurance
Company ("Investors Heritage") (collectively the "Companies") had their best
year ever in net gain from operations, with the exception of 1986, when two non-
recurring transactions occurred. Kentucky Investors' net gain was $1,975,137 _
up 30% over year-end 1997. Investors Heritage's net gain from operations was
$2,766,098 _ up 30% over a year ago.
Record Ordinary insurance sales were attained again in 1998. Single Premium
Preneed sales increased 20%; Annual Pay Preneed sales were up 8%; Annual Pay
Final Expense sales were up 10%; Mortgage Protection Single Premium sales sold
through financial institutions were up 30%. Traditional Ordinary Life sales were
up 9.6% with most of this increase from our Payroll Deduction Sales program.
Overall, the core block of Ordinary Life business was up 14% during 1998. We
have another ambitious goal for insurance sales during 1999, and the first two
months of the year indicate the goals will be reached.
As a result of a strong economy and our continued concentration in the Credit
Life and Credit Accident & Health Insurance market, Credit Insurance sales were
up in 1998.
The Companies can report again this year that the asset quality is a very strong
point in our operations. At year-end, 100% of fixed income assets were rated
investment grade and only one small residential loan was more than ninety days
past due.
As I have for the past ten years, I refer you to the Analysis of Asset Adequacy
performed each year, even though we are only required to do so every three
years. Each year Investors Heritage's Asset Adequacy Model has become more
sophisticated and useful. As in prior years, the Analysis shows very favorable
results.
A detailed report on activities of the Companies is presented in the
Management's Discussion and Analysis on Pages 10-21 of this Annual Review. You
are encouraged to carefully read the material.
Beginning with the 1995 Annual Review, we reported to stockholders that the
Companies had addressed the Year 2000 issue (Y2K) facing all users of
information services and computers. Again, I want to assure our stockholders and
others who read this Annual Review that the Companies' systems are Y2K
compliant. We began working toward a Y2K solution in 1988 while redesigning our
overall data processing systems. During the past ten years we have upgraded and
tested our systems and have been compliant since 1995.
We recently developed a web site for Investors Heritage. The address is
www.investorsheritage.com. We hope our web site will provide information and
assistance to current Investors Heritage associates, and will be a source of
information for prospective new associates. Hopefully, stockholders will also
find it interesting and informative. We have provided a great deal more
information about our Company than most insurance companies provide. We believe
it will help current and future clients (insureds and sales associates) become
better acquainted with the Company and our service personnel.
The Companies have developed a strategic alliance with Family Assistance, Inc.
to help provide at-need financing and accounts receivable management for our
funeral home associates. We firmly believe that providing needed services for
our sales associates is important. Through eighteen months of study and field
testing, we determined that funeral homes need an outlet for quick financing for
at-need funerals, and need a good system to assist in managing accounts
receivables. The Family Assistance Program has been utilized by a number of
firms for several months, and in December, 1998, we began presenting the Program
to all our funeral home associates. This will enable them to cost effectively
and quickly provide at-need financing, and it also gives them access to a
successful program for managing accounts receivable. We believe this alliance
will be a strong asset in our Preneed market.
Two new officers were named in 1998 to replace officers who are no longer with
Investors Heritage Life Insurance Company.
On June 30, Clair Manson retired after eleven years of outstanding service to
the Companies as Vice President and Chief Actuary. I had the pleasure of hiring
Clair after a lengthy search for just the right person. His work for Investors
Heritage was exemplary. He had an excellent actuarial mind and was able to
explain matters so others of us could understand. He also enjoyed working with
marketing personnel in developing products they wanted and could sell. Clair was
succeeded by Julie Hunsinger who had been Assistant Vice President and Assistant
Actuary since 1992. Julie has an outstanding actuarial background and experience
in financial actuarial work. She also understands the importance of sales and is
good at both creating ideas and listening to others to develop the best possible
products and reporting systems.
John Simmons, who had done an outstanding job as Vice President, Financial
Services (Credit Life and Credit Ordinary sales), resigned in 1997. John had
overseen tremendous growth in our Financial Services Division and successfully
managed the Division through considerable change in this segment of our
business. John was replaced in 1998 by Michael F. Dudgeon, Jr., who is also a
member of the Investors Heritage Board of Directors. Michael has been in Preneed
sales management for Investors Heritage since December, 1994. He has a lifetime
of understanding of the Companies' goals and has great ability to work with
others, to analyze problems or opportunities, and find ways to address them. He
continues to assist in Preneed matters, especially in South Carolina, a state
that shows great promise in the Preneed Division.
We thank John and Clair for their great contributions to our Companies, and we
wish Julie and Michael great success in their new responsibilities.
The pictures in this year's Annual Review are of most members of the home
office administration staff and some of the marketing personnel. We are
fortunate to have dedicated people who are building careers with the Companies.
By each name is the year the employee was hired. Please note the large number of
employees who have 10 or more years with the Companies. One of the key elements
of our success is that the people who manage and administer the operations
believe in the Companies and are investing their time and money in them. They
also are aware of our history and understand and believe in our mission and
goals. Hopefully, this understanding of the Companies helps us provide the
service our clients deserve, and enables us to personalize our service in
relationship to them. In turn, we believe this has translated into success for
shareholders of the Companies.
As we rapidly approach the end of the 20th century and the Year 2000 arrives, we
believe that Investors Heritage Life Insurance Company and Kentucky Investors,
Inc. are well positioned to thrive in our ever-changing, competitive markets. We
diligently look at what we do and how we do it; we constantly seek ways to
improve and move forward. We have an outstanding Company with dedicated
employees and sales associates. We are in attractive unique markets and believe
that opportunities will exist well into the next century for continued
development, growth and profitability.
We look forward to entering the 21st century with our stockholders,
policyholders, and company associates _ remembering our founder's statement
from our beginning in 1960, "We know where we are going; we invite you to go
with us." After thirty-nine years of using this phrase, including me quoting it
at various times since Mr. Waterfield's death in 1988, I believe it is time to
alter his statement a bit. Because of the longtime ownership of the majority of
our stockholders, the number of years that many of our employees and sales
associates have been with us, and the strong relationships developed with our
newest associates, I believe a more fitting statement now is, "We know where we
are going; we are glad you are going with us."
On behalf of the Officers and Board of Directors of the Companies, I want to
express our appreciation to the stockholders for your investment in and your
relationship with the Companies, and look forward to our working together to
continue to build a strong and viable organization.
Underwriting Department pictured at the Singing Bridge.
Norma Smith '69, Nancy Walton '66, Linda Tindall '86, Carolyn Monroe '86,
Charlotte Moore '92 and Kathy Sexton '75.
Underwriting Department pictured at the Governor's Mansion (see photo top page
6)
Twina Keeton '96, Debbie Bright '71, Joyce Wright '91, Marti Smith '82, Rhodonna
Redding '89, Alex Thompson '77, Judy Smith '98, Robert Lewis '98 (Claims).
Information Services pictured at the Kentucky Military History Museum.
Mike Wood '85, April Rogers '93, Bill Leroy '94, Mary Lou Barnard '84,
Lewis Rogers '87, Betty Barnard '70, Larry Lee '94.
Policy Services Department pictured at the Daniel Boone Memorial.
Colleen Hackney '86, David Marraccini '78, Sue Fields '98, Barbara Stratton '86,
Linda Sims '85, Jane Wise '64, Gwyna Stormes '95, Barbara Hawkins '87, Flo
Osborne '84.
Premium Accounting Department pictured at the Kentucky Vietnam Memorial.
Martha Hammons '72, Michelle Johnson '99, Margaret Nichols '88,
Shirley Harrod '94, Michelle Meier '96.
Credit Life Accounting & Human Resources pictured at the Bibb-Burnley House.
Angie Smith '99, Bonnie Conquest '95, Vicky Harrod '96, Jennifer McClain '80,
Joyce Courtney '75, Peggy Kays '67.
<PAGE>
MANAGEMENT'S
DISCUSSION AND ANALYSIS
EXPANSION
For the last several years Investors Heritage Life Insurance Company ("Investors
Heritage") has been expanding its market share in the preneed funeral market.
The result has been consistent growth in almost all of the states that were
targeted for expansion. Investors Heritage Financial Services Group, Inc.
("Financial Services Group") a wholly owned subsidiary of Kentucky Investors,
Inc. ("Kentucky Investors") continues to operate under marketing agreements with
Investors Heritage and other unaffiliated insurers. This has proven to be
successful and enabled Financial Services Group and Investors Heritage to
continue utilizing their expertise in the marketing and administration of credit
insurance products. Further, through Financial Services Group, Investors
Heritage is able to offer products such as mortgage protection and ordinary life
insurance through financial institutions.
FINANCIAL STRENGTH
The quality of our investment portfolio and the current level of shareholders'
equity of Kentucky Investors and Investors Heritage continue to provide a sound
financial base as we strive to expand our marketing system to offer competitive,
quality products. Please see INVESTMENTS, LIQUIDITY AND FUND RESTRICTIONS for a
more detailed discussion.
BUSINESS SEGMENTS
Prior to 1998 segment data was presented on an "industry approach" in accordance
with Financial Accounting Standard Board (FASB) Statement No. 14. FASB
Statement No. 131 became effective for 1998 and superceded Statement No. 14.
Statement No. 131 requires a "management approach" in the presentation of
business segments based on how management internally evaluates the operating
performance of its business units. The segment data that follows has been
prepared in accordance with Statement No. 131. Accordingly, 1997 and 1996 data
have been restated to comply with this new FASB Statement. The former "Life and
Annuity" segment has been divided into two areas, "Preneed and Burial Products"
and "Traditional and Universal Life Products." The former "Credit Life" segment
is now "Credit Insurance Products and Administrative Services" and the former
"Corporate" segment is now "Corporate and Other"." Please refer to the Notes to
the Consolidated Financial Statements for additional information regarding
segment data.
REVENUES
Overall revenues were $57,461,000, $52,497,000 and $47,780,000 in 1998, 1997 and
1996, respectively for Investors Heritage. The increases were due primarily to
our growth as a provider of quality preneed products, growth in invested assets
due to increased sales in the preneed and burial products and our market
expansion of traditional life and credit insurance products with financial
institutions. A discussion of the changes follows. Additionally, Investors
Heritage has experienced steady growth in Net Investment Income which increased
9% or $1,181,000 in 1998 from 1997. The 1997 increase over 1996 was 12% or
$1,429,000.
PRENEED & BURIAL PRODUCTS
The preneed and burial segment includes both life and annuity products sold by
funeral directors or affiliated agents to fund prearranged funerals.
Revenues for the Preneed & Burial business segment were 12% or $4,324,000 higher
in 1998 than 1997. The 1997 increase over 1996 was 11% or $3,782,000.
Insurance sales exceeded production goals set for 1998 by approximately 5%.
Actual production increased approximately 13% in 1998 over 1997, due to
marketing expansion in single premium preneed products. New premiums collected
during 1998, 1997 and 1996 were $23,818,000, $21,168,000 and $16,681,000,
respectively. During 1998, Investors Heritage targeted thirteen states for
developing new accounts. Eighty percent of that goal was reached. Additionally,
Investors Heritage entered into a contractual relationship with nineteen new
accounts in two untargeted two states. This resulted in the goal being exceeded
by seven percent.
Premium production remains strong in North Carolina. However, due to the
successful expansion of our marketing operation noted above, preneed premiums
from North Carolina agents accounted for 42% of the total preneed premiums
collected in 1998 compared to 46% for 1997. Premium collections from Kentucky
were 25% of the total for 1998 and 19% for 1997. Other states showing
significant gains were Georgia, Indiana, South Carolina and West Virginia.
Management plans to continue to develop the preneed funeral market and
anticipates increases in single premium production for 1999 over 1998 in the
range of 8-12%.
Increase in Net Investment Income earned by preneed and burial products also
contributed to the overall increase in Revenues. Net investment income
increased 14% in 1998 compared to 1997 and 20% in 1997 compared to 1996. Net
investment income did not increase as significantly in 1998 compared to 1997 due
to the decline in interest rates on investments under current market conditions.
Kentucky Investors, Inc. has contracted with a firm that provides an at-need
financing program and an accounts receivable/cash management system for funeral
homes. This program will be offered to existing Preneed funeral home clients as
well as funeral homes that do not currently sell the Investors Heritage Preneed
insurance products. New preneed accounts are anticipated as a result.
TRADITIONAL & UNIVERSAL LIFE PRODUCTS
This segment includes traditional life and group life insurance products,
annuities (primarily qualified) and universal life products. This will continue
to be a sales division within Investors Heritage.
Revenues for 1998, 1997 and 1996 were $14,146,000, $13,950,000 and $13,454,000,
respectively. New premiums collected during 1998, 1997 and 1996 were $3,663,000,
$4,073,000 and $4,244,000, respectively. The decrease in premiums results from
the emphasis being placed on single premium production. Net investment income
for this segment increased 3% in 1998 compared to 1997 and 6% in 1997 compared
to 1996. The increase in net investment income was not as significant in 1998
compared to 1997 due to the decline in premium production and the decline in
interest rates on investments under current market conditions.
Product updates are anticipated for the more traditional lines offered by
Investors Heritage. Estate planning sales for funeral directors and their
families is a marketing unit within the traditional life division and the
Investors Heritage business plan includes expansion of this unit during 1999.
Financial Services Group will also continue to market traditional insurance
products of Investors Heritage through banks and other financial institutions.
CREDIT INSURANCE PRODUCTS & ADMINISTRATIVE SERVICES
This segment includes the marketing and administration of credit life and credit
accident & health insurance products (respectively "Credit Life" and "Credit
A&H", and collectively "Credit Insurance").
Credit insurance premiums written during 1998, 1997 and 1996 were $17,385,000,
$13,683,000 and $8,739,000, respectively. All of the related underwriting risk
is being reinsured 100% with major, well-known life companies. In addition,
Financial Services Group has obtained reinsurance relationships for Investors
Heritage with three other companies. Each of these agreements generates
marketing and retention fees, but not administration fees.
Revenues for this segment are $307,000, $152,000 and ($330,000) for 1998, 1997
and 1996, respectively. As anticipated, revenues from the Credit Insurance
segment were negative in 1996 because policies written and insured by Investors
Heritage in 1994 and 1993 that were cancelled prior to maturity, required
refunds of unearned premiums.
CORPORATE & OTHER
This segment consists of corporate accounts measured primarily by stockholders'
paid-in capital, contributed surplus, earned surplus, property and equipment,
investments in affiliates and other minor business lines which include group
annuities and group and individual accident and health products.
Revenues from this segment were $1,689,000 in 1998, $1,400,000 in 1997 and
$1,443,000 in 1996. The most significant reason for the increase in revenues
during 1998 was a $209,000 realized capital gain. Realized losses occurred
during 1997 and 1996.
Prior to 1997, most of the accident and health business produced by this segment
related to assumed business. During 1996, Investors Heritage stopped assuming
policies sold in connection with this reinsurance agreement. Accordingly,
revenues (net of realized gain/loss activity) have declined.
OPERATING RESULTS
Investors Heritage's Net Income for 1998 increased $640,000 or 30% from 1997 and
for 1997 increased $525,000 or 33% from 1996. Kentucky Investors' Net Income
for 1998 increased $453,000 or 30% from 1997 and for 1997 increased $376,000 or
33% from 1996.
Earnings per share were $3.06, $2.36 and $1.78 for 1998, 1997 and 1996,
respectively for Investors Heritage. Earnings per share were $2.34, $1.84 and
$1.41 during the same periods for Kentucky Investors.
PRENEED & BURIAL PRODUCTS
Pre-Tax Income (Income from Operations Before Federal Income Tax) for this
business segment of Investors Heritage was $2,579,000, $2,524,000 and $913,000
for 1998, 1997 and 1996, respectively. The increase in Pre-Tax Income in 1998
and 1997 when compared to 1996 is the result of actively managing its investment
portfolio and reduced levels of relative policyholder benefits and expenses
related to in force business. However, current market conditions, including
competitive pricing for this segment and the low interest rate environment
continue to narrow profits generated from new sales.
TRADITIONAL & UNIVERSAL LIFE PRODUCTS
Pre-Tax Income for this segment was $1,343,000, $852,000 and $1,528,000 in 1998,
1997 and 1996, respectively. Higher than expected unreinsured claims and
expense levels in 1997 reduced Pre-Tax Income considerably. 1998 and 1996 were
close to projections for revenues and expenses.
CREDIT INSURANCE PRODUCTS & ADMINSTRATIVE SERVICES
Pre-Tax Losses were $395,000, $666,000 and $579,000 for 1998, 1997 and 1996.
Losses have been generated by the run-off of Credit Insurance and the related
deferred acquisition costs amortization. In 1999, this line's performance
should improve due to the growth of the income from fully reinsured business and
reduced amortization from run-off business.
CORPORATE & OTHER
Pre-Tax Income (Loss) for this segment was $333,000, ($7,000) and ($306,000) for
1998, 1997 and 1996, respectively. Realized gains of $209,000 allocated to this
segment during 1998 were the primary reason for the improvement in Pre-Tax
Income.
INVESTMENTS, LIQUIDITY AND FUND RESTRICTIONS
The investment portfolio of Investors Heritage continues to provide financial
stability. It is management's opinion that Kentucky Investors and Investors
Heritage have adequate cash flows both on a long-term and short-term basis as
evidenced by the Consolidated Statements of Cash Flows presented in this Annual
Review. Investors Heritage's internal cash flows are derived from insurance
premiums and investments. The cash flows of Kentucky Investors are derived from
the dividends paid to it by Investors Heritage, Financial Services Group and
Investors Heritage Printing, Inc. ("Heritage Printing"). Management anticipates
these cash flows to experience steady growth due to improved profitability of
all three companies.
During 1998, Financial Services Group's fourth full year of operation, revenues
were $452,000 up 22% or $81,000 compared to 1997, and dividends in the aggregate
amount of $171,000 were paid to Kentucky Investors. Revenues from Heritage
Printing were $456,000 in 1998, down 5% compared to $482,000 in 1997, and
Heritage Printing paid $10,000 in dividends to Kentucky Investors in 1998.
Management of Heritage Printing will continue to work to improve revenues from
unaffiliated sources as well as to provide printing services for Investors
Heritage. Revenues from these sources constitute less than 1% of Kentucky
Investors' overall Revenues in 1998 and management is working on the continued
growth and profitability of both Financial Services Group and Heritage Printing.
Management is not aware of any commitments or unusual events that could
materially affect Kentucky Investors' or Investors Heritage's capital resources.
Further, there is no long-term or short-term external debt. Other than the
items disclosed in Note H to the Consolidated Financial Statements and the
increased regulatory reporting requirements which generally increase
administrative expenses, management is not aware of any current recommendations
by any regulatory authority which if implemented would have any material effect
on Investors Heritage's liquidity, capital resources or operations.
Management does not perceive a need for any external financing and there are no
plans to acquire same. However, Kentucky Investors and Investors Heritage will
continue to explore various opportunities including corporate reorganizations,
acquisitions and purchasing blocks of business from other companies, which may
dictate a need for either long-term or short-term debt. There are no
restrictions as to use of funds except the restriction on Investors Heritage as
to the payment of cash dividends to shareholders which is discussed in more
detail in Note G to the Consolidated Financial Statements.
Since inception, Investors Heritage has maintained a sound, conservative
investment strategy. A pie chart showing the Distribution of Invested Assets is
on page 15. Investors Heritage's fixed income portfolio of public bonds is
managed by an independent portfolio manager, Charter Oak Capital Management,
Inc. ("Charter Oak"). As of December 31, 1998, 86% of Investors Heritage's
total invested assets are managed by Charter Oak pursuant to specific investment
guidelines which have been approved by the Board of Directors. Since the
inception of Investors Heritage's relationship with Charter Oak, the primary
objectives have been to maintain the quality and integrity of the fixed income
portfolio while improving the total return on investments. These goals have
been accomplished by methodically diversifying the portfolio over the last 10
years.
DISTRIBUTION OF INVESTED ASSETS GRAPH
A pie chart appears on this page showing the Distribution of Invested Assets for
all of the assets of Investors Heritage Life Insurance Company. The chart shows
the following breakdown: Fixed Maturities: 86.4%; Contractual Obligations of
Affiliates: 0.2%; Investments in Affiliates: 0.8%; Equity Securities 1.5%;
Short Term Investments: 0.5%; Policy Loans: 3.2%; Other Long Term Investments:
0.2%; Mortgage Loans-R.E.: 7.2%.
The fixed income portfolio is diversified among sectors. The market value and
the Standard & Poor's average quality rating of this portfolio as of December
31, 1998 are $193.9 million and AA, respectively. At year-end 1998 the fixed
income portfolio was allocated as follows: 53.7% - corporate; 12.0% -
government; 19.7% - mortgage-backed securities; 9.2% - foreign; 4.3% - asset
backed securities; and 1.1% - states and political subdivisions. Within the
corporate bond sector, the portfolio is also diversified with 38.0% of that
sector invested in bank and finance, 46.4% in industrial and miscellaneous, and
15.6% in utilities. Pie charts showing the Distribution of Fixed Income Assets
and Distribution of Corporate Bonds are located on page 16 and 17.
The fixed income portfolio also includes $38.2 million (at fair value) of
mortgage-backed securities ("MBS") which represents 17% of total invested assets
and 20% of the fixed income portfolio. Mortgage-backed securities add value to
the portfolio and Charter Oak has provided the expertise to purchase MBS with
the confidence that the credits have been properly analyzed and that the
investment properly suits the asset and liability needs of Investors Heritage.
DISTRIBUTION OF FIXED INCOME ASSETS GRAPH
A pie chart appears on this page showing the Distribution of Fixed Income
Assets. The chart shows the following breakdown: Corporate: 53.7%;
Government: 12.0%; Mortgage-backed Securities: 19.7%; Foreigns: 9.2%; Asset-
backed Securities; 4.3%; States & Political Subdivisions: 1.1%.
There have been concerns expressed by rating agencies, various regulators and
other constituencies regarding investments in MBS's by insurers and other
financial institutions. Although these highly rated securities provide
excellent credit quality, their liquidity and risk must be monitored. Except
for two commercial backed mortgages of approximately $1.5 million, all of the
collateral of the MBS owned by Investors Heritage are guaranteed by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC").
The FNMA and FHLMC securities are structured either as publicly-traded
collateralized mortgage obligations ("CMO") or pass-throughs. Unlike most
corporate or real estate debt, the primary concern with a MBS is uncertainty of
timing of cash flows due to prepayment assumptions rather than the possibility
of loss of principal.
Investors Heritage's CMO holdings represent approximately 71% of the total MBS
portfolio. When these securities are purchased at a discount or premium, the
income yield will vary with changes in prepayment speeds due to the change in
accretion of discount or amortization of premium, as well as the timing of the
basic principal and interest cash flows. The overall impact of the CMO's
variability in yields on the portfolio is not significant in relation to the
yield and cash flows of the total invested assets of Investors Heritage. More
importantly, Investors Heritage has no exposure to the more volatile, high-risk
CMO's, such as those structured to share in residual cash flows or which receive
only interest payments. Except for one sequential pay CMO of approximately
$999,000, the CMO's held by Investors Heritage are either planned amortization
class ("PAC") bonds, including one planned amortization class-Z account ("PAC-
Z"), or support class ("SUP") bonds. Both of these CMO's are structured to
provide more certain cash flows to the investor and therefore have reduced
prepayment risk.
DISTRIBUTION OF CORPORATE BONDS GRAPH
A pie chart appears on this page showing the Distribution of Corporate Bonds
Graph. This chart shows the following breakdown: Industrial and Miscellaneous:
46.4%; Bank and Finance: 38%; Utilities: 15.6%.
Pass-throughs comprise the remainder of MBS owned by Investors Heritage,
representing approximately 29% of the total MBS portfolio. Pass-throughs are
GNMA, FNMA or FHLMC guaranteed MBS which, simply stated, pass-through interest
and principal payments to the investors in accordance with their respective
ownership percentage.
Additionally, Investors Heritage also engages in commercial and residential
mortgage lending with approximately 93% of these investments being in commercial
properties. All mortgage loans are originated in-house and all loans are
secured by first mortgages on the real estate. Loan to value ratios of 80% or
less and debt service coverage from existing cash flows of 115% are generally
required. Investors Heritage minimizes credit risk in its mortgage loan
portfolio through various methods, including stringently underwriting the loan
request, maintaining small average loan balances, reviewing its larger mortgage
loans on an annual basis and diversifying the portfolio by property type. The
average loan balance is $294,348 and the average loan to value is 50.6%. The
largest loan currently held by Investors Heritage is $983,378. Investors
Heritage has $16.2 million invested in mortgage loans which represents 8% of
total invested assets. The portfolio is diversified across various property
types as follows: 19.2% - office; 32.4% - retail; 7.5% -industrial; 6.1% - 1 to
4 family; 19.2% - apartments; and 15.6% - other. A pie chart showing the
Distribution of Mortgage Loans is located above.
DISTRIBUTION OF MORTGAGE LOANS
A pie chart appears on this page showing the Distribution of Mortgage Loans.
This chart shows the following breakdown: Retail: 32.4%; Apartments: 19.2%;
Office Properties: 19.2%; Residential (1-4 families): 6.1%; Industrial: 7.5%;
Other: 15.6%.
Although approximately 71.5% of Investors Heritage's mortgage loans are located
in the various geographic regions of Kentucky, Investors Heritage is familiar
with its mortgage loan markets and is not aware of any negative factors or
trends which would have a material impact on the local economies where Investors
Heritage's mortgage loan properties are located. Investors Heritage has been
successful in adding value to the total investment portfolio through its
mortgage loan originations due to the fact that yields realized from the
mortgage loan portfolio are from 1.875 to 4.65 basis points higher than yields
realized from fixed income investments. Value has also been added because the
mortgage loan portfolio has consistently performed well. As of December 31,
1998, Investors Heritage had only one non-performing mortgage loan, which would
include loans past due 90 days or more, loans in process of foreclosure,
restructured loans and real estate acquired through foreclosure. The non-
performing mortgage loan, which is more than 90 days past due, is a Residential
Mortgage with an outstanding balance of $44,701. The property securing the loan
has a fair market value of $75,000.
The strength of our liquidity is found in our conservative approach in the
product development area and in the strength and stability of our fixed income
portfolio and our mortgage loans. For 1998, Investors Heritage's fixed income
investments were 100% investment grade as rated by Standard & Poor's, unchanged
from 100% for 1997. None of Investors Heritage's fixed income assets are in
default. Liquidity is also managed by laddering maturities of our fixed income
portfolio. The average duration of our fixed income investments is 5.3 years
with approximately $10.7 million due within 12 months and approximately $30.3
million due within the following four years. Historically management has
anticipated that all such investments will be held until maturity. However, one
of the responsibilities of our independent portfolio manager is to constantly
monitor the credit rating of our fixed income investments to determine if rating
changes of any investment requires action by management. As explained in detail
in Note A to the Consolidated Financial Statements, all of Investors Heritage's
fixed income securities and all marketable equity securities are classified as
available-for-sale and are carried at fair value.
OPTION ADJUSTED VALUE VS TERM STRUCTURE SHIFT
A graph appears on this page which shows the results of the Asset Adequacy
Analysis performed by Investors Heritage Life Insurance Company. The graph
demonstrates the option-adjusted prices of assets, liabilities, and surplus at
various shifts in the interest rate environment.
MARKET RISK EXPOSURES
Measuring market risk is a key function of our asset/liability management
process. To test financial risk and investment strategy, Investors Heritage
performs an asset adequacy analysis each year. Dynamic models of both assets
and liabilities are created to project financial results under several shifts in
the current interest rate environment. Results show that the company's exposure
to a relative 10% increase or decrease in the interest rates prevalent at
December 31, 1998 is a net loss of less than $250,000. A graph of the total
price behavior curve tested is shown on Page 19 of this Annual Review.
Items taken into account on the asset side include prepayment and liquidity
risks, asset diversification and quality considerations. On the liability side,
interest crediting strategies and policyholder and agent behavior (lapses,
loans, withdrawals, and premium flow) are dynamically modeled in relationship to
the particular interest rate environment tested. Although Investors Heritage is
careful to ensure that these assumptions are consistent with the best available
data, interest-sensitive cash flows cannot be forecast with certainty, and can
deviate significantly from the assumptions made. Because asset and liability
durations are continually changing as new policyholder contracts are issued and
as new investments are added to the portfolio, Investors Heritage manages its
balance sheet on an ongoing basis, and its net exposure to changes in interest
rates may vary over time.
REGULATORY MATTERS
The statutory capital and surplus of Investors Heritage decreased $121,000 in
1998 following an increase of $882,000 in 1997. Depressed market values of
unaffiliated common stock at year-end 1998 compared to year-end 1997 contributed
most significantly to the decrease. The writedown of home office real estate
from market value to depreciated cost required by the Kentucky Department of
Insurance and reserve strengthening for the North Carolina burial associations
business block produced a $827,000 charge to surplus for both 1997 and 1998.
1999 will be the last year for these two items.
For Generally Accepted Accounting Principles ("GAAP") reporting purposes, the
home office real estate is already carried at depreciated cost and the notes and
affiliated common stock are carried at cost. As anticipated, these adjustments
did not affect Investors Heritage's financial position or net income based on
generally accepted accounting principles, or its statutory net income. For
additional discussion on this issue, refer to Note H to the Consolidated
Financial Statements.
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written using 2-
digits rather than 4-digits to define the applicable year. Any computer program
that has time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
Investors Heritage recognized the Year 2000 Issue in 1988 and began working on a
solution at that time. The Information Systems Department has worked diligently
to make modifications to existing software so that the Year 2000 Issue will not
pose significant operational problems for its computer systems. As of year end
1995, Investors Heritage's systems were in full compliance with all Year 2000
Issue requirements and it is anticipated that there will be no exposure to
contingencies related to the Year 2000 Issue for the products it has sold. The
cost to implement system changes related to the Year 2000 issue has been
nominal.
Although Investors Heritage does not anticipate any major interruption of
business activities, that will be dependent, in part, upon the activities of
third parties. Management has initiated formal communications with all of its
significant reinsurers, vendors, and financial institutions and has been advised
that all are either in full compliance or anticipate being in full compliance
prior to June 30, 1999. Even though Investors Heritage has assessed and
continues to assess third party issues, it has no direct ability to influence
the compliance actions of such parties. Accordingly, there can be no guarantee
that the systems of other companies on which Investors Heritage relies will be
Year 2000 compliant, leading to an adverse effect on future operating results of
Investors Heritage.
CONSOLIDATION
The accompanying consolidated financial statements of Kentucky Investors and
Investors Heritage include the accounts of their respective majority-owned
subsidiaries, after elimination of intercompany transactions. This discussion
and analysis is intended for both Investors Heritage and Kentucky Investors
because their respective financial statements are similar in presentation and
identical in most cases.
<PAGE>
BOARD OF DIRECTORS
Harry Lee Waterfield II
Chairman of the Board I K a b c d e f g h
Frankfort, Kentucky
Dr. Adron Doran I a b e
Lexington, Kentucky
H. Glenn Doran I K c d f g
Murray, Kentucky
Michael F. Dudgeon, Jr. I c
Frankfort, Kentucky
Gordon C. Duke I K d g
Frankfort, Kentucky
Robert M. Hardy, Jr. I K a d f g h
Frankfort, Kentucky
Jerry F. Howell I K a b c d e h
Leesburg, Florida
Dr. Jerry F. Howell, Jr. I K c f
Morehead, Kentucky
David W. Reed K h
Gilbertsville, Kentucky
Helen Wagner I K b f
Owensboro, Kentucky
I Investors Heritage Life Insurance Company
K Kentucky Investors, Inc.
a Investors Heritage Life Executive Committee
b Investors Heritage Life Nominating Committee
c Investors Heritage Life Audit Committee
d Investors Heritage Life Finance Committee
e Investors Heritage Life Compensation Committee
f Kentucky Investors, Executive Committee
g Kentucky Investors Finance Committee
h Kentucky Investors Nominating Committee
<PAGE>
CORPORATE OFFICERS
Harry Lee Waterfield II Nancy W. Walton
Chairman, President and Vice President, Underwriting I
Chief Executive Officer IKPF First Vice President K
Jimmy R. McIver
Treasurer IKPF
Wilma Yeary Jane Wise
Secretary IK Vice President, Policy Services I
Jane S. Jackson Margaret J. Kays
Assistant Secretary IK Vice President, Human Resources I
SecretaryPF
Julie Hunsinger
Vice President and Chief ActuaryI
Howard L. Graham Don R. Philpot
Vice President, Corporate Services IK Vice President, Agency I
Raymond L. Carr N. Douglas Hippe
Vice President, Vice President, Accounting I
Administrative Operations and
Computer Services I
Robert M. Hardy, Jr. Rick Calvert
Vice President and General Counsel IK Vice President P
Vice President, Legal F
Michael F. Dudgeon, Jr.
Vice President, Financial Services I
Vice President F
William H. Keller, M.D.
Medical Director I
Ernst & Young
Independent Auditor IK
I Investors Heritage Life Insurance Company
F Investors Heritage Financial Services Group, Inc.
K Kentucky Investors, Inc.
P Investors Heritage Printing, Inc.
<PAGE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 and 1997
ASSETS 1998 1997
INVESTMENTS
Securities available-for-sale, at fair value:
Fixed maturities
(amortized cost:
1998-$181,886,791;
1997-$164,680,115) $193,911,467 $171,782,911
Equity securities
(cost: 1998-$913,714;
1997-$912,465) 3,378,471 3,169,376
Mortgage loans on
real estate 16,189,127 13,734,791
Policy loans 7,203,344 6,976,601
Other long-term
investment 488,828 453,106
Short-term investments 1,200,970 1,361,165
____________ ____________
Total investments $222,372,207 $197,477,950
Cash and cash equivalents 2,514,371 2,939,453
Accrued investment income 3,098,930 2,905,504
Due and deferred premiums 4,129,967 4,014,177
Deferred acquisition costs 27,288,684 27,225,643
Leased property under
capital leases 404,877 -0-
Property and equipment 1,604,618 1,748,579
Goodwill 2,088,642 1,966,843
Other assets 1,510,848 1,649,596
Amounts recoverable from
reinsurers 23,355,631 16,944,617
____________ ____________
$288,368,775 $256,872,362
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit
reserves $207,115,725 $189,398,071
Unearned premium reserves
20,069,565 14,460,410
Policy claims 2,086,316 2,256,654
Other policyholders' funds:
Dividend & endowment accumulations
1,053,972 1,030,218
Reserves for dividends & endowments & other
784,630 887,768
____________ ____________
Total policy liabilities
$231,110,208 $208,033,121
Federal income taxes 8,122,499 5,574,113
Obligations under
capital leases 407,462 -0-
Other liabilities 4,032,569 3,936,137
____________ ____________
Total liabilities
$243,672,738 $217,543,371
____________ ____________
MINORITY INTEREST IN SUBSIDIARY
$ 12,471,302 $ 11,242,171
____________ ____________
STOCKHOLDERS' EQUITY
Common stock (shares issued:
1998-848,116; 1997-836,895)
$ 848,116 $ 836,895
Paid-in surplus 3,442,248 3,384,061
Accumulated other comprehensive income
6,392,746 4,043,101
Retained earnings 21,541,625 19,822,763
____________ ____________
Total stockholders' equity
$ 32,224,735 $ 28,086,820
____________ ____________
$288,368,775 $ 256,872,362
============ =============
See notes to consolidated financial statements.
<PAGE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
REVENUES
Premiums and other considerations
$42,638,289 $39,129,106 $ 36,354,025
Investment income, net of expenses
14,167,232 12,972,322 11,528,961
Realized gain (loss) on investments, net
126,179 (33,794) (488,126)
Other income 776,612 639,248 566,804
___________ ___________ ____________
Total revenue $57,708,312 $52,706,882 $ 47,961,664
___________ ___________ ____________
BENEFITS AND EXPENSES
Death and other benefits $20,767,497 $19,218,783 $19,134,559
Guaranteed annual
endowments 800,041 835,220 867,200
Dividends to policyholders 626,325 743,582 647,279
Increase in benefit reserves and
unearned premiums 18,400,657 16,112,923 12,587,751
Acquisition costs deferred(7,006,366) (6,862,085) (6,139,949)
Amortization of deferred acquisition costs
6,497,263 6,946,659 6,904,477
Commissions 5,231,882 4,702,676 4,382,830
Other insurance expenses 8,380,727 8,165,730 7,935,471
___________ ___________ ___________
Total benefits and expenses
$53,698,026 $49,863,488 $46,319,618
___________ ___________ ___________
Income from operations before
Federal Income Tax and minority
interest in net income of subsidiary
$ 4,010,286 $ 2,843,394 $ 1,642,046
___________ ___________ ___________
Provision for income taxes
Current $ 362,000 $ 497,000 $ 437,000
Deferred 952,000 264,000 (360,000)
____________ ____________ __________
$ 1,314,000 $ 761,000 $ 77,000
____________ ____________ __________
income from operations before
minority interest in net income
of subsidiary $ 2,696,286 $ 2,082,394 $ 1,565,046
MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY 721,149 559,842 418,427
____________ ____________ ___________
Net Income $ 1,975,137 $ 1,522,552 $ 1,146,619
============ ============ ============
Earnings Per Share $ 2.34 $ 1.84 $ 1.41
============ ============ ============
See notes to consolidated financial statements.
<PAGE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK SURPLUS INCOME EARNINGS EQUITY
________ ________ _____________ _________ _____________
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996
$811,128 $3,374,704 $2,916,509 $17,539,199 $24,641,540
Comprehensive Income:
Net Income
1,146,619 1,146,619
Change in net unrealized appreciation
on available-for-sale securities
(1,406,284) (1,406,284)
Total Comprehensive Income (259,665)
Cash Dividend (344,611) (344,611)
Issuance of common stock, net
9,347 (89) 111,251 120,509
________ __________ ___________ ___________ ___________
BALANCE, DECEMBER 31, 1996
$820,475 $3,374,615 $1,510,225 $18,452,458 $24,157,773
Comprehensive Income:
Net Income 1,522,552 1,522,552
Change in net unrealized appreciation
on available-for-sale securities
2,532,876 2,532,876
Total Comprehensive Income 4,055,428
Cash Dividend (349,285) (349,285)
Issuance of common stock, net
16,420 9,446 197,038 222,904
________ __________ ___________ ___________ ___________
BALANCE, DECEMBER 31, 1997
$836,895 $3,384,061 $4,043,101 $19,822,763 $28,086,820
Comprehensive Income:
Net Income 1,975,137 1,975,137
Change in net unrealized appreciation
on available-for-sale securities
2,349,645 2,349,645
Total Comprehensive Income 4,324,782
Cash Dividend (354,926) (354,926)
Issuance of common stock, net
11,221 58,187 98,651 168,059
________ __________ ___________ ___________ __________
BALANCE, DECEMBER 31, 1998
$848,116 $3,442,248 $6,392,746 $21,541,625 $32,224,735
========== ========== ========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
OPERATING ACTIVITIES
Net Income $ 1,975,137 $ 1,522,552 $ 1,146,619
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase in Benefit Reserves
25,220,661 22,663,249 18,302,594
Change in Claims Liability
(170,338) 662,113 (71,408)
Change in Other Policyholder Funds
(79,384) (30,697) (151,680)
Amortization of Deferred Acquisition Costs
6,497,263 6,946,659 6,904,477
Policy Acquisition Costs Deferred
(7,006,366) (6,862,085) (6,139,949)
Realized Loss (Gain) on Investments
(209,187) 33,794 488,126
Increase in Accrued Investment Income
(193,426) (492,401) (273,267)
Change in Other Assets and Other Liabilities
646,584 672,582 395,311
Provision for Deferred Federal Income Taxes
952,000 264,000 (360,000)
Federal Income Tax -0- -0- (250,438)
Change in Due and Deferred Premiums
(115,790) 66,306 633,574
Net Adjustment for Premium and
Discount on Investments
269,283 206,299 256,456
Depreciation and Other Amortization
201,157 394,116 336,406
Change in Minority Interest and Other
487,559 468,090 321,608
Change in Amounts Recoverable from Reinsurers
(6,411,014) (7,325,846) (5,954,989)
__________ __________ __________
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 22,064,139 $ 19,188,731 $ 15,583,440
____________ ____________ ____________
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases $(30,462,168) $(47,713,033) $(46,706,125)
Sales and Maturities 13,194,144 28,565,612 32,427,878
Other Investments:
Cost of Acquisition (4,857,026) (2,912,452) (2,478,676)
Sales and Maturities 2,300,420 2,482,421 1,651,805
Net Additions to Property and Equipment
(583,872) (48,574) (366,597)
____________ ___________ ___________
NET CASH USED BY INVESTING
ACTIVITIES $(20,408,502) $(19,626,026) $(15,471,715)
____________ ___________ ___________
FINANCING ACTIVITIES
Receipts from universal life policies credited to
policyholder account balances
$ 4,356,590 $ 6,074,832 $ 4,949,560
Return of policyholder account balances on
universal life policies (6,250,442) (5,256,212) (4,570,049)
Issuances of Common Stock 168,059 222,904 120,509
Dividends (354,926) (349,285) (344,611)
___________ ___________ ________
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ (2,080,719) $ 692,239 $ 155,409
___________ _____________ ____ ________
INCREASE (DECREASE) IN CASH
$ (425,082)$ 254,944 $ 267,134
Cash and cash equivalents at beginning of year
2,939,453 2,684,509 2,417,375
______________ ___________ ____________
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,514,371 $ 2,939,453 $ 2,684,509
============== ============= =============
See notes to consolidated financial statements.
<PAGE>
KENTUCKY INVESTORS, INC.
SELECTED FINANCIAL DATA
KENTUCKY INVESTORS, INC. AND SUBSIDIARIES
(000's omitted except for Earnings and Cash Dividends Per Share)
1998 1997 1996 1995 1994
Total Revenue $ 57,708 $ 52,707 $ 47,962 $ 44,005 $ 46,656
Total Benefits & Expenses
53,698 49,863 46,320 43,191 44,039
Net Income 1,975 1,523 1,147 555 1,523
Earnings Per Share
2.34 1.84 1.41 .71 1.97
Total Assets 288,369 256,872 224,997 208,045 191,367
Total Liabilities
243,673 217,543 190,997 173,288 164,902
Debt 407 -0- -0- -0- -0-
Cash Dividends
Per Share .38 .38 .38 .38 .37
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Kentucky Investors, Inc.
We have audited the accompanying consolidated balance sheets of
Kentucky Investors, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kentucky
Investors, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1999
Investors Heritage Life Insurance Company
SELECTED FINANCIAL DATA
INVESTORS HERITAGE LIFE INSURANCE COMPANY AND SUBSIDIARY
(000's omitted except for Earnings and Cash Dividends Per Share)
1998 1997 1996 1995 1994
Premiums $ 42,638 $ 39,129 $ 36,354 $ 33,061 $ 36,444
Net Investment Income
14,264 13,083 11,654 10,815 10,011
Net Income 2,766 2,127 1,602 917 2,401
Earnings Per Share
3.06 2.36 1.78 1.02 2.66
Total Assets 289,825 258,654 227,140 210,490 194,262
Policy Reserves
227,185 203,858 180,377 161,695 155,179
Debt 407 -0- -0- -0- -0-
Cash Dividends Per Share
.76 .76 .76 .76 .74
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Investors Heritage Life Insurance Company
We have audited the accompanying consolidated balance sheets of
Investors Heritage Life Insurance Company and subsidiary as of December 31,
1998 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Investors
Heritage Life Insurance Company and subsidiary at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1999
<PAGE>
Investors Heritage Life Insurance Company
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 and 1997
ASSETS 1998 1997
INVESTMENTS
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost:
1998-$181,886,791;
1997-$164,680,115) $193,911,467 $171,782,911
Equity securities (cost: 1998
and 1997-$912,458) 3,377,213 3,169,370
Mortgage loans on
real estate 16,189,127 13,734,791
Policy loans 7,203,344 6,976,601
Other long-term investments 437,221 403,106
Short-term investments 1,170,970 1,211,165
____________ ____________
$222,289,342 $197,277,944
Investments in affiliates 1,837,510 1,975,382
Contractual obligations of
affiliate 431,035 538,794
____________ ____________
Total investments $224,557,887 $199,792,120
Cash and cash equivalents 2,461,887 2,902,587
Accrued investment income 3,097,421 2,904,861
Due and deferred premiums 4,129,967 4,014,177
Deferred acquisition costs 27,288,684 27,225,643
Leased property under capital
leases 404,877 -0-
Property and equipment 1,566,117 1,703,387
Goodwill 1,508,780 1,574,381
Other assets 1,453,280 1,592,539
Amounts recoverable from
reinsurers 23,355,631 16,944,617
____________ ____________
$289,824,531 $258,654,312
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves $207,115,725 $189,398,071
Unearned premium
reserves 20,069,565 14,460,410
Policy claims 2,086,316 2,256,654
Other policyholders' funds:
Dividend & endowment accumulations
1,053,972 1,030,218
Reserves for dividends & endowments & other
784,630 887,768
____________ ____________
Total policy
liabilities $231,110,208 $208,033,121
Federal income taxes 6,487,085 4,043,087
Obligations under capital
leases 407,462 -0-
Other liabilities 3,983,860 3,874,424
____________ ____________
Total liabilities $241,988,615 $215,950,632
____________ ____________
STOCKHOLDERS' EQUITY
Common stock (shares issued:
1998-904,373; 1997-905,611) $ 1,447,797 $ 1,449,778
Paid-in surplus 3,777,101 3,776,625
Accumulated other comprehensive
income 8,594,131 5,502,914
Retained earnings 34,016,887 31,974,363
____________ ____________
Total stockholders' equity
$ 47,835,916 $ 42,703,680
____________ ____________
$289,824,531 $ 58,654,312
============= ============
See notes to consolidated financial statements.
<PAGE>
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
REVENUES
Premiums and other
considerations $42,638,289 $39,129,106 $36,354,025
Investment income, net
of expenses 14,264,246 13,083,006 11,653,732
Realized gain (loss)
on investments, net 209,186 (19,346) (489,685)
Other income 349,310 304,280 261,524
___________ ___________ ___________
Total revenue $57,461,031 $52,497,046 $47,779,596
___________ ___________ ___________
BENEFITS AND EXPENSES
Death and other
benefits $20,767,497 $19,218,783 $19,134,559
Guaranteed annual
endowments 800,041 835,220 867,200
Dividends to
policyholders 626,325 743,582 647,279
Increase in benefit reserves and
unearned
premiums 18,400,657 16,112,923 12,587,751
Acquisition costs
deferred (7,006,366) (6,862,085) (6,139,949)
Amortization of deferred
acquisition costs 6,497,263 6,946,659 6,904,477
Commissions 5,231,882 4,702,676 4,382,830
Other insurance
expenses 8,283,634 8,096,713 7,839,875
___________ ___________ ___________
Total benefits
and expenses $53,600,933 $49,794,471 $46,224,022
___________ ___________ ___________
Income from operations before
Federal Income Tax $ 3,860,098 $ 2,702,575 $ 1,555,574
___________ ___________ ___________
Provision for income taxes
Current $ 247,000 $ 384,000 $ 360,000
Deferred 847,000 192,000 (406,000)
___________ ___________ ___________
$ 1,094,000 $ 576,000 $ (46,000)
___________ ___________ ___________
Net Income $ 2,766,098 $ 2,126,575 $ 1,601,574
============ ============ ============
Earnings Per Share $ 3.06 $ 2.36 $ 1.78
============ ============ ============
See notes to consolidated financial statements.
<PAGE>
<TABLE>
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK SURPLUS INCOME EARNINGS EQUITY
________ ________ _____________ __________ ___________
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996
$1,441,797 $3,776,427 $3,948,035 $29,493,727 $38,659,986
Comprehensive Income:
Net Income 1,601,574 1,601,574
Change in net unrealized appreciation
on available-for-sale securities
(1,903,816) (1,903,816)
Total Comprehensive Income (302,242)
Cash Dividend (684,442) (684,442)
Net cost of common stock
sold (purchased)
(79) 198 (1,393) (1,274)
__________ __________ ___________ ___________ __________
BALANCE, DECEMBER 31, 1996
$1,441,718 $3,776,625 $2,044,219 $30,409,466 $37,672,028
Comprehensive Income:
Net Income 2,126,575 2,126,575
Change in net unrealized appreciation
on available-for-sale securities
3,458,695 3,458,695
Total Comprehensive Income 5,585,270
Cash Dividend (684,580) (684,580)
Net cost of common stock sold
8,060 122,902 130,962
__________ __________ ___________ ___________ _________
BALANCE, DECEMBER 31, 1997
$1,449,778 $3,776,625 $5,502,914 $31,974,363 $42,703,680
Comprehensive Income:
Net Income 2,766,098 2,766,098
Change in net unrealized appreciation
on available-for-sale securities
3,091,217 3,091,217
Total Comprehensive Income 5,857,315
Cash Dividend (687,745) (687,745)
Net cost of common stock
sold (purchased)
(1,981) 476 (35,829) (37,334)
__________ __________ ___________ ___________ __________
BALANCE, DECEMBER 31, 1998
$1,447,797 $3,777,101 $8,594,131 $34,016,887 $47,835,916
========== ========== ========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
OPERATING ACTIVITIES
Net Income $ 2,766,098 $ 2,126,575 $ 1,601,574
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase in Benefit
Reserves 25,220,661 22,663,249 18,302,594
Change in Claims
Liability (170,338) 662,113 (71,408)
Change in Other Policyholder
Funds (79,384) (30,697) (151,680)
Amortization of Deferred
Acquisition Costs 6,497,263 6,946,659 6,904,477
Policy Acquisition Costs
Deferred (7,006,366) (6,862,085) (6,139,949)
Realized Loss (Gain) on
Investments (209,187) 19,346 489,685
Increase in Accrued
Investment Income (192,560) (492,148) (273,380)
Change in Other Assets and
Other Liabilities 656,157 688,876 378,800
Provision for Deferred Federal
Income Taxes 847,000 192,000 (406,000)
Federal Income Tax 4,554 (5,807) (250,481)
Change in Due and Deferred
Premiums (115,790) 66,306 633,574
Net Adjustment for Premium and
Discount on Investments
269,283 206,299 256,456
Depreciation and Other Amortization
381,866 348,513 313,192
Change in Amounts Recoverable
from Reinsurers (6,411,014) (7,325,846) (5,954,989)
___________ _________ _________
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 22,458,243 $ 19,203,353 $ 15,632,465
__________ ___________ ___________
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases $(30,460,916) $(47,713,033) $(46,706,125)
Sales and Maturities 13,194,144 28,565,612 32,427,878
Other Investments:
Cost of Acquisition (4,951,926) (2,840,452) (2,465,182)
Sales and Maturities 2,522,558 2,818,049 2,054,548
Net Additions to Property
and Equipment (583,872) (43,510) (366,596)
__________ __________ __________
NET CASH USED BY INVESTING
ACTIVITIES $(20,280,012) $(19,213,334) $(15,055,477)
____________ ___________ ___________
FINANCING ACTIVITIES
Receipts from universal life policies
credited to policyholder
account balances $ 4,356,590 $ 6,074,832 $ 4,949,560
Return of policyholder account
balances on universal
life policies (6,250,442) (5,256,212) (4,570,049)
Repurchase of Common Stock (37,334) 130,962 (1,472)
Dividends (687,745) (684,580) (684,442)
_________ __________ _________
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ (2,618,931) $ 265,002 $ (306,403)
___________ ____________ ___________
INCREASE (DECREASE) IN CASH
$ (440,700) $ 255,021 $ 270,585
Cash and cash equivalents at
beginning of year 2,902,587 2,647,566 2,376,981
____________ ___________ _____________
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,461,887 $ 2,902,587 $ 2,647,566
============= ============= ==============
See notes to consolidated financial statements.
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
KENTUCKY INVESTORS, INC.
IINVESTORS HERITAGE LIFE INSURANCE COMPANY
NOTE A - Nature of Operations and Accounting Policies
Kentucky Investors, Inc. (Kentucky Investors) is the holding company of
Investors Heritage Life Insurance Company (Investors Heritage), Investors
Heritage Printing, Inc., a printing company and Investors Heritage Financial
Services Group, Inc., an insurance marketing company. Ninety-nine percent of
Kentucky Investors operations are generated by Investors Heritage.
Investors Heritage's operations involve the sale and administration of various
insurance and annuity products, including, but not limited to, participating,
non-participating, whole life, limited pay, universal life, annuity contracts,
credit life, credit accident and health and group insurance policies. The
principal markets for Investors Heritage products are in the Commonwealths of
Kentucky and Virginia, and the states of North Carolina, South Carolina, Ohio,
Indiana, Florida, Tennessee, Illinois, Georgia, West Virginia and Texas.
Basis of Presentation: The accompanying consolidated financial statements of
Kentucky Investors, Inc. and subsidiaries and Investors Heritage Life Insurance
Company and subsidiary have been prepared in accordance with generally accepted
accounting principles (GAAP). Investors Heritage also submits financial
statements to insurance regulatory authorities based on statutory accounting
practices which differ from GAAP.
Principles of Consolidation: The consolidated financial statements include the
majority-owned subsidiaries of Kentucky Investors which are Investors Heritage
Printing, Inc., Investors Heritage and its subsidiary, Investors Underwriters,
Inc., and Investors Heritage Financial Services Group, Inc. In 1994 Kentucky
Investors formed Investors Heritage Financial Services Group, a wholly-owned
marketing company which markets a variety of products for a number of companies
as well as Investors Heritage's mortgage protection products to financial
institutions. Intercompany transactions are eliminated in the Kentucky Investors
consolidated financial statements. The accompanying Investors Heritage
financial statements include intercompany transactions with Kentucky Investors
and other affiliates which are not eliminated.
Investments: In accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", Kentucky Investors and Investors Heritage classify all fixed
maturities and equity securities as available-for-sale. Under SFAS No. 115,
securities classified as available-for-sale are carried at fair value with
appreciation (depreciation) relating to temporary market value changes recorded
as an adjustment to other comprehensive income.
Premiums and discounts on fixed maturity investments are amortized into income
using the interest method. Anticipated prepayments on mortgage-backed
securities are considered in the determination of the effective yield on such
securities. If a difference arises between anticipated prepayments and actual
prepayments, the carrying value of the investment is adjusted with a
corresponding charge or credit to interest income.
Realized gains and losses on the sale of investments are determined based upon
the specific identification method and include provisions for other-than-
temporary impairments where appropriate.
Mortgage loans, policy loans and other long-term investments are carried at
unpaid balances. Short term investments represent securities with maturity
dates within one year but exceeding three months. These securities are carried
at amortized cost.
Cash equivalents include money market funds on deposit at various financial
institutions with contractual maturity dates within three months at the time of
purchase.
Deferred Acquisition Costs: Commissions and other acquisition costs which vary
with and are primarily related to the production of new business are deferred
and amortized over the life of the related policies (refer to Revenues and
Expenses discussed later regarding amortization methods). Recoverability of
deferred acquisition costs is evaluated annually by comparing the current
estimate of the present value of expected pretax future profits to the
unamortized asset balance. If such current estimate is less than the existing
balance, the difference is charged to expense.
Property and Equipment: Property and equipment is carried at cost less
accumulated depreciation, using principally the straight-line method.
Accumulated depreciation on property and equipment of Kentucky Investors was
$3,366,812 and $3,498,084 at December 31, 1998 and 1997, respectively.
Accumulated depreciation on property and equipment of Investors Heritage was
$3,275,397 and $3,407,860 at December 31, 1998 and 1997, respectively.
Capital Leases: During 1998 Investors Heritage acquired new computer equipment
through a three-year capital lease. Lease payments for 1998 were $48,646.
Future minimum lease payments for 1999, 2000 and 2001 are $163,668, $163,668 and
$115,023, respectively. The present value of net minimum lease payments at
December 31, 1998 was $407,462, which is equal to the total future minimum lease
payments of $442,359 less imputed interest of $34,897. Accumulated amortization
on the leased property was $43,603 at December 31, 1998.
Goodwill: Goodwill for Investors Heritage is being amortized over forty years
using the straight-line method. Accumulated amortization was $1,115,217 and
$1,049,616 at December 31, 1998 and 1997, respectively.
Benefit Reserves and Policyholder Deposits: Reserves on traditional life and
accident and health insurance products are calculated using the net level
premium method based upon estimated future investment yields, mortality,
withdrawals and other assumptions, including dividends on participating
policies. The assumptions used for prior year issues are locked in. Current
year issues are reserved for using updated assumptions determined by reviewing
the Company's past experience and includes a provision for possible unfavorable
deviation.
Benefit reserves and policyholder deposits on universal life and investment-
type products are determined by using the retrospective deposit method and
represent the policy account value before consideration of surrender charges.
In addition, unearned revenues are included as a part of the benefit reserve.
The mortality assumptions for regular ordinary business are based on the 1955-60
Basic Table, Select and Ultimate, for plans issued prior to 1982, the 1965-70
Basic Table, Select and Ultimate, for plans issued in 1982 through 1984, the
1975-80 Basic Table, Select and Ultimate, for plans issued after 1984 and on the
Company's experience for final expense plans.
Reinsurance: Kentucky Investors and Investors Heritage assume and cede
reinsurance under various agreements providing greater diversification of
business, allowing management to control exposure to potential losses arising
from large risks, and providing additional capacity for growth. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
related liabilities associated with the reinsured policies. In accordance with
SFAS No. 113 reserves ceded to reinsurers of $22,616,183 and $15,998,475 at
December 31, 1998 and 1997, respectively, are shown gross on the balance sheets
of Kentucky Investors and Investors Heritage.
Unearned Premium Reserves: Credit life unearned premium reserves are calculated
for level and reducing coverage using the monthly pro rata and Rule of 78's
methods, respectively. Credit accident and health unearned premium reserves are
determined based upon the Rule of 78's.
Policy Claims: Policy claims are based on known liabilities plus estimated
future liabilities developed from trends of historical data applied to current
exposure.
Other Policyholders' Funds: Other policyholders' funds consist primarily of
dividends and endowments left on deposit at interest. Participating business
approximates 7% of ordinary life insurance in force. Participating dividends
are accrued as declared by the Board of Directors of Investors Heritage. The
liability for future policy benefits for participating policies was determined
based on the Net Level Premium Reserve Method, 3% interest, and the 1941 CSO
Mortality and 1958 CSO Mortality tables. All guaranteed benefits were
considered in calculating these reserves. The average assumed investment yields
used in determining expected gross margins ranged from 3.56% to 9.17% (for the
current and all future years an assumed investment yield of 6.80% was utilized).
Unamortized acquisition costs associated with participating business are
amortized in proportion to expected gross margins.
Federal Income Taxes: Kentucky Investors and Investors Heritage utilize the
liability method in accordance with FASB Statement 109 "Accounting for Incomes
Taxes" to account for income taxes. Under such method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and the tax bases of assets and liabilities and are measured using the enacted
tax rates.
Revenues and Expenses: Revenues on traditional life and accident and health
insurance products consist of direct and assumed premiums reported as earned
when due. Liabilities for future policy benefits, including unearned premium
reserves on accident and health policies and unreleased profits on limited-pay
life policies, are provided and acquisition costs are amortized by associating
benefits and expenses with earned premiums to recognize related profits over the
life of the contracts. Acquisition costs are amortized over the premium paying
period using the net level premium method. Traditional life insurance products
are treated as long duration contracts since they are ordinary whole life
insurance products which generally remain in force for the lifetime of the
insured. The accident and health insurance products are treated as long
duration contracts because they are non-cancellable.
Revenues for universal life and investment-type products consist of investment
income and policy charges for the cost of insurance and policy initiation and
administrative fees. Expenses include interest credited to policy account
balances, actual administrative expenses and benefit payments in excess of
policy account balances.
Deferred policy acquisition costs related to universal life and investment-type
products are amortized as a uniform percentage of each year's expected gross
profits, over the life of the policies. Amortization is unlocked for
significant changes in expected versus actual gross profits, including the
affects of realized gains or losses.
Common Stock and Earnings per Share: The par value per share for Kentucky
Investors is $1.00 with 4,000,000 shares authorized (shares issued at December
31, 1998: 848,116; 1997: 836,895; and 1996: 820,475). Earnings per share of
common stock were computed based on the weighted average number of common shares
outstanding during each year. The number of common shares used in this
computation was 843,251 in 1998, 829,725 in 1997, and 813,754 in 1996. Cash
dividends per share were $.38 in 1998, 1997, and 1996.
The stated value of Investors Heritage common stock was $1,447,797, $1,449,778,
and $1,441,718, at December 31, 1998, 1997 and 1996, respectively. 2,000,000
shares were authorized at December 31, 1998, 1997 and 1996 (shares issued at
December 31, 1998: 904,373; 1997: 905,611; and 1996: 900,574). Earnings per
share of common stock were computed based on the weighted average number of
common shares outstanding during each year: 904,334 in 1998, 902,739 in 1997 and
900,508 in 1996. Cash dividends per share were $.76 in 1998, 1997, and 1996.
Accumulated Other Comprehensive Income: As of January 1, 1998 the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to this requirement.
The reclassification amounts (net of 34% tax) for the years ended December 31,
1998, 1997 and 1996 are summarized as follows:
1998 1997 1996
Net unrealized gain (loss) arising
during period $3,215,115 $3,426,479 $(2,435,429)
Reclassification adjustment for net (gains)
losses included in net income
(123,898) 32,216 531,613
__________ __________ __________
Net unrealized gain (loss) on certain
securities for Investors Heritage
$3,091,217 $3,458,695 $(1,903,816)
Minority interest in other comprehensive
income (741,572) (925,819) 497,532
__________ __________ __________
Net unrealized gain (loss) on certain
securities for Kentucky Investors
$2,349,645 $2,532,876 $(1,406,284)
========== ========== ===========
Reclassifications: Certain prior year amounts have been reclassified to conform
to the 1998 presentations.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE B - Investments
Investors Heritage limits credit risk by emphasizing investment grade
securities and by diversifying its investment portfolio among government and
corporate bonds and mortgage loans. Investors Heritage manages its fixed
income portfolio to diversify between and within industry sectors. Mortgage
loans are issued at loan to value ratios not exceeding 80 percent.
Approximately $11,571,000 of the loans outstanding at December 31, 1998 were to
borrowers located in Kentucky. All loans are secured by a first mortgage on the
property.
Investments in available-for-sale securities are summarized as follows:
1998 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ _________ _________ _________
Available-for-sale securities:
U.S. Government
Obligations $ 21,741,471 $ 1,509,437 $ -0- $ 23,250,908
States and Political
Subdivisions 1,992,186 72,464 -0- 2,064,650
Corporate 105,089,331 7,586,323 42,515 112,633,139
Foreign 16,445,886 1,360,974 -0- 17,806,860
Mortgage-Backed
Securities 36,617,917 1,537,993 -0- 38,155,910
___________ ___________ ______________ ____________
Total Fixed Maturity
Securities $181,886,791 $12,067,191 $ 42,515 $ 193,911,467
Equity Securities 912,458 2,468,604 3,849 3,377,213
___________ __________ ______________ ______________
Total $182,799,249 $14,535,795 $ 46,364 $ 197,288,680
============ =========== ============== ==============
1997 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ _________ _________ _______
Available-for-sale securities:
U.S. Government
Obligations $ 22,472,841 $1,060,540 $ -0- $ 23,533,381
States and Political
Subdivisions 1,990,527 40,043 -0- 2,030,570
Corporate 90,409,024 4,396,915 515 94,805,424
Foreign 14,680,336 733,064 -0- 15,413,400
Mortgage-Backed
Securities 35,127,387 910,684 7,935 36,000,136
___________ _________ ___________ ___________
Total Fixed Maturity
Securities $164,680,115 $7,141,246 $ 38,450 $171,782,911
Equity Securities 912,458 2,261,561 4,649 3,169,370
___________ _________ __________ ___________
Total $165,592,573 $9,402,807 $ 43,099 $174,952,281
============ ========== =========== ============
In accordance with SFAS No. 115, net unrealized gains (losses) for investments
classified as available-for-sale are shown, net of the effect on deferred income
taxes and deferred policy acquisition costs assuming that the appreciation
(depreciation) had been realized. A summary follows:
December 31
1998 1997
__________ _________
Net unrealized appreciation on
available-for-sale securities $14,489,431 $ 9,359,708
Adjustment to deferred acquisition costs (1,468,021) (1,021,959)
Deferred income taxes (4,427,279) (2,834,835)
____________ ____________
Net unrealized appreciation on
available-for-sale securities
for Investors Heritage $ 8,594,131 $ 5,502,914
Minority shareholders' interest (2,201,385) (1,459,813)
_____________ _____________
Net unrealized appreciation on
available-for-sale securities for
Kentucky Investors $ 6,392,746 $ 4,043,101
============ ============
The amortized cost and fair value of debt securities at December 31, 1998, by
contractual maturity, are presented below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Available-for-Sale
Amortized Fair
Cost Value
_________ __________
Due in one year or less $ 10,552,763 $ 10,670,368
Due after one year through five years 28,989,260 30,323,538
Due after five years through ten years 51,306,378 55,049,785
Due after ten years 43,844,302 48,624,741
Due at multiple maturity dates 47,194,088 49,243,035
____________ _____________
Total $181,886,791 $193,911,467
============ =============
Proceeds during 1998, 1997 and 1996 from sales and maturities of investments in
available-for-sale securities were $13,194,150, $28,565,510 and $32,427,878
respectively. Gross gains of $162,746, $360,679 and $101,509 and gross losses
of $38,848, $392,895 and $633,122 were realized on those sales during 1998, 1997
and 1996, respectively.
Presented below is investment information for Investors Heritage, including the
accumulated and annual change in net unrealized investment gain or loss.
Additionally, the table below shows the annual change in net unrealized
investment gain (loss) and the amount of realized investment gain (loss) on debt
and equity securities for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
Change in unrealized investment gain (loss):
Available-for-sale:
Debt securities $ 4,921,880 $ 5,167,977 $ (3,629,100)
Equity securities 207,843 683,427 318,943
Realized investment gain (loss):
Available-for-sale:
Debt securities $ 123,892 $ (47,341) $ (449,194)
Equity securities 6 15,125 (38,221)
Major categories of investment income for Investors Heritage are summarized as
follows:
1998 1997 1996
Fixed maturities $12,442,337 $11,329,773 $ 9,865,087
Mortgage loans on real estate 1,311,727 1,212,102 1,222,649
Other 1,029,835 975,897 927,817
__________ ___________ ___________
$14,783,899 $13,517,772 $12,015,553
Investment expenses 519,653 434,766 361,821
___________ ___________ ___________
$14,264,246 $13,083,006 $11,653,732
========= =========== ===========
Investors Heritage is required to hold assets on deposit for the benefit of
policyholders in accordance with statutory rules and regulations. At December
31, 1998 and 1997, these required deposits had book values of $23,571,493 and
$23,696,655, respectively.
NOTE C - Fair Values of Financial Instruments
The following disclosure of the estimated fair values of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments". The estimated fair value amounts have
been determined using available market information and appropriate valuation
methodologies. However, considerable judgement was necessarily required to
interpret market data to develop these estimates. Accordingly, the estimates
are not necessarily indicative of the amounts which could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the fair value amounts. The
following table relates solely to Investors Heritage. Carrying values and fair
values for Kentucky Investors approximate those shown for Investors Heritage,
except for the investments in and obligations of affiliates recognized by
Investors Heritage which are eliminated for Kentucky Investors reporting.
December 31
1998 1997
Investors Heritage Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturities $193,911,467 $193,911,467 $171,782,911 $171,782,911
Equity securities 3,377,213 3,377,213 3,169,370 3,169,370
Mortgages on real estate:
Commercial 15,010,785 16,971,064 12,939,239 13,929,217
Residential 1,178,342 1,355,737 795,552 863,184
Policy loans 7,203,344 7,203,344 6,976,601 6,976,601
Other long-term
investments 437,221 437,221 403,106 403,106
Short-term investments 1,170,970 1,170,970 1,211,165 1,211,165
Investments in affiliates 1,837,510 5,531,175 1,975,382 5,116,936
Contractual obligations
of affiliate 431,035 431,035 538,794 538,794
Cash and cash equivalents 2,461,887 2,461,887 2,902,587 2,902,587
Accrued investment income 3,097,421 3,097,421 2,904,861 2,904,861
Liabilities:
Policyholder deposits
(investment-type \
contracts) $ 56,519,216 $ 52,220,665 $ 55,303,701 $49,947,246
Policy claims 2,086,316 2,086,316 2,256,654 2,256,654
Obligations under capital
leases 407,462 407,462 -0- -0-
The following methods and assumptions were used in estimating the "fair value"
disclosures for financial instruments in the accompanying financial statements
and notes thereto:
Cash, cash equivalents, short-term investments, policy loans, accrued investment
income, other long term investments and contractual obligations of affiliates:
The carrying amounts reported for these financial instruments approximate their
fair values.
Fixed maturity, equity securities, and investments in affiliates: The fair
values for fixed maturity, equity securities (including redeemable preferred
stocks) and investments in affiliates are based on quoted market prices.
Mortgage loans: The fair values for mortgage loans are estimated using
discounted cash flow analyses, using the actual spot rate yield curve in effect
at December 31.
Investment-type contracts: The fair values for the liabilities under
investment-type insurance contracts are calculated as surrender values on these
contracts.
Policy claims and obligations under capital leases: The carrying amounts
reported for these liabilities approximate their fair value.
The fair values for insurance contracts other than investment contracts are not
required to be disclosed under SFAS No. 107.
NOTE D - Investment in Affiliates/Contractual Obligation of Affiliate/Affiliate
Transactions
Investors Heritage's investment in the common stock of its parent, Kentucky
Investors, either directly or indirectly, was valued at December 31, 1998:
Cost: $1,837,510; Market: $5,531,175 and at December 31, 1997: Cost: $1,975,382;
Market: $5,116,936. Additionally, Investors Heritage holds notes receivable
from Kentucky Investors with unpaid principal balances of $431,035 and $538,794
at December 31, 1998 and 1997, respectively, with variable interest rates and
due dates ranging from 2000 to 2004. Kentucky Investors owns approximately 74%
of Investors Heritage. Sales of Kentucky Investors common stock owned by
Investors Heritage are reported by Kentucky Investors as stock issuances. The
consideration received from such sales is recorded by Kentucky Investors as
follows: an adjustment to common stock at par value of securities sold, an
adjustment to retained earnings for the cost of securities sold in excess of par
value, and an adjustment to paid in surplus for the difference in consideration
received and cost of the securities paid by Investors Heritage.
Investors Heritage owns the home office real estate and leases the property to
its parent, Kentucky Investors and its subsidiaries. Lease payments made by
Kentucky Investors and its subsidiaries to Investors Heritage (and included in
its statement of income) during 1998, 1997 and 1996 were $13,298, $13,090 and
$13,395, respectively. The carrying value of the home office real estate at
December 31, 1998 and 1997 was $1,079,426 and $1,130,844, respectively. The
effects of the lease are eliminated in Kentucky Investors statement of income.
NOTE E - Federal Income Tax
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of December 31 are as
follows:
Investors Heritage 1998 1997
Deferred tax liabilities:
Policy acquisition costs $ 7,541,000 $ 7,393,000
Net unrealized gain on
available-for-sale securities 4,427,000 2,835,000
Other 453,000 348,000
______________ _____________
Total deferred tax
liabilities $ 12,421,000 $10,576,000
Deferred tax assets:
Benefit reserves $ 5,517,000 $ 6,116,000
Other 417,000 417,000
____________ ___________
Total deferred tax
assets $ 5,934,000 $ 6,533,000
____________ ____________
Net deferred tax liabilities of
Investors Heritage $ 6,487,000 $ 4,043,000
Kentucky Investors
Deferred tax liability:
Undistributed earnings
in subsidiary 1,635,000 1,531,000
____________ __________
Net deferred tax liabilities of
Kentucky Investors $ 8,122,000 $ 5,574,000
============ ============
Federal income taxes in the consolidated balance sheets include deferred taxes
and in 1998, taxes currently payable. In 1997, taxes recoverable of $91,000 is
included in other assets in the consolidated balance sheets.
The reconciliation of income tax attributable to operations computed at the
federal statutory tax rate to income tax expense is:
1998 1997 1996
Statutory federal income tax rate 35.0% 35.0 % 35.0 %
Graduated tax rate (1.0)% (1.0)% (1.0)%
Small life insurance company deduction (7.5)% (16.5)% (37.9)%
Dividend exclusion and tax-exempt income (.6)% (1.0)% (2.1)%
Increase (decrease) in valuation ._ ._ (16.2)%
Alternative minimum taxes 1.4% 2.8 % 2.0 %
Purchase accounting differences. .6% .8 % .5 %
Other, net .4% 1.2 % 16.8 %
______ ______ ______
Effective income tax rate_
Investors Heritage 28.3% 21.3 % (2.9)%
Consolidating adjustments 4.5% 5.5 % 7.6%
______ ______ ______
Effective income tax rate_
Kentucky Investors 32.8% 26.8 % 4.7%
===== ===== ====
At December 31, 1998 approximately $4,000,000 of the retained earnings of
Investors Heritage represents earnings prior to 1984 which accumulated in an
account known as policyholders' surplus, which was not subject to income
taxation. In certain circumstances, including if distributions are made to
stockholders in excess of approximately $27,000,000, Investors Heritage could be
subject to additional federal income tax unrelated to its normal taxable income.
No provision for such income tax has been made at December 31, 1998.
Kentucky Investors made income tax payments of $135,653, $131,757 and $65,693 in
1998, 1997 and 1996, respectively. Investors Heritage made income tax payments
of $151,000, $385,000 and $620,000 in 1998, 1997 and 1996, respectively.
NOTE F - Employee Benefit Plans
As of January 1, 1998 the Company adopted SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits", which revises prior
disclosure requirements. The following tables have been reclassified to conform
with SFAS No. 132.
Kentucky Investors and Investors Heritage participate in a noncontributory
retirement plan which covers substantially all employees. Benefits are based on
years of service and the highest consecutive 60 months average earnings within
the last 120 months of credited service. Benefits are funded based on
actuarially-determined amounts.
The following tables provide additional details for Kentucky Investors on a
consolidated basis. Because the amounts for the unconsolidated parent company
and Investors Heritage Printing, Inc. are immaterial, they are not separately
presented.
1998 1997 1996
Change in benefit obligation:
Benefit obligation at
beginning of year $5,662,063 $5,173,951 $ 4,575,352
Service cost 251,795 238,817 295,721
Interest cost 430,739 382,866 343,151
Actuarial (gain) loss 72,114 (71,167) (1,456)
Benefits paid (404,779) (62,404) (38,817)
__________ __________ ___________
Benefit obligation at
end of year $6,011,932 $5,662,063 $ 5,173,951
__________ __________ ___________
Change in plan assets:
Fair value of plan assets at
beginning of year $4,771,638 $4,057,709 $ 3,460,959
Actual return on plan
assets 468,683 474,553 335,567
Employer contribution 252,000 301,780 300,000
Benefits paid (404,779) (62,404) (38,817)
__________ __________ ___________
Fair value of plan assets at
end of year $5,087,542 $4,771,638 $ 4,057,709
__________ __________ ___________
Funded status $ (924,390) $ (890,425) $(1,116,242)
Unrecognized net actuarial
loss 1,065,329 1,115,533 1,133,852
Unrecognized transition
asset (102,430) (136,574) (170,717)
Unrecognized prior service
credit (196,573) (231,676) -0-
__________ __________ ___________
Accrued pension cost $ (158,064) $ (143,142) $ (153,107)
========== ========== ===========
Components of net periodic benefit cost:
Service cost $ 251,795 $ 238,817 $ 295,721
Interest cost 430,739 382,866 343,151
Expected return on plan
assets (468,683) (474,553) (335,567)
Recognized net loss 122,318 213,931 120,443
Amortization of prior service
cost (35,103) (35,103) -0-
Amortization of transition
asset (34,144) (34,143) (34,144)
__________ __________ ___________
Net periodic benefit
cost $ 266,922 $ 291,815 $ 389,604
=========== =========== ===========
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% for 1998 and 1997. The rate of increase
in future compensation levels was 5% for 1998, 1997 and 1996. The expected
long-term rate of return on plan assets was 9% in 1998, 1997 and 1996. Plan
assets represent a deposit administration fund of Investors Heritage.
Kentucky Investors and Investors Heritage also sponsor a 401(k) defined
contribution plan. Matching contributions to the plan expensed for 1998, 1997
and 1996 were $186,000, $171,000, and $156,000, respectively.
NOTE G - Stockholders' Equity and Dividend Restrictions
Statutory restrictions limit the amount of dividends which may be paid by
Investors Heritage. Generally, dividends during any year may not be paid,
without prior regulatory approval, in excess of the lessor of (a) 10 percent of
statutory stockholders' equity as of the preceding December 31, or (b) statutory
net income for the preceding year. In addition, dividends are limited to the
amount of unassigned surplus reported for statutory purposes, which was
$9,375,173 at December 31, 1998.
NOTE H - Statutory Accounting Practices
Investors Heritage's statutory-basis capital and surplus was $13,579,260 and
$13,700,023 at December 31, 1998 and 1997, respectively. Statutory-basis net
income was $1,297,550, $1,294,586, and $1,422,626 for the years ended December
31, 1998, 1997 and 1996, respectively.
Principle adjustments to statutory amounts to derive GAAP amounts include: a)
costs of acquiring new policies are deferred and amortized; b) benefit reserves
are calculated using more realistic investment, mortality and withdrawal
assumptions; c) deferred income taxes are provided; d) value of business
acquired and goodwill are established for acquired companies; and e) accounting
for certain investments in debt securities.
Investors Heritage is domiciled in the Commonwealth of Kentucky and prepares its
statutory-basis financial statements in accordance with accounting practices
prescribed or permitted by the Kentucky Department of Insurance (the
"Department"). Currently, "prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, as well as a
variety of publications of the National Association of Insurance Commissioners
("NAIC"). "Permitted" statutory accounting practices encompass all accounting
practices that are not prescribed; such practices may differ from state to
state, may differ from company to company within a state, and may change in the
future. In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that Investors Heritage uses to prepare its statutory-basis financial
statements. Codification will require adoption by the various states before it
becomes the prescribed statutory basis of accounting for insurance companies
domesticated within those states. Accordingly, before Codification becomes
effective for Investors Heritage, Kentucky must adopt Codification as the
prescribed basis of accounting on which domestic insurers must report their
statutory basis results to the Department. At this time it is anticipated that
Kentucky will adopt Codification. Management has not yet determined the impact
of Codification on Investors Heritage statutory basis financial statements.
During the Department's 1995 quadrennial examination of Investors Heritage,
previously permitted admitted assets were required to be written-down. In 1998,
the home-office real estate, representing the sole remaining asset not yet fully
written-down to the prescribed value, was amortized in accordance with the
Department's write-down schedule by $475,646. The remaining balance associated
with the home office real estate to be written-down during 1999 is $475,646.
These adjustments had no effect, other than requiring disclosure, on Kentucky
Investors or Investors Heritage's financial statements prepared in accordance
with generally accepted accounting principles.
NOTE I - Segment and Reinsurance Data
Prior to 1998 segment data has been presented on an "industry approach" in
accordance with SFAS No. 14. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", became effective for 1998 and superceded
SFAS No. 14. SFAS No. 131 requires a "management approach" (how management
internally evaluates the operating performance of its business units) in the
presentation of business segments. The segment data that follows has been
prepared in accordance with SFAS No. 131. Previously reported information has
been restated to comply with the new requirements.
Investors Heritage operates in four segments as shown in the following table.
All segments include both individual and group insurance. Identifiable
revenues, expenses and assets are assigned directly to the applicable segment.
Net investment income and invested assets are generally allocated to the
insurance and the corporate segments in proportion to policy liabilities and
stockholders' equity, respectively. Certain assets, such as property and
equipment and investments in affiliates, are assigned to the Corporate segment.
Goodwill has been allocated to the insurance lines based upon the mix of
business of companies acquired. Corporate segment results for the parent
company, Investors Heritage Printing, Inc., and Investors Heritage Financial
Services Group are immaterial, after elimination of intercompany amounts, and
are not presented.
1998 1997 1996
(000's omitted)
Revenue:
Preneed & Burial Products $ 41,319 $ 36,995 $ 33,213
Traditional & Universal Life
Products 14,146 13,950 13,454
Credit Insurance Products &
Administrative Services 307 152 (330)
Corporate & other 1,689 1,400 1,443
_________ _________ _________
$ 57,461 $ 52,497 $ 47,780
========= ========= =========
Pre-Tax Income from Operations:
Preneed & Burial Products $ 2,686 $ 2,524 $ 913
Traditional & Universal Life
Products 1,236 852 1,528
Credit Insurance Products &
Administrative Services (395) (666) (579)
Corporate & other 333 (7) (306)
_________ ________ _________
$ 3,860 $ 2,703 $ 1,556
========= ========= =========
Assets:
Preneed & Burial Products $ 139,993 $123,111 $104,708
Traditional & Universal Life
Products 75,168 72,586 69,600
Credit Insurance Products &
Administrative Services 21,987 15,385 9,724
Corporate & other 52,677 47,572 43,108
_________ ________ ________
$ 289,825 $258,654 $227,140
========= ======== ========
Amortization and Depreciation Expense:
Preneed & Burial Products $ 4,056 $ 4,361 $ 4,328
Traditional & Universal Life
Products 2,249 1,951 1,281
Credit Insurance Products &
Administrative Services 149 460 1,216
Corporate & other 425 523 393
_________ ________ _________
$ 6,879 $ 7,295 $ 7,218
========= ======== =========
Investors Heritage ceded 100% of the risks associated with its credit life and
accident insurance written during 1998, 1997 and 1996 through coinsurance
agreements with various companies. Investors Heritage administers the ceded
credit life and accident insurance for an agreed-upon fee. During 1998, 1997
and 1996, Investors Heritage received $612,081, $505,400 and $410,062,
respectively, of fee income associated with these reinsurance arrangements.
Ceded benefit and claim reserves associated with these reinsurance arrangements
at December 31, 1998 and 1997 were $17,310,827 and $11,460,482, respectively.
Additionally, Investors Heritage utilizes yearly renewable term reinsurance to
cede life insurance coverage in excess of its retention limit which has been set
at $100,000. Total premiums ceded amounted to $18,123,000, $14,468,000 and
$9,978,000 in 1998, 1997 and 1996, respectively and commissions and expense
allowances received were $10,900,000, $8,657,000 and $5,795,000 in 1998, 1997
and 1996, respectively. Unearned premium reserves were reduced by $19,859,000
and $13,785,000 at December 31, 1998 and 1997, respectively, for credit-related
reinsurance transactions. Benefit recoveries associated with Investors Heritage
ceded reinsurance contracts were $2,403,000, $1,956,000 and $1,421,000 in 1998,
1997 and 1996, respectively. Investors Heritage remains contingently liable on
all ceded insurance should any reinsurer be unable to meet their obligations.
Assumed reinsurance premiums were $2,787,000, $2,855,000 and $3,734,000 in 1998,
1997 and 1996, respectively.
NOTE J - Contingent Liabilities
Investors Heritage is named as a defendant in a number of legal actions arising
primarily from claims made under insurance policies. Management and its legal
counsel are of the opinion that the settlement of those actions will not have a
material adverse effect on Investors Heritage's financial position or results of
operations.
In most of the states in which Investors Heritage is licensed to do business,
guaranty fund assessments may be taken as a credit against premium taxes over a
five year period. These assessments, brought about by the insolvency of life
and health insurers, are levied at the discretion of the various state guaranty
fund associations to cover association obligations. There has been a
significant increase in recent years of guaranty fund assessments. There is no
reasonable way to determine if the assessments will increase or decrease in the
future, but management is of the opinion that the effect would not be material
on the financial position or results of operations of either Investors Heritage
or Kentucky Investors because of the use of premium tax off-sets.
<PAGE>
Stock Information
Stock Prices
OTC Bulletin Board MARKET QUOTATIONS
Investors Heritage Life Insurance Company
1998 MARKET PRICE RANGE
March June Sept. Dec.
26 - 26 1/2 26 1/2 - 28 26 - 28 25 - 26 1/2
1998 Annual Dividend Per Share - $.76
1997 MARKET PRICE RANGE
March June Sept. Dec.
26 - 28 26 - 29 26 - 29 26 1/2 - 29
1997 Annual Dividend Per Share - $.76
Kentucky Investors
1998 MARKET PRICE RANGE
March June Sept. Dec.
16 - 16-3/4 17 - 20 20 - 20-1/2 18 - 20
1998 Annual Dividend Per Share - $.38
1997 MARKET PRICE RANGE
March June Sept. Dec.
13 1/2 - 14 1/4 13 3/4 - 14 5/8 14 3/4 - 15 3/4 16 - 16 1/2
1997 Annual Dividend Per Share - $.38
The stock of both companies is quoted on the OTC Bulletin Board. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission,
and may not represent actual transactions. The symbol for Investors Heritage
Life is INLF and the symbol for Kentucky Investors is KINV.
The 1999 cash dividend to be paid to its stockholders by Investors Heritage Life
on April 9, 1999 is $.76 per share, and the cash dividend to be paid on the same
date to its shareholders by Kentucky Investors is $.38 per share.
ANNUAL MEETING
The 1999 meeting of shareholders of Investors Heritage Life Insurance Company is
scheduled for 10 a.m. on Thursday, May 13, 1999, at the company auditorium,
Second and Shelby Streets, Frankfort, Kentucky. The annual meeting of
shareholders of Kentucky Investors, Inc., is scheduled for the same date and
location at 11 a.m.
FORM 10-K
A copy of the Form 10-K Annual Report to the Securities and Exchange Commission
for either Company can be obtained upon request to the Secretary of that
company.
TRANSFER AGENT
Investors Heritage Life Insurance Company
Stock Transfer Department
P.O. Box 717
Frankfort, Kentucky 40602
(502) 223-2364 - EXT. 305
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 1998
Commission File Number 0-1999
KENTUCKY INVESTORS, INC.
(Exact name of registrant as specified in Charter)
KENTUCKY 61-6030333
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
200 Capital Avenue, Frankfort, Kentucky 40601
(Address of Principal Executive Offices)
Registrant's telephone number, including area code 502 223-2361
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common $1 Par Value
Name of Each Exchange on Which Registered
NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Common Capital Stock Par Value $1.00 Per Share
(Title of Class)
Indicate by check mark whether the registrant (l) 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form 10-K
or any amendment to this Form 10-K. (X)
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant $8,815,780 as of December 31, 1998.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class
Common Capital Stock
Outstanding at December 31, 1998
848,116
Documents Incorporated by Reference:
(1) Portions of the Annual Report to the Stockholders for the year ended
December 31, 1998 (Form 10-K, Items 1, 5a, 6, 7 and 8)
(2) Portions of the Proxy Statement dated April 16, 1999, for the Annual
Meeting of Stockholders to be held May 13, 1999 (Form 10-K, Items 10, 11, 12 and
13.)
<PAGE>
PART I
Item 1. Business
(a) General
(a) The business of Kentucky Investors, Inc. (the "Company") is the
holder of the majority interest in a life insurance company, and total interest
in a printing company and an insurance marketing company which was formed in
1994. The home office of the Company, the insurance subsidiary, the printing
subsidiary and the marketing subsidiary are located at 200 Capital Avenue,
Frankfort, Kentucky 40601. The telephone number is (502) 223-2361. Kentucky
Investors, Inc., now owns 74% of Investors Heritage Life Insurance Company,
Frankfort, Kentucky ("IHL" or the "Insurance Subsidiary") and 100% of Investors
Heritage Printing, Inc. ("IHP") and Investors Heritage Financial Services Group,
Inc. ("FSG"). IHP and FSG are collectively hereinafter referred to as the "Non-
insurance Subsidiaries". IHL, IHP and FSG are collectively hereinafter referred
to as the "Subsidiaries". IHL owns 96% of Investors Underwriters, Inc., an
investment holding company. While the Company continues to expand the Non-
insurance Subsidiaries, less than 1% of the Company's total operations were
generated by the Non-insurance Subsidiaries for the year ended December 31,
1998. The Non-insurance Subsidiaries' total assets and stockholder equity
comprised less than 1% in the aggregate of the Company's reported total assets
and stockholder equity as of December 31, 1998.
During 1994 the Company formed FSG, a wholly-owned marketing company
which marketed and will continue to market a variety of products to financial
institutions for a number of other unaffiliated companies as well as IHL. As
anticipated more than 10% of FSG's revenues during 1998 were derived from the
sale of IHL's Credit Insurance products.
IHL
The business segments of the Insurance Subsidiary are identified
and discussed on pages 45 - 47 of the Annual Report to Stockholders for the year
ended December 31, 1998 and are incorporated herein by reference. A portfolio of
the standard forms of participating, non-participating, whole life, limited pay,
endowments, split-funding, interest-sensitive whole life, guaranteed issue whole
life, universal life, term and group life are offered by IHL. In addition, IHL
writes credit life and credit accident and health insurance (respectively,
"Credit Life" and "Credit A&H", and collectively "Credit Insurance") on a group
basis.
Ordinary Life. Ordinary Life sales are under the direct
supervision of the home office using a regionally supervised agency system. The
method of field operation involves independent contractual agents working with
district and regional managers. These managers contract with and train agents
who work under them. The regional managers may have several district managers
under their supervision. As a result of IHL's growth in the preneed area,
agency relationships have been entered into directly with the funeral home
owner. Management anticipates this trend to continue and, depending on the size
of the funeral home and state law, preneed counselors will also become part of
the agency force. IHL also sells business through general agents or brokers who
may represent one or more companies.
Approximately 37% of total insurance in force is Ordinary life.
As stated above, the Ordinary Life sales are built around a standard
portfolio of life insurance policies with some of the contributions to in-force
business being a participating ordinary life insurance policy, a guaranteed
issue whole life policy and non-participating life policies.
Some of the participating policies provide for payment of guaranteed
annual endowments of fixed amounts beginning at the end of the second policy
year and continuing through the premium paying period. These policies also have
an annual guaranteed benefit. As of December 31, 1998, 7% of the total
ordinary insurance in force was comprised of participating policies and of the
7%, approximately 6% was comprised of participating policies with some
guaranteed benefit.
Another block of participating policies provides for payment of a dividend
which will purchase additional insurance equal to 5% of the previous year's
total death benefit, including any additional insurance purchased in prior
years. The dividend is not guaranteed. As of December 31, 1998, 1% of the
total ordinary insurance in force was comprised of participating policies with
non-guaranteed benefits.
Non-participating life insurance policies represented 93% of the total
ordinary insurance in force.
IHL also issues two non-participating interest-sensitive single
premium whole life policies based on simplified underwriting. These policies
provide for payment of the full face amount at the death of the insured and for
increasing death benefits on a non-guaranteed basis.
During 1994, IHL introduced new products designed for the prearranged
funeral market. These products are single premium and modal premium non-
participating whole life policies. Single premium policies are sold on a
guaranteed issue basis and modal premium policies are fully underwritten. Both
single and modal premium policies provide for non- guaranteed increasing death
benefits and have a maximum face amount of $25,000. IHL also introduced a new
mortgage protection product which is being marketed by FSG.
During 1997 IHL introduced group life products designed for the
prearranged funeral market. Some of these products provide for the payment of
the full face amount at the death of the insured and some provide graded death
benefits during the first year. All of the products provide for increasing
death benefits on a non-guaranteed basis.
During 1998 IHL introduced a new generation of both individual and group
life products designed for the prearranged funeral market. These products
differ from the 1997 products by offering simplified underwriting for the multi-
pay policies and shorter reduced benefit policies. These new products, called
the "Legacy 2000 Series" were implemented throughout the last two quarters of
1998 and have been well received in the market.
Credit Insurance. Credit Insurance is generally sold through banks,
finance companies and automobile dealerships and is offered in connection with
the extension of credit by financial institutions. The amount of the insurance
is designed to cover the amount of the loan with the financial institution being
the beneficiary of the insurance policy to the extent of the unpaid balance of
the loan. Credit Insurance production is dependent on consumer debt. In times
of low unemployment, reasonable interest rates and a steadily improving economy,
consumer debt increases; therefore, Credit Insurance sales increase. When the
economy slows, consumer debt slows and therefore Credit Insurance sales
decrease.
Initially, FSG entered into a marketing agreement with Franklin Life
Insurance Company ("Franklin")to market Franklin's Credit Insurance products
during 1995. However, during the fourth quarter of 1995, IHL and FSG were
advised that Franklin was exiting the Commonwealth of Kentucky as a direct
writer of Credit Insurance products.
FSG initiated discussions with unaffiliated companies regarding a
transaction where the Credit Insurance business would be written by IHL and all
of the risk insured would be immediately reinsured to the unaffiliated company.
In December, 1995, IHL entered into a reinsurance agreement with The Connecticut
General Life Insurance Company, Bloomfield, Connecticut ("Connecticut General")
under the terms of which IHL cedes to Connecticut General 100% of the risk on
all Credit Insurance policies sold by IHL. In addition to receiving a retention
fee, IHL also receives a fee for administration and claims processing services.
In addition, FSG would be able to generate revenues in the form of commissions
from the sale of IHL's Credit Insurance products.
It has not been necessary for IHL to add any employees to assist in the
administration of this business. No additional amounts were expended in order
to put IHL's administrative and claims processing capabilities to use.
Employees will be added only when warranted.
It was and continues to be management's belief that the number of Credit
Insurance providers in the Commonwealth of Kentucky is contracting as a result
of two Kentucky domestic insurers exiting the Credit Insurance market.
Management believed there would be opportunities to administer Credit Insurance
business in Kentucky for non-domestic insurers that are expected to replace
exiting insurers. This belief has come to fruition in an alternate way through
the reinsurance agreement with Connecticut General. In addition, IHL has
recently entered into a reinsurance agreement with two unaffiliated companies,
Life Investors Insurance Company of America ("Life Investors"), Bankers Life
Insurance Company ("Bankers Life") and American United Life Insurance Company
("AUL"). The AUL agreement was entered into during 1998. Pursuant to those
agreements, the Company's Credit Insurance products sold by Life Investors',
Bankers Life's and AUL's agents will be reinsured to Life Investors, Bankers
Life and AUL, respectively. IHL and FSG will be paid a retention fee and a
marketing fee for services provided. IHL has continued to seek contracts to
operate as an administrator for other companies which sell Credit Insurance.
FSG will continue to call on banks, finance companies and selected
automobile dealerships to market the Credit Insurance products for IHL. As
anticipated that more than 10% of FSG's revenues for 1998 were derived from the
sale of IHL's Credit Insurance products. IHL anticipates 1999 Credit Insurance
gross written premiums to exceed $2 million. During the 3rd Quarter 1998, IHL
was advised that Connecticut General was exiting the market as a reinsurer of
Credit Insurance products. Therefore, during the 4th Quarter 198, IHL and FSG
negotiated new reinsurance agreements with Munich American Reassurance Company,
Atlanta, Georgia ("Munich") and Reliastar Life Insurance Company, Minneapolis,
Minnesota ("Reliaster") whereby effective January 1, 1998 IHL will reinsurance
50% of the risk on all Credit Insurance policies to each reinsurer. As described
above, that business was and will continue to be ceded to Connecticut General.
Approximately 9% of the total life insurance in force is Credit Insurance, all
of which was written directly by IHL.
In addition to selling Credit Insurance, some IHL bank agents obtain an
ordinary life license enabling them to sell mortgage insurance that might be
required in excess of the statutory credit life limitation enacted by each state
where our Credit Insurance products are sold. The mortgage insurance sales
operations will continue to be conducted through FSG.
Group Life. Group life accounts for the remaining 44% of in-force
business. Since 1990, IHL has participated in the Federal Employee Group
Life Insurance (FEGLI) Program, which is administered by Metropolitan Life
Insurance Company. As a result of the termination of the Commonwealth of
Kentucky group life contract, on November 30, 1992, IHL's participation in the
FEGLI Program has substantially decreased since 1993 and 1994. The reduction of
in-force business since 1993 has been $222,377,000.
During 1997, IHL converted to group insurance products in the preneed
market in a majority of states. The Legacy 2000 Series introduced during 1998
is also a group product in many states. Therefore, group life premiums and in-
force business increased significantly while individual premiums and in-force
business decreased commensurately. Group life premiums during 1997 were
$7,324,000 as compared to $3,881,000 in 1996 which is an increase of 89%.
Principal Markets. The principal markets for IHL's products are in
the Commonwealths of Kentucky and Virginia, and the States of North Carolina,
South Carolina, Georgia, Ohio, Indiana, Florida, Tennessee, Illinois, Kansas,
West Virginia and Texas. IHL has licensed ordinary agents and regional managers
throughout these states and credit life agents in over 278 banks and automobile
dealerships.
IHL is also licensed in sixteen other states: Alabama, Arkansas,
Mississippi, and Louisiana in the South and Southeast; Colorado, Missouri, New
Mexico, North Dakota, South Dakota, Oklahoma, Montana, Nebraska, Arizona and
Utah in the West; and Michigan in the North. The business in these states is
written mostly through general agents. During 1999 IHL anticipates expanding
its preneed operation into several of these states.
Risk. In many cases IHL requires evidence of insurability before
issuing individual life policies including, in some cases, a medical examination
or a statement by an attending physician. Home office underwriters review the
evidence of insurability required and approve the issuance of the policy in
accordance with the application if the risk is acceptable. Some applicants who
are substandard risks are rejected, but many are offered policies with higher
premiums, restricted coverages or reduced benefits during the first two policy
years. The majority of the single premium business is written through the
prearranged funeral market without evidence of insurability, relying on
safeguards such as product design, limits on the amount of coverage, and
premiums which recognize the resultant higher level of claims.
Risk is integral to insurance but, as is customary in the insurance
business, IHL obtains reinsurance with respect to amounts in excess of its
retention limits. The maximum limit of retention by IHL on its standard
contract for any one life is $100,000 plus the amount of the return of premium
benefits, if any. The maximum is reduced for sub-standard classes of risk.
The maximum retention on Credit Life is also $100,000 per life. Excess
coverages are reinsured externally to unaffiliated reinsurers. As of December
31, 1998, approximately $660,887,00, or 24% of total life insurance in force was
reinsured with non-affiliated well established insurance companies. IHL would
become liable for the reinsured risks if the reinsurers could not meet their
obligations. IHL has not experienced a reinsurer default under any of the
reinsurance agreements to which IHL is a party. Further, IHL has no knowledge
of and does not anticipate any material default in any existing reinsurance
obligation.
IHL is party to reinsurance and coinsurance agreements with seventeen non-
affiliated companies. The reinsurers for IHL and amounts of insurance in
force that are reinsured are as follows:
Company Reinsurance Amount Percent of Total
Connecticut General Life
Insurance Co. $409,884,000 62.14%
Crown Life Insurance Co. 1,579,000 .2%
The Lincoln National Life
Insurance Co. 83,977,000 12.7%
J.M. Limited 1,286,000 .2%
Bankers Life Insurance Co. 107,270,000 16.2%
AEtna Life Insurance Co. 284,000 .04%
Indiana-Kentucky Ins. Co. Ltd. 228,000 .03%
Riverside Reinsurance Ltd. 634,000 .01%
Lancaster Life Insurance Co. 3,961,000 .6%
Business Men's Assurance Co. 5,456,000 .8%
Swiss Re America 1,100,000 .2%
Munich American Reinsurance Co. 41,372,000 6.3%
Life Investors Ins. Co.
of America 3,177,000 .48%
Other Companies (3) 679,000 .1%
TOTAL $660,887,000 100.0%
During 1998, IHL reinsured all of the risk on the Credit Insurance policies sold
by its agents to Connecticut General; however, the reinsurance agreement was
terminated effective December 31, 1998 with respect to new issues. Connecticut
General will not accept the risk on any new policies issued after December 31,
1998; however, Connecticut General will continue to provide reinsurance on all
Credit Insurance policies sold between January 1, 1996 and December 31, 1998.
During 1999, IHL will reinsure all of the risk on the Credit Insurance products
sold by its agents to Munich and Reliastar. As explained above, some of these
risks will also be reinsured to Life Investors, Bankers Life and AUL.
Regulation of Insurance. The business of IHL is subject to regulation
and supervision by the insurance regulatory authority of each state in which IHL
is licensed to do business. Such regulators grant licenses to transact
business; regulate trade practices; approve policy forms; license agents;
approve certain premium rates; establish minimum reserve and loss ratio
requirements; review form and content of required financial statements;
prescribe types and amounts of investments permitted; and assure that capital,
surplus and solvency requirements are met. Insurance companies can also be
required under the solvency or guaranty laws of most states in which they do
business to pay assessments up to prescribed limits to fund policyholder losses
or liabilities of insolvent insurance companies. They are also required to file
detailed annual reports with supervisory agencies, and records of their business
are subject to examination at any time. Under the rules of the National
Association of Insurance Commissioners (the "NAIC"), a self-regulatory
organization of state insurance commissioners, insurance companies are examined
periodically by one or more of the regulatory authorities.
Domiciled in the Commonwealth of Kentucky, IHL is licensed by the Kentucky
Department of Insurance and is subject to its examination and regulations. The
quadrennial audit was completed during 1998 for the three years ending December
31, 1998. Other than three minor accounting entries regarding reporting of EDP
equipment, general expenses and receivables, the Examination Report contains no
recommendaitons and no adjustments were made to the statutory financial
statements.
In December of 1992, the NAIC adopted a "Risk Based Capital for Life
and/or Health Insurers Model Act" (the "Model Act") which was designed to
identify inadequately capitalized life and health insurers. The Model Act
defines two key measures: (i) adjusted capital, which equals an insurer's
statutory capital and surplus plus its asset valuation reserve, plus one-half
its liability for policyholder dividends ("Adjusted Capital") and (ii)
authorized control level risk based capital ("RBC"). RBC is determined by a
complex formula which is intended to take into account the various risks assumed
by an insurer. Should an insurer's Adjusted Capital fall below certain
prescribed levels (defined in terms of its RBC), the Model Act provides for the
following four different levels of regulatory attention:
"Company Action Level:" This level of review is triggered if an insurer's
Adjusted Capital is less than 200 percent of its RBC. The insurer is required to
submit a plan to the appropriate regulatory authority that discusses proposed
corrective action. IHL's Adjusted Capital is more than 2.9 times the required
amount.
"Regulatory Action Level": This level of review is triggered if an
insurer's Adjusted Capital is less than 150% of its RBC. The regulatory
authority formally requires the insurer to submit an RBC plan, and performs a
special examination of the insurer and issues an order specifying corrective
actions. IHL's Adjusted Capital is more than 3.9 times the required amount.
"Authorized Control Level": This level of review is triggered if an
insurer's Adjusted Capital is less than 100% of its RBC. The regulatory
authority is authorized to take whatever action it deems necessary. IHL's
Adjusted Capital is more than 5.8 times the required amount.
"Mandatory Control Level": This level of review is triggered if an
insurer's Adjusted Capital falls below 70% of its RBC. The regulatory authority
is required to place the insurer under its control. IHL's Adjusted Capital is
more than 8.4 times the amount required.
Since the Adjusted Capital levels of IHL currently exceed all of the
regulatory action levels as defined by the NAIC's Model Act, the Model Act
currently has no impact on the Company's operations or financial condition.
Competition. The life insurance business is highly competitive. With the
introduction of universal life and other interest sensitive products in recent
years, competition with other financial institutions has increased. The
industry includes both stock and mutual companies, including some of the largest
financial institutions in the United States. While IHL is responsive to the
current economic environment, the life insurance market is relatively volatile,
and IHL's operating results may vary with those conditions.
IHL differentiates itself through its marketing techniques, product
features, customer service and reputation. IHL maintains its competitive
position by its focus on areas which have historically proven profitable. Those
areas include single premium pre-need products, modal premium final expense
products, traditional whole life products, mortgage protection products and
level term products. IHL's competitive position is maintained by its ability to
provide quality customer service throughout the distribution system. Other
competitive strengths include IHL's asset/liability management system, a quality
investment portfolio which provides liquidity and IHL's non-leveraged financial
position.
The business of IHL is not seasonal.
Dividend income from the Insurance Subsidiary for 1998 amounted to
approximately $503,988.
Other Subsidiaries. IHP does job printing for IHL as well as numerous
unaffiliated sources. This includes the printing of the application forms and
other office forms required by IHL.
While the income from IHP is not a significant factor in the Company's
overall business, a number of significant changes were made during 1994 and the
Company experienced continued growth and improved profitability during the last
three years. However, revenues from IHP continued to be less than one percent
of the Company's total revenue for 1998.
As anticipated the formation and operation of FSG generated additional
revenue to the Company. Although this additional revenue is not a significant
factor in the Company's overall business, FSG experienced growth in its second
year of operations with revenues of $282,000 in 1996 compared to $171,000 in
1995. The growth pattern continued during 1997 with revenues of $370,000 as
compared to $282,000 in 1996. Even considering this growth, revenues from FSG
will continue to account for less than one percent of the Company's total
revenue for 1997. See Schedule II.
Additionally, the Company earns fees for other services performed for the
Insurance Subsidiary. The fees are paid by the Insurance Subsidiary for the
necessary supervision and coordination required to provide a common policy for
all the companies. The supervision results in a coordination of contracts with
the various independent agents, common sales brochures, and a savings to each
company in the area of printing and purchasing. The Company purchases blanket
fidelity bonds to include employees of all subsidiary companies at a savings
when compared to purchases made by individual companies. The group life,
hospitalization, and the retirement programs for the various companies are also
administered by the Company. These fees are not significant to the Company's
total revenue. The Company also has revenue from other investments, but it is
not a significant factor in its business.
(b) Material Changes and Developments
There were no material changes in the Company's holdings during the year
1998. While changes in the life insurance business can be dramatic, new product
development and innovative sales methods must be ongoing to meet the current
economic times. IHL, however, believes that growth from increased sales is
directly related to the constant attention paid to revising and selling the
products developed by IHL.
Ordinary Production. IHL is working diligently to increase ordinary
product sales. The largest increase in this area has been the final expense and
prearranged funeral sales. Final expense sales include the sale of lower face
amount ordinary life insurance products, the purpose of which is to pay the
insured's final expenses. Prearranged funeral sales includes the sale of modal
premium and single premium ordinary life policies which are sold to fund a
specific prearranged funeral contract.
Since 1993 IHL has continued to expand its marketing capability in this
area. As a result, IHL steadily increased sales of preneed products. During
1997 IHL continued to increase its marketing operations and to expand into new
states, including but not limited to, Tennessee, Indiana, Illinois, Kansas,
South Carolina and Georgia and experienced growth in premium production of
approximately 27% in the prearranged funeral market during 1997 over 1996,
$21,104,000 compared to $16,681,000.
During 1998, the Company focused on increasing its market share in
existing states and expanding into some new areas, including Arkansas. Even
though single premium growth was anticipated to be 12-15%, when combining
ordinary life, group life and individual annuities, actual growth was 11%.
Single premium production for these lines of business was $23,413,000 for 1998
compared to $21,102,00 for 1997 and IHL anticipates continued growth in this
segment of approximately 12-15% during 1999.
Credit Insurance. IHL has marketed and sold Credit Insurance since
1966. Realizing the significant contribution of our financial marketing group,
which was successful in increasing IHL's Credit Insurance production to record
levels during the late 1980's and early 1990's, and realizing the significant
relationship our employees have developed with the financial institutions in the
Commonwealth of Kentucky, the Company formed FSG. During 1995, FSG marketed
Franklin Life Insurance Company's ("Franklin") Credit Insurance products.
In December 1995, Franklin exited the market and IHL entered into a
reinsurance agreement with Connecticut General under the terms of which all of
the risk on all Credit Insurance policies sold by IHL would be reinsured with
Connecticut General.
Since 1996 FSG has marketed IHL's Credit Insurance products and will
continue to do so in 1999. However, during 1999 all of the risk on all Credit
Insurance policies sold by IHL will be reinsured with Munich and Reliastar. In
addition, FSG is responsible for marketing products for unaffiliated companies
to financial institutions including Individual Disability (Illinois Mutual Life
and Casualty Company), Involuntary Unemployment Insurance (Vesta Fire Insurance
Corp.), and GAP, which covers the excess of the loan amount over the value of
the collateral if the collateral is a total loss (General Electric Capital
Assurance Company). IHL was not a direct writer of any of these products
during 1998.
FSG also marketed IHL's mortgage protection products, and IHL anticipated
growth of approximately 20% in this segment of its business due to the marketing
efforts of FSG. IHL's management anticipates steady growth in this segment
during 1999 due to FSG's efforts.
Actual growth in 1998 was approximately 25.5%. Premium production in this
area increased $535,663, from $2,076,752 in 1997 to $2,612,415 in 1998.
Management anticipates an increase of approximately 20% during 1999.
Employees. The Company does not have any employees. The Company's
officers perform various functions described in item 9(a) above; however, they
are not paid a salary by the Company for performing such functions. The number
of persons employed by IHL is 107. The number of active independent contractual
agents of IHL is 2,188. Management of IHL considers its relationship with the
employees and agents to be satisfactory.
Item 2. Properties
The Company owns no real estate, but the Company and the printing company
rent office space from IHL. The total rental fee is $883 per month. The
printing equipment and machines in the print shop, owned by the printing
subsidiary have a net book value of $38,501.
Item 3. Legal Proceedings
There are no legal proceedings to which the Registrant is a party.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Matters
(a) The information relative to the market value of the Company's stock
appears on the inside back cover in the Annual Report to the Stockholders for
the year ended December 31, 1998, and is incorporated herein by reference.
(b) Approximate Number of Equity Security Holders
(A) (B)
Number of
Holders
Title of Class of Record 12-31-98
Common Stock 2,370
(c) Dividends
Kentucky Investors, Inc., paid dividends totaling $440,800 to stockholders
in 1998 representing a $.38 per share. The 1999 cash dividend to be paid April
9, 1999, to stockholders of record March 26, 1999 is $.38 per share.
Item 6. Selected Financial Data
Selected financial data for the past five years appears on page 28 in the
Annual Report to the Stockholders for the year ended December 31, 1998, and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of financial condition and results of
operations appears on pages 10 - 21in the Annual Report to the Stockholders for
the year ended December 31, 1998, and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and notes appear on pages 24 - 27 and 34 - 47 in
the Annual Report to Stockholders for the year ended December 31, 1998 and are
incorporated herein by reference. See Part IV, Item 14.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) The Executive officers and directors of the Company are:
Name, Position & Year Family
Became Officer/Director Age Relationship
Harry Lee Waterfield II 55
Chairman of the Board,
President/1963
Jimmy R. McIver 47
Treasurer/1988
Nancy W. Walton 59 Sister of
First Vice Harry Lee
President/1988 Waterfield II
Robert M. Hardy, Jr. 41 Nephew of
Director, Vice President Harry Lee
and General Waterfield II
Counsel/ 1988
Howard L. Graham 64
Vice President
Corporate Services
1989
Wilma Yeary 67
Secretary/ 1989
Jane S. Jackson 44
Asst. Secretary
1989
Helen S. Wagner 62
Director/ 1986
Gordon Duke 53
Director/ 1991
H. Glenn Doran 73
Director/ 1963
Jerry F. Howell 85
Director/ 1963
Jerry F. Howell, Jr. 57 Son of Jerry
Director/ 1983 F. Howell
David W. Reed 45
Director/ 1982
(b) Each of the Directors has occupied the position indicated for a
period of more than five years. Information regarding the business experience
of the Directors who are not officers of the Company is shown on pages 2 and 3
of the Proxy Statement of the Annual Meeting of Shareholders to be held on May
13, 1999, and is incorporated herein by reference.
There have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the evaluation of the
ability and integrity of any Director or Executive Officer during the past five
years.
Officers are appointed annually by the Board of Directors at the Board
meeting immediately following the Annual Meeting of Shareholders. There are no
arrangements or any understandings between any officer and any other person
pursuant to which the office was selected.
Item 11. Executive Compensation and Transactions
Information regarding compensation of executive officers and transactions
with executive officers and directors is not restated in this Annual Report
because the response to this item is shown on page 4 of the Proxy Statement for
the Annual Meeting of Shareholders to be held May 13, 1999 and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership by Officers, Directors, and management, is not restated
in this Form 10-K because the response to this item is shown on pages 3 and 4 of
the Proxy Statement for the Annual Meeting of Stockholders to be held May 13,
1999, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Certain relationships and related transactions are shown on page 5 of the
Proxy Statement for the Annual Meeting of Stockholders to be held May 13, 1999,
under the heading "Certain Relationships and Related Transactions" and are
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1. Financial Statements incorporated herein by reference in Item 8 to
the Company's Annual Report to Stockholders for the year ended December 31, 1998
(pages 24 - 28 and 30 - 33) filed as Exhibit 1:
Consolidated Balance Sheets -- December 31, 1998 and 1997
For each of the three years in the period ended December 31, 1998:
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)2. Consolidated Financial Statement Schedules
Schedule II -- Condensed Financial Information of Registrant
The financial statements and schedules of Investors Heritage Life
Insurance Company, as incorporated by reference in its Annual Report on Form 10-
K filed with the Securities & Exchange Commission for the year ended December
31, 1998, are incorporated herein by reference.
All other schedules have been omitted as not applicable, not required, or
the required information has been included in the financial statements, notes
thereto, or are incorporated herein by reference to the Annual Report on Form
10-K of Investors Heritage Life Insurance Company for the year ended December
31, 1998.
(a)3. Listing of Exhibits
Exhibit 1 - Annual Report to the Stockholders for the year ended December
31, 1998.*
Exhibit 3.1-- Articles of Incorporation of the Company, as amended.
Exhibit 3.2-- By-Laws of the Company, as amended. (Incorporated by
reference as Exhibit 3.2 of the Company's Annual Report on Form 10-K/A-1 for the
year ended December 31, 1994.)
Exhibit 11-- Statements re Computation of Per Share Earnings.**
Exhibit 23 - Consent of Independent Auditors.
Exhibit 27 _ Financial Data Schedule.
*The material included in this Report shall not be deemed to be "filed"
with the Commission or otherwise subject to the liabilities of Section 18 of the
Act, except to the extent that this registrant specifically incorporates it in
its Annual Report on this Form 10-K by reference.
**Exhibit 11 is not restated in this Form 10-K because the information
required is contained in Note A to the Consolidated Financial Statements,
"Common Stock and Earnings per Share", on page 37 of the Annual Report to the
Stockholders for the year ended December 31, 1998, and is incorporated herein by
reference.
(b) Reports on Form 8-K
No filing of Form 8-K was made in 1998.
(c) See Item 14(a)(3) above.
(d) Financial Statement Schedules - The response to this portion of Item
14 is submitted as a separate section of this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.
KENTUCKY INVESTORS, INC.
March 24, 1999 /s/
DATE BY: Harry Lee Waterfield II
ITS: Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report is signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/
Harry Lee Waterfield II
Chairman of the Board
and President
March 24, 1999
/s/
Robert M. Hardy, Jr.
Vice President and
General Counsel and Director
March 24, 1999
/s/
Jimmy R. McIver
Treasurer
March 24, 1999
/s/
Howard L. Graham
Vice-President
Corporate Services
March 24, 1999
/s/
Jerry F. Howell
Director
March 24, 1999
/s/
Gordon Duke
Director
March 24, 1999
Helen S. Wagner
Director
H. Glenn Doran
Director
David W. Reed
Director
/s/
Jerry F. Howell, Jr.
Director
March 24, 1999
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Kentucky Investors, Inc.
We have audited the consolidated financial statements of Kentucky
Investors, Inc. and subsidiaries listed in the accompanying Index to financial
statements (Item 14(a)). Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Kentucky Investors, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1999
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 NO. 33-46722-01) pertaining to the Kentucky Investors, Inc. and
Affiliated Companies 401(k) Savings Plan and Trust Agreement and in the related
prospectus of our report dated March 24, 1999, with respect to the consolidated
financial statements and schedule of Kentucky Investors, Inc. and subsidiaries
included in the Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1999
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
KENTUCKY INVESTORS, INC.
CONDENSED BALANCE SHEET
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, 1996
1998 1997 1996
------ ------ ------
Assets
Cash and Cash
Equivalents $ 52,484 $ 36,866 $ 36,943
Investment in
Subsidiary 34,106,966 29,878,589 26,071,120
Other Assets 180,487 291,583 221,215
----------- ---------- ----------
$34,339,937 $30,207,038 $26,329,278
=========== =========== ===========
Liabilities:
Notes Payable
to Subsidiary $ 431,035 $ 538,794 $ 646,554
Other
Liabilities 48,753 50,398 65,600
Deferred Taxes 1,635,414 1,531,026 1,459,351
Stockholders'
Equity
Common Stock 848,116 836,895 820,475
Paid in Capital 3,442,248 3,384,061 3,374,615
Unrealized
Appreciation
(depreciation)
of available-
for-sale
securities of
Subsidiary 6,392,746 4,043,101 1,510,225
Retained
Earnings 21,541,625 19,822,763 18,452,458
------------ ---------- -----------
Total Stock-
holders'
Equity $32,224,735 $28,086,820 $24,157,773
----------- ---------- ----------
$34,339,937 $30,207,038 $26,329,278
=========== =========== ===========
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
KENTUCKY INVESTORS, INC.
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, 1996
1998 1997 1996
------ ------ ------
Income
From printing
services to:
Affiliated
companies $ 302,051 $ 361,013 $ 369,143
Others 140,797 116,328 143,295
Realized Gain/Loss
on Investments 3,700 64
Other services
to subsidiary 203,146 190,478 158,285
Dividends from
subsidiary 505,679 505,636 505,635
Interest and
other income 301,712 228,880 165,687
------------ ---------- --------
$1,457,085 $1,402,399 $1,342,045
Operating
Expenses 628,637 649,917 655,308
------------ ---------- ----------
Operating
income before
equity in
undistributed
earnings of
subsidiary $ 828,448 $ 752,482 $ 686,737
Equity in
undistributed
earnings of
subsidiary for
the year $1,395,689 $ 960,070 $ 581,882
---------- --------- ---------
Income before
provision for
income taxes $2,224,137 $1,712,552 $1,268,619
---------- --------- ----------
Provision for
Income Taxes
Current $ 144,000 $ 118,000 $ 76,000
Deferred 105,000 72,000 46,000
----------- ---------- ---------
$ 249,000 $ 190,000 $ 122,000
----------- ----------- ----------
Income before
cumulative
effect of
accounting
change $1,975,137 $1,522,552 $1,146,619
Cumulative
effect of
accounting
change $ -0- $ -0- $ -0-
----------- ---------- ---------
Income $1,975,137 $1,522,552 $1,146,619
========== ========== ==========
Earnings Per
Share $ 2.34 $ 1.84 $ 1.41
========== ========== ==========
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
KENTUCKY INVESTORS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, 1996
1998 1997 1996
----- ------ ------
NET CASH
PROVIDED
BY OPERATING
ACTIVITIES $ 592,177 $ 548,483 $ 538,549
----------- ----------- -----------
FINANCING
ACTIVITIES
Decrease in
Notes
Payable $ (107,759) $(107,760)$ (101,200)
Dividends (440,800) (440,800) (440,800)
Acquisition of Treasury Stock (28,000)
------------ ----------- ----------
CASH USED BY
FINANCING
ACTIVITIES $ (576,559) $(548,560) $(542,000)
----------- ----------- ------------
INCREASE
(DECREASE)
IN CASH $ 15,618 $ (77) $ (3,451)
Cash and Cash
Equivalents
at beginning
of year $ 36,866 $ 36,943 $ 40,394
----------- ------------ ----------
CASH AND CASH
EQUIVALENTS
AT END OF
YEAR $ 52,484 $ 36,866 $ 36,943
============ ============ ==========
<PAGE>
1998 ANNUAL REVIEW
INVESTORS HERITAGE
LIFE INSURANCE COMPANY
KENTUCKY INVESTORS, INC.
TABLE OF CONTENTS
Frankfort's Historical Sites 2
Mission and Strategy Statement 4
Letter to our Shareholders 5
Management's Discussion and Analysis 10
Board of Directors 22
Corporate Officers 23
Kentucky Investors, Inc.
Consolidated Financial Statements 24
Selected Financial Data 28
Report of Independent Auditors 28
Investors Heritage Life Insurance Company
Selected Financial Data 29
Report of Independent Auditors 29
Consolidated Financial Statements 30
Notes to Consolidated Financial Statement 34
Stock Prices and Annual Meeting 48
Photos by Lucy Carol Johnson
<PAGE>
Many of the Investors Heritage Life Insurance Company employees are shown in
pictures taken at eleven points of interest in Frankfort, Kentucky. These
historical sites are briefly described in order of appearance in the Annual
Review. When in Frankfort we hope you will visit these and many other sites of
interest and historical significance.
Old State Capitol
The Old State Capitol building was designed by Gideon Shyrock and built between
1827-1830, introducing the Greek Revival style west of the Appalachians. Inside
stands a self-supporting stone stairway. It served as the state capitol from
1830-1910. This was the only pro-Union state capitol occupied by the
Confederate Army. After a bitterly contested election, Governor William Goebel
was shot and killed by an assassin on the Capitol lawn in 1899. Garth K.
Ferguson, the maternal grandfather of Harry Lee Waterfield II, Nancy Waterfield
Walton, and RoseGayle Waterfield Hardy, was a Senate page and his father a
Senator at the time of the assassination.
Old Governor's Mansion
When Kentucky was admitted to the Union in 1792 there was no executive
residence. Isaac Shelby, the first Kentucky Governor, lived in a log cabin.
Construction on this home was begun in 1797 and finished in time for the second
governor, James Garrard. In 1956 the house was designated as the official
residence of the Lieutenant Governor of Kentucky. The patio and rose garden
were added during the early 1970's. Our founder, Harry Lee Waterfield was the
first Lt. Governor to reside in the Old Mansion. He and his family lived there
during his two terms from 1956 - 1959 and 1963 -1967. The Old Mansion is the
oldest executive residence still in use in the United States. It was occupied
two years before the White House.
Liberty Hall
This Federalist style house was built in 1796 for Kentucky's first Senator, John
Brown. Brown was a member of the Virginia Legislature and the Old Congress
before statehood. He served in the U.S. Senate from 1792-1805. He was a
soldier under Washington and an aide to Lafayette. In 1810 his wife,
Margaretta, started the first Sunday School west of the Alleghenies in the
garden which became the First Presbyterian Church. Four generations of Browns
lived in the house.
First Presbyterian Church
The Church was organized in 1815 as an outgrowth of the Sunday School begun in
1810 by Margaretta Brown. The present Gothic building was built in 1849.
Although the building was not completed, it was opened for service for visiting
President-elect, Zachary Taylor.
Orlando Brown House
This Greek Revival house was designed by Kentucky architect, Gideon Shyrock, for
the second son of John Brown. The house was built in 1835 and three generations
of Browns lived in the house until 1945.
Singing Bridge
The Singing Bridge spans the Kentucky River linking Bridge Street and St. Clair
in downtown Frankfort. The steel bridge was built in 1893 to replace a covered
wooden bridge. The open grate floor creates a variety of musical pitches
depending on the weight and speed of traffic; thus the St. Clair Street Bridge
is known as the "Singing Bridge".
Executive Mansion
The Executive Mansion was built in 1912 and the exterior was modeled after Marie
Antoinette's villa near the Palace of Versailles. Twenty-two Kentucky Governors
have lived in the Mansion. It was renovated to its original Beaux-Arts style
between 1980-1984, including the formal garden in front.
Kentucky Military History Museum
Kentucky constructed the Old State Arsenal in 1850. It stands on a cliff
overlooking the Kentucky River. The Arsenal was converted to Military History
Museum in 1973.
Daniel Boone Memorial
Daniel Boone was born in Pennsylvania in 1734 and raised in Yadkin County, North
Carolina. He explored Eastern Kentucky and the Bluegrass Region between 1767-
1771. He worked to open a road between Holston Valley, Tennessee, and
Boonesborough, Kentucky, to aid in immigration promoted by the Transylvania
Company. He moved to Missouri with his wife in 1799 where he died in 1820. He
and Rebecca were re-interred in the Frankfort Cemetery in 1845. The Frankfort
Cemetery was incorporated in 1844 and is Kentucky's original rural cemetery.
Kentucky Vietnam Memorial
The Memorial was built in 1988 to honor the more than 125,000 Kentuckians who
served in Vietnam. The name of each of the 1,065 Kentuckians who died in the
war is located so that the shadow of the sundial touches each name on the actual
anniversary of his death. The names of the 22 missing in action or prisoners of
war are placed in front of the sundial where the shadow never falls, paying
special tribute to their personal agony and symbolizing our continued vigil for
their return.
Bibb-Burnley House
This house stands on the site of the first house lived in on Wapping Street. It
was built in 1786. Lt. John B. Bibb, who served during the War of 1812, bought
the property and built the present house in 1845. He served as representative
from Logan County from 1827-1828 and in the Senate from 1830-1834. Bibb was an
amateur horticulturist and developed the Bibb variety of lettuce here.
Executive Department pictured at the Old Capitol.
Jill Greenlief '89, Rob Hardy '87, Harry Lee Waterfield II '61, Whitney
Waterfield '94, Jane Jackson '74;
Howard Graham '65, Mary Reynolds '90, Raymond Carr '72, Ron Johnson '84 and
Wilma Yeary '63.
Financial Services Group & the Actuarial Department pictured at the Old
Governor's Mansion.
Alan Davis '88, Kenya Eastman '84, Rob Goodin '88;
Julie Hunsinger '92, Will Graham '90, Bobby Russell '74, and Michael Dudgeon
'94.
<PAGE>
Mission and Strategy
Statements
OUR MISSION
The mission of Investors Heritage Life Insurance Company is to provide quality
life insurance products and services, and maintain financial strength for the
benefit of our insureds, stockholders, agents and employees.
Investors Heritage Life Insurance Company is committed to achieving long-term
financial objectives by implementing strategies to increase the volume and
quality of insurance in force. We will improve the quality of the delivery
system with programs to enhance the skills and timely response of marketing and
support service functions.
OUR STRATEGY
The strategic plan focuses on timely product development, technology, education,
communication, human resources practices, and market concentration as key
elements to the attainment of financial objectives.
The overall strategy is to provide competitive products and superior quality
services while improving productivity and job enrichment.
Benefits Department and Office Services pictured at Liberty Hall.
Missy West '99, Roland Herzel '91, Robin Bowman '83, Tammy Kull '89, Debbie
Beach '76, Alice Taylor '93, Steve Wise '98,
Norman Dickerson '97, Thelma Vitug '96, Harold Minnis '61 and Suzanne Schodorf
'93. Absent from picture Rodney Brooks '97, and Pat Porter '93.
<PAGE>
LETTER TO OUR
SHAREHOLDERS
Agency Department pictured at the First Presbyterian Church.
Don Philpot '72, Marlene Terrell '84, Bob Ockerman '91, Lori Cook '96, David
Clark '98, Stephanie Houghlin '98 and Louellen Stivers '87.
Investors Heritage Printing and the Accounting Department pictured at the
Orlando Brown House.
Rick Calvert '94, Steve Riddle '78, Dale Cox '95, Phyllis Cornett '95; Cara
Ballinger '88, Toni Hornback '88,
Dianne Rogers '82, Doug Hippe '65, Jimmy McIver '72, Susie Jones '84. Absent
from picture Epp Williamson '78.
Hard work and successful implementation of our Business Plan over the past
several years resulted in another successful year during 1998. Kentucky
Investors, Inc. ("Kentucky Investors") and Investors Heritage Life Insurance
Company ("Investors Heritage") (collectively the "Companies") had their best
year ever in net gain from operations, with the exception of 1986, when two non-
recurring transactions occurred. Kentucky Investors' net gain was $1,975,137 _
up 30% over year-end 1997. Investors Heritage's net gain from operations was
$2,766,098 _ up 30% over a year ago.
Record Ordinary insurance sales were attained again in 1998. Single Premium
Preneed sales increased 20%; Annual Pay Preneed sales were up 8%; Annual Pay
Final Expense sales were up 10%; Mortgage Protection Single Premium sales sold
through financial institutions were up 30%. Traditional Ordinary Life sales were
up 9.6% with most of this increase from our Payroll Deduction Sales program.
Overall, the core block of Ordinary Life business was up 14% during 1998. We
have another ambitious goal for insurance sales during 1999, and the first two
months of the year indicate the goals will be reached.
As a result of a strong economy and our continued concentration in the Credit
Life and Credit Accident & Health Insurance market, Credit Insurance sales were
up in 1998.
The Companies can report again this year that the asset quality is a very strong
point in our operations. At year-end, 100% of fixed income assets were rated
investment grade and only one small residential loan was more than ninety days
past due.
As I have for the past ten years, I refer you to the Analysis of Asset Adequacy
performed each year, even though we are only required to do so every three
years. Each year Investors Heritage's Asset Adequacy Model has become more
sophisticated and useful. As in prior years, the Analysis shows very favorable
results.
A detailed report on activities of the Companies is presented in the
Management's Discussion and Analysis on Pages 10-21 of this Annual Review. You
are encouraged to carefully read the material.
Beginning with the 1995 Annual Review, we reported to stockholders that the
Companies had addressed the Year 2000 issue (Y2K) facing all users of
information services and computers. Again, I want to assure our stockholders and
others who read this Annual Review that the Companies' systems are Y2K
compliant. We began working toward a Y2K solution in 1988 while redesigning our
overall data processing systems. During the past ten years we have upgraded and
tested our systems and have been compliant since 1995.
We recently developed a web site for Investors Heritage. The address is
www.investorsheritage.com. We hope our web site will provide information and
assistance to current Investors Heritage associates, and will be a source of
information for prospective new associates. Hopefully, stockholders will also
find it interesting and informative. We have provided a great deal more
information about our Company than most insurance companies provide. We believe
it will help current and future clients (insureds and sales associates) become
better acquainted with the Company and our service personnel.
The Companies have developed a strategic alliance with Family Assistance, Inc.
to help provide at-need financing and accounts receivable management for our
funeral home associates. We firmly believe that providing needed services for
our sales associates is important. Through eighteen months of study and field
testing, we determined that funeral homes need an outlet for quick financing for
at-need funerals, and need a good system to assist in managing accounts
receivables. The Family Assistance Program has been utilized by a number of
firms for several months, and in December, 1998, we began presenting the Program
to all our funeral home associates. This will enable them to cost effectively
and quickly provide at-need financing, and it also gives them access to a
successful program for managing accounts receivable. We believe this alliance
will be a strong asset in our Preneed market.
Two new officers were named in 1998 to replace officers who are no longer with
Investors Heritage Life Insurance Company.
On June 30, Clair Manson retired after eleven years of outstanding service to
the Companies as Vice President and Chief Actuary. I had the pleasure of hiring
Clair after a lengthy search for just the right person. His work for Investors
Heritage was exemplary. He had an excellent actuarial mind and was able to
explain matters so others of us could understand. He also enjoyed working with
marketing personnel in developing products they wanted and could sell. Clair was
succeeded by Julie Hunsinger who had been Assistant Vice President and Assistant
Actuary since 1992. Julie has an outstanding actuarial background and experience
in financial actuarial work. She also understands the importance of sales and is
good at both creating ideas and listening to others to develop the best possible
products and reporting systems.
John Simmons, who had done an outstanding job as Vice President, Financial
Services (Credit Life and Credit Ordinary sales), resigned in 1997. John had
overseen tremendous growth in our Financial Services Division and successfully
managed the Division through considerable change in this segment of our
business. John was replaced in 1998 by Michael F. Dudgeon, Jr., who is also a
member of the Investors Heritage Board of Directors. Michael has been in Preneed
sales management for Investors Heritage since December, 1994. He has a lifetime
of understanding of the Companies' goals and has great ability to work with
others, to analyze problems or opportunities, and find ways to address them. He
continues to assist in Preneed matters, especially in South Carolina, a state
that shows great promise in the Preneed Division.
We thank John and Clair for their great contributions to our Companies, and we
wish Julie and Michael great success in their new responsibilities.
The pictures in this year's Annual Review are of most members of the home
office administration staff and some of the marketing personnel. We are
fortunate to have dedicated people who are building careers with the Companies.
By each name is the year the employee was hired. Please note the large number of
employees who have 10 or more years with the Companies. One of the key elements
of our success is that the people who manage and administer the operations
believe in the Companies and are investing their time and money in them. They
also are aware of our history and understand and believe in our mission and
goals. Hopefully, this understanding of the Companies helps us provide the
service our clients deserve, and enables us to personalize our service in
relationship to them. In turn, we believe this has translated into success for
shareholders of the Companies.
As we rapidly approach the end of the 20th century and the Year 2000 arrives, we
believe that Investors Heritage Life Insurance Company and Kentucky Investors,
Inc. are well positioned to thrive in our ever-changing, competitive markets. We
diligently look at what we do and how we do it; we constantly seek ways to
improve and move forward. We have an outstanding Company with dedicated
employees and sales associates. We are in attractive unique markets and believe
that opportunities will exist well into the next century for continued
development, growth and profitability.
We look forward to entering the 21st century with our stockholders,
policyholders, and company associates _ remembering our founder's statement
from our beginning in 1960, "We know where we are going; we invite you to go
with us." After thirty-nine years of using this phrase, including me quoting it
at various times since Mr. Waterfield's death in 1988, I believe it is time to
alter his statement a bit. Because of the longtime ownership of the majority of
our stockholders, the number of years that many of our employees and sales
associates have been with us, and the strong relationships developed with our
newest associates, I believe a more fitting statement now is, "We know where we
are going; we are glad you are going with us."
On behalf of the Officers and Board of Directors of the Companies, I want to
express our appreciation to the stockholders for your investment in and your
relationship with the Companies, and look forward to our working together to
continue to build a strong and viable organization.
Underwriting Department pictured at the Singing Bridge.
Norma Smith '69, Nancy Walton '66, Linda Tindall '86, Carolyn Monroe '86,
Charlotte Moore '92 and Kathy Sexton '75.
Underwriting Department pictured at the Governor's Mansion (see photo top page
6)
Twina Keeton '96, Debbie Bright '71, Joyce Wright '91, Marti Smith '82, Rhodonna
Redding '89, Alex Thompson '77, Judy Smith '98, Robert Lewis '98 (Claims).
Information Services pictured at the Kentucky Military History Museum.
Mike Wood '85, April Rogers '93, Bill Leroy '94, Mary Lou Barnard '84,
Lewis Rogers '87, Betty Barnard '70, Larry Lee '94.
Policy Services Department pictured at the Daniel Boone Memorial.
Colleen Hackney '86, David Marraccini '78, Sue Fields '98, Barbara Stratton '86,
Linda Sims '85, Jane Wise '64, Gwyna Stormes '95, Barbara Hawkins '87, Flo
Osborne '84.
Premium Accounting Department pictured at the Kentucky Vietnam Memorial.
Martha Hammons '72, Michelle Johnson '99, Margaret Nichols '88,
Shirley Harrod '94, Michelle Meier '96.
Credit Life Accounting & Human Resources pictured at the Bibb-Burnley House.
Angie Smith '99, Bonnie Conquest '95, Vicky Harrod '96, Jennifer McClain '80,
Joyce Courtney '75, Peggy Kays '67.
<PAGE>
MANAGEMENT'S
DISCUSSION AND ANALYSIS
EXPANSION
For the last several years Investors Heritage Life Insurance Company ("Investors
Heritage") has been expanding its market share in the preneed funeral market.
The result has been consistent growth in almost all of the states that were
targeted for expansion. Investors Heritage Financial Services Group, Inc.
("Financial Services Group") a wholly owned subsidiary of Kentucky Investors,
Inc. ("Kentucky Investors") continues to operate under marketing agreements with
Investors Heritage and other unaffiliated insurers. This has proven to be
successful and enabled Financial Services Group and Investors Heritage to
continue utilizing their expertise in the marketing and administration of credit
insurance products. Further, through Financial Services Group, Investors
Heritage is able to offer products such as mortgage protection and ordinary life
insurance through financial institutions.
FINANCIAL STRENGTH
The quality of our investment portfolio and the current level of shareholders'
equity of Kentucky Investors and Investors Heritage continue to provide a sound
financial base as we strive to expand our marketing system to offer competitive,
quality products. Please see INVESTMENTS, LIQUIDITY AND FUND RESTRICTIONS for a
more detailed discussion.
BUSINESS SEGMENTS
Prior to 1998 segment data was presented on an "industry approach" in accordance
with Financial Accounting Standard Board (FASB) Statement No. 14. FASB
Statement No. 131 became effective for 1998 and superceded Statement No. 14.
Statement No. 131 requires a "management approach" in the presentation of
business segments based on how management internally evaluates the operating
performance of its business units. The segment data that follows has been
prepared in accordance with Statement No. 131. Accordingly, 1997 and 1996 data
have been restated to comply with this new FASB Statement. The former "Life and
Annuity" segment has been divided into two areas, "Preneed and Burial Products"
and "Traditional and Universal Life Products." The former "Credit Life" segment
is now "Credit Insurance Products and Administrative Services" and the former
"Corporate" segment is now "Corporate and Other"." Please refer to the Notes to
the Consolidated Financial Statements for additional information regarding
segment data.
REVENUES
Overall revenues were $57,461,000, $52,497,000 and $47,780,000 in 1998, 1997 and
1996, respectively for Investors Heritage. The increases were due primarily to
our growth as a provider of quality preneed products, growth in invested assets
due to increased sales in the preneed and burial products and our market
expansion of traditional life and credit insurance products with financial
institutions. A discussion of the changes follows. Additionally, Investors
Heritage has experienced steady growth in Net Investment Income which increased
9% or $1,181,000 in 1998 from 1997. The 1997 increase over 1996 was 12% or
$1,429,000.
PRENEED & BURIAL PRODUCTS
The preneed and burial segment includes both life and annuity products sold by
funeral directors or affiliated agents to fund prearranged funerals.
Revenues for the Preneed & Burial business segment were 12% or $4,324,000 higher
in 1998 than 1997. The 1997 increase over 1996 was 11% or $3,782,000.
Insurance sales exceeded production goals set for 1998 by approximately 5%.
Actual production increased approximately 13% in 1998 over 1997, due to
marketing expansion in single premium preneed products. New premiums collected
during 1998, 1997 and 1996 were $23,818,000, $21,168,000 and $16,681,000,
respectively. During 1998, Investors Heritage targeted thirteen states for
developing new accounts. Eighty percent of that goal was reached. Additionally,
Investors Heritage entered into a contractual relationship with nineteen new
accounts in two untargeted two states. This resulted in the goal being exceeded
by seven percent.
Premium production remains strong in North Carolina. However, due to the
successful expansion of our marketing operation noted above, preneed premiums
from North Carolina agents accounted for 42% of the total preneed premiums
collected in 1998 compared to 46% for 1997. Premium collections from Kentucky
were 25% of the total for 1998 and 19% for 1997. Other states showing
significant gains were Georgia, Indiana, South Carolina and West Virginia.
Management plans to continue to develop the preneed funeral market and
anticipates increases in single premium production for 1999 over 1998 in the
range of 8-12%.
Increase in Net Investment Income earned by preneed and burial products also
contributed to the overall increase in Revenues. Net investment income
increased 14% in 1998 compared to 1997 and 20% in 1997 compared to 1996. Net
investment income did not increase as significantly in 1998 compared to 1997 due
to the decline in interest rates on investments under current market conditions.
Kentucky Investors, Inc. has contracted with a firm that provides an at-need
financing program and an accounts receivable/cash management system for funeral
homes. This program will be offered to existing Preneed funeral home clients as
well as funeral homes that do not currently sell the Investors Heritage Preneed
insurance products. New preneed accounts are anticipated as a result.
TRADITIONAL & UNIVERSAL LIFE PRODUCTS
This segment includes traditional life and group life insurance products,
annuities (primarily qualified) and universal life products. This will continue
to be a sales division within Investors Heritage.
Revenues for 1998, 1997 and 1996 were $14,146,000, $13,950,000 and $13,454,000,
respectively. New premiums collected during 1998, 1997 and 1996 were $3,663,000,
$4,073,000 and $4,244,000, respectively. The decrease in premiums results from
the emphasis being placed on single premium production. Net investment income
for this segment increased 3% in 1998 compared to 1997 and 6% in 1997 compared
to 1996. The increase in net investment income was not as significant in 1998
compared to 1997 due to the decline in premium production and the decline in
interest rates on investments under current market conditions.
Product updates are anticipated for the more traditional lines offered by
Investors Heritage. Estate planning sales for funeral directors and their
families is a marketing unit within the traditional life division and the
Investors Heritage business plan includes expansion of this unit during 1999.
Financial Services Group will also continue to market traditional insurance
products of Investors Heritage through banks and other financial institutions.
CREDIT INSURANCE PRODUCTS & ADMINISTRATIVE SERVICES
This segment includes the marketing and administration of credit life and credit
accident & health insurance products (respectively "Credit Life" and "Credit
A&H", and collectively "Credit Insurance").
Credit insurance premiums written during 1998, 1997 and 1996 were $17,385,000,
$13,683,000 and $8,739,000, respectively. All of the related underwriting risk
is being reinsured 100% with major, well-known life companies. In addition,
Financial Services Group has obtained reinsurance relationships for Investors
Heritage with three other companies. Each of these agreements generates
marketing and retention fees, but not administration fees.
Revenues for this segment are $307,000, $152,000 and ($330,000) for 1998, 1997
and 1996, respectively. As anticipated, revenues from the Credit Insurance
segment were negative in 1996 because policies written and insured by Investors
Heritage in 1994 and 1993 that were cancelled prior to maturity, required
refunds of unearned premiums.
CORPORATE & OTHER
This segment consists of corporate accounts measured primarily by stockholders'
paid-in capital, contributed surplus, earned surplus, property and equipment,
investments in affiliates and other minor business lines which include group
annuities and group and individual accident and health products.
Revenues from this segment were $1,689,000 in 1998, $1,400,000 in 1997 and
$1,443,000 in 1996. The most significant reason for the increase in revenues
during 1998 was a $209,000 realized capital gain. Realized losses occurred
during 1997 and 1996.
Prior to 1997, most of the accident and health business produced by this segment
related to assumed business. During 1996, Investors Heritage stopped assuming
policies sold in connection with this reinsurance agreement. Accordingly,
revenues (net of realized gain/loss activity) have declined.
OPERATING RESULTS
Investors Heritage's Net Income for 1998 increased $640,000 or 30% from 1997 and
for 1997 increased $525,000 or 33% from 1996. Kentucky Investors' Net Income
for 1998 increased $453,000 or 30% from 1997 and for 1997 increased $376,000 or
33% from 1996.
Earnings per share were $3.06, $2.36 and $1.78 for 1998, 1997 and 1996,
respectively for Investors Heritage. Earnings per share were $2.34, $1.84 and
$1.41 during the same periods for Kentucky Investors.
PRENEED & BURIAL PRODUCTS
Pre-Tax Income (Income from Operations Before Federal Income Tax) for this
business segment of Investors Heritage was $2,579,000, $2,524,000 and $913,000
for 1998, 1997 and 1996, respectively. The increase in Pre-Tax Income in 1998
and 1997 when compared to 1996 is the result of actively managing its investment
portfolio and reduced levels of relative policyholder benefits and expenses
related to in force business. However, current market conditions, including
competitive pricing for this segment and the low interest rate environment
continue to narrow profits generated from new sales.
TRADITIONAL & UNIVERSAL LIFE PRODUCTS
Pre-Tax Income for this segment was $1,343,000, $852,000 and $1,528,000 in 1998,
1997 and 1996, respectively. Higher than expected unreinsured claims and
expense levels in 1997 reduced Pre-Tax Income considerably. 1998 and 1996 were
close to projections for revenues and expenses.
CREDIT INSURANCE PRODUCTS & ADMINSTRATIVE SERVICES
Pre-Tax Losses were $395,000, $666,000 and $579,000 for 1998, 1997 and 1996.
Losses have been generated by the run-off of Credit Insurance and the related
deferred acquisition costs amortization. In 1999, this line's performance
should improve due to the growth of the income from fully reinsured business and
reduced amortization from run-off business.
CORPORATE & OTHER
Pre-Tax Income (Loss) for this segment was $333,000, ($7,000) and ($306,000) for
1998, 1997 and 1996, respectively. Realized gains of $209,000 allocated to this
segment during 1998 were the primary reason for the improvement in Pre-Tax
Income.
INVESTMENTS, LIQUIDITY AND FUND RESTRICTIONS
The investment portfolio of Investors Heritage continues to provide financial
stability. It is management's opinion that Kentucky Investors and Investors
Heritage have adequate cash flows both on a long-term and short-term basis as
evidenced by the Consolidated Statements of Cash Flows presented in this Annual
Review. Investors Heritage's internal cash flows are derived from insurance
premiums and investments. The cash flows of Kentucky Investors are derived from
the dividends paid to it by Investors Heritage, Financial Services Group and
Investors Heritage Printing, Inc. ("Heritage Printing"). Management anticipates
these cash flows to experience steady growth due to improved profitability of
all three companies.
During 1998, Financial Services Group's fourth full year of operation, revenues
were $452,000 up 22% or $81,000 compared to 1997, and dividends in the aggregate
amount of $171,000 were paid to Kentucky Investors. Revenues from Heritage
Printing were $456,000 in 1998, down 5% compared to $482,000 in 1997, and
Heritage Printing paid $10,000 in dividends to Kentucky Investors in 1998.
Management of Heritage Printing will continue to work to improve revenues from
unaffiliated sources as well as to provide printing services for Investors
Heritage. Revenues from these sources constitute less than 1% of Kentucky
Investors' overall Revenues in 1998 and management is working on the continued
growth and profitability of both Financial Services Group and Heritage Printing.
Management is not aware of any commitments or unusual events that could
materially affect Kentucky Investors' or Investors Heritage's capital resources.
Further, there is no long-term or short-term external debt. Other than the
items disclosed in Note H to the Consolidated Financial Statements and the
increased regulatory reporting requirements which generally increase
administrative expenses, management is not aware of any current recommendations
by any regulatory authority which if implemented would have any material effect
on Investors Heritage's liquidity, capital resources or operations.
Management does not perceive a need for any external financing and there are no
plans to acquire same. However, Kentucky Investors and Investors Heritage will
continue to explore various opportunities including corporate reorganizations,
acquisitions and purchasing blocks of business from other companies, which may
dictate a need for either long-term or short-term debt. There are no
restrictions as to use of funds except the restriction on Investors Heritage as
to the payment of cash dividends to shareholders which is discussed in more
detail in Note G to the Consolidated Financial Statements.
Since inception, Investors Heritage has maintained a sound, conservative
investment strategy. A pie chart showing the Distribution of Invested Assets is
on page 15. Investors Heritage's fixed income portfolio of public bonds is
managed by an independent portfolio manager, Charter Oak Capital Management,
Inc. ("Charter Oak"). As of December 31, 1998, 86% of Investors Heritage's
total invested assets are managed by Charter Oak pursuant to specific investment
guidelines which have been approved by the Board of Directors. Since the
inception of Investors Heritage's relationship with Charter Oak, the primary
objectives have been to maintain the quality and integrity of the fixed income
portfolio while improving the total return on investments. These goals have
been accomplished by methodically diversifying the portfolio over the last 10
years.
DISTRIBUTION OF INVESTED ASSETS GRAPH
A pie chart appears on this page showing the Distribution of Invested Assets for
all of the assets of Investors Heritage Life Insurance Company. The chart shows
the following breakdown: Fixed Maturities: 86.4%; Contractual Obligations of
Affiliates: 0.2%; Investments in Affiliates: 0.8%; Equity Securities 1.5%;
Short Term Investments: 0.5%; Policy Loans: 3.2%; Other Long Term Investments:
0.2%; Mortgage Loans-R.E.: 7.2%.
The fixed income portfolio is diversified among sectors. The market value and
the Standard & Poor's average quality rating of this portfolio as of December
31, 1998 are $193.9 million and AA, respectively. At year-end 1998 the fixed
income portfolio was allocated as follows: 53.7% - corporate; 12.0% -
government; 19.7% - mortgage-backed securities; 9.2% - foreign; 4.3% - asset
backed securities; and 1.1% - states and political subdivisions. Within the
corporate bond sector, the portfolio is also diversified with 38.0% of that
sector invested in bank and finance, 46.4% in industrial and miscellaneous, and
15.6% in utilities. Pie charts showing the Distribution of Fixed Income Assets
and Distribution of Corporate Bonds are located on page 16 and 17.
The fixed income portfolio also includes $38.2 million (at fair value) of
mortgage-backed securities ("MBS") which represents 17% of total invested assets
and 20% of the fixed income portfolio. Mortgage-backed securities add value to
the portfolio and Charter Oak has provided the expertise to purchase MBS with
the confidence that the credits have been properly analyzed and that the
investment properly suits the asset and liability needs of Investors Heritage.
DISTRIBUTION OF FIXED INCOME ASSETS GRAPH
A pie chart appears on this page showing the Distribution of Fixed Income
Assets. The chart shows the following breakdown: Corporate: 53.7%;
Government: 12.0%; Mortgage-backed Securities: 19.7%; Foreigns: 9.2%; Asset-
backed Securities; 4.3%; States & Political Subdivisions: 1.1%.
There have been concerns expressed by rating agencies, various regulators and
other constituencies regarding investments in MBS's by insurers and other
financial institutions. Although these highly rated securities provide
excellent credit quality, their liquidity and risk must be monitored. Except
for two commercial backed mortgages of approximately $1.5 million, all of the
collateral of the MBS owned by Investors Heritage are guaranteed by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC").
The FNMA and FHLMC securities are structured either as publicly-traded
collateralized mortgage obligations ("CMO") or pass-throughs. Unlike most
corporate or real estate debt, the primary concern with a MBS is uncertainty of
timing of cash flows due to prepayment assumptions rather than the possibility
of loss of principal.
Investors Heritage's CMO holdings represent approximately 71% of the total MBS
portfolio. When these securities are purchased at a discount or premium, the
income yield will vary with changes in prepayment speeds due to the change in
accretion of discount or amortization of premium, as well as the timing of the
basic principal and interest cash flows. The overall impact of the CMO's
variability in yields on the portfolio is not significant in relation to the
yield and cash flows of the total invested assets of Investors Heritage. More
importantly, Investors Heritage has no exposure to the more volatile, high-risk
CMO's, such as those structured to share in residual cash flows or which receive
only interest payments. Except for one sequential pay CMO of approximately
$999,000, the CMO's held by Investors Heritage are either planned amortization
class ("PAC") bonds, including one planned amortization class-Z account ("PAC-
Z"), or support class ("SUP") bonds. Both of these CMO's are structured to
provide more certain cash flows to the investor and therefore have reduced
prepayment risk.
DISTRIBUTION OF CORPORATE BONDS GRAPH
A pie chart appears on this page showing the Distribution of Corporate Bonds
Graph. This chart shows the following breakdown: Industrial and Miscellaneous:
46.4%; Bank and Finance: 38%; Utilities: 15.6%.
Pass-throughs comprise the remainder of MBS owned by Investors Heritage,
representing approximately 29% of the total MBS portfolio. Pass-throughs are
GNMA, FNMA or FHLMC guaranteed MBS which, simply stated, pass-through interest
and principal payments to the investors in accordance with their respective
ownership percentage.
Additionally, Investors Heritage also engages in commercial and residential
mortgage lending with approximately 93% of these investments being in commercial
properties. All mortgage loans are originated in-house and all loans are
secured by first mortgages on the real estate. Loan to value ratios of 80% or
less and debt service coverage from existing cash flows of 115% are generally
required. Investors Heritage minimizes credit risk in its mortgage loan
portfolio through various methods, including stringently underwriting the loan
request, maintaining small average loan balances, reviewing its larger mortgage
loans on an annual basis and diversifying the portfolio by property type. The
average loan balance is $294,348 and the average loan to value is 50.6%. The
largest loan currently held by Investors Heritage is $983,378. Investors
Heritage has $16.2 million invested in mortgage loans which represents 8% of
total invested assets. The portfolio is diversified across various property
types as follows: 19.2% - office; 32.4% - retail; 7.5% -industrial; 6.1% - 1 to
4 family; 19.2% - apartments; and 15.6% - other. A pie chart showing the
Distribution of Mortgage Loans is located above.
DISTRIBUTION OF MORTGAGE LOANS
A pie chart appears on this page showing the Distribution of Mortgage Loans.
This chart shows the following breakdown: Retail: 32.4%; Apartments: 19.2%;
Office Properties: 19.2%; Residential (1-4 families): 6.1%; Industrial: 7.5%;
Other: 15.6%.
Although approximately 71.5% of Investors Heritage's mortgage loans are located
in the various geographic regions of Kentucky, Investors Heritage is familiar
with its mortgage loan markets and is not aware of any negative factors or
trends which would have a material impact on the local economies where Investors
Heritage's mortgage loan properties are located. Investors Heritage has been
successful in adding value to the total investment portfolio through its
mortgage loan originations due to the fact that yields realized from the
mortgage loan portfolio are from 1.875 to 4.65 basis points higher than yields
realized from fixed income investments. Value has also been added because the
mortgage loan portfolio has consistently performed well. As of December 31,
1998, Investors Heritage had only one non-performing mortgage loan, which would
include loans past due 90 days or more, loans in process of foreclosure,
restructured loans and real estate acquired through foreclosure. The non-
performing mortgage loan, which is more than 90 days past due, is a Residential
Mortgage with an outstanding balance of $44,701. The property securing the loan
has a fair market value of $75,000.
The strength of our liquidity is found in our conservative approach in the
product development area and in the strength and stability of our fixed income
portfolio and our mortgage loans. For 1998, Investors Heritage's fixed income
investments were 100% investment grade as rated by Standard & Poor's, unchanged
from 100% for 1997. None of Investors Heritage's fixed income assets are in
default. Liquidity is also managed by laddering maturities of our fixed income
portfolio. The average duration of our fixed income investments is 5.3 years
with approximately $10.7 million due within 12 months and approximately $30.3
million due within the following four years. Historically management has
anticipated that all such investments will be held until maturity. However, one
of the responsibilities of our independent portfolio manager is to constantly
monitor the credit rating of our fixed income investments to determine if rating
changes of any investment requires action by management. As explained in detail
in Note A to the Consolidated Financial Statements, all of Investors Heritage's
fixed income securities and all marketable equity securities are classified as
available-for-sale and are carried at fair value.
OPTION ADJUSTED VALUE VS TERM STRUCTURE SHIFT
A graph appears on this page which shows the results of the Asset Adequacy
Analysis performed by Investors Heritage Life Insurance Company. The graph
demonstrates the option-adjusted prices of assets, liabilities, and surplus at
various shifts in the interest rate environment.
MARKET RISK EXPOSURES
Measuring market risk is a key function of our asset/liability management
process. To test financial risk and investment strategy, Investors Heritage
performs an asset adequacy analysis each year. Dynamic models of both assets
and liabilities are created to project financial results under several shifts in
the current interest rate environment. Results show that the company's exposure
to a relative 10% increase or decrease in the interest rates prevalent at
December 31, 1998 is a net loss of less than $250,000. A graph of the total
price behavior curve tested is shown on Page 19 of this Annual Review.
Items taken into account on the asset side include prepayment and liquidity
risks, asset diversification and quality considerations. On the liability side,
interest crediting strategies and policyholder and agent behavior (lapses,
loans, withdrawals, and premium flow) are dynamically modeled in relationship to
the particular interest rate environment tested. Although Investors Heritage is
careful to ensure that these assumptions are consistent with the best available
data, interest-sensitive cash flows cannot be forecast with certainty, and can
deviate significantly from the assumptions made. Because asset and liability
durations are continually changing as new policyholder contracts are issued and
as new investments are added to the portfolio, Investors Heritage manages its
balance sheet on an ongoing basis, and its net exposure to changes in interest
rates may vary over time.
REGULATORY MATTERS
The statutory capital and surplus of Investors Heritage decreased $121,000 in
1998 following an increase of $882,000 in 1997. Depressed market values of
unaffiliated common stock at year-end 1998 compared to year-end 1997 contributed
most significantly to the decrease. The writedown of home office real estate
from market value to depreciated cost required by the Kentucky Department of
Insurance and reserve strengthening for the North Carolina burial associations
business block produced a $827,000 charge to surplus for both 1997 and 1998.
1999 will be the last year for these two items.
For Generally Accepted Accounting Principles ("GAAP") reporting purposes, the
home office real estate is already carried at depreciated cost and the notes and
affiliated common stock are carried at cost. As anticipated, these adjustments
did not affect Investors Heritage's financial position or net income based on
generally accepted accounting principles, or its statutory net income. For
additional discussion on this issue, refer to Note H to the Consolidated
Financial Statements.
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written using 2-
digits rather than 4-digits to define the applicable year. Any computer program
that has time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
Investors Heritage recognized the Year 2000 Issue in 1988 and began working on a
solution at that time. The Information Systems Department has worked diligently
to make modifications to existing software so that the Year 2000 Issue will not
pose significant operational problems for its computer systems. As of year end
1995, Investors Heritage's systems were in full compliance with all Year 2000
Issue requirements and it is anticipated that there will be no exposure to
contingencies related to the Year 2000 Issue for the products it has sold. The
cost to implement system changes related to the Year 2000 issue has been
nominal.
Although Investors Heritage does not anticipate any major interruption of
business activities, that will be dependent, in part, upon the activities of
third parties. Management has initiated formal communications with all of its
significant reinsurers, vendors, and financial institutions and has been advised
that all are either in full compliance or anticipate being in full compliance
prior to June 30, 1999. Even though Investors Heritage has assessed and
continues to assess third party issues, it has no direct ability to influence
the compliance actions of such parties. Accordingly, there can be no guarantee
that the systems of other companies on which Investors Heritage relies will be
Year 2000 compliant, leading to an adverse effect on future operating results of
Investors Heritage.
CONSOLIDATION
The accompanying consolidated financial statements of Kentucky Investors and
Investors Heritage include the accounts of their respective majority-owned
subsidiaries, after elimination of intercompany transactions. This discussion
and analysis is intended for both Investors Heritage and Kentucky Investors
because their respective financial statements are similar in presentation and
identical in most cases.
<PAGE>
BOARD OF DIRECTORS
Harry Lee Waterfield II
Chairman of the Board I K a b c d e f g h
Frankfort, Kentucky
Dr. Adron Doran I a b e
Lexington, Kentucky
H. Glenn Doran I K c d f g
Murray, Kentucky
Michael F. Dudgeon, Jr. I c
Frankfort, Kentucky
Gordon C. Duke I K d g
Frankfort, Kentucky
Robert M. Hardy, Jr. I K a d f g h
Frankfort, Kentucky
Jerry F. Howell I K a b c d e h
Leesburg, Florida
Dr. Jerry F. Howell, Jr. I K c f
Morehead, Kentucky
David W. Reed K h
Gilbertsville, Kentucky
Helen Wagner I K b f
Owensboro, Kentucky
I Investors Heritage Life Insurance Company
K Kentucky Investors, Inc.
a Investors Heritage Life Executive Committee
b Investors Heritage Life Nominating Committee
c Investors Heritage Life Audit Committee
d Investors Heritage Life Finance Committee
e Investors Heritage Life Compensation Committee
f Kentucky Investors, Executive Committee
g Kentucky Investors Finance Committee
h Kentucky Investors Nominating Committee
<PAGE>
CORPORATE OFFICERS
Harry Lee Waterfield II Nancy W. Walton
Chairman, President and Vice President, Underwriting I
Chief Executive Officer IKPF First Vice President K
Jimmy R. McIver
Treasurer IKPF
Wilma Yeary Jane Wise
Secretary IK Vice President, Policy Services I
Jane S. Jackson Margaret J. Kays
Assistant Secretary IK Vice President, Human Resources I
SecretaryPF
Julie Hunsinger
Vice President and Chief ActuaryI
Howard L. Graham Don R. Philpot
Vice President, Corporate Services IK Vice President, Agency I
Raymond L. Carr N. Douglas Hippe
Vice President, Vice President, Accounting I
Administrative Operations and
Computer Services I
Robert M. Hardy, Jr. Rick Calvert
Vice President and General Counsel IK Vice President P
Vice President, Legal F
Michael F. Dudgeon, Jr.
Vice President, Financial Services I
Vice President F
William H. Keller, M.D.
Medical Director I
Ernst & Young
Independent Auditor IK
I Investors Heritage Life Insurance Company
F Investors Heritage Financial Services Group, Inc.
K Kentucky Investors, Inc.
P Investors Heritage Printing, Inc.
<PAGE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 and 1997
ASSETS 1998 1997
INVESTMENTS
Securities available-for-sale, at fair value:
Fixed maturities
(amortized cost:
1998-$181,886,791;
1997-$164,680,115) $193,911,467 $171,782,911
Equity securities
(cost: 1998-$913,714;
1997-$912,465) 3,378,471 3,169,376
Mortgage loans on
real estate 16,189,127 13,734,791
Policy loans 7,203,344 6,976,601
Other long-term
investment 488,828 453,106
Short-term investments 1,200,970 1,361,165
____________ ____________
Total investments $222,372,207 $197,477,950
Cash and cash equivalents 2,514,371 2,939,453
Accrued investment income 3,098,930 2,905,504
Due and deferred premiums 4,129,967 4,014,177
Deferred acquisition costs 27,288,684 27,225,643
Leased property under
capital leases 404,877 -0-
Property and equipment 1,604,618 1,748,579
Goodwill 2,088,642 1,966,843
Other assets 1,510,848 1,649,596
Amounts recoverable from
reinsurers 23,355,631 16,944,617
____________ ____________
$288,368,775 $256,872,362
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit
reserves $207,115,725 $189,398,071
Unearned premium reserves
20,069,565 14,460,410
Policy claims 2,086,316 2,256,654
Other policyholders' funds:
Dividend & endowment accumulations
1,053,972 1,030,218
Reserves for dividends & endowments & other
784,630 887,768
____________ ____________
Total policy liabilities
$231,110,208 $208,033,121
Federal income taxes 8,122,499 5,574,113
Obligations under
capital leases 407,462 -0-
Other liabilities 4,032,569 3,936,137
____________ ____________
Total liabilities
$243,672,738 $217,543,371
____________ ____________
MINORITY INTEREST IN SUBSIDIARY
$ 12,471,302 $ 11,242,171
____________ ____________
STOCKHOLDERS' EQUITY
Common stock (shares issued:
1998-848,116; 1997-836,895)
$ 848,116 $ 836,895
Paid-in surplus 3,442,248 3,384,061
Accumulated other comprehensive income
6,392,746 4,043,101
Retained earnings 21,541,625 19,822,763
____________ ____________
Total stockholders' equity
$ 32,224,735 $ 28,086,820
____________ ____________
$288,368,775 $ 256,872,362
============ =============
See notes to consolidated financial statements.
<PAGE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
REVENUES
Premiums and other considerations
$42,638,289 $39,129,106 $ 36,354,025
Investment income, net of expenses
14,167,232 12,972,322 11,528,961
Realized gain (loss) on investments, net
126,179 (33,794) (488,126)
Other income 776,612 639,248 566,804
___________ ___________ ____________
Total revenue $57,708,312 $52,706,882 $ 47,961,664
___________ ___________ ____________
BENEFITS AND EXPENSES
Death and other benefits $20,767,497 $19,218,783 $19,134,559
Guaranteed annual
endowments 800,041 835,220 867,200
Dividends to policyholders 626,325 743,582 647,279
Increase in benefit reserves and
unearned premiums 18,400,657 16,112,923 12,587,751
Acquisition costs deferred(7,006,366) (6,862,085) (6,139,949)
Amortization of deferred acquisition costs
6,497,263 6,946,659 6,904,477
Commissions 5,231,882 4,702,676 4,382,830
Other insurance expenses 8,380,727 8,165,730 7,935,471
___________ ___________ ___________
Total benefits and expenses
$53,698,026 $49,863,488 $46,319,618
___________ ___________ ___________
Income from operations before
Federal Income Tax and minority
interest in net income of subsidiary
$ 4,010,286 $ 2,843,394 $ 1,642,046
___________ ___________ ___________
Provision for income taxes
Current $ 362,000 $ 497,000 $ 437,000
Deferred 952,000 264,000 (360,000)
____________ ____________ __________
$ 1,314,000 $ 761,000 $ 77,000
____________ ____________ __________
income from operations before
minority interest in net income
of subsidiary $ 2,696,286 $ 2,082,394 $ 1,565,046
MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY 721,149 559,842 418,427
____________ ____________ ___________
Net Income $ 1,975,137 $ 1,522,552 $ 1,146,619
============ ============ ============
Earnings Per Share $ 2.34 $ 1.84 $ 1.41
============ ============ ============
See notes to consolidated financial statements.
<PAGE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK SURPLUS INCOME EARNINGS EQUITY
________ ________ _____________ _________ _____________
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996
$811,128 $3,374,704 $2,916,509 $17,539,199 $24,641,540
Comprehensive Income:
Net Income
1,146,619 1,146,619
Change in net unrealized appreciation
on available-for-sale securities
(1,406,284) (1,406,284)
Total Comprehensive Income (259,665)
Cash Dividend (344,611) (344,611)
Issuance of common stock, net
9,347 (89) 111,251 120,509
________ __________ ___________ ___________ ___________
BALANCE, DECEMBER 31, 1996
$820,475 $3,374,615 $1,510,225 $18,452,458 $24,157,773
Comprehensive Income:
Net Income 1,522,552 1,522,552
Change in net unrealized appreciation
on available-for-sale securities
2,532,876 2,532,876
Total Comprehensive Income 4,055,428
Cash Dividend (349,285) (349,285)
Issuance of common stock, net
16,420 9,446 197,038 222,904
________ __________ ___________ ___________ ___________
BALANCE, DECEMBER 31, 1997
$836,895 $3,384,061 $4,043,101 $19,822,763 $28,086,820
Comprehensive Income:
Net Income 1,975,137 1,975,137
Change in net unrealized appreciation
on available-for-sale securities
2,349,645 2,349,645
Total Comprehensive Income 4,324,782
Cash Dividend (354,926) (354,926)
Issuance of common stock, net
11,221 58,187 98,651 168,059
________ __________ ___________ ___________ __________
BALANCE, DECEMBER 31, 1998
$848,116 $3,442,248 $6,392,746 $21,541,625 $32,224,735
========== ========== ========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
OPERATING ACTIVITIES
Net Income $ 1,975,137 $ 1,522,552 $ 1,146,619
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase in Benefit Reserves
25,220,661 22,663,249 18,302,594
Change in Claims Liability
(170,338) 662,113 (71,408)
Change in Other Policyholder Funds
(79,384) (30,697) (151,680)
Amortization of Deferred Acquisition Costs
6,497,263 6,946,659 6,904,477
Policy Acquisition Costs Deferred
(7,006,366) (6,862,085) (6,139,949)
Realized Loss (Gain) on Investments
(209,187) 33,794 488,126
Increase in Accrued Investment Income
(193,426) (492,401) (273,267)
Change in Other Assets and Other Liabilities
646,584 672,582 395,311
Provision for Deferred Federal Income Taxes
952,000 264,000 (360,000)
Federal Income Tax -0- -0- (250,438)
Change in Due and Deferred Premiums
(115,790) 66,306 633,574
Net Adjustment for Premium and
Discount on Investments
269,283 206,299 256,456
Depreciation and Other Amortization
201,157 394,116 336,406
Change in Minority Interest and Other
487,559 468,090 321,608
Change in Amounts Recoverable from Reinsurers
(6,411,014) (7,325,846) (5,954,989)
__________ __________ __________
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 22,064,139 $ 19,188,731 $ 15,583,440
____________ ____________ ____________
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases $(30,462,168) $(47,713,033) $(46,706,125)
Sales and Maturities 13,194,144 28,565,612 32,427,878
Other Investments:
Cost of Acquisition (4,857,026) (2,912,452) (2,478,676)
Sales and Maturities 2,300,420 2,482,421 1,651,805
Net Additions to Property and Equipment
(583,872) (48,574) (366,597)
____________ ___________ ___________
NET CASH USED BY INVESTING
ACTIVITIES $(20,408,502) $(19,626,026) $(15,471,715)
____________ ___________ ___________
FINANCING ACTIVITIES
Receipts from universal life policies credited to
policyholder account balances
$ 4,356,590 $ 6,074,832 $ 4,949,560
Return of policyholder account balances on
universal life policies (6,250,442) (5,256,212) (4,570,049)
Issuances of Common Stock 168,059 222,904 120,509
Dividends (354,926) (349,285) (344,611)
___________ ___________ ________
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ (2,080,719) $ 692,239 $ 155,409
___________ _____________ ____ ________
INCREASE (DECREASE) IN CASH
$ (425,082)$ 254,944 $ 267,134
Cash and cash equivalents at beginning of year
2,939,453 2,684,509 2,417,375
______________ ___________ ____________
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,514,371 $ 2,939,453 $ 2,684,509
============== ============= =============
See notes to consolidated financial statements.
<PAGE>
KENTUCKY INVESTORS, INC.
SELECTED FINANCIAL DATA
KENTUCKY INVESTORS, INC. AND SUBSIDIARIES
(000's omitted except for Earnings and Cash Dividends Per Share)
1998 1997 1996 1995 1994
Total Revenue $ 57,708 $ 52,707 $ 47,962 $ 44,005 $ 46,656
Total Benefits & Expenses
53,698 49,863 46,320 43,191 44,039
Net Income 1,975 1,523 1,147 555 1,523
Earnings Per Share
2.34 1.84 1.41 .71 1.97
Total Assets 288,369 256,872 224,997 208,045 191,367
Total Liabilities
243,673 217,543 190,997 173,288 164,902
Debt 407 -0- -0- -0- -0-
Cash Dividends
Per Share .38 .38 .38 .38 .37
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Kentucky Investors, Inc.
We have audited the accompanying consolidated balance sheets of
Kentucky Investors, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kentucky
Investors, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1999
Investors Heritage Life Insurance Company
SELECTED FINANCIAL DATA
INVESTORS HERITAGE LIFE INSURANCE COMPANY AND SUBSIDIARY
(000's omitted except for Earnings and Cash Dividends Per Share)
1998 1997 1996 1995 1994
Premiums $ 42,638 $ 39,129 $ 36,354 $ 33,061 $ 36,444
Net Investment Income
14,264 13,083 11,654 10,815 10,011
Net Income 2,766 2,127 1,602 917 2,401
Earnings Per Share
3.06 2.36 1.78 1.02 2.66
Total Assets 289,825 258,654 227,140 210,490 194,262
Policy Reserves
227,185 203,858 180,377 161,695 155,179
Debt 407 -0- -0- -0- -0-
Cash Dividends Per Share
.76 .76 .76 .76 .74
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Investors Heritage Life Insurance Company
We have audited the accompanying consolidated balance sheets of
Investors Heritage Life Insurance Company and subsidiary as of December 31,
1998 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Investors
Heritage Life Insurance Company and subsidiary at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1999
<PAGE>
Investors Heritage Life Insurance Company
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 and 1997
ASSETS 1998 1997
INVESTMENTS
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost:
1998-$181,886,791;
1997-$164,680,115) $193,911,467 $171,782,911
Equity securities (cost: 1998
and 1997-$912,458) 3,377,213 3,169,370
Mortgage loans on
real estate 16,189,127 13,734,791
Policy loans 7,203,344 6,976,601
Other long-term investments 437,221 403,106
Short-term investments 1,170,970 1,211,165
____________ ____________
$222,289,342 $197,277,944
Investments in affiliates 1,837,510 1,975,382
Contractual obligations of
affiliate 431,035 538,794
____________ ____________
Total investments $224,557,887 $199,792,120
Cash and cash equivalents 2,461,887 2,902,587
Accrued investment income 3,097,421 2,904,861
Due and deferred premiums 4,129,967 4,014,177
Deferred acquisition costs 27,288,684 27,225,643
Leased property under capital
leases 404,877 -0-
Property and equipment 1,566,117 1,703,387
Goodwill 1,508,780 1,574,381
Other assets 1,453,280 1,592,539
Amounts recoverable from
reinsurers 23,355,631 16,944,617
____________ ____________
$289,824,531 $258,654,312
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves $207,115,725 $189,398,071
Unearned premium
reserves 20,069,565 14,460,410
Policy claims 2,086,316 2,256,654
Other policyholders' funds:
Dividend & endowment accumulations
1,053,972 1,030,218
Reserves for dividends & endowments & other
784,630 887,768
____________ ____________
Total policy
liabilities $231,110,208 $208,033,121
Federal income taxes 6,487,085 4,043,087
Obligations under capital
leases 407,462 -0-
Other liabilities 3,983,860 3,874,424
____________ ____________
Total liabilities $241,988,615 $215,950,632
____________ ____________
STOCKHOLDERS' EQUITY
Common stock (shares issued:
1998-904,373; 1997-905,611) $ 1,447,797 $ 1,449,778
Paid-in surplus 3,777,101 3,776,625
Accumulated other comprehensive
income 8,594,131 5,502,914
Retained earnings 34,016,887 31,974,363
____________ ____________
Total stockholders' equity
$ 47,835,916 $ 42,703,680
____________ ____________
$289,824,531 $ 58,654,312
============= ============
See notes to consolidated financial statements.
<PAGE>
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
REVENUES
Premiums and other
considerations $42,638,289 $39,129,106 $36,354,025
Investment income, net
of expenses 14,264,246 13,083,006 11,653,732
Realized gain (loss)
on investments, net 209,186 (19,346) (489,685)
Other income 349,310 304,280 261,524
___________ ___________ ___________
Total revenue $57,461,031 $52,497,046 $47,779,596
___________ ___________ ___________
BENEFITS AND EXPENSES
Death and other
benefits $20,767,497 $19,218,783 $19,134,559
Guaranteed annual
endowments 800,041 835,220 867,200
Dividends to
policyholders 626,325 743,582 647,279
Increase in benefit reserves and
unearned
premiums 18,400,657 16,112,923 12,587,751
Acquisition costs
deferred (7,006,366) (6,862,085) (6,139,949)
Amortization of deferred
acquisition costs 6,497,263 6,946,659 6,904,477
Commissions 5,231,882 4,702,676 4,382,830
Other insurance
expenses 8,283,634 8,096,713 7,839,875
___________ ___________ ___________
Total benefits
and expenses $53,600,933 $49,794,471 $46,224,022
___________ ___________ ___________
Income from operations before
Federal Income Tax $ 3,860,098 $ 2,702,575 $ 1,555,574
___________ ___________ ___________
Provision for income taxes
Current $ 247,000 $ 384,000 $ 360,000
Deferred 847,000 192,000 (406,000)
___________ ___________ ___________
$ 1,094,000 $ 576,000 $ (46,000)
___________ ___________ ___________
Net Income $ 2,766,098 $ 2,126,575 $ 1,601,574
============ ============ ============
Earnings Per Share $ 3.06 $ 2.36 $ 1.78
============ ============ ============
See notes to consolidated financial statements.
<PAGE>
<TABLE>
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK SURPLUS INCOME EARNINGS EQUITY
________ ________ _____________ __________ ___________
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996
$1,441,797 $3,776,427 $3,948,035 $29,493,727 $38,659,986
Comprehensive Income:
Net Income 1,601,574 1,601,574
Change in net unrealized appreciation
on available-for-sale securities
(1,903,816) (1,903,816)
Total Comprehensive Income (302,242)
Cash Dividend (684,442) (684,442)
Net cost of common stock
sold (purchased)
(79) 198 (1,393) (1,274)
__________ __________ ___________ ___________ __________
BALANCE, DECEMBER 31, 1996
$1,441,718 $3,776,625 $2,044,219 $30,409,466 $37,672,028
Comprehensive Income:
Net Income 2,126,575 2,126,575
Change in net unrealized appreciation
on available-for-sale securities
3,458,695 3,458,695
Total Comprehensive Income 5,585,270
Cash Dividend (684,580) (684,580)
Net cost of common stock sold
8,060 122,902 130,962
__________ __________ ___________ ___________ _________
BALANCE, DECEMBER 31, 1997
$1,449,778 $3,776,625 $5,502,914 $31,974,363 $42,703,680
Comprehensive Income:
Net Income 2,766,098 2,766,098
Change in net unrealized appreciation
on available-for-sale securities
3,091,217 3,091,217
Total Comprehensive Income 5,857,315
Cash Dividend (687,745) (687,745)
Net cost of common stock
sold (purchased)
(1,981) 476 (35,829) (37,334)
__________ __________ ___________ ___________ __________
BALANCE, DECEMBER 31, 1998
$1,447,797 $3,777,101 $8,594,131 $34,016,887 $47,835,916
========== ========== ========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
OPERATING ACTIVITIES
Net Income $ 2,766,098 $ 2,126,575 $ 1,601,574
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase in Benefit
Reserves 25,220,661 22,663,249 18,302,594
Change in Claims
Liability (170,338) 662,113 (71,408)
Change in Other Policyholder
Funds (79,384) (30,697) (151,680)
Amortization of Deferred
Acquisition Costs 6,497,263 6,946,659 6,904,477
Policy Acquisition Costs
Deferred (7,006,366) (6,862,085) (6,139,949)
Realized Loss (Gain) on
Investments (209,187) 19,346 489,685
Increase in Accrued
Investment Income (192,560) (492,148) (273,380)
Change in Other Assets and
Other Liabilities 656,157 688,876 378,800
Provision for Deferred Federal
Income Taxes 847,000 192,000 (406,000)
Federal Income Tax 4,554 (5,807) (250,481)
Change in Due and Deferred
Premiums (115,790) 66,306 633,574
Net Adjustment for Premium and
Discount on Investments
269,283 206,299 256,456
Depreciation and Other Amortization
381,866 348,513 313,192
Change in Amounts Recoverable
from Reinsurers (6,411,014) (7,325,846) (5,954,989)
___________ _________ _________
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 22,458,243 $ 19,203,353 $ 15,632,465
__________ ___________ ___________
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases $(30,460,916) $(47,713,033) $(46,706,125)
Sales and Maturities 13,194,144 28,565,612 32,427,878
Other Investments:
Cost of Acquisition (4,951,926) (2,840,452) (2,465,182)
Sales and Maturities 2,522,558 2,818,049 2,054,548
Net Additions to Property
and Equipment (583,872) (43,510) (366,596)
__________ __________ __________
NET CASH USED BY INVESTING
ACTIVITIES $(20,280,012) $(19,213,334) $(15,055,477)
____________ ___________ ___________
FINANCING ACTIVITIES
Receipts from universal life policies
credited to policyholder
account balances $ 4,356,590 $ 6,074,832 $ 4,949,560
Return of policyholder account
balances on universal
life policies (6,250,442) (5,256,212) (4,570,049)
Repurchase of Common Stock (37,334) 130,962 (1,472)
Dividends (687,745) (684,580) (684,442)
_________ __________ _________
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ (2,618,931) $ 265,002 $ (306,403)
___________ ____________ ___________
INCREASE (DECREASE) IN CASH
$ (440,700) $ 255,021 $ 270,585
Cash and cash equivalents at
beginning of year 2,902,587 2,647,566 2,376,981
____________ ___________ _____________
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,461,887 $ 2,902,587 $ 2,647,566
============= ============= ==============
See notes to consolidated financial statements.
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
KENTUCKY INVESTORS, INC.
IINVESTORS HERITAGE LIFE INSURANCE COMPANY
NOTE A - Nature of Operations and Accounting Policies
Kentucky Investors, Inc. (Kentucky Investors) is the holding company of
Investors Heritage Life Insurance Company (Investors Heritage), Investors
Heritage Printing, Inc., a printing company and Investors Heritage Financial
Services Group, Inc., an insurance marketing company. Ninety-nine percent of
Kentucky Investors operations are generated by Investors Heritage.
Investors Heritage's operations involve the sale and administration of various
insurance and annuity products, including, but not limited to, participating,
non-participating, whole life, limited pay, universal life, annuity contracts,
credit life, credit accident and health and group insurance policies. The
principal markets for Investors Heritage products are in the Commonwealths of
Kentucky and Virginia, and the states of North Carolina, South Carolina, Ohio,
Indiana, Florida, Tennessee, Illinois, Georgia, West Virginia and Texas.
Basis of Presentation: The accompanying consolidated financial statements of
Kentucky Investors, Inc. and subsidiaries and Investors Heritage Life Insurance
Company and subsidiary have been prepared in accordance with generally accepted
accounting principles (GAAP). Investors Heritage also submits financial
statements to insurance regulatory authorities based on statutory accounting
practices which differ from GAAP.
Principles of Consolidation: The consolidated financial statements include the
majority-owned subsidiaries of Kentucky Investors which are Investors Heritage
Printing, Inc., Investors Heritage and its subsidiary, Investors Underwriters,
Inc., and Investors Heritage Financial Services Group, Inc. In 1994 Kentucky
Investors formed Investors Heritage Financial Services Group, a wholly-owned
marketing company which markets a variety of products for a number of companies
as well as Investors Heritage's mortgage protection products to financial
institutions. Intercompany transactions are eliminated in the Kentucky Investors
consolidated financial statements. The accompanying Investors Heritage
financial statements include intercompany transactions with Kentucky Investors
and other affiliates which are not eliminated.
Investments: In accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", Kentucky Investors and Investors Heritage classify all fixed
maturities and equity securities as available-for-sale. Under SFAS No. 115,
securities classified as available-for-sale are carried at fair value with
appreciation (depreciation) relating to temporary market value changes recorded
as an adjustment to other comprehensive income.
Premiums and discounts on fixed maturity investments are amortized into income
using the interest method. Anticipated prepayments on mortgage-backed
securities are considered in the determination of the effective yield on such
securities. If a difference arises between anticipated prepayments and actual
prepayments, the carrying value of the investment is adjusted with a
corresponding charge or credit to interest income.
Realized gains and losses on the sale of investments are determined based upon
the specific identification method and include provisions for other-than-
temporary impairments where appropriate.
Mortgage loans, policy loans and other long-term investments are carried at
unpaid balances. Short term investments represent securities with maturity
dates within one year but exceeding three months. These securities are carried
at amortized cost.
Cash equivalents include money market funds on deposit at various financial
institutions with contractual maturity dates within three months at the time of
purchase.
Deferred Acquisition Costs: Commissions and other acquisition costs which vary
with and are primarily related to the production of new business are deferred
and amortized over the life of the related policies (refer to Revenues and
Expenses discussed later regarding amortization methods). Recoverability of
deferred acquisition costs is evaluated annually by comparing the current
estimate of the present value of expected pretax future profits to the
unamortized asset balance. If such current estimate is less than the existing
balance, the difference is charged to expense.
Property and Equipment: Property and equipment is carried at cost less
accumulated depreciation, using principally the straight-line method.
Accumulated depreciation on property and equipment of Kentucky Investors was
$3,366,812 and $3,498,084 at December 31, 1998 and 1997, respectively.
Accumulated depreciation on property and equipment of Investors Heritage was
$3,275,397 and $3,407,860 at December 31, 1998 and 1997, respectively.
Capital Leases: During 1998 Investors Heritage acquired new computer equipment
through a three-year capital lease. Lease payments for 1998 were $48,646.
Future minimum lease payments for 1999, 2000 and 2001 are $163,668, $163,668 and
$115,023, respectively. The present value of net minimum lease payments at
December 31, 1998 was $407,462, which is equal to the total future minimum lease
payments of $442,359 less imputed interest of $34,897. Accumulated amortization
on the leased property was $43,603 at December 31, 1998.
Goodwill: Goodwill for Investors Heritage is being amortized over forty years
using the straight-line method. Accumulated amortization was $1,115,217 and
$1,049,616 at December 31, 1998 and 1997, respectively.
Benefit Reserves and Policyholder Deposits: Reserves on traditional life and
accident and health insurance products are calculated using the net level
premium method based upon estimated future investment yields, mortality,
withdrawals and other assumptions, including dividends on participating
policies. The assumptions used for prior year issues are locked in. Current
year issues are reserved for using updated assumptions determined by reviewing
the Company's past experience and includes a provision for possible unfavorable
deviation.
Benefit reserves and policyholder deposits on universal life and investment-
type products are determined by using the retrospective deposit method and
represent the policy account value before consideration of surrender charges.
In addition, unearned revenues are included as a part of the benefit reserve.
The mortality assumptions for regular ordinary business are based on the 1955-60
Basic Table, Select and Ultimate, for plans issued prior to 1982, the 1965-70
Basic Table, Select and Ultimate, for plans issued in 1982 through 1984, the
1975-80 Basic Table, Select and Ultimate, for plans issued after 1984 and on the
Company's experience for final expense plans.
Reinsurance: Kentucky Investors and Investors Heritage assume and cede
reinsurance under various agreements providing greater diversification of
business, allowing management to control exposure to potential losses arising
from large risks, and providing additional capacity for growth. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
related liabilities associated with the reinsured policies. In accordance with
SFAS No. 113 reserves ceded to reinsurers of $22,616,183 and $15,998,475 at
December 31, 1998 and 1997, respectively, are shown gross on the balance sheets
of Kentucky Investors and Investors Heritage.
Unearned Premium Reserves: Credit life unearned premium reserves are calculated
for level and reducing coverage using the monthly pro rata and Rule of 78's
methods, respectively. Credit accident and health unearned premium reserves are
determined based upon the Rule of 78's.
Policy Claims: Policy claims are based on known liabilities plus estimated
future liabilities developed from trends of historical data applied to current
exposure.
Other Policyholders' Funds: Other policyholders' funds consist primarily of
dividends and endowments left on deposit at interest. Participating business
approximates 7% of ordinary life insurance in force. Participating dividends
are accrued as declared by the Board of Directors of Investors Heritage. The
liability for future policy benefits for participating policies was determined
based on the Net Level Premium Reserve Method, 3% interest, and the 1941 CSO
Mortality and 1958 CSO Mortality tables. All guaranteed benefits were
considered in calculating these reserves. The average assumed investment yields
used in determining expected gross margins ranged from 3.56% to 9.17% (for the
current and all future years an assumed investment yield of 6.80% was utilized).
Unamortized acquisition costs associated with participating business are
amortized in proportion to expected gross margins.
Federal Income Taxes: Kentucky Investors and Investors Heritage utilize the
liability method in accordance with FASB Statement 109 "Accounting for Incomes
Taxes" to account for income taxes. Under such method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and the tax bases of assets and liabilities and are measured using the enacted
tax rates.
Revenues and Expenses: Revenues on traditional life and accident and health
insurance products consist of direct and assumed premiums reported as earned
when due. Liabilities for future policy benefits, including unearned premium
reserves on accident and health policies and unreleased profits on limited-pay
life policies, are provided and acquisition costs are amortized by associating
benefits and expenses with earned premiums to recognize related profits over the
life of the contracts. Acquisition costs are amortized over the premium paying
period using the net level premium method. Traditional life insurance products
are treated as long duration contracts since they are ordinary whole life
insurance products which generally remain in force for the lifetime of the
insured. The accident and health insurance products are treated as long
duration contracts because they are non-cancellable.
Revenues for universal life and investment-type products consist of investment
income and policy charges for the cost of insurance and policy initiation and
administrative fees. Expenses include interest credited to policy account
balances, actual administrative expenses and benefit payments in excess of
policy account balances.
Deferred policy acquisition costs related to universal life and investment-type
products are amortized as a uniform percentage of each year's expected gross
profits, over the life of the policies. Amortization is unlocked for
significant changes in expected versus actual gross profits, including the
affects of realized gains or losses.
Common Stock and Earnings per Share: The par value per share for Kentucky
Investors is $1.00 with 4,000,000 shares authorized (shares issued at December
31, 1998: 848,116; 1997: 836,895; and 1996: 820,475). Earnings per share of
common stock were computed based on the weighted average number of common shares
outstanding during each year. The number of common shares used in this
computation was 843,251 in 1998, 829,725 in 1997, and 813,754 in 1996. Cash
dividends per share were $.38 in 1998, 1997, and 1996.
The stated value of Investors Heritage common stock was $1,447,797, $1,449,778,
and $1,441,718, at December 31, 1998, 1997 and 1996, respectively. 2,000,000
shares were authorized at December 31, 1998, 1997 and 1996 (shares issued at
December 31, 1998: 904,373; 1997: 905,611; and 1996: 900,574). Earnings per
share of common stock were computed based on the weighted average number of
common shares outstanding during each year: 904,334 in 1998, 902,739 in 1997 and
900,508 in 1996. Cash dividends per share were $.76 in 1998, 1997, and 1996.
Accumulated Other Comprehensive Income: As of January 1, 1998 the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to this requirement.
The reclassification amounts (net of 34% tax) for the years ended December 31,
1998, 1997 and 1996 are summarized as follows:
1998 1997 1996
Net unrealized gain (loss) arising
during period $3,215,115 $3,426,479 $(2,435,429)
Reclassification adjustment for net (gains)
losses included in net income
(123,898) 32,216 531,613
__________ __________ __________
Net unrealized gain (loss) on certain
securities for Investors Heritage
$3,091,217 $3,458,695 $(1,903,816)
Minority interest in other comprehensive
income (741,572) (925,819) 497,532
__________ __________ __________
Net unrealized gain (loss) on certain
securities for Kentucky Investors
$2,349,645 $2,532,876 $(1,406,284)
========== ========== ===========
Reclassifications: Certain prior year amounts have been reclassified to conform
to the 1998 presentations.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE B - Investments
Investors Heritage limits credit risk by emphasizing investment grade
securities and by diversifying its investment portfolio among government and
corporate bonds and mortgage loans. Investors Heritage manages its fixed
income portfolio to diversify between and within industry sectors. Mortgage
loans are issued at loan to value ratios not exceeding 80 percent.
Approximately $11,571,000 of the loans outstanding at December 31, 1998 were to
borrowers located in Kentucky. All loans are secured by a first mortgage on the
property.
Investments in available-for-sale securities are summarized as follows:
1998 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ _________ _________ _________
Available-for-sale securities:
U.S. Government
Obligations $ 21,741,471 $ 1,509,437 $ -0- $ 23,250,908
States and Political
Subdivisions 1,992,186 72,464 -0- 2,064,650
Corporate 105,089,331 7,586,323 42,515 112,633,139
Foreign 16,445,886 1,360,974 -0- 17,806,860
Mortgage-Backed
Securities 36,617,917 1,537,993 -0- 38,155,910
___________ ___________ ______________ ____________
Total Fixed Maturity
Securities $181,886,791 $12,067,191 $ 42,515 $ 193,911,467
Equity Securities 912,458 2,468,604 3,849 3,377,213
___________ __________ ______________ ______________
Total $182,799,249 $14,535,795 $ 46,364 $ 197,288,680
============ =========== ============== ==============
1997 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ _________ _________ _______
Available-for-sale securities:
U.S. Government
Obligations $ 22,472,841 $1,060,540 $ -0- $ 23,533,381
States and Political
Subdivisions 1,990,527 40,043 -0- 2,030,570
Corporate 90,409,024 4,396,915 515 94,805,424
Foreign 14,680,336 733,064 -0- 15,413,400
Mortgage-Backed
Securities 35,127,387 910,684 7,935 36,000,136
___________ _________ ___________ ___________
Total Fixed Maturity
Securities $164,680,115 $7,141,246 $ 38,450 $171,782,911
Equity Securities 912,458 2,261,561 4,649 3,169,370
___________ _________ __________ ___________
Total $165,592,573 $9,402,807 $ 43,099 $174,952,281
============ ========== =========== ============
In accordance with SFAS No. 115, net unrealized gains (losses) for investments
classified as available-for-sale are shown, net of the effect on deferred income
taxes and deferred policy acquisition costs assuming that the appreciation
(depreciation) had been realized. A summary follows:
December 31
1998 1997
__________ _________
Net unrealized appreciation on
available-for-sale securities $14,489,431 $ 9,359,708
Adjustment to deferred acquisition costs (1,468,021) (1,021,959)
Deferred income taxes (4,427,279) (2,834,835)
____________ ____________
Net unrealized appreciation on
available-for-sale securities
for Investors Heritage $ 8,594,131 $ 5,502,914
Minority shareholders' interest (2,201,385) (1,459,813)
_____________ _____________
Net unrealized appreciation on
available-for-sale securities for
Kentucky Investors $ 6,392,746 $ 4,043,101
============ ============
The amortized cost and fair value of debt securities at December 31, 1998, by
contractual maturity, are presented below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Available-for-Sale
Amortized Fair
Cost Value
_________ __________
Due in one year or less $ 10,552,763 $ 10,670,368
Due after one year through five years 28,989,260 30,323,538
Due after five years through ten years 51,306,378 55,049,785
Due after ten years 43,844,302 48,624,741
Due at multiple maturity dates 47,194,088 49,243,035
____________ _____________
Total $181,886,791 $193,911,467
============ =============
Proceeds during 1998, 1997 and 1996 from sales and maturities of investments in
available-for-sale securities were $13,194,150, $28,565,510 and $32,427,878
respectively. Gross gains of $162,746, $360,679 and $101,509 and gross losses
of $38,848, $392,895 and $633,122 were realized on those sales during 1998, 1997
and 1996, respectively.
Presented below is investment information for Investors Heritage, including the
accumulated and annual change in net unrealized investment gain or loss.
Additionally, the table below shows the annual change in net unrealized
investment gain (loss) and the amount of realized investment gain (loss) on debt
and equity securities for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
Change in unrealized investment gain (loss):
Available-for-sale:
Debt securities $ 4,921,880 $ 5,167,977 $ (3,629,100)
Equity securities 207,843 683,427 318,943
Realized investment gain (loss):
Available-for-sale:
Debt securities $ 123,892 $ (47,341) $ (449,194)
Equity securities 6 15,125 (38,221)
Major categories of investment income for Investors Heritage are summarized as
follows:
1998 1997 1996
Fixed maturities $12,442,337 $11,329,773 $ 9,865,087
Mortgage loans on real estate 1,311,727 1,212,102 1,222,649
Other 1,029,835 975,897 927,817
__________ ___________ ___________
$14,783,899 $13,517,772 $12,015,553
Investment expenses 519,653 434,766 361,821
___________ ___________ ___________
$14,264,246 $13,083,006 $11,653,732
========= =========== ===========
Investors Heritage is required to hold assets on deposit for the benefit of
policyholders in accordance with statutory rules and regulations. At December
31, 1998 and 1997, these required deposits had book values of $23,571,493 and
$23,696,655, respectively.
NOTE C - Fair Values of Financial Instruments
The following disclosure of the estimated fair values of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments". The estimated fair value amounts have
been determined using available market information and appropriate valuation
methodologies. However, considerable judgement was necessarily required to
interpret market data to develop these estimates. Accordingly, the estimates
are not necessarily indicative of the amounts which could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the fair value amounts. The
following table relates solely to Investors Heritage. Carrying values and fair
values for Kentucky Investors approximate those shown for Investors Heritage,
except for the investments in and obligations of affiliates recognized by
Investors Heritage which are eliminated for Kentucky Investors reporting.
December 31
1998 1997
Investors Heritage Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturities $193,911,467 $193,911,467 $171,782,911 $171,782,911
Equity securities 3,377,213 3,377,213 3,169,370 3,169,370
Mortgages on real estate:
Commercial 15,010,785 16,971,064 12,939,239 13,929,217
Residential 1,178,342 1,355,737 795,552 863,184
Policy loans 7,203,344 7,203,344 6,976,601 6,976,601
Other long-term
investments 437,221 437,221 403,106 403,106
Short-term investments 1,170,970 1,170,970 1,211,165 1,211,165
Investments in affiliates 1,837,510 5,531,175 1,975,382 5,116,936
Contractual obligations
of affiliate 431,035 431,035 538,794 538,794
Cash and cash equivalents 2,461,887 2,461,887 2,902,587 2,902,587
Accrued investment income 3,097,421 3,097,421 2,904,861 2,904,861
Liabilities:
Policyholder deposits
(investment-type \
contracts) $ 56,519,216 $ 52,220,665 $ 55,303,701 $49,947,246
Policy claims 2,086,316 2,086,316 2,256,654 2,256,654
Obligations under capital
leases 407,462 407,462 -0- -0-
The following methods and assumptions were used in estimating the "fair value"
disclosures for financial instruments in the accompanying financial statements
and notes thereto:
Cash, cash equivalents, short-term investments, policy loans, accrued investment
income, other long term investments and contractual obligations of affiliates:
The carrying amounts reported for these financial instruments approximate their
fair values.
Fixed maturity, equity securities, and investments in affiliates: The fair
values for fixed maturity, equity securities (including redeemable preferred
stocks) and investments in affiliates are based on quoted market prices.
Mortgage loans: The fair values for mortgage loans are estimated using
discounted cash flow analyses, using the actual spot rate yield curve in effect
at December 31.
Investment-type contracts: The fair values for the liabilities under
investment-type insurance contracts are calculated as surrender values on these
contracts.
Policy claims and obligations under capital leases: The carrying amounts
reported for these liabilities approximate their fair value.
The fair values for insurance contracts other than investment contracts are not
required to be disclosed under SFAS No. 107.
NOTE D - Investment in Affiliates/Contractual Obligation of Affiliate/Affiliate
Transactions
Investors Heritage's investment in the common stock of its parent, Kentucky
Investors, either directly or indirectly, was valued at December 31, 1998:
Cost: $1,837,510; Market: $5,531,175 and at December 31, 1997: Cost: $1,975,382;
Market: $5,116,936. Additionally, Investors Heritage holds notes receivable
from Kentucky Investors with unpaid principal balances of $431,035 and $538,794
at December 31, 1998 and 1997, respectively, with variable interest rates and
due dates ranging from 2000 to 2004. Kentucky Investors owns approximately 74%
of Investors Heritage. Sales of Kentucky Investors common stock owned by
Investors Heritage are reported by Kentucky Investors as stock issuances. The
consideration received from such sales is recorded by Kentucky Investors as
follows: an adjustment to common stock at par value of securities sold, an
adjustment to retained earnings for the cost of securities sold in excess of par
value, and an adjustment to paid in surplus for the difference in consideration
received and cost of the securities paid by Investors Heritage.
Investors Heritage owns the home office real estate and leases the property to
its parent, Kentucky Investors and its subsidiaries. Lease payments made by
Kentucky Investors and its subsidiaries to Investors Heritage (and included in
its statement of income) during 1998, 1997 and 1996 were $13,298, $13,090 and
$13,395, respectively. The carrying value of the home office real estate at
December 31, 1998 and 1997 was $1,079,426 and $1,130,844, respectively. The
effects of the lease are eliminated in Kentucky Investors statement of income.
NOTE E - Federal Income Tax
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of December 31 are as
follows:
Investors Heritage 1998 1997
Deferred tax liabilities:
Policy acquisition costs $ 7,541,000 $ 7,393,000
Net unrealized gain on
available-for-sale securities 4,427,000 2,835,000
Other 453,000 348,000
______________ _____________
Total deferred tax
liabilities $ 12,421,000 $10,576,000
Deferred tax assets:
Benefit reserves $ 5,517,000 $ 6,116,000
Other 417,000 417,000
____________ ___________
Total deferred tax
assets $ 5,934,000 $ 6,533,000
____________ ____________
Net deferred tax liabilities of
Investors Heritage $ 6,487,000 $ 4,043,000
Kentucky Investors
Deferred tax liability:
Undistributed earnings
in subsidiary 1,635,000 1,531,000
____________ __________
Net deferred tax liabilities of
Kentucky Investors $ 8,122,000 $ 5,574,000
============ ============
Federal income taxes in the consolidated balance sheets include deferred taxes
and in 1998, taxes currently payable. In 1997, taxes recoverable of $91,000 is
included in other assets in the consolidated balance sheets.
The reconciliation of income tax attributable to operations computed at the
federal statutory tax rate to income tax expense is:
1998 1997 1996
Statutory federal income tax rate 35.0% 35.0 % 35.0 %
Graduated tax rate (1.0)% (1.0)% (1.0)%
Small life insurance company deduction (7.5)% (16.5)% (37.9)%
Dividend exclusion and tax-exempt income (.6)% (1.0)% (2.1)%
Increase (decrease) in valuation ._ ._ (16.2)%
Alternative minimum taxes 1.4% 2.8 % 2.0 %
Purchase accounting differences. .6% .8 % .5 %
Other, net .4% 1.2 % 16.8 %
______ ______ ______
Effective income tax rate_
Investors Heritage 28.3% 21.3 % (2.9)%
Consolidating adjustments 4.5% 5.5 % 7.6%
______ ______ ______
Effective income tax rate_
Kentucky Investors 32.8% 26.8 % 4.7%
===== ===== ====
At December 31, 1998 approximately $4,000,000 of the retained earnings of
Investors Heritage represents earnings prior to 1984 which accumulated in an
account known as policyholders' surplus, which was not subject to income
taxation. In certain circumstances, including if distributions are made to
stockholders in excess of approximately $27,000,000, Investors Heritage could be
subject to additional federal income tax unrelated to its normal taxable income.
No provision for such income tax has been made at December 31, 1998.
Kentucky Investors made income tax payments of $135,653, $131,757 and $65,693 in
1998, 1997 and 1996, respectively. Investors Heritage made income tax payments
of $151,000, $385,000 and $620,000 in 1998, 1997 and 1996, respectively.
NOTE F - Employee Benefit Plans
As of January 1, 1998 the Company adopted SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits", which revises prior
disclosure requirements. The following tables have been reclassified to conform
with SFAS No. 132.
Kentucky Investors and Investors Heritage participate in a noncontributory
retirement plan which covers substantially all employees. Benefits are based on
years of service and the highest consecutive 60 months average earnings within
the last 120 months of credited service. Benefits are funded based on
actuarially-determined amounts.
The following tables provide additional details for Kentucky Investors on a
consolidated basis. Because the amounts for the unconsolidated parent company
and Investors Heritage Printing, Inc. are immaterial, they are not separately
presented.
1998 1997 1996
Change in benefit obligation:
Benefit obligation at
beginning of year $5,662,063 $5,173,951 $ 4,575,352
Service cost 251,795 238,817 295,721
Interest cost 430,739 382,866 343,151
Actuarial (gain) loss 72,114 (71,167) (1,456)
Benefits paid (404,779) (62,404) (38,817)
__________ __________ ___________
Benefit obligation at
end of year $6,011,932 $5,662,063 $ 5,173,951
__________ __________ ___________
Change in plan assets:
Fair value of plan assets at
beginning of year $4,771,638 $4,057,709 $ 3,460,959
Actual return on plan
assets 468,683 474,553 335,567
Employer contribution 252,000 301,780 300,000
Benefits paid (404,779) (62,404) (38,817)
__________ __________ ___________
Fair value of plan assets at
end of year $5,087,542 $4,771,638 $ 4,057,709
__________ __________ ___________
Funded status $ (924,390) $ (890,425) $(1,116,242)
Unrecognized net actuarial
loss 1,065,329 1,115,533 1,133,852
Unrecognized transition
asset (102,430) (136,574) (170,717)
Unrecognized prior service
credit (196,573) (231,676) -0-
__________ __________ ___________
Accrued pension cost $ (158,064) $ (143,142) $ (153,107)
========== ========== ===========
Components of net periodic benefit cost:
Service cost $ 251,795 $ 238,817 $ 295,721
Interest cost 430,739 382,866 343,151
Expected return on plan
assets (468,683) (474,553) (335,567)
Recognized net loss 122,318 213,931 120,443
Amortization of prior service
cost (35,103) (35,103) -0-
Amortization of transition
asset (34,144) (34,143) (34,144)
__________ __________ ___________
Net periodic benefit
cost $ 266,922 $ 291,815 $ 389,604
=========== =========== ===========
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% for 1998 and 1997. The rate of increase
in future compensation levels was 5% for 1998, 1997 and 1996. The expected
long-term rate of return on plan assets was 9% in 1998, 1997 and 1996. Plan
assets represent a deposit administration fund of Investors Heritage.
Kentucky Investors and Investors Heritage also sponsor a 401(k) defined
contribution plan. Matching contributions to the plan expensed for 1998, 1997
and 1996 were $186,000, $171,000, and $156,000, respectively.
NOTE G - Stockholders' Equity and Dividend Restrictions
Statutory restrictions limit the amount of dividends which may be paid by
Investors Heritage. Generally, dividends during any year may not be paid,
without prior regulatory approval, in excess of the lessor of (a) 10 percent of
statutory stockholders' equity as of the preceding December 31, or (b) statutory
net income for the preceding year. In addition, dividends are limited to the
amount of unassigned surplus reported for statutory purposes, which was
$9,375,173 at December 31, 1998.
NOTE H - Statutory Accounting Practices
Investors Heritage's statutory-basis capital and surplus was $13,579,260 and
$13,700,023 at December 31, 1998 and 1997, respectively. Statutory-basis net
income was $1,297,550, $1,294,586, and $1,422,626 for the years ended December
31, 1998, 1997 and 1996, respectively.
Principle adjustments to statutory amounts to derive GAAP amounts include: a)
costs of acquiring new policies are deferred and amortized; b) benefit reserves
are calculated using more realistic investment, mortality and withdrawal
assumptions; c) deferred income taxes are provided; d) value of business
acquired and goodwill are established for acquired companies; and e) accounting
for certain investments in debt securities.
Investors Heritage is domiciled in the Commonwealth of Kentucky and prepares its
statutory-basis financial statements in accordance with accounting practices
prescribed or permitted by the Kentucky Department of Insurance (the
"Department"). Currently, "prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, as well as a
variety of publications of the National Association of Insurance Commissioners
("NAIC"). "Permitted" statutory accounting practices encompass all accounting
practices that are not prescribed; such practices may differ from state to
state, may differ from company to company within a state, and may change in the
future. In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that Investors Heritage uses to prepare its statutory-basis financial
statements. Codification will require adoption by the various states before it
becomes the prescribed statutory basis of accounting for insurance companies
domesticated within those states. Accordingly, before Codification becomes
effective for Investors Heritage, Kentucky must adopt Codification as the
prescribed basis of accounting on which domestic insurers must report their
statutory basis results to the Department. At this time it is anticipated that
Kentucky will adopt Codification. Management has not yet determined the impact
of Codification on Investors Heritage statutory basis financial statements.
During the Department's 1995 quadrennial examination of Investors Heritage,
previously permitted admitted assets were required to be written-down. In 1998,
the home-office real estate, representing the sole remaining asset not yet fully
written-down to the prescribed value, was amortized in accordance with the
Department's write-down schedule by $475,646. The remaining balance associated
with the home office real estate to be written-down during 1999 is $475,646.
These adjustments had no effect, other than requiring disclosure, on Kentucky
Investors or Investors Heritage's financial statements prepared in accordance
with generally accepted accounting principles.
NOTE I - Segment and Reinsurance Data
Prior to 1998 segment data has been presented on an "industry approach" in
accordance with SFAS No. 14. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", became effective for 1998 and superceded
SFAS No. 14. SFAS No. 131 requires a "management approach" (how management
internally evaluates the operating performance of its business units) in the
presentation of business segments. The segment data that follows has been
prepared in accordance with SFAS No. 131. Previously reported information has
been restated to comply with the new requirements.
Investors Heritage operates in four segments as shown in the following table.
All segments include both individual and group insurance. Identifiable
revenues, expenses and assets are assigned directly to the applicable segment.
Net investment income and invested assets are generally allocated to the
insurance and the corporate segments in proportion to policy liabilities and
stockholders' equity, respectively. Certain assets, such as property and
equipment and investments in affiliates, are assigned to the Corporate segment.
Goodwill has been allocated to the insurance lines based upon the mix of
business of companies acquired. Corporate segment results for the parent
company, Investors Heritage Printing, Inc., and Investors Heritage Financial
Services Group are immaterial, after elimination of intercompany amounts, and
are not presented.
1998 1997 1996
(000's omitted)
Revenue:
Preneed & Burial Products $ 41,319 $ 36,995 $ 33,213
Traditional & Universal Life
Products 14,146 13,950 13,454
Credit Insurance Products &
Administrative Services 307 152 (330)
Corporate & other 1,689 1,400 1,443
_________ _________ _________
$ 57,461 $ 52,497 $ 47,780
========= ========= =========
Pre-Tax Income from Operations:
Preneed & Burial Products $ 2,686 $ 2,524 $ 913
Traditional & Universal Life
Products 1,236 852 1,528
Credit Insurance Products &
Administrative Services (395) (666) (579)
Corporate & other 333 (7) (306)
_________ ________ _________
$ 3,860 $ 2,703 $ 1,556
========= ========= =========
Assets:
Preneed & Burial Products $ 139,993 $123,111 $104,708
Traditional & Universal Life
Products 75,168 72,586 69,600
Credit Insurance Products &
Administrative Services 21,987 15,385 9,724
Corporate & other 52,677 47,572 43,108
_________ ________ ________
$ 289,825 $258,654 $227,140
========= ======== ========
Amortization and Depreciation Expense:
Preneed & Burial Products $ 4,056 $ 4,361 $ 4,328
Traditional & Universal Life
Products 2,249 1,951 1,281
Credit Insurance Products &
Administrative Services 149 460 1,216
Corporate & other 425 523 393
_________ ________ _________
$ 6,879 $ 7,295 $ 7,218
========= ======== =========
Investors Heritage ceded 100% of the risks associated with its credit life and
accident insurance written during 1998, 1997 and 1996 through coinsurance
agreements with various companies. Investors Heritage administers the ceded
credit life and accident insurance for an agreed-upon fee. During 1998, 1997
and 1996, Investors Heritage received $612,081, $505,400 and $410,062,
respectively, of fee income associated with these reinsurance arrangements.
Ceded benefit and claim reserves associated with these reinsurance arrangements
at December 31, 1998 and 1997 were $17,310,827 and $11,460,482, respectively.
Additionally, Investors Heritage utilizes yearly renewable term reinsurance to
cede life insurance coverage in excess of its retention limit which has been set
at $100,000. Total premiums ceded amounted to $18,123,000, $14,468,000 and
$9,978,000 in 1998, 1997 and 1996, respectively and commissions and expense
allowances received were $10,900,000, $8,657,000 and $5,795,000 in 1998, 1997
and 1996, respectively. Unearned premium reserves were reduced by $19,859,000
and $13,785,000 at December 31, 1998 and 1997, respectively, for credit-related
reinsurance transactions. Benefit recoveries associated with Investors Heritage
ceded reinsurance contracts were $2,403,000, $1,956,000 and $1,421,000 in 1998,
1997 and 1996, respectively. Investors Heritage remains contingently liable on
all ceded insurance should any reinsurer be unable to meet their obligations.
Assumed reinsurance premiums were $2,787,000, $2,855,000 and $3,734,000 in 1998,
1997 and 1996, respectively.
NOTE J - Contingent Liabilities
Investors Heritage is named as a defendant in a number of legal actions arising
primarily from claims made under insurance policies. Management and its legal
counsel are of the opinion that the settlement of those actions will not have a
material adverse effect on Investors Heritage's financial position or results of
operations.
In most of the states in which Investors Heritage is licensed to do business,
guaranty fund assessments may be taken as a credit against premium taxes over a
five year period. These assessments, brought about by the insolvency of life
and health insurers, are levied at the discretion of the various state guaranty
fund associations to cover association obligations. There has been a
significant increase in recent years of guaranty fund assessments. There is no
reasonable way to determine if the assessments will increase or decrease in the
future, but management is of the opinion that the effect would not be material
on the financial position or results of operations of either Investors Heritage
or Kentucky Investors because of the use of premium tax off-sets.
<PAGE>
Stock Information
Stock Prices
OTC Bulletin Board MARKET QUOTATIONS
Investors Heritage Life Insurance Company
1998 MARKET PRICE RANGE
March June Sept. Dec.
26 - 26 1/2 26 1/2 - 28 26 - 28 25 - 26 1/2
1998 Annual Dividend Per Share - $.76
1997 MARKET PRICE RANGE
March June Sept. Dec.
26 - 28 26 - 29 26 - 29 26 1/2 - 29
1997 Annual Dividend Per Share - $.76
Kentucky Investors
1998 MARKET PRICE RANGE
March June Sept. Dec.
16 - 16-3/4 17 - 20 20 - 20-1/2 18 - 20
1998 Annual Dividend Per Share - $.38
1997 MARKET PRICE RANGE
March June Sept. Dec.
13 1/2 - 14 1/4 13 3/4 - 14 5/8 14 3/4 - 15 3/4 16 - 16 1/2
1997 Annual Dividend Per Share - $.38
The stock of both companies is quoted on the OTC Bulletin Board. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission,
and may not represent actual transactions. The symbol for Investors Heritage
Life is INLF and the symbol for Kentucky Investors is KINV.
The 1999 cash dividend to be paid to its stockholders by Investors Heritage Life
on April 9, 1999 is $.76 per share, and the cash dividend to be paid on the same
date to its shareholders by Kentucky Investors is $.38 per share.
ANNUAL MEETING
The 1999 meeting of shareholders of Investors Heritage Life Insurance Company is
scheduled for 10 a.m. on Thursday, May 13, 1999, at the company auditorium,
Second and Shelby Streets, Frankfort, Kentucky. The annual meeting of
shareholders of Kentucky Investors, Inc., is scheduled for the same date and
location at 11 a.m.
FORM 10-K
A copy of the Form 10-K Annual Report to the Securities and Exchange Commission
for either Company can be obtained upon request to the Secretary of that
company.
TRANSFER AGENT
Investors Heritage Life Insurance Company
Stock Transfer Department
P.O. Box 717
Frankfort, Kentucky 40602
(502) 223-2364 - EXT. 305
<PAGE>
<TABLE>
[ARTICLE] 7
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] DEC-31-1998
[DEBT-HELD-FOR-SALE] 193,911,467
[DEBT-CARRYING-VALUE] 0
[DEBT-MARKET-VALUE] 0
[EQUITIES] 3,378,471
[MORTGAGE] 16,189,127
[REAL-ESTATE] 0
[TOTAL-INVEST] 222,372,207
[CASH] 2,514,371
[RECOVER-REINSURE] 186,154
[DEFERRED-ACQUISITION] 27,288,684
[TOTAL-ASSETS] 288,368,775
[POLICY-LOSSES] 207,115,725
[UNEARNED-PREMIUMS] 20,069,565
[POLICY-OTHER] 2,086,316
[POLICY-HOLDER-FUNDS] 1,838,602
[NOTES-PAYABLE] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 848,116
[OTHER-SE] 31,376,619
[TOTAL-LIABILITY-AND-EQUITY] 288,368,775
[PREMIUMS] 42,638,289
[INVESTMENT-INCOME] 14,167,232
[INVESTMENT-GAINS] 126,179
[OTHER-INCOME] 776,612
[BENEFITS] 20,767,497
[UNDERWRITING-AMORTIZATION] (509,103)
[UNDERWRITING-OTHER] 33,439,632
[INCOME-PRETAX] 4,010,286
[INCOME-TAX] 1,314,000
[INCOME-CONTINUING] 2,696,286
[DISCONTINUED] 0
[EXTRAORDINARY] 721,149
[CHANGES] 0
[NET-INCOME] 1,975,137
[EPS-BASIC] 2.34
[EPS-DILUTED] 0
[RESERVE-OPEN] 0
[PROVISION-CURRENT] 0
[PROVISION-PRIOR] 0
[PAYMENTS-CURRENT] 0
[PAYMENTS-PRIOR] 0
[RESERVE-CLOSE] 0
[CUMULATIVE-DEFICIENCY] 0
</TABLE>
INVESTORS HERITAGE LIFE INSURANCE COMPANY
200 Capital Avenue
FRANKFORT, KENTUCKY 40601
Notice of Annual Meeting of Shareholders
To Be Held May 13, 1999
TO THE SHAREHOLDERS OF
INVESTORS HERITAGE LIFE INSURANCE COMPANY
Notice is hereby given that the annual meeting of shareholders of Investors
Heritage Life Insurance Company, a Kentucky corporation, (the "Company") will be
held at the Investors Heritage Life Insurance Company auditorium, Second and
Shelby Streets, Frankfort, Kentucky 40601, on Thursday, May 13, 1999, at 10:00
a.m. (Eastern Daylight Time), for the following purposes:
(1) To elect three Directors to hold office for a term of three years each
or until their successors are duly elected and qualified; and
(2) To transact such other business as may properly come before the
meeting, or any adjournment thereof.
The Board of Directors, in accordance with the By-laws, has fixed the close
of business on March 26, 1999, as the record date for determining the
shareholders entitled to notice of and to vote at the meeting and any
adjournment thereof. The stock transfer books will not be closed.
It is hoped that you will attend the meeting, but if it is not your
intention to be present, you are respectfully requested to sign, date and return
the enclosed proxy immediately in the accompanying postage-prepaid envelope. The
proxy is being solicited by and on behalf of the Board of Directors of the
Company.
Your attention is directed to the Company's 1998 annual report and to the
proxy statement, both of which accompany this notice.
By Order of the Board of Directors
/s/
Wilma Yeary, FLMI/CPS, Secretary
P.O. Box 717
Frankfort, Kentucky 40602
April 16, 1999
<PAGE>
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS, MAY 13, 1999
The following information is furnished in connection with the solicitation
of the enclosed proxy by and on behalf of the Board of Directors of Investors
Heritage Life Insurance Company (the "Company" or "IHLIC"), for use at the
annual meeting of shareholders of the Company to be held at the Investors
Heritage Life Insurance Company auditorium, Second and Shelby Streets,
Frankfort, Kentucky 40601, on Thursday, May 13, 1999, at 10:00 a.m. (Eastern
Daylight Time), and at any adjournment thereof, for the purposes set forth in
the Notice of Annual Meeting.
PROXY MAY BE REVOKED
A shareholder executing and returning the enclosed proxy may revoke such
proxy at any time prior to the exercise of the authority thereby given by giving
written notice to the Secretary of the Company as provided by Kentucky Revised
Statutes 271B.7-220(6).
COST AND METHOD OF SOLICITATION
The Board of Directors intends to solicit proxies by use of the mails, and
all cost of soliciting proxies for this annual meeting will be borne by the
Company. The proxy statements and proxy cards will be mailed to the
shareholders on April 16, 1999.
VOTING SECURITIES
The Company has issued one class of capital stock. There are 904,373
shares outstanding each of which is entitled to one vote, except that in
election of Directors, cumulative voting rights apply as provided by Kentucky
Revised Statutes 271B.7-280. Each shareholder shall have the right to cast as
many votes in the aggregate as he is entitled to vote, multiplied by the number
of Directors to be elected, and may cast the whole number for one candidate or
distribute such votes among two or more candidates. Kentucky Investors, Inc.
("KII"), 200 Capital Avenue, Frankfort, Kentucky 40601, owns of record directly
and indirectly 670,146 shares of stock which represents 74% of outstanding
voting securities. The Company owns directly 216,399 shares or 19% of the stock
of KII. Investors Underwriters, Inc. ("IUI"), 200 Capital Avenue, Frankfort,
Kentucky 40601, owns 94,185 shares or 8% of the stock of KII. No other person
is known by the Company to own of record or beneficially more than 5% of the
Company's capital stock except as shown in the table below. The Board of
Directors has fixed March 26, 1999, as the record date for determining those
eligible to vote, and only such persons as are shareholders of record at the
close of business on that day will be entitled to vote at such meeting and any
adjournment thereof.
THE PURPOSE OF THE MEETING SHALL BE:
(1) To elect three Directors to hold office for a term of three years each
or until their successors are duly elected and qualified; and
(2) To transact such other business as may properly come before the
meeting, or any adjournment thereof.
ELECTION OF DIRECTORS
The Articles of Incorporation provide that three Directors shall be elected
at each annual meeting for a term of three years.
The persons named in the proxy shall vote the shares represented by the
proxies returned and duly executed in favor of the election of the three
Directors named below, unless the authority is withheld, to hold office for
terms of three years each or until their successors are duly elected and
qualified. All nominees have consented to serve. In the event any of the
persons named below shall not be available, proxies will be voted for such
substitute nominee, or nominees, as the persons named in the proxy shall
designate.
The following information is given with respect to the nominees for
election as Director and for each of the other Directors whose terms will
continue after the meeting. Each Director was elected to his present term of
office by vote of the shareholders at an annual meeting except for Gordon Duke
who was elected by the Board of Directors on August 15, 1996, to fill the
unexpired term of Joe R. Johnson who passed away on July 17, 1996.
Each of the Directors has had the business experience indicated for more
than five years except Gordon Duke and Michael F. Dudgeon, Jr. and since 1992
Mr. Duke has been President of Court Key, Inc. From February 1994, until March
1999, Mr. Duke was the Executive Vice President, Asset Management Division for
Webb Companies Lexington, Kentucky. On March 8, 1999 Mr. Duke was employed by
the Commonwealth of Kentucky, Department of Financial Incentives, Cabinet for
Economic Development. From August, 1991 to February 1993 Mr. Dudgeon was
employed as Assistant Director of Annual Giving with Rollins College, Winter
Park, Florida. From February, 1993 to December 1993 he was employed as
Assistant Director of Development, The Corporation for Special Children,
Orlando, Florida. On December 19, 1994 he was hired by IHLIC as a Regional
Preneed Sales Director. On May 16, 1998 he became Vice President Financial
Services for the Company.
<PAGE>
Number of Shares of Capital Stock of the Company and Its Parent Beneficially
Owned, Directly or Indirectly, by Nominees and Directors as of December 31, 1998
Name, Position Ky Percentage
With the Company Director Investors of Stock
& Business Experience Since IHLIC Inc. (Parent) Owned
===========================================================================
Nominees:
cHelen S. Wagner 1986 2,500(1) 30,000(2) (-)
Director. Real Estate Broker, Secretary/
Treasurer, Wagner-Shuck Builders, Inc.
Director, Kentucky Investors, Inc. Age 62.
*+Jerry F. Howell 1964 567(3) 6,000(4) (-)
abDirector. Independent Investor.
cDirector, Kentucky Investors, Inc. Age 85.
aMichael F. Dudgeon, Jr. 1988 35(5) 3,897(6) (-)
Director, Vice President, Financial Services.
Age 37.
Other Directors Whose Terms Will Continue After Meeting:
+Gordon C. Duke, Director. 1996 55 110 (-)
Commonwealth of Kentucky,
Dept. of Financial Incentives,
Cabinet for Economic Development.
Director, KII. Age 53.
aDr. Jerry F. Howell, Jr. 1987 1,124 33,500 (-)
Director, Professor Emeritus,
Dept. of Biological and
Environmental Sciences, Morehead
State University. Director, KII. Age 57.
*+Robert M. Hardy, Jr. 1986 29(7) 14,285(8) (-)
Director. Vice President &
General Counsel. Director.
General Counsel, KII. Age 41.
*+Harry Lee Waterfield II 1966 755,379 776,680 (83%)
abChairman of the Board, (9)(10) (11)(12)
cPresident and Chief Executive Officer.(13)(14)(15) (16)(17)(18)
Chairman of the Board, President, (19)(20)(21) (22)(23)(24)(25)
Kentucky Investors, Inc. Age 55. (26)(27)
*aAdron Doran 1972 510 125 (-)
bcDirector. President Emeritus,
Morehead State University. Age 89.
+H. Glenn Doran 1992 783 20,000 (-)
Director. Chairman of the Board,
Peoples Bank of Murray.
Director, KII. Age 73.
All Directors and Officers as a Group: 798,279
* Member of Executive Committee b Member of Compensation Committee
+ Member of Finance Committee c Member of Nominating Committee
a Audit Committee (-) Indicates less than 1%
- - -----------------------------------------------------------------------------
(1) Includes 1,538 shares of IHLIC held in an irrevocable trust for the benefit
of the children of Helen S. Wagner.
(2) Includes 8,936 shares of KII held in an irrevocable trust for the benefit of
the children of Helen S. Wagner.
(3) All shares are held in Trust under the Jerry F. Howell, Sr. revocable living
trust agreement dated 3/7/96.
(4) All shares are held in Trust under the Jerry F. Howell, Sr. revocable living
trust agreement dated 3/7/96.
(5) Includes 6 shares of IHLIC held in Trust by Farmers Bank under the 401(k)
Plan.
(6) Includes 826 shares of KII held in Trust by Farmers Bank under the 401(k)
Plan.
(7) Includes 18 shares of IHLIC held in Trust by Farmers Bank under the 401(k)
Plan.
(8) Includes 5,485 shares of KII held in Trust by Farmers Bank under the 401(k)
Plan.
(9) Includes 7,900 shares of IHLIC owned by HLW Investment Corp. of which Mr.
Waterfield II is an officer.
(10) Includes 642 shares of IHLIC owned by HLW Corporation of which Mr.
Waterfield II is an officer.
(11) Mr. Waterfield II is part of a group which includes HLW Investment Corp.,
HLW Corporation, RoseGayle Waterfield Hardy, Nancy Waterfield Walton, Harry Lee
Waterfield II Irrevocable Trusts Funds 1, 2, 3 and 4, RoseGayle Waterfield Hardy
Irrevocable Trusts Funds 1, 2, 3 and 4, Nancy Waterfield Walton Irrevocable
Trusts Funds 1, 2, 3 and 4, RoseGayle Waterfield Hardy, Nancy Waterfield Walton
and Harry Lee Waterfield II Trust dated 11/22/76, Investors Heritage Life
Insurance Company, Investors Underwriters, Inc., TAP & CO., and Kentucky
Investors, Inc. Employee Retirement Plan.
(12) Includes 130,824 shares of KII owned by HLW Investment Corp. of which Mr.
Waterfield II is an officer.
(13) Includes 3,038 shares of IHLIC held in the name of CEDE & CO., nominee for
the four separate irrevocable trusts for Harry Lee Waterfield II, RoseGayle
Waterfield Hardy and Nancy Waterfield Walton.
(14) Includes 200 shares of IHLIC held by Nancy Waterfield Walton -- see
Footnote (11).
(15) Includes 241 shares of IHLIC held by RoseGayle Waterfield Hardy - see
Footnote (11).
(16) Includes 41,836 shares of KII owned by HLW Corporation of which Mr.
Waterfield II is an officer.
(17) Includes 15,222 shares of KII held in trust for the benefit of the children
of Harry Lee Waterfield.
(18) Includes 15,691 shares of KII held in Trust by Farmers Bank and Capital
Trust Company, Frankfort, Kentucky ("Farmers Bank") under the KII and Affiliated
Companies 401(k) Savings Plan and Trust Agreement ("401(k) Plan").
(19) Includes 72,745 or 6% of the shares of IHLIC held in the name of TAP & CO.
for the benefit of employees who participate in the 401(k) Plan. Mr. Waterfield
II is a member of the Administrative Committee that directs the voting of these
shares.
(20) Includes 2,165 shares of IHLIC owned by Investors Heritage Printing, Inc.
of which Mr. Waterfield II is an officer.
(21) Includes 663,202 shares of IHLIC owned by KII of which Mr. Waterfield II is
an officer.
(22) Includes 12,063 shares of KII held by Nancy Waterfield Walton - see
Footnote (11).
(23) Includes 9,502 shares of KII held by RoseGayle Waterfield Hardy - see
Footnote (11).
(24) Includes 228,920 shares of KII held by IHLIC and 94,185 shares of KII held
by IUI. Mr. Waterfield II is Chairman of both companies. These corporations
have the power to dispose of these shares.
(25) Includes 145,299 shares or 17% of the shares of KII held in the name of TAP
& CO. for the benefit of employees who participate in the 401(k) Plan. Mr.
Waterfield II is a member of the Administrative Committee that directs the
voting of these shares.
(26) Includes 32,559 shares of KII held in twelve separate irrevocable trusts,
four each (Funds 1, 2, 3 and 4) for Harry Lee Waterfield II, RoseGayle
Waterfield Hardy, and Nancy Waterfield Walton, respectively.
(27) Includes 31,000 shares of KII owned by the Kentucky Investors, Inc.
Employee Retirement Plan. Mr. Waterfield II is a member of the Retirement Plan
Committee.
Meetings of the Board of Directors are held regularly each month and there
is also an organizational meeting following the annual meeting of shareholders.
The Board held 11 meetings in 1998.
The By-laws of the Company provide for an Executive Committee. The
Committee has and exercises all of the powers of the Board of Directors in the
management of the business affairs and property of the Company during the
intervals between meetings of the Board. The Board considers the actions of the
Executive Committee and has approval and veto power over its actions. The
Executive Committee met 5 times in 1998.
The Board of Directors has designated a Finance Committee that meets on
call and reviews and makes recommendations concerning investments to the Board
of Directors. The Finance Committee met 10 times during 1998.
The Board of Directors has provided for a Compensation Committee that meets
on call and reviews the compensation of the employees and makes recommendations
to the Board. The Compensation Committee met 12 times during 1998.
The Board has designated an Audit Committee that meets on call and reviews
the work of the independent auditors, reviews internally prepared financial
statements for unusual trends and/or financial account relationships and reviews
the audit reports prepared by the departments of insurance and regulatory
authorities in the various states in which the Company operates. The Audit
Committee met 1 time during 1998.
<PAGE>
The Board of Directors has named a Nominating Committee that meets on call
and submits recommendations to the Board of Directors for members of the Board
to be submitted to the shareholders for election. The Nominating Committee met
1 time during 1998.
No one, except Jerry F. Howell attended fewer than 75% of the aggregate
Board and Committee meetings. The Directors were paid $400 for each Board
meeting.
SHAREHOLDER PROPOSALS FOR THE 2000 MEETING
Shareholders who wish to suggest nominees or offer proposals intended to be
presented at the 2000 annual meeting must forward this information to the
Secretary of the Company no later than December 17, 1999.
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERVIEW AND PHILOSOPHY
During 1998, the Compensation Committee of the Board of Directors was
comprised of three Directors. All of the members of the Compensation Committee
except Mr. Waterfield II are outside directors. The Compensation Committee is
responsible for developing and making recommendations to the Board with respect
to the Company's executive compensation policies as well as the compensation
policies for all of the Company's employees. Additionally, the Compensation
Committee, pursuant to authority delegated by the Board of Directors, determines
on an annual basis the compensation to be paid to the chief executive officer
and each of the other executive officers of the Company. All members of the
Committee take part in consideration of executive compensation even if
compensation affects its members.
With the exception of the Company's Vice President and Chief Actuary and
Company's General Counsel whose original compensations were based on salary and
benefits of actuaries and attorneys respectively with similar background and
experience, the compensation of the executive officers of the Company is based
on historical and current individual performance, job duties and
responsibilities and longevity with the Company. Notwithstanding those
criteria, the Compensation Committee makes a subjective determination using its
discretion to set executive compensation at levels warranted in its judgment by
external, internal or an individual's circumstances. It should be noted that
the Compensation Committee determines executive compensation in the same manner
as the compensation of all other Company employees.
The Company's executive compensation program is comprised of base salary,
an annual cash bonus based on a percentage of salary, and employee benefits
which are generally available to all employees of the Company including a 401(k)
Savings Plan, a defined benefit retirement plan, and a cafeteria plan. The
Company also provides a deferred compensation plan that is available to eligible
executive officers of the Company. This plan is intended to supplement or
replace participation of those individuals in the 401(k) Savings Plan and allows
eligible executive officers to contribute up to 10% of salary and receive a
matching contribution from the Company. In addition, bonuses are paid from time
to time to executive officers and other employees for performance on
extraordinary projects. The Compensation Committee also makes a subjective
determination in authorizing these bonuses.
The amount of perquisites, as determined in accordance with the rules of
the Securities and Exchange Commission relating to Executive Compensation, did
not exceed 10% of salary for 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of three members. Two of the members,
Jerry F. Howell and Adron Doran, are outside directors. The third member, Harry
Lee Waterfield II, is also the Chairman of the Board, and the President and
Chief Executive Officer of the Company.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Waterfield II is the President of the Company and as such serves as its
chief executive officer. He also serves as Chairman of the Board of Directors.
Mr. Waterfield II was appointed to the position of President and Chairman of the
Board in August 1988. Mr. Waterfield's II compensation is based on criteria
similar to that used for other executive officers of the Company. Mr.
Waterfield II has been an employee of the Company in various capacities for 37
years and has received raises throughout the years for the various capacities in
which he has served.
<PAGE>
When Mr. Waterfield II assumed the duties and responsibilities of Chief
Executive Officer and Chairman of the Board, he did not receive an increase in
base compensation commensurate with the additional responsibilities undertaken.
Since that date, he has received salary adjustments from the Compensation
Committee on the anniversary date of his employment. The compensation paid to
Mr. Waterfield II during 1998 is shown in the summary compensation table below.
SUMMARY COMPENSATION TABLE
The following table sets forth each executive officer whose aggregate
direct compensation from Investors Heritage Life Insurance Company exceeded
$100,000.
NAME AND PRINCIPAL OTHER ANNUAL
POSITION YEAR SALARY($) BONUS($) COMPENSATION
=========================================================================
Harry Lee Waterfield II 1998 $163,780(1) $20,597 -0-
President, Chairman 1997 $158,684(1) $20,177 -0-
of the Board, & 1996 $153,293(1) $18,686 -0-
Chief Executive Officer
Howard L. Graham 1998 $121,460(1) $10,542 -0-
Vice President- 1997 $117,694(2) $10,181 -0-
Corporate Services 1996 $113,064(2) $ 9,825 -0-
Raymond L. Carr 1998 $107,818(1) $11,769 -0-
Vice President- 1997 $ 98,962(1) $10,983 -0-
Administrative Services 1996 $101,228(1) $ 8,967 -0-
Robert M. Hardy, Jr. 1998 $ 92,398(1) $10,414 -0-
Vice President, General
Counsel, Director
- -------------------------------------------------------------------------------
(1) Amounts reported consist of directors' fees from the Company and of
contributions made by the Company under the 401(k) Plan. The Plan is available
to all employees of the Company.
(2) Amounts reported consist of contributions made by the Company under the
401(k) Plan which is available to all employees of the Company and contributions
made by the Company to the Company's Deferred Compensation Plan which is
available to eligible executive officers of the Company.
STOCK PERFORMANCE GRAPH
The following graph sets forth the cumulative total shareholder return
(assuming reinvestment of dividends) to the Company's shareholders during the
five year period ended December 31, 1998, as well as an overall stock market
index (Russell 2000), and the Company's peer group index utilized for the period
ending December 31, 1995 ("Peer Group") which has been selected on an industry
basis. The component companies utilized in the Peer Group are identical to the
Peer Group presented last year and includes Cotton States Life and Health
Insurance Co., Penn Treaty American Corp., Reliable Life Insurance Co. -CLA.,
and Allied Life Financial and Citizens, Inc. Reliable Life Insurance Co. -CIA
and Allied Life Financial were acquired during 1998. Therefore, only partial
total return information was available for those Companies and they will not be
included in next year's Peer Group. The market capitalization of each peer
group company is weighted in the performance graph set forth below.
<PAGE>
COMPARISON OF FIVE-YEAR TOTAL RETURNS *
INVESTORS HERITAGE LIFE INSURANCE COMPANY, RUSSELL 2000 INDEX, PEER GROUP
(Performance Results Through 12/31/98)
The Performance Graph Appears Here.
1993 1994 1995 1996 1997 1998
INLF $100.00 $102.85 $105.85 $109.94 $114.08 $124.73
RUSSELL 2000 $100.00 $ 98.02 $125.89 $146.59 $179.13 $187.20
PEER GROUP $100.00 $106.98 $127.61 $152.92 $188.47 $174.21
Assumes $100.00 invested at the close of trading 12/93 in Investors Heritage
Life Insurance Company common stock, Russell 2000 Index, and Peer Group.
* Cumulative total return assumes reinvestment of dividends.
Source: Value Line, Inc.
Factual material is obtained from sources believed to be reliable, but the
publisher is not responsible for any errors or omissions contained herein.
RETIREMENT PLAN
All of the Company's employees are covered by a qualified retirement plan
to which only the Company contributes. Benefits are based both upon years of
service and the highest consecutive five-year average annual salaries. The
estimated benefits are subject to the provisions of the Internal Revenue Code of
1954, as amended, which limits the annual benefits which may be paid from a tax
qualified retirement plan.
The following table sets forth certain levels of earnings and the estimated
annual benefits payable upon normal retirement under the qualified retirement
plan for the years of service indicated.
As of December 31, 1998, the officers named in the summary compensation
table have been credited with the following number of years of service: Harry
Lee Waterfield II, 36 years; Howard L. Graham, 33 years; Raymond L. Carr 26
years and Robert M. Hardy, Jr., 11 years.
HIGHEST AVERAGE
ANNUAL EARNINGS
FOR FIVE CONSECUTIVE ESTIMATED ANNUAL BENEFITS
YEARS DURING 10 YEAR UPON RETIREMENT FOR YEARS
PERIOD PRECEDING OF SERVICE INDICATED
RETIREMENT 10 YEARS 15 YEARS 20 YEARS 25 YEARS
- - -------------------------------------------------------------------
$ 40,000 $ 8,000 $ 12,000 $ 16,000 $ 20,000
60,000 12,000 18,000 24,000 30,000
80,000 16,000 24,000 32,000 40,000
100,000 20,000 30,000 40,000 50,000
120,000 24,000 36,000 48,000 60,000
<PAGE>
AUDITORS
Ernst & Young, LLP, Louisville, Kentucky, is the independent auditing firm
for the Company and has been since 1981, including the most recent year of 1998.
A representative is expected to be present at the shareholders' meeting with the
opportunity to make a statement and will respond to appropriate questions. The
services provided by Ernst & Young, LLP during 1998 consisted of the audit of
the Company's financial statements and audit of the Company's employee benefit
plans. No member of the firm of Ernst & Young, LLP has any relationship with the
Company other than the usual relationship that exists between independent
auditors and clients.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no transactions to which the Company was or is to be a party in
which any officer, Director, or nominee for election as Director, had any direct
or indirect material interest.
At the date of this proxy statement, management knows of no other matters
that may come before the meeting. However, if any other matters properly come
before the meeting, it is the intention of the persons named in the proxy
statement to vote on such matters in accordance with their best judgement.
By Order of the Board of Directors
INVESTORS HERITAGE LIFE INSURANCE COMPANY
/s/
Wilma Yeary, FLMI/CPS, Secretary
Frankfort, Kentucky
April 16, 1999
<PAGE>
_ Proxy_ INVESTORS HERITAGE LIFE INSURANCE COMPANY_ Proxy_
200 CAPITAL AVENUE, FRANKFORT, KENTUCKY 40601
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Harry Lee Waterfield II and Jerry F. Howell, or
either of them, attorneys with full power of substitution to vote as proxies for
the undersigned at the annual meeting of shareholders of Investors Heritage
Life Insurance Company to be held on May 13, 1999, or at any adjournment
thereof, and vote as designated below with all powers the undersigned would
possess, if present, upon matters described in the Notice of Annual Meeting and
Proxy Statement dated April 16, 1999 as follows:
(1)Election of Directors
_______ FOR all nominees listed below (except as marked to the contrary below)
_______ WITHHOLD AUTHORITY to vote for all nominees below
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW:
Helen S. Wagner Jerry F. Howell Michael F. Dudgeon, Jr.
(2) On any other matter which may come before the meeting in accordance with
their best judgement.
PLEASE SIGN, DATE AND MAIL PROMPTLY IN THE ENCLOSED ENVELOPE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL PROPOSALS.
To be counted this proxy must be signed, dated and received by the Corporate
Secretary of Investors Heritage Life Insurance Company, 200 Capital Avenue, P.
O. Box 717, Frankfort, Kentucky 40602, on or before May 13, 1999.
This proxy when properly executed will be voted in accordance with instructions
specified but in the absence of any instructions will be voted "FOR".
Please sign exactly as name appears on address. If shares of stock are held
jointly, all joint owners should sign. If signing as attorney, administrator,
executor, guardian, trustee or corporate officer, please add your title as such.
- - -------------------------------------------------------------------------
Shareholder's signature
Date---------------------------------, 1999
KENTUCKY INVESTORS, INC.
200 CAPITAL AVENUE
FRANKFORT, KENTUCKY 40601
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 13, 1999
TO THE SHAREHOLDERS OF
KENTUCKY INVESTORS, INC.
Notice is hereby given that the annual meeting of shareholders of Kentucky
Investors, Inc., a Kentucky corporation, (the "Company") will be held at the
Investors Heritage Life Insurance Company auditorium, Second and Shelby Streets,
Frankfort, Kentucky 40601, on Thursday, May 13, 1999, at 11:00 A.M. (Eastern
Daylight Time), for the following purposes:
(1) To elect three Directors to hold office for a term of three years each
or until their successors are duly elected and qualified; and
(2) To transact such other business as may properly come before the
meeting, or any adjournment thereof.
The Board of Directors, in accordance with the By-laws, has fixed the close
of business on March 26, 1999, as the record date for determining the
shareholders entitled to notice of and to vote at the meeting and any
adjournment thereof. The stock transfer books will not be closed.
It is hoped that you will attend the meeting, but if it is not your
intention to be present, you are respectfully requested to sign, date and return
the enclosed proxy immediately in the accompanying postage-prepaid envelope.
The proxy is being solicited by and on behalf of the Board of Directors of the
Company.
Your attention is directed to the Company's 1998 annual report and to the
proxy statement, both of which accompany this notice.
By Order of the Board of Directors
/s/
Wilma Yeary, FLMI/CPS, Secretary
P.O. Box 717
Frankfort, Kentucky 40602
April 16, 1999
<PAGE>
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS, MAY 13, 1999
The following information is furnished in connection with the solicitation
of the enclosed proxy by and on behalf of the Board of Directors of Kentucky
Investors, Inc. (the "Company" or "KII"), for use at the annual meeting of
shareholders of the Company to be held at the Investors Heritage Life Insurance
Company auditorium, Second and Shelby Streets, Frankfort, Kentucky 40601, on
Thursday, May 13, 1999, at 11:00 A.M. (Eastern Daylight Time), and at any
adjournment thereof, for the purposes set forth in the Notice of Annual Meeting.
PROXY MAY BE REVOKED
A shareholder executing and returning the enclosed proxy may revoke such
proxy at any time prior to exercise of the authority thereby given by giving
written notice to the Secretary of the Company as provided by Kentucky Revised
Statutes 271B.7-220(6).
COST AND METHOD OF SOLICITATION
The Board of Directors intends to solicit proxies by use of the mails, and
all costs of soliciting proxies for this annual meeting will be borne by the
Company. The proxy statement and form of proxy will be mailed to the
shareholders on April 16, 1999.
VOTING SECURITIES
The Company has issued one class of capital stock. There are 1,158,700
shares outstanding of which 848,116 are entitled to one vote each, except that
in election of Directors, cumulative voting rights apply as provided by Kentucky
Revised Statutes 271B.7-280. Each shareholder shall have the right to cast as
many votes in the aggregate as he is entitled to vote, multiplied by the number
of Directors to be elected, and may cast the whole number for one candidate or
distribute such votes among two or more candidates. Investors Heritage Life
Insurance Company ("IHLIC"), 200 Capital Avenue, Frankfort, Kentucky 40601 holds
directly 216,399 shares or 19% of the stock of the Company. Investors
Underwriters, Inc. ("IUI"), 200 Capital Avenue, Frankfort, Kentucky 40601 owns
94,185 shares or 8% of the stock of the Company. IHLIC owns 603 shares or 96%
of the stock of Investors Underwriters, Inc. HLW Investment Corp., 200 Capital
Avenue, Frankfort, Kentucky 40601 owns 130,824 shares or 11% of the Company. No
other person is known by the Company to own of record, or beneficially, more
than 5% of the Company's capital stock except as shown on the table below. The
Board of Directors has fixed March 26, 1999, as the record date for determining
those eligible to vote, and only such persons as are shareholders of record at
the close of business on that day will be entitled to vote at such meeting, and
at any adjournment thereof.
THE PURPOSE OF THE MEETING SHALL BE:
(1) To elect three Directors to hold office for a term of three years each
or until their successors are duly elected and qualified; and
(2) To transact such other business as may properly come before the
meeting, or any adjournment thereof.
ELECTION OF DIRECTORS
The Articles of Incorporation provide that three Directors shall be elected
at each annual meeting for a term of three years.
The persons named in the proxy shall vote the shares represented by the
proxies returned and duly executed in favor of the election of the three
Directors named below, unless the authority is withheld, to hold office for
terms of three years each or until their successors are duly elected and
qualified. All nominees have consented to serve. In the event any of the
persons named below shall not be available, proxies will be voted for such
substitute nominee, or nominees, as the persons named in the proxy shall
designate.
The following information is given with respect to the nominees for
election as Directors and for each of the other Directors whose terms will
continue after the meeting except as noted. Each Director was elected to his
present term of office by vote of the shareholders at an annual meeting. Each
of the Directors has had the business experience indicated for more than five
years except for Gordon Duke. In 1992 Mr. Duke became President of Court Key,
Inc. In February 1994 Mr. Duke became Executive Vice President, Asset
Management Division for Webb Companies, Lexington, Kentucky. On March 8, 1999
Mr. Duke was employed by the Commonwealth of Kentucky, Department of Financial
Incentives, Cabinet for Economic Development.
<PAGE>
Number of Shares of Capital Stock of the Company and Its Subsidiaries
Beneficially Owned, Directly or Indirectly, by Nominees and Other Directors as
of December 31, 1998
Name, Position Kentucky IHLIC Percentage
With the Company Director Investors, (74% Owned of Stock
& Business Experience Since Inc. (1) Subsidiary) Owned
===========================================================================
NOMINEES:
+Gordon Duke 1991 110 55 (-)
Director. Commonwealth of
Kentucky, Department of
Financial Incentives, Cabinet
for Economic Development.
Companies. Age 53.
*+Robert M. Hardy, Jr. 1988 14,285(2) 29(3) 1%
aDirector & General Counsel. Director,
Vice President, General Counsel,
IHLIC. Age 41.
*+Harry Lee Waterfield II 1963 776,680(4) 755,379(5) 67%
aChairman of the Board & (6)(7) (8)(9)
President. Chairman (10)(11) (12)(13)
of the Board, President & (14)(15) (16)
Chief Executive (17)(18) (19)(20)
Officer, IHLIC. Age 55.
Other Directors Whose Terms Will Continue After Meeting:
+H. Glenn Doran 1963 20,000 78 2%
*Director. Chairman of the Board, Peoples
Bank of Murray. Director, IHLIC. Age 73.
aJerry F. Howell 1963 6,000 567 (-)
Director. Independent Investor. (21) (22)
Director, IHLIC. Age 84.
*Dr. Jerry F. Howell, Jr. 1983 33,500 1,124 3%
Director. Professor Emeritus,
Dept. of Biological and
Environmental Sciences,
Morehead State University.
Director, IHLIC. Age 57.
aDavid W. Reed 1982 25,950 1,214 2%
Director. Independent Businessman. Age 44.
Helen S. Wagner 1986 30,000(23) 2,500(24) 3%
Director. Real Estate Broker, Secretary/
Treasurer, Wagner-Shuck Builders,
Inc. Director, IHLIC. Age 62.
All Directors and Officers as a Group: 932,566
*Member of Executive Committee aMember of Nominating Committee
+Member of Finance Committee (-)Indicates less than 1%
- - ------------------------------------------------------------------------------
(1) At December 31, 1998, 848,116 shares were outstanding and entitled to vote.
(2) Includes 6,087 shares of KII held in Trust by Farmers Bank and Capital Trust
Company, Frankfort, Kentucky ("Farmers Bank") under Kentucky Investors, Inc. and
Affiliated companies 401(k) Savings Plan and Trust Agreement ("401(k) Plan").
(3) Includes 18 shares of IHLIC held in trust by Farmers Bank under the 401(k)
Plan.
(4) Mr. Waterfield II is part of a group which includes HLW Investment Corp.,
HLW Corporation, RoseGayle Waterfield Hardy, Nancy Waterfield Walton, Harry Lee
Waterfield II Irrevocable Trust Funds 1, 2, 3 and 4, RoseGayle Waterfield Hardy,
Nancy Waterfield Walton and Harry Lee Waterfield II Trust dated 12/22/76, IHLIC,
IUI, TAP & CO. and KII Employee Retirement Plan.
(5) Includes 7,900 shares of IHLIC owned by HLW Investment Corp. of which Mr.
Waterfield II is an officer.
(6) Includes 130,824 shares of KII owned by HLW Investment Corp. of which Mr.
Waterfield II is an officer.
(7) Includes 41,836 shares of KII owned by HLW Corporation of which Mr.
Waterfield II is an officer.
(8) Includes 642 shares of IHLIC owned by HLW Corporation of which Mr.
Waterfield II is an officer.
(9) Includes 3,038 shares of IHLIC held in the name of CEDE & Co., nominee for
the four separate Irrevocable Trusts for Harry Lee Waterfield II, RoseGayle
Waterfield Hardy and Nancy Waterfield Walton.
(10) Includes 15,222 shares of KII held in trust for the benefit of the
children of Harry Lee Waterfield.
(11) Includes 16,627 shares of KII held in Trust by Farmers Bank under the
401(k) Plan.
(12) Includes 200 shares of IHLIC held by Nancy Waterfield Walton - see Footnote
(4).
(13) Includes 241 shares of IHLIC held by RoseGayle Waterfield Hardy - see
Footnote (4).
(14) Includes 12,063 shares of KII held by Nancy Waterfield Walton - see
Footnote (4).
(15) Includes 9,502 shares of KII held by RoseGayle Waterfield Hardy - see
Footnote (4).
(16) Includes 70,272 or 7% of the shares of IHLIC held in the name of TAP & CO.
for the benefit of employees who participate in the 401(k) Plan. Mr. Waterfield
II is a member of the Administrative Committee, which directs the voting of
these shares.
(17) Includes 216,399 shares of KII held by IHLIC and 94,185 shares of KII held
by IUI. Mr. Waterfield II is Chairman of both companies. The corporations have
the power to dispose of these shares.
(18) Includes 155,756 or 18% of the shares of KII, held in the name of TAP & CO
for the benefit of employees who participate in the 401(k) Plan. Mr. Waterfield
II is a member of the Administrative Committee, which directs the voting of
these shares.
(19) Includes 32,559 shares of KII held in the name of CEDE & Co., nominee for
the twelve separate Irrevocable Trusts, three each (Funds 1, 2, 3 and 4) for
Harry Lee Waterfield II, RoseGayle Waterfield Hardy and Nancy Waterfield Walton,
respectively.
(20) Includes 31,000 shares of KII owned by the Kentucky Investors, Inc.,
Employee Retirement Plan of which Mr. Waterfield II is a member of the
Retirement Plan Committee.
(21) Held under Jerry F. Howell, Sr. revocable living trust agreement dated 3-7-
96.
(22) Held under Jerry F. Howell, Sr. revocable living trust agreement dated 3-7-
96.
(23) Includes 11,397 shares of KII held in an irrevocable trust for the benefit
of the children of Helen S. Wagner.
(24) Includes 1,538 shares of IHLIC held in an irrevocable trust for the benefit
of the children of Helen S. Wagner.
Meetings of the Board of Directors are held on call and there is an
organizational meeting following the annual meeting of shareholders. The Board
had 8 meetings in 1998.
The Board has an Executive Committee that exercises the power of the Board
of Directors in management of the business affairs during intervals between
meetings of the Board. The Board considers the action of the Executive
Committee and has approval and veto power over its actions. The Executive
Committee met 3 times in 1998.
The Board of Directors has provided for a Finance Committee that meets on
call and reviews and makes recommendations concerning investments to the Board
of Directors. The Finance Committee met six times in 1998.
The Board of Directors has provided for a Nominating Committee that meets
on call and submits recommendations to the Board of Directors for members of the
Board to be submitted to the shareholders for election. The Nominating
Committee met one time in 1998.
No one except David Reed attended fewer than 75% of the aggregate of the
total number of Board and Committee meetings. The Directors were paid $100 for
each Board Meeting.
SHAREHOLDER PROPOSALS FOR THE 2000 MEETING
Shareholders who wish to suggest nominees or offer proposals intended to be
presented at the 2000 annual meeting must forward this information to the
Secretary of the Company no later than December 17, 1999.
COMPENSATION OF EXECUTIVE OFFICERS PAID BY THE CORPORATION AND ITS SUBSIDIARIES
The Company does not pay any of its executive officers a regular salary;
therefore, the Company does not have a Compensation Committee. The expense of
the retirement plan to Kentucky Investors, Inc., for its executive officers is
none. Seven executive officers of the Company, who also serve as Directors
and/or officers of IHLIC were compensated by IHLIC. The following SUMMARY
COMPENSATION TABLE sets forth each executive officer of the Company whose
aggregate direct compensation received from IHLIC exceeded $100,000.
<PAGE>
NAME AND PRINCIPAL
POSITION YEAR SALARY($) BONUS
- - ---------------------------------------------------------------
Harry Lee Waterfield II 1998 $163,780(1) $20,597
President, Chairman of 1997 $158,684(1) $20,177
the Board, & 1996 $153,293(1) $18,686
Chief Executive Officer
Howard L. Graham 1998 $121,460(1) $10,542
Vice President - 1997 $117,694(2) $10,181
Corporate Services 1996 $113,064(2) $ 9,825
Robert M. Hardy, Jr. 1998 $ 92,398(1) $10,414
Vice President, General
Counsel & Director
(1) Amounts reported consist of director's fees from IHLIC and of contributions
made by IHLIC under the 401(k) Plan. The Plan is available to all employees of
IHLIC.
(2) Amounts reported consist of contributions made by the Company under the
401k) Plan which is available to all employees of the company and contributions
made by the Company to the Company's Deferred Compensation Plan whish is
available to eligible executive officers of the Company.
STOCK PERFORMANCE GRAPH
The following graph sets forth the cumulative total shareholder return
(assuming reinvestment of dividends) to the Company's shareholders during the
five year period ended December 31, 1998, as well as an overall stock market
index (Russell 2000) and the Company's peer group index selected on an industry
basis. The component companies utilized in the peer group include The Liberty
Corp., Realiastar Financial Corp., Provident Companies, Inc., Torchmark Corp.,
UNUM Corp., and Washington National Corp. The peer group utilized this year is
identical to last year's peer group with the exception of Washington National
Corp. This company was deleted due to the fact that it was acquired by or
merged with another company and historical returns are not maintained on
companies that have been acquired or merged. Therefore, no financial data was
available. The market capitalization of the peer group company is weighted in
the performance graph presented on the next page.
Comparison of Five-Year Cumulative Total Return*
Kentucky Investors, Inc., Russell 2000 Index, Peer Group
(Performance results through 12/31/98
The Performance Graph Appears Here.
1993 1994 1995 1996 1997 1998
KINV $100.00 $102.96 $108.21 $113.45 $146.23 $165.39
RUSSELL 2000 $100.00 $ 98.02 $125.89 $146.59 $179.13 $174.23
PEER GROUP $100.00 $ 79.58 $116.29 $149.58 $232.93 $240.56
Assumes $100.00 invested at the close of trading 12/93 in Investors Heritage
Life Insurance Company common stock, Russell 2000 Index, and Peer Group.
* Cumulative total return assumes reinvestment of dividends.
Source: Value Line, Inc.
<PAGE>
Factual material is obtained from sources believed to be reliable, but the
publisher is not responsible for any errors or omissions contained herein.
AUDITORS
Ernst & Young, LLP, Louisville, Kentucky, is the independent auditing firm
for the Company and has been since 1981, including the most recent year of 1998.
A representative is expected to be present at the shareholders' meeting with the
opportunity to make a statement and will respond to appropriate questions. The
services provided by Ernst & Young, LLP during 1998 consisted of the audit of
the Company's financial statements and audit of the Company's employee benefit
plans. No member of the firm of Ernst & Young, LLP has any relationship with
the Company other than the usual relationship that exists between independent
auditors and clients.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no other transactions to which the Company was or is to be a
party, in which any officer or Director or nominee for election as Director had
any direct or indirect material interest.
At the date of this proxy statement, management knows of no other matters
to come before the meeting. However, if any other matter properly comes before
the meeting, it is the intention of the persons named in the proxy statement to
vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
KENTUCKY INVESTORS, INC.
/s/
Wilma Yeary, FLMI/CPS, Secretary
Frankfort, Kentucky
April 16, 1999
<PAGE>
_ Proxy_ KENTUCKY INVESTORS, INC. _ Proxy_
200 CAPITAL AVENUE, FRANKFORT, KENTUCKY 40601
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Harry Lee Waterfield II and Jerry F. Howell, or
either of them, attorneys with full power of substitution to vote as proxies for
the undersigned at the annual meeting of shareholders of Kentucky Investors,
Inc. to be held on May 13, 1999, or at any adjournment thereof, and vote as
designated below with all powers the undersigned would possess, if present, upon
matters described in the notice of annual meeting and proxy statement dated
April 16, 1999 as follows:
(1) Election of Directors
- - --------------- FOR all nominees listed below (except as marked to the
contrary below)
- - --------------- WITHHOLD AUTHORITY to vote for all nominees below
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW:
Gordon Duke Robert M. Hardy, Jr. Harry Lee Waterfield II
(2) On any other matter which may come before the meeting in accordance with
their best judgement.
PLEASE SIGN, DATE AND MAIL PROMPTLY IN THE ENCLOSED ENVELOPE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL PROPOSALS.
To be counted this proxy must be signed, dated and received by the Corporate
Secretary of Kentucky Investors, Inc., 200 Capital Avenue, P. O. Box 717,
Frankfort, Kentucky 40602, on or before May 13, 1999.
This proxy when properly executed will be voted in accordance with instructions
specified but in the absence of any instructions will be voted "FOR".
Please sign exactly as name appears on address. If shares of stock are held
jointly, all joint owners should sign. If signing as attorney, administrator,
executor, guardian, trustee or corporate officer, please add your title as such.
- - --------------------------------------------
Shareholder's signature
Date ______________,1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15 (d) of the Securities Exchange Act of 1934
FOR SIX MONTHS ENDED
June 30, 1999
Commission File: 0-3216
INVESTORS HERITAGE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in Charter)
KENTUCKY
(State of Other Jurisdiction of Incorporation or Organization)
61-0574893
(IRS Employer Identification Number)
200 Capital Avenue, P. O. Box 717
Frankfort, Kentucky 40602
(Address of Principal Executive Offices)
Registrant's Telephone Number - (502) 223-2361
Securities registered pursuant to Section 13(g) of the Act:
Common Capital Stock par value $1.00 per share
(Title of Class)
Number of outstanding shares as of June 30, 1999 - 904,395
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 ____
<PAGE>
PART I - CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1. The following consolidated statements have been prepared by management
in accordance with generally accepted accounting principles ("GAAP"). In
management's opinion, all adjustments and certain reclassifications necessary
for a fair statement of financial position at June 30, 1999 and December 31,
1998 and the results of operations for the three and six months ended June 30,
1999 and 1998 have been made.
INVESTORS HERITAGE LIFE INSURANCE COMPANY
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, 1999 December 31, 1998
Assets
Investments
Fixed maturities available-for-sale at
fair value (amortized cost:
1999-$191,131,019; 1998-
$181,886,791) $192,324,585 $193,911,467
Mortgage loans on real estate 14,986,939 16,189,127
Other investments 14,112,293 14,457,293
Total investments $221,423,817 $224,557,887
Cash and cash equivalents 3,225,285 2,461,887
Due and deferred premiums 4,056,339 4,129,967
Deferred acquisition costs 29,254,790 27,288,684
Other assets 8,030,092 8,030,475
Amounts recoverable from reinsurers 26,306,933 23,355,631
$292,297,256 $289,824,531
Liabilities and Stockholders' Equity
Liabilities
Policy liabilities:
Benefit reserves $215,224,527 $207,115,725
Unearned premium reserves 22,428,481 20,069,565
Other policyholders' funds 3,696,570 3,924,918
Total policy liabilities $241,349,578 $231,110,208
Federal income taxes 3,770,975 6,487,085
Other liabilities 4,899,284 4,391,322
Total liabilities $250,019,837 $241,988,615
Stockholders' Equity
Common stock (shares issued:
1999-904,406; 1998-904,373) $ 1,447,850 $ 1,447,797
Paid-in surplus 3,777,035 3,777,101
Accumulated other comprehensive income 2,296,903 8,594,131
Retained earnings 34,755,631 34,016,887
Total stockholders' equity $ 42,277,419 $ 47,835,916
$292,297,256 $289,824,531
See accompanying notes.
<PAGE>
INVESTORS HERITAGE LIFE INSURANCE COMPANY
Condensed Consolidated Income Statements (Unaudited)
Three Months Ended June 30
1999 1998
REVENUES
Premiums and other considerations $11,803,041 $11,100,540
Investment income, net of expense 3,787,335 3,467,548
Realized gain (loss)on investments, net (111,592) 114,034
Other income 111,413 89,006
Total revenues $15,590,197 $14,771,128
BENEFITS AND EXPENSES
Death and other benefits $ 5,765,253 $ 4,895,966
Guaranteed annual endowments 228,242 233,184
Dividends to policyholders 202,851 114,808
Increase in benefit reserves and
unearned premiums 4,766,079 5,134,348
Amortization of deferred
acquisition costs, net (247,950) 6,915
Commissions 1,612,521 1,326,633
Other insurance expenses 2,279,703 2,128,871
Total benefits and expenses $14,606,699 $13,840,725
Income from operations before Federal
income tax $ 983,498 $ 930,403
Provision for income taxes:
Current $ 38,277 $ 80,854
Deferred 237,102 114,531
Total $ 275,379 $ 195,385
Net Income $ 708,119 $ 735,018
Earnings per share $ 0.79 $ 0.81
Dividends per share $ 0.00 $ 0.00
<PAGE>
INVESTORS HERITAGE LIFE INSURANCE COMPANY
Condensed Consolidated Income Statements (Unaudited)
Six Months Ended June 30
1999 1998
REVENUES
Premiums and other considerations $22,674,887 $21,840,302
Investment income, net of expense 7,540,310 6,947,689
Realized gain (loss) on investments, net (86,133) 131,601
Other income 201,003 160,712
Total revenues $30,330,067 $29,080,304
BENEFITS AND EXPENSES
Death and other benefits $11,763,951 $10,540,636
Guaranteed annual endowments 426,076 437,945
Dividends to policyholders 377,433 290,346
Increase in benefit reserves and
unearned premiums 9,246,572 9,342,962
Amortization of deferred
acquisition costs, net (872,631) 30,110
Commissions 3,037,880 2,562,277
Other insurance expenses 4,371,288 4,153,747
Total benefits and expenses $28,350,569 $27,358,023
Income from operations before Federal
income tax $ 1,979,498 $ 1,722,281
Provision for income taxes:
Current $ 49,277 $ 126,549
Deferred 504,982 235,130
Total $ 554,259 $ 361,679
Net Income $ 1,425,239 $ 1,360,602
Earnings per share $ 1.58 $ 1.50
Dividends per share $ 0.76 $ 0.76
See accompanying notes.
<PAGE>
INVESTORS HERITAGE LIFE INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flow (Unaudited)
Six Months Ended June 30
1999 1998
Net cash provided by operating activities $ 10,792,974 $ 11,349,079
Investing activities
Securities available-for-sale:
Purchases $(22,954,206) $(13,834,470)
Sales and maturities 13,694,758 3,681,959
Other investments:
Cost of acquisition (1,108,293) (1,503,859)
Sales and maturities 2,763,833 1,130,291
Other investing activities (125,356) (65,536)
Net cash used by investing activities $ (7,729,264) $(10,591,615)
Financing Activities
Receipts from universal life policies
credited to policyholder
account balances $ 1,964,605 $ 2,465,133
Return of policyholder account
balances on universal
life policies (3,578,409) (3,034,901)
Other financing activities (686,508) (742,758)
Net cash used by financing activities $ (2,300,312) $ (1,312,526)
Increase (decrease) in cash and cash
equivalents $ 763,398 $ (555,062)
Cash and cash equivalents at beginning
of period 2,461,887 2,902,587
Cash and cash equivalents at end of period $ 3,225,285 $ 2,347,525
See accompanying notes.
<PAGE>
INVESTORS HERITAGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
NOTE A - Nature of Operations: Kentucky Investors, Inc. (Kentucky Investors) is
the holding company of Investors Heritage Life Insurance Company (the Company),
Investors Heritage Printing, Inc., a printing company and Investors Heritage
Financial Services Group, Inc., an insurance marketing company.
The Company's operations involve the sale and administration of various
insurance and annuity products, including, but not limited to, participating,
non-participating, whole life, limited pay, universal life, annuity contracts,
credit life, credit accident and health and group insurance policies. The
principal markets for the Company products are in the Commonwealths of Kentucky
and Virginia, and the states of North Carolina, South Carolina, Ohio, Indiana,
Florida, Tennessee, Illinois, Georgia, West Virginia and Texas.
NOTE B - Basis of Presentation: The accompanying unaudited condensed
consolidated financial statements of the Company and subsidiary have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 1999, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 1998,
included in the Company's Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE C - Earnings per Share: Earnings per share of common stock were computed
based on the weighted average number of common shares outstanding during each
period. The number of shares used in this computation for the Company is
904,428 and 904,911 for June 30, 1999 and 1998, respectively.
NOTE D - Segment Data: The Company operates in four segments as shown in the
following table. All segments include both individual and group insurance.
Identifiable revenues and expenses are assigned directly to the applicable
segment. Net investment income is generally allocated to the insurance and the
corporate segments in proportion to policy liabilities and stockholders' equity,
respectively.
June 30, 1999 June 30, 1998
Revenues:
Preneed & Burial Products $22,647,434 $21,005,179
Traditional & Universal Life Products 6,833,436 7,030,213
Credit Insurance Products &
Administrative Services 135,868 129,782
Corporate & Other 713,329 915,130
$30,330,067 $29,080,304
Pre-Tax Income from Operations:
Preneed & Burial Products $ 1,657,377 $ 1,206,070
Traditional & Universal Life Products 397,856 366,490
Credit Insurance Products &
Administrative Services (44,154) (61,484)
Corporate & Other (31,581) 211,205
$ 1,979,498 $ 1,722,281
NOTE E - Federal Income Taxes: Current taxes are provided based on estimates of
the projected effective annual tax rate. Deferred taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
NOTE F _ Comprehensive Income: The components of comprehensive income (loss),
net of related tax, are as follows:
Three Months Ended
June 30, 1999 June 30, 1998
Net income $ 708,119 $ 735,018
Net unrealized gains (losses) on
available-for-sale securities 3,417,807 898,845
Comprehensive income (loss) $2,709,688 $1,633,863
Six Months Ended
June 30, 1999 June 30, 1998
Net income $ 1,425,239 $1,360,602
Net unrealized gains (losses) on
available-for-sale securities (6,297,228) 1,188,175
Comprehensive income (loss) $(4,871,989) $2,548,777
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Investors Heritage Life Insurance Company (the "Company") is a life insurance
company incorporated under the laws of the Commonwealth of Kentucky. The
Company offers a full line of life insurance products including, but not limited
to, whole life, term life, single premium life, multi-pay life and annuities.
The Company's primary lines of business are insurance policies and annuities
utilized to fund preneed funeral contracts, credit life and credit disability
insurance, and term life and reducing term life sold through financial
institutions. During 1998 the Company introduced the Legacy 2000 Series of
products to the preneed funeral market. The Company's operating earnings are
derived primarily from revenues generated from the sale of life insurance
policies plus the Company's investment results, including realized gains
(losses), less interest credited, benefits to policyholders and expenses.
Investments, Liquidity and Capital Resources
Premiums, which include mortality and expense charges, and investment income are
the Company's primary sources of cash flow used to meet short-term and long-term
cash requirements.
The Company's short-term obligations consist primarily of policyholder benefits
and operating expenses. The Company has historically been able to meet these
obligations out of operating cash, premiums and investment income.
Management is not aware of any commitments or unusual events that could
materially affect capital resources. The Company has no long-term or short-term
external debt. However, the Company will continue to explore various
opportunities including corporate reorganizations, acquisitions and purchasing
blocks of business from other companies, which may dictate a need for either
long-term or short-term debt.
The Company has maintained a sound, conservative investment strategy. At June
30, 1999, 86.9% of invested assets consisted of fixed income public bonds
compared to 86.4% at December 31, 1998. Fixed income assets are managed by
Charter Oak Capital Management, Inc., an independent portfolio manager.
Additionally, the Company also engages in commercial and residential mortgage
lending with approximately 92% of these investments being in commercial
properties. All mortgage loans are originated in-house and all loans are secured
by first mortgages on the real estate. At June 30, 1999, 6.8% of invested assets
consisted of mortgage loans compared to 7.2% at December 31, 1998. $1,848,000
of the decrease is due to the early pay-off of several mortgage loans as a
result of the sale or refinancing of the property. New mortgage loans made
during the first six months of 1999 totaled $1,070,000. Management anticipates
funding several new mortgage loan investments during the remainder of 1999 to
maintain a similar or slightly higher percentage of mortgage loans to total
invested assets.
The Company's conservative approach in the product development area and the
strength and stability of its fixed income and mortgage loan portfolios provide
adequate liquidity both in the short-term and the long-term. At June 30, 1999
the Company's fixed income investments were 100% investment grade as rated by
Standard & Poor's, unchanged from December 31, 1998. None of the Company's fixed
income assets are in default and there has been no material change in the
distribution of the Company's fixed income portfolio.
The Company's principal long-term obligations are fixed contractual obligations
incurred in the sale of its life insurance products. The premium charged for
these products are based on conservative and actuarially sound assumptions as to
mortality, persistency and interest. The Company believes these assumptions
will produce revenues sufficient to meet its future contractual benefit
obligations and operating expenses, and provide an adequate profit margin.
Results of Operations
Total premium income (net of reinsurance) increased 6.3% when compared to the
second quarter of 1998, and increased 3.8% for the first six months of 1999 when
compared to the same period in 1998. (For further explanation, see "Business
Segments" below). Net investment income for the second quarter 1999 increased
9.2% compared to the second quarter of 1998 and increased 8.5% for the first six
months of 1999 when compared to the same period in 1998. This is due primarily
to the increase in the Company's asset base. Overall Revenue for the second
quarter 1999 increased 5.5% when compared to the second quarter 1998 and
increased 4.3% for the first six months of 1999.
Total Benefits and Expenses were 5.5% higher in the second quarter 1999 when
compared to the same quarter of 1998 and 3.6% higher for the first six months of
1999 when compared to the same period in 1998. The primary reasons for this
increase are (1) increased sales of Preneed and Burial Products combined with a
change in the commission structure which generates higher first year
commissions, and (2) higher than projected claims for the first four months of
1999. These claims have been analyzed revealing no particular anti-selection.
Claims improved from previous levels during May and June, 1999.
Business Segments
Management internally evaluates the performance of Company operations by the
following business segments:
Preneed & Burial Products includes both life and annuity products sold by
funeral directors or affiliated agents to fund prearranged funerals. Revenues
for this segment were 7.8% higher for the first six months of 1999 when compared
to the same period of 1998. The increase is due to increased sales of the
Company's Legacy 2000 Series of Preneed and Burial Products used in the pre-
arranged funeral and final expense markets and the Net Investment Income
associated with those products. Pre-Tax Income from Operations during the first
six months 1999 was 37.4% higher than the comparable period for 1998 due
primarily to higher than anticipated sales of non-single premium Legacy 2000
Series products combined with the new commission structure on those products.
The Company plans to continue its expansion of territory and recruitment of
agents in the Preneed and Burial insurance market.
Traditional & Universal Life Products includes traditional life and group life
insurance products, annuities (primarily qualified) and universal life products.
Revenues for this segment were 2.8% lower for the first six months of 1999 when
compared to the first six months of 1998. Pre-Tax Income from Operations for
the first six months of 1999 was 8.6% higher than the comparable period for 1998
primarily due to significantly lower claims in universal life products.
Credit Insurance Products & Administrative Services includes the marketing and
administration of credit life and credit accident & health insurance products.
Revenues were 4.7% higher and Pre- tax income has improved 28.2% for the first
six months of 1999 when compared to the first six months of 1998 primarily due
to the reduction in the run-off of a closed block of credit business combined
with increased service fees on new credit business. All of the related
underwriting risk currently produced is being reinsured 100% with highly-rated
life companies.
Corporate & Other consists of corporate accounts measured primarily by
stockholders' paid-in capital, contributed surplus, earned surplus, property and
equipment, investments in affiliates and other minor business lines which
include group annuities and group and individual accident and health products.
Revenues were 22.1% lower for the first six months of 1999 when compared to the
same period of 1998. Pre-Tax Income was 114.95% lower for the first six months
of 1999 when compared to the first six months of 1998. The decreases in Revenues
and Pre-Tax Income are primarily due to realized capital losses during the
second quarter of 1999 and the continued run-off of a closed block of group
accident and health insurance and claims associated with that block.
Federal Income Taxes
Current taxes are provided based on estimates of the projected effective annual
tax rate. Deferred taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The effective tax rate
was 28% at June 30, 1999 compared to 21% for June 30, 1998. The increase in
the effective tax rate is due primarily to the reduced benefit of the small
life insurance company deduction resulting from an increase in net income.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using 2-
digits rather than 4-digits to define the applicable year. Any computer program
that has time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company recognized the Year 2000 Issue in 1988 and began working on a
solution at that time. The Information Systems Department has worked diligently
to make modifications to existing software so that the Year 2000 Issue will not
pose significant operational problems for its computer systems. As of year end
1995, the Company's systems were in full compliance with all Year 2000 Issue
requirements and it is anticipated that there will be no exposure to
contingencies related to the Year 2000 Issue for the products it has sold. The
cost to implement system changes related to the Year 2000 issue has been
nominal.
Although the Company does not anticipate any major interruption of business
activities, that will be dependent, in part, upon the activities of third
parties. Management has initiated formal communications with all of its
significant reinsurers, vendors, and financial institutions and has been advised
that all are either in full compliance or anticipate being in full compliance
prior to June 30, 1999, with the exception of the utility that supplies power to
Investors Heritage which anticipates having critical systems Year 2000 ready by
September 30, 1999. Even though the Company has assessed and continues to
assess third party issues, it has no direct ability to influence the compliance
actions of such parties. Accordingly, there can be no guarantee that the
systems of other companies on which Investors Heritage relies will be Year 2000
compliant, leading to an adverse effect on future operating results of the
Company.
Forward Looking Information
The Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as
"expect," "anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Whether or
not actual results differ materially from forward-looking statements may depend
on numerous foreseeable and unforeseeable factors and developments. Some of
these may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments,
industry consolidation and the effects of competition in the insurance business
from other insurance companies and other financial institutions operation in the
Company's market area and elsewhere. Others may relate to the Company
specifically, such as credit, volatility and other risks associated with the
Company's investment portfolio. The Company cautions that such factors are not
exclusive. The Company disclaims any obligation to update forward-looking
information.
PART II _ OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company is involved in litigation relating claims arising
out of its operations in the normal course of business. As of August 9, 1999,
the Company is not a party to any legal proceedings, the adverse outcome of
which, in management's opinion, individually or in the aggregate, would have a
material adverse effect on the Company's financial condition or results of
operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the stockholders was held on May 13, 1999 at 10:00
a.m. The purpose of the meeting was to elect directors.
(b) The purpose of the meeting was as follows:
To elect three (3) directors to hold office for a term of three (3) years or
until their successors are duly elected and qualified.
The following individuals were elected for a term of (3) years and the number of
votes cast was as follows:
Helen S. Wagner _ Number of Votes Cast FOR _ 826,818; WITHHELD - 741
Jerry F. Howell _ Number of Votes Cast FOR _ 826,793; WITHHELD - 766
Michael F. Dudgeon, Jr. _ Number of Votes Cast FOR _ 826,759; WITHHELD - 800
The other directors whose terms will continue after the meeting are:
Gordon C. Duke
Dr. Jerry F. Howell, Jr.
Robert M. Hardy, Jr.
Harry Lee Waterfield II
Adron Doran
H. Glenn Doran
ITEM 5. Other Information.
Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Definitive Proxy Statements and Annual Reviews were filed with the
Securities and Exchange Commission.
(b) There were no reports filed on Form 8-K during the quarter ended June 30,
1999.
(c) Exhibit 27 - Financial Data Schedule.
<PAGE>
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.
INVESTORS HERITAGE LIFE INSURANCE COMPANY
/s/
BY: HARRY LEE WATERFIELD II
PRESIDENT
DATE: August 13, 1999
/s/
BY: JIMMY R. MCIVER
TREASURER
DATE: August 13, 1999
<TABLE>
[ARTICLE] 7
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-END] JUN-30-1999
[DEBT-HELD-FOR-SALE] 192,324,585
[DEBT-CARRYING-VALUE] 0
[DEBT-MARKET-VALUE] 0
[EQUITIES] 3,385,169
[MORTGAGE] 14,986,939
[REAL-ESTATE] 372,555
[TOTAL-INVEST] 221,423,817
[CASH] 3,225,285
[RECOVER-REINSURE] 376,741
[DEFERRED-ACQUISITION] 29,254,790
[TOTAL-ASSETS] 292,297,256
[POLICY-LOSSES] 215,224,527
[UNEARNED-PREMIUMS] 22,428,481
[POLICY-OTHER] 1,879,534
[POLICY-HOLDER-FUNDS] 1,817,036
[NOTES-PAYABLE] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 1,447,850
[OTHER-SE] 40,829,569
[TOTAL-LIABILITY-AND-EQUITY] 292,297,256
[PREMIUMS] 22,674,887
[INVESTMENT-INCOME] 7,540,310
[INVESTMENT-GAINS] (86,133)
[OTHER-INCOME] 201,003
[BENEFITS] 11,763,951
[UNDERWRITING-AMORTIZATION] (872,631)
[UNDERWRITING-OTHER] 17,459,249
[INCOME-PRETAX] 1,979,498
[INCOME-TAX] 554,259
[INCOME-CONTINUING] 1,425,239
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 1,425,239
[EPS-BASIC] 1.58
[EPS-DILUTED] 0
[RESERVE-OPEN] 0
[PROVISION-CURRENT] 0
[PROVISION-PRIOR] 0
[PAYMENTS-CURRENT] 0
[PAYMENTS-PRIOR] 0
[RESERVE-CLOSE] 0
[CUMULATIVE-DEFICIENCY] 0
</TABLE>
KENTUCKY REVISED STATUTES
CHAPTER 271B
BUSINESS CORPORATIONS
SUBTITLE 13. DISSENTERS' RIGHTS
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
271B.13-010. Definitions for subtitle.
------------------------
As used in this subtitle:
(1) "Corporation" means the issuer of the shares held by a
dissenter, except that in the case of a merger where the
issuing corporation is not the surviving corporation, then,
after consummation of the merger, "corporation" shall mean
the surviving corporation.
(2) "Dissenter" means a shareholder who is entitled to dissent
from corporate action under KRS 271B.13-020 and who
exercises that right when and in the manner required by KRS
271B.13-200 to 271B.13-280.
(3) "Fair value," with respect to a dissenter's shares, means
the value of the shares immediately before the effectuation
of the corporate action to which the dissenter objects,
excluding any appreciation or depreciation in anticipation
of the corporate action unless exclusion would be
inequitable. In any transaction subject to the requirements
of KRS 271B.12-210 or exempted by KRS 271B.12-220(2), "fair
value" shall be at least an amount required to be paid under
KRS 271B.12-220(2) in order to be exempt from the
requirements of KRS 271B.12-210.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average
rate currently paid by the corporation on its principal bank
loans or, if none, at a rate that is fair and equitable
under all the circumstances.
(5) "Record shareholder" means the person in whose name shares
are registered in the records of a corporation or the
beneficial owner of shares to the extent of the rights
granted by a nominee certificate on file with a corporation.
(6) "Beneficial shareholder" means the person who is a
beneficial owner of shares held in a voting trust or by a
nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
271B.13-020. Right to dissent.
----------------
(1) A shareholder shall be entitled to dissent from, and obtain
payment of the fair value of his shares in the event of, any
of the following corporate actions:
(a) Consummation of a plan of merger to which the
corporation is a party:
1. If shareholder approval is required for the merger
by KRS 271B.11-030 or the articles of
incorporation and the shareholder is entitled to
vote on the merger; or
2. If the corporation is a subsidiary that is merged
with its parent under KRS 271B.11-040;
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares
will be acquired, if the shareholder is entitled to
vote on the plan;
(c) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation
other than in the usual and regular course of business,
if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not
including a sale pursuant to court order or a sale for
cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed
to the shareholders within one (1) year after the date
of sale;
(d) An amendment of the articles of incorporation that
materially and adversely affects rights in respect of a
dissenter's shares because it:
1. Alters or abolishes a preferential right of the
shares to a distribution or in dissolution;
2. Creates, alters, or abolishes a right in respect
of redemption, including a provision respecting a
sinking fund for the redemption or repurchase, of
the shares;
3. Excludes or limits the right of the shares to vote
on any matter other than a limitation by dilution
through issuance of shares or other securities
with similar voting rights; or
4. Reduces the number of shares owned by the
shareholder to a fraction of a share if the
fractional share so created is to be acquired for
cash under KRS 271B.6-040;
(e) Any transaction subject to the requirements of KRS
271B.12-210 or exempted by KRS 271B.12-220(2); or
(f) Any corporate action taken pursuant to a shareholder
vote to the extent the articles of incorporation,
bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their
shares.
(2) A shareholder entitled to dissent and obtain payment for his
shares under this chapter shall not challenge the corporate
action creating his entitlement unless the action is
unlawful or fraudulent with respect to the shareholder or
the corporation.
271B.13-030. Dissent by nominees and beneficial owners.
-----------------------------------------
(1) A record shareholder may assert dissenters' rights as to
fewer than all the shares registered in his name only if he
shall dissent with respect to all shares beneficially owned
by any one (1) person and notify the corporation in writing
of the name and address of each person on whose behalf he
asserts dissenters' rights. The rights of a partial
dissenter under this subsection shall be determined as if
the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
(a) He submits to the corporation the record shareholder's
written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights;
and
(b) He does so with respect to all shares of which he is
the beneficial shareholder or over which he has power
to direct the vote.
271B.13-200. Notice of dissenters' rights.
----------------------------
(1) If proposed corporate action creating dissenters' rights
under KRS 271B.13-020 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that
shareholders are or may be entitled to assert dissenters'
rights under this subtitle and the corporation shall
undertake to provide a copy of this subtitle to any
shareholder entitled to vote at the shareholders' meeting
upon request of that shareholder.
(2) If corporate action creating dissenters' rights under KRS
271B.13-020 is taken without a vote of shareholders, the
corporation shall notify in writing all shareholders
entitled to assert dissenters' rights that the action was
taken and send them the dissenters' notice described in KRS
271B.13-220.
271B.13-210. Notice of intent to demand payment.
----------------------------------
(1) If proposed corporate action creating dissenters' rights
under KRS 271B.13-020 is submitted to a vote at a
shareholders' meeting, a shareholder who wishes to assert
dissenters' rights:
(a) Shall deliver to the corporation before the vote is
taken written notice of his intent to demand payment
for his shares if the proposed action is effectuated;
and
(b) Shall not vote his shares in favor of the proposed
action.
(2) A shareholder who does not satisfy the requirements of
subsection (1) of this section shall not be entitled to
payment for his shares under this chapter.
271B.13-220. Dissenters' notice.
------------------
(1) If proposed corporate action creating dissenters' rights
under KRS 271B.13-020 is authorized at a shareholders'
meeting, the corporation shall deliver a written dissenters'
notice to all shareholders who satisfied the requirements of
KRS 271B.13-210.
(2) The dissenters' notice shall be sent no later than ten (10)
days after the date the proposed corporate action was
authorized by the shareholders, or, if no shareholder
authorization was obtained, by the board of directors, and
shall:
(a) State where the payment demand must be sent and where
and when certificates for certificated shares must be
deposited;
(b) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the
payment demand is received;
(c) Supply a form for demanding payment that includes the
date of the first announcement to news media or to
shareholders of the terms of the proposed corporate
action and requires that the person asserting
dissenters' rights certify whether or not he acquired
beneficial ownership of the shares before that date;
(d) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than thirty
(30), nor more than sixty (60) days after the date the
notice provided in subsection (1) of this section is
delivered; and
(e) Be accompanied by a copy of this subtitle.
271B.13-230. Duty to demand payment.
----------------------
(1) A shareholder who is sent a dissenters' notice described in
KRS 271B.13-220 shall demand payment, certify whether he
acquired beneficial ownership of the shares before the date
required to be set forth in the dissenters' notice pursuant
to subsection (2)(c) of KRS 271B.13-220, and deposit his
certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his share
certificates under subsection (1) of this section shall
retain all other rights of a shareholder until these rights
are cancelled or modified by the taking of the proposed
corporate action. (3) A shareholder who does not demand
payment or deposit his share certificates where required,
each by the date set in the dissenters' notice, shall not be
entitled to payment for his shares under this subtitle.
271B.13-240. Share restrictions.
------------------
(1) The corporation may restrict the transfer of uncertificated
shares from the date the demand for their payment is
received until the proposed corporate action is taken or the
restrictions released under KRS 271B.13-260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares shall retain all other rights of a
shareholder until these rights are cancelled or modified by
the taking of the proposed corporate action.
271B.13-250. Payment.
-------
(1) Except as provided in KRS 271B.13-270, as soon as the
proposed corporate action is taken, or upon receipt of a
payment demand, the corporation shall pay each dissenter who
complied with KRS 271B.13-230 the amount the corporation
estimates to be the fair value of his shares, plus accrued
interest.
(2) The payment shall be accompanied by:
(a) The corporation's balance sheet as of the end of a
fiscal year ending not more than sixteen (16) months
before the date of payment, an income statement for
that year, a statement of changes in shareholders'
equity for that year, and the latest available interim
financial statements, if any;
(b) A statement of the corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated; and
(d) A statement of the dissenter's right to demand payment
under KRS 271B.13-280.
271B.13-260. Failure to take action.
----------------------
(1) If the corporation does not take the proposed action within
sixty (60) days after the date set for demanding payment and
depositing share certificates, the corporation shall return
the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing
transfer restrictions, the corporation takes the proposed
action, it shall send a new dissenters' notice under KRS
271B.13-220 and repeat the payment demand procedure.
271B.13-270. After-acquired shares.
---------------------
(1) A corporation may elect to withhold payment required by KRS
271B.13-250 from a dissenter unless he was the beneficial
owner of the shares before the date set forth in the
dissenters' notice as the date of the first announcement to
news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment
under subsection (1) of this section, after taking the
proposed corporate action, it shall estimate the fair value
of the shares, plus accrued interest, and shall pay this
amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with
its offer a statement of its estimate of the fair value of
the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to
demand payment under KRS 271B.13-280.
271B.13-280. Procedure if shareholder dissatisfied with payment
--------------------------------------------------
or offer.
- --------
(1) A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of
interest due, and demand payment of his estimate (less any
payment under KRS 271B.13-250), or reject the corporation's
offer under KRS 271B.13-270 and demand payment of the fair
value of his shares and interest due, if:
(a) The dissenter believes that the amount paid under KRS
271B.13-250 or offered under KRS 271B.13-270 is less
than the fair value of his shares or that the interest
due is incorrectly calculated;
(b) The corporation fails to make payment under KRS 271B.13-
250 within sixty (60) days after the date set for
demanding payment; or
(c) The corporation, having failed to take the proposed
action, does not return the deposited certificates or
release the transfer restrictions imposed on
uncertificated shares within sixty (60) days after the
date set for demanding payment.
(2) A dissenter waives his right to demand payment under this
section unless he shall notify the corporation of his demand
in writing under subsection (1) of this section within
thirty (30) days after the corporation made or offered
payment for his shares.
JUDICIAL APPRAISAL OF SHARES
271B.13-300. Court action.
------------
(1) If a demand for payment under KRS 271B.13-280 remains
unsettled, the corporation shall commence a proceeding
within sixty (60) days after receiving the payment demand
and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not
commence the proceeding within the sixty (60) day period, it
shall pay each dissenter whose demand remains unsettled the
amount demanded.
(2) The corporation shall commence the proceeding in the circuit
court of the county where a corporation's principal office
(or, if none in this state, its registered office) is
located. If the corporation is a foreign corporation without
a registered office in this state, it shall commence the
proceeding in the county in this state where the registered
office of the domestic corporation merged with or whose
shares were acquired by the foreign corporation was located.
(3) The corporation shall make all dissenters (whether or not
residents of this state) whose demands remain unsettled
parties to the proceeding as in an action against their
shares and all parties shall be served with a copy of the
petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is
commenced under subsection (2) of this section shall be
plenary and exclusive. The court may appoint one (1) or more
persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have
the powers described in the order appointing them, or in any
amendment to it. The dissenters shall be entitled to the
same discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding shall be
entitled to judgment:
(a) For the amount, if any, by which the court finds the
fair value of his shares, plus interest, exceeds the
amount paid by the corporation; or
(b) For the fair value, plus accrued interest, of his after-
acquired shares for which the corporation elected to
withhold payment under KRS 271B.13-270.
271B.13-310. Court costs and counsel fees.
----------------------------
(1) The court in an appraisal proceeding commenced under KRS
271B.13-300 shall determine all costs of the proceeding,
including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess
the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in
amounts the court finds equitable, to the extent the court
finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under KRS 271B.13-280.
(2) The court may also assess the fees and expenses of counsel
and experts for the respective parties, in amounts the court
finds equitable:
(a) Against the corporation and in favor of any or all
dissenters, if the court finds the corporation did not
substantially comply with the requirements of KRS
271B.13-200 to 271B.13-280; or
(b) Against either the corporation or a dissenter, in favor
of any other party, if the court finds that the party
against whom the fees and expenses are assessed acted
arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this subtitle.
(3) If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters
similarly situated, and that the fees for those services
should not be assessed against the corporation, the court
may award to these counsel reasonable fees to be paid out of
the amounts awarded the dissenters who were benefited.
Consent of Independent Auditors
We consent to the reference to our firm under the caption
"The Share Exchange - United States Federal Income Tax
Consequences" in the Transaction Statement (Schedule 13E-3)
dated September 27, 1999, and to the incorporation by
reference of our reports dated March 24, 1999, with respect
to the consolidated financial statements and schedules of
Kentucky Investors, Inc. and Investors Heritage Life
Insurance Company, included in their respective Annual
Reports (Form 10-K) for the year ended December 31, 1998,
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Louisville, Kentucky
September 24, 1999
We hereby consent to the inclusion of our opinion letter to the
special committee of the Board of Directors of Investors Heritage Life
Insurance Company (the "Company") as an Appendix to the Joint Proxy
Statement/Prospectus relating to the proposed share exchange with
Kentucky Investors Inc. and the Company contained in the Registration
Statement on Form S-4 and Form 13E-3 of the Company filed with the
Securities and Exchange Commission, and to the references to our firm
and such opinion in such Joint Proxy Statement/Prospectus.
September 27, 1999 THE ROBINSON-HUMPHREY COMPANY, LLC
