AMENDMENT 3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
JANUARY 15, 1999
Registration No. 333-44269
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4/A3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
UNITED TRUST, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 6711
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
37-1172848
(I.R.S. EMPLOYER IDENTIFICATION NO.)
5250 SOUTH SIXTH STREET ROAD
SPRINGFIELD, ILLINOIS 62703
(217) 241-6300
(Address, including ZIP code, and telephone number,
including area code, of registrant's principal executive offices)
JAMES E. MELVILLE
PRESIDENT AND CHIEF OPERATING OFFICER
5250 SOUTH SIXTH STREET ROAD
SPRINGFIELD, ILLINOIS 62703
(217) 241-6300
(Names, address, including ZIP code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale of the securities to
the public: UPON COMPLETION OF THE MERGER AS DESCRIBED IN THIS REGISTRATION
STATEMENT
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box:
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
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CALCULATION OF REGISTRATION FEE
Title of Proposed Proposed
each maximum maximum
Class of Amount to offering aggregate Amount of
Securities be price offering Registration
to be registered per unit price fee(2)
Registered (1) (2)
Common Stock,
No par value 826,153 9.70 8,013,684 2,404.11
(1) Represents the approximate number of shares issuable upon the merger
of United Income, Inc. into the registrant.
(2) Pursuant to Rule 457(f), the registration fee is based upon the book
value of UTI at September 30, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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UNITED TRUST, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K, showing the location in
the Prospectus of the answers to the items in Part I of Form S-4.
Item No. and Caption Location in Prospectus
1.Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus Facing page; Cross- reference
Sheet; Outside Front Cover
Page of Prospectus
2.Inside Front and Outside Back Cover Pages of
Prospectus Inside Front and Outside Back
CoverPages of Prospectus; Table
of Contents; Available
Information
3.Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information Proxy Statement Summary
Information Regarding the
4.Terms of the Transaction Proposed Merger; Description
of UTI and UII Capital Stock
5.Pro Forma Financial Information UTI and UII Pro Forma
Consolidated Condensed
Financial Information -
Unaudited
6.Material Contracts with the Company Being
Acquired The UTI Holding Company System;
Business or UTI; Business of
UII: Certain Relationships and
Related Transactions
7.Additional Information Required for Reoffering
By Persons and Parties Deemed to be
Underwriters *
8.Interests of Named Experts and Counsel *
9.Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities *
10.Information with Respect to S-3
Registrants *
11.Incorporation of Certain Information by
Reference *
12.Information with Respect to S-2 or S-3
Registrants *
13.Incorporation of Certain Information by
Reference *
14.Information with Respect to Registrants Other
Than S-2 or S-3 Registrants Selected Financial Data of UTI;
Business of UTI; Market Prices
and Dividends; UTI Management's
Discussion and Analysis of
UTI's Financial Condition and
Results of Operations;
Potential Conflicts of
Interest; Index to Exhibits;
Index to Financial Statements
15.Information with Respect to S-3 Companies *
16.Information with Respect to S-2 or S-3
Companies *
17.Information with Respect to Companies Other
Than S-2 or S-3 Companies Selected Financial Data of
UII; Business Of UII; Market
Prices and Dividends; UII
Management's Discussion and
Analysis Of UII's Financial
Condition and Results
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3
Of Operations; Relationship
with Independent Public
Accountants; Index To
Financial Statements
18.Information if Proxies, Consents or
Authorizations are to be Solicited Solicitations and Revocability
of UTI and UII Proxies;
Principal Stockholders and
Stock Ownership of Management;
Dissenters' Appraisal Rights;
Information Regarding the
Proposed Merger; Management of
UTI
19.Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer *
________
* Not applicable or answer thereto is negative
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UNITED INCOME, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 15, 1999
To the Stockholders of United Income, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders of
United Income, Inc. ("UII") will be held on March 15, 1999 at 1:00 p.m. at
the Holiday Inn Select Airport, 2501 South High School Road, Indianapolis,
Indiana 46241 for the following purposes:
1. To consider and act upon a proposal to approve and adopt an
Agreement and Plan of Reorganization by and between UII and United
Trust, Inc., an Illinois corporation ("UTI"), which provides for the
merger of UII into UTI, the conversion of each outstanding share of UII
Common Stock, no par value into one share of UTI Common Stock, no par
value. Upon the Effective date of the Merger the corporate name of
United Trust, Inc. shall be changed to United Trust Group, Inc.
Stockholders of UII who dissent from approval of this proposal have the
right to obtain payment for the fair value of their shares pursuant to
statutory procedures under Ohio state law, a copy of the relevant
provisions of which is attached as Appendix B to the Proxy Statement;
and
2. To transact such other business as may properly come before the
meeting.
The Board of Directors has fixed the close of business on February 1,
1999 as the record date for the determination of stockholders entitled to
notice of and to vote at the Special Meeting.
Whether or not you plan to attend the Special Meeting, you are urged to
mark, date, and sign the enclosed proxy and return it promptly so that your
vote can be recorded. If you are present at the meeting and desire to do
so, you may revoke your proxy and vote in person.
By Order of the Board of Directors,
GEORGE E. FRANCIS, Secretary
Dated: February 1, 1999
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING IN PERSON.
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UNITED TRUST, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 15, 1999
To the Stockholders of United Trust, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of
United Trust, Inc. ("UTI") will be held on March 15, 1999 at 1:00 p.m. at
the Holiday Inn Select Airport, 2501 South High School Road, Indianapolis,
Indiana 46241 for the following purposes:
1. To consider and act upon a proposal to approve and adopt an
Agreement and Plan of Reorganization by and between UTI and United
Income, Inc., an Ohio corporation ("UII"), which provides for the
merger of UII into UTI and the conversion of each outstanding share of
UII Common Stock, no par value, into one share of UTI Common Stock, no
par value. If the proposed merger is approved, UTI will issue 826,153
shares of its Common Stock, no par value to UII shareholders which
will represent 24.9% of its then issued and outstanding Common Stock,
net of treasury shares. Upon the Effective date of the Merger, the
corporate name of United Trust, Inc. shall be changed to United Trust
Group, Inc. Stockholders of UTI who dissent from approval of this
proposal have the right to obtain payment for the fair value of their
shares pursuant to statutory procedures under Illinois state law, a
copy of the relevant provisions of which is attached as Appendix C to
the Proxy Statement; and
2. To consider and act upon a proposal to approve an amendment
to UTI's Articles of Incorporation increasing the amount of authorized
Common Stock, no par value from 3,500,000 shares to 7,000,000 shares;
and
3. To transact such other business as may properly come before
the meeting.
The Board of Directors has fixed the close of business on February 1,
1999 as the record date for the determination of stockholders entitled to
notice of and to vote at the Special Meeting.
Whether or not you plan to attend the Special Meeting, you are urged
to mark, date and sign the enclosed proxy and return it promptly so that
your vote can be recorded. If you are present at the meeting and desire to
do so, you may revoke your proxy and vote in person.
By Order of the Board of Directors,
GEORGE E. FRANCIS, Secretary
Dated: February 1, 1999
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING IN PERSON.
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PRELIMINARY PROSPECTUS/PROXY STATEMENT DATED FEBRUARY 1, 1999
PROSPECTUS RELATING TO
826,153 SHARES OF COMMON STOCK OF
UNITED TRUST, INC.
JOINT PROXY STATEMENT RELATING TO
SPECIAL MEETINGS OF THE SHAREHOLDERS OF
UNITED TRUST, INC. AND UNITED INCOME, INC.
BOTH TO BE HELD MARCH 15, 1999
This Prospectus relates to 826,153 shares of Common Stock of United
Trust, Inc., an Illinois corporation ("UTI") to be issued in connection
with an Agreement and Plan of Reorganization dated as of March 31, 1998, a
copy of which is attached hereto as Appendix A ("the Merger Agreement"),
pursuant to which UTI would be the surviving company to a merger ("the
Merger"), with United Income, Inc., an Ohio corporation ("UII"). If the
Merger is approved (See "INFORMATION REGARDING THE PROPOSED MERGER" and
"RISK FACTORS") each one share of UII Common Stock, no par value ("the UII
Common Stock"), excluding those held by UII as treasury shares will be
converted ("the Conversion") into one share of UTI Common Stock, no par
value ("the UTI Common Stock"). Simultaneously with the Conversion, the
corporate name of UTI will be changed to United Trust Group, Inc. The
826,153 shares of UTI Common Stock issued to the UII Shareholders will
represent 24.9% of UTI's then issued and outstanding Common Stock, net of
treasury shares and will be issued at an aggregate value of $8,013,684.
This Prospectus also serves as a Proxy Statement for Special Meetings
of Shareholders of each of UTI and UII both of which will be held on March
15, 1999. The close of business on February 1, 1999 has been fixed as the
record date for the determination of Stockholders entitled to notice of and
to vote at the Special Meetings of Shareholders. Each share of both the
UTI Common Stock and UII Common Stock is entitled to one vote.
Abstentions, shares not voted for any reason and broker non votes will have
the same effect as a negative vote. The holders of a majority of the
outstanding shares of both the UTI Common Stock and UTI Common Stock
entitled to vote represented in person or by proxy shall constitute a
quorum for consideration of such matters placed before the Shareholders.
On September 30, 1998, the high bid for the UTI Common Stock traded on
the NASDAQ Small Cap exchange was $6.50 The UII Common Stock is not listed
or actively traded, therefore no quote is available.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS FEBRUARY 1, 1999.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION.
NEITHER THE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS PASSED UPON
THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES HEREBY
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY UTI, UII OR ANY OTHER PERSON.
THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO PURCHASE ANY SECURITIES OTHER THAN THE
SHARES OF UTI OR UII HOLDINGS TO WHICH IT RELATES, OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO PURCHASE ANY SECURITIES COVERED BY THIS JOINT
PROXY STATEMENT/PROSPECTUS OR THE SOLICITATION OF A PROXY IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
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AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SUCH SHARES SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF UTI OR UII SINCE THE DATE HEREOF, OR THE DATE AS OF WHICH
CERTAIN INFORMATION IS SET FORTH HEREIN.
AVAILABLE INFORMATION
UTI is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Securities and Exchange Commission. The reports,
proxy statements distributed to stockholders of UTI, and other information
filed by UTI can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. and at the Commission's Regional Offices located at Seven
World Trade Center, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Additionally, the Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. Said information may be obtained via the Internet at
(http://www.sec.gov).
UTI has filed a Registration Statement of Form S-4 (the "Registration
Statement") with the Commission under the Securities Act of 1933.
Information contained herein is subject to the completion or amendment
thereof. These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes effective.
This Joint Proxy Statement/Prospectus does not contain all the information
set forth in the Registration Statement, certain portions of which are
omitted in accordance with the Rules and Regulations of the Commission.
For further information pertaining to UTI and the shares to be issued in
the Merger, reference is made to the Registration Statement and exhibits
thereto.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed with the Commission by UTI and UII are
incorporated herein by reference:
1. Annual Report of UTI on Form 10-K for the year ended December 31,
1997, as amended on June 1, 1998, October 9, 1998; and
January 15, 1999.
2. Quarterly Reports of UTI on Form 10-Q for the quarters ended
March 31, 1998, June 30, 1998 and September 30, 1998; and
amendments.
3. Annual Report of UII on Form 10-K for the year ended
December 31, 1997, as amended on June 1, 1998, October 9, 1998;
and January 15, 1999.
4. Quarterly Reports of UII on Form 10-Q for the quarters ended
March 31, 1998, June 30, 1998 and September 30, 1998 and amendments.
All documents filed after the date hereof by UTI or UII pursuant to Sections
13(a), 14 or 15(d) of the Exchange Act, and prior to the termination of the
Merger hereunder, shall be deemed to be incorporated in these Proxy
Statements by reference and to be a part of this Proxy Statement from
the date of filing of such documents.
UTI and UII undertake to provide without charge to each person to whom
a copy of this Proxy Statement has been delivered, on the written or oral
request of any such person, a copy of any or all of the information that
has been incorporated by reference herein (not including exhibits to
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information incorporated by reference unless such exhibits are specifically
incorporated by reference to information that this Proxy Statement
incorporates). These documents are available, upon request, from United
Trust, Inc., 5250 South Sixth Street Road, Springfield, IL 62703,
telephone (217) 241-6300. In order to ensure timely delivery of the
documents, any request should be made by five business days prior to the
Special Meetings.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of the Registration Statement and this Proxy
Statement to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of the Registration Statement
or this Proxy Statement.
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PRELIMINARY PROXY MATERIAL DATED FEBRUARY 1, 1999
UNITED INCOME, INC.
5250 SOUTH SIXTH STREET ROAD
SPRINGFIELD, ILLINOIS 62703
SOLICITATION AND REVOCABILITY OF UII PROXIES
This Proxy Statement is furnished in connection with the
solicitation by UII's Board of Directors of proxies to be voted at a
Special Meeting of Stockholders, or any adjournment thereof, to be held on
March 15, 1999 at 1:00 p.m. at the Holiday Inn Select Airport, 2501 South
High School Road, Indianapolis, Indiana 46201. The purpose of the Special
Meeting of Stockholders, as set forth in the accompanying notice, is (i) to
vote on the proposal for the merger of UII into UTI, pursuant to the terms
of an Agreement and Plan of Reorganization (the "Merger Agreement"), and
(ii) to conduct such other business as may properly come before the meeting
or any adjournment thereof. The Proxy Statement and accompanying proxy are
being mailed to stockholders on or about February 1, 1999.
Any proxy may be revoked by the person giving it at any time before
it is voted by delivering to the Secretary of UII a written notice of
revocation or a duly executed proxy bearing a later date. Shares
represented by a proxy, properly executed and returned to UII and not
revoked, will be voted at the Special Meeting.
Shares will be voted in accordance with the directions of the
stockholder as specified on the proxy. In the absence of directions, the
proxy will be voted FOR the approval of the Merger Agreement. Any other
matters that may properly come before the meeting will be acted upon by the
persons named in the accompanying proxy in accordance with their
discretion.
The close of business on February 1, 1999 has been fixed as the
record date (the "Record Date") for the determination of stockholders
entitled to notice of and to vote at the Special Meeting and any
adjournment thereof. As of the Record Date, UII had 1,391,919 shares of
Common Stock, no par value, outstanding and entitled to vote. No other
voting securities of UII are outstanding. There are no cumulative voting
rights.
The cost of soliciting proxies will be borne by UII. UII may
reimburse brokers and other persons for their reasonable expenses in
forwarding proxy material to the beneficial owners of UII Common Stock.
Solicitations may be made by telephone, by telegram or by personal calls.
A copy of the Merger Agreement is included as Appendix A to this
Proxy Statement. The description of the Merger contained in this Proxy
Statement, including the summary of the terms of the Merger Agreement, is
qualified in its entirety by reference to the full text of the Merger
Agreement which is incorporated herein by reference.
THE DATE OF THIS PROXY STATEMENT IS FEBRUARY 1, 1999.
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PRELIMINARY PROXY MATERIAL DATED FEBRUARY 1, 1999
UNITED TRUST, INC.
5250 SOUTH SIXTH STREET ROAD
SPRINGFIELD, ILLINOIS 62703
PROXY STATEMENT
SOLICITATION AND REVOCABILITY OF UTI PROXIES
This Proxy Statement is furnished in connection with the
solicitation by the Board of Directors of UTI of proxies to be voted at a
Special Meeting of Stockholders, or at any adjournment thereof, to be held
on March 15, 1999, at 1:00 p.m. at the Holiday Inn Select Airport, 2501
South High School Road, Indianapolis, Indiana 46201. The purpose of the
Special Meeting of Stockholders as set forth in the accompanying notice is
(i) to vote on the proposal for the merger of UII into UTI, pursuant to the
terms of an Agreement and Plan of Reorganization ("the Merger Agreement");
(ii) to vote on a proposal to amend UTI's Articles of Incorporation to
increase the amount of authorized Common Stock from 3,500,000 shares to
7,000,000 shares; and (iii) to conduct such other business as may properly
come before the meeting or any adjournment thereof. The Proxy Statement
and accompanying proxy are being mailed to stockholders on or about
February 1, 1999.
Any proxy may be revoked by the person giving it at any time before
it is voted by delivering to the Secretary of UTI a written notice of
revocation or a duly executed proxy bearing a later date. Shares
represented by a proxy, properly executed and returned to UTI and not
revoked, will be voted at the Special Meeting.
Shares will be voted in accordance with the directions of the
stockholder as specified on the proxy. In the absence of directions, the
proxy will be voted FOR the approval of the proposals described above. Any
other matters that may properly come before the meeting will be acted upon
by the persons named in the accompanying proxy in accordance with their
discretion.
The close of business on February 1, 1999 has been fixed as the
record date (the "Record Date") for the determination of stockholders
entitled to notice of and to vote at the Special Meeting and any
adjournment thereof. As of the Record Date, UTI had 2,490,438 shares of
Common Stock, no par value, outstanding and entitled to vote. No other
voting securities of UTI are outstanding. There are no cumulative voting
rights.
The cost of soliciting proxies will be borne by UTI. UTI may
reimburse brokers and other persons for their reasonable expenses in
forwarding proxy material to the beneficial owners of UTI Common Stock.
Solicitations may be made by telephone, by telegram or by personal calls.
A copy of the Merger Agreement is included as Appendix A to this
Proxy Statement. The description of the Merger contained in this Proxy
Statement, including the summary of the terms of the Merger Agreement, is
qualified in its entirety by reference to the full text of the Merger
Agreement which is incorporated herein by reference.
THE DATE OF THIS PROXY STATEMENT IS FEBRUARY 1, 1999.
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TABLE OF CONTENTS
Page
PROXY STATEMENT SUMMARY 13
POTENTIAL CONFLICT OF INTERESTS 15
RISK FACTORS 17
INTRODUCTION 20
THE UTI HOLDING COMPANY SYSTEM 20
PRINCIPAL STOCKHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT 23
INFORMATION REGARDING THE PROPOSED MERGER 28
DISSENTERS' RIGHTS 34
SELECTED FINANCIAL DATA OF UII 37
UII MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 38
SELECTED FINANCIAL DATA OF UTI 56
UTI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 57
FEDERAL INCOME TAXES 78
CAPITALIZATION OF UTI AND UII 78
UTI AND UII PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
INFORMANTION - UNAUDITED 80
MARKET PRICES AND DIVIDENDS 87
BUSINESS OF UII 88
BUSINESS OF UTI 96
DIRECTORS AND EXECUTIVE OFFICERS OF UII 108
BENEFICIAL OWNERS AND MANAGEMENT OF UII 115
DIRECTORS AND EXECUTIVE OFFICERS OF UTI 117
BENEFICIAL OWNERS AND MANAGEMENT OF UTI 124
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 126
YEAR 2000 ISSUE 127
RECENT DEVELOPMENT 128
DESCRIPTION OF UTI AND UII CAPITAL STOCK 129
PROPOSED INCREASE IN THE AUTHORIZED COMMON STOCK OF UTI 131
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS 132
OTHER MATTERS TO COME BEFORE THE MEETING 132
SIGNATURES 133
INDEX TO EXHIBITS 134
INDEX TO FINANCIAL STATEMENTS OF UTI AND UII 138
Appendix A Agreement and Plan of Reorganization 255
Appendix B Rights of Dissenting Stockholders of
United Income, Inc. 273
Appendix C Rights of Dissenting Stockholders of
United Trust, Inc. 277
Appendix D Proposed Amendment to Articles of
Incorporation of UTI 280
Appendix E Consent to use of UTI and UII opinions issued
by Kerber Eck and Braeckel LLP 283
Appendix F Consent to use of Tax Opinion of KPMG Peat
Marwick LLP 284
Appendix G Tax Opinion of KPMG Peat Marwick LLP 285
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PROXY STATEMENT SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in the
Proxy Statement and by the full text of the Agreement and Plan of
Reorganization (the "Merger Agreement") which is attached hereto as
Appendix A and incorporated herein by reference.
DATE OF SPECIAL MEETINGS OF
UTI AND UII STOCKHOLDERS March 15, 1999
RECORD DATE February 1, 1999
EFFECTIVE DATE The closing of the transactions ("the
Effective Date") contemplated by the Merger Agreement
shall take place at the executive offices of UII
beginning at 2:00 p.m. on the first business day
following the day upon which the UTI and UII
stockholders meetings to approve the Merger were held.
SHARES OF UTI AND UII UTI Common Stock outstanding 2,490,438
UII Common Stock outstanding 1,391,919
UII Common Stock owned by UTI 565,766
UTI Shares to be issued to UII
Shareholders 826,153
PROPOSALS UII will be merged into UTI pursuant to the
Merger Agreement. The Merger is conditioned upon the
approval of both the UTI Shareholders and the UII
Shareholders. The Merger is not conditioned upon the
proposal to increase the UTI authorized shares.
The number of authorized Common Stock of
UTI will be increased from 3,500,000 to 7,000,000.
The proposed increase is not conditioned upon the
approval of the Merger.
NAME CHANGE Upon the Effective Date of the Merger, the corporate
name of United Trust, Inc. will change to United
Trust Group, Inc.
REASONS FOR THE
MERGER The Board of Directors of each UTI and UII has
concluded that the Merger will benefit the business
operations of UTI and UII and their respective
stockholders by creating a larger, more viable life
insurance holding group with lower administrative
costs, a simplified corporate structure, and more
readily marketable securities. UTI and UII have no
operations of its own other than its holding
companies and investment activities. The Merger will
have no effect on the administration of UTI's and
UII's subsidiary insurance company operations. The
commonalty of ownership among UTI and UTI's officers
and directors conflict in terms of their voting
authority and resulting differences in their
percentage of ownership from the merger. The close
of business on February 1, 1999 has been fixed as the
record date for the determination of stockholders
entitled to notice of and to vote on the proposals.
Regulatory approval is not required from the States
in which its' life insurance subsidiaries are
authorized to do business and that UTI and UII are
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proceeding in accordance with the provisions of the
Illinois Business Corporation Act and the Ohio
General Corporation Law, respectively.
INCREASE IN UTI
AUTHORIZED The Board of Directors of UTI has declared
COMMON STOCK advisable to increase UTI's authorized capital stock
from 3,500,000 shares to 7,000,000 shares. The
purpose is to provide UTI with the flexibility to
engage in future transactions that UTI's Board of
Directors deem necessary or desirable UTI has
sufficient unissued authorized stock to
complete the proposed Merger of UTI and UII without
the proposed increase in authorized capital stock.
CONVERSION RATIO One share of UII Common Stock, excluding shares held
by UII as treasury shares and shares as to which
dissenter's appraisal rights shall have been
perfected, will be converted into one share of UTI
Common Stock.
UTI owns 565,766 shares of UII Common
Stock. Upon consummation of the Merger, these shares
will be canceled and no consideration in return with
respect thereto.
VOTING Each share of both the UTI Common Stock and
UII Common Stock is entitled to one vote.
Abstentions, shares not voted for any reason and
broker non votes will have the same effect as a
negative vote. There are no cumulative voting rights
for either the UTI Common Stock or the UII Common
Stock. The holders of a majority of the outstanding
shares of both the UTI Common Stock and UII Common
Stock entitled to vote represented in person or by
proxy shall constitute a quorum for consideration of
matters placed before the Shareholders.
VOTE REQUIRED UTI The affirmative votes of the holders of two-
thirds of the outstanding UTI Common Stock are
required for approval of the proposals 1. and 2. The
executive officers and directors of UTI beneficially
own 68.0% of the outstanding Common Stock of UTI and
they intend to vote in favor of proposals 1. and 2.
UII The affirmative vote of the holders of a
majority of the outstanding UII Common Stock is
required for approval of the Merger by UII. The
executive officers and directors of UII beneficially
own 5.5% of the outstanding Common Stock of UII.
Additionally, UTI owns 40.6% of the outstanding
Common Stock OF UII. Both the officers and directors
of UII and the Board of Directors of UTI
(collectively owning 46.1% of the Common Stock of
UII) intend to vote in favor of the UII merger.
SHAREHOLDER RIGHTS If the Merger is consummated, all Holders of UII
Common Stock will become shareholders of UTI. The
rights of holders of common stock of both UTI and UII
are governed by Illinois and Ohio law, respectively.
In addition, the rights and obligations of
shareholders are also governed by the Articles of
Incorporation and Code of Regulation of the
respective companies.
Because both UTI and UII Articles of Incorporation
and Codes of Regulations are substantially the same,
there will be no change in the relative rights and
obligations of holders of common stock of UII when
they become holders of common stock of UTI. With
regard to State laws, there are no consequential
effects of any differences on the UII shareholders.
TAX CONSEQUENCES UTI believes that the UII merger will be tax-free to
all shareholders of UII receiving UTI Common Stock
14
<PAGE>
and that the UII basis and holding period for UII
Common Stock received will be those attributed to
shares surrendered in the UII merger. See "Tax
Consequences".
BOARD OF DIRECTORS The Board of Directors of each of UTI and UII
recommends approval of the proposals.
DISSENTERS' APPRAISAL
RIGHTS UTI and UII stockholders who dissent from
approval of the Merger pursuant to certain procedures
under Illinois and Ohio state laws have the right to
obtain payment for the fair value of their shares.
BUSINESS OF UTI AND
UII UTI is a holding company owning 53% of the
outstanding capital stock of UTG. Additionally, UTI
owns 40.6% of UII, also a holding company, which in
turn owns the remaining 47% of the outstanding
capital stock of UTG. UTG is a holding company
formed in 1992 as a vehicle to acquire Commonwealth
Industries Corporation. UTG owns directly a majority
of the outstanding capital stock of First
Commonwealth Corporation ("FCC"). FCC in turn owns
100% of Universal Guaranty Life Insurance Company
("UG"). UG in turn owns 100% of United Security
Assurance Company ("USA"), and USA in turns owns 84%
of Appalachian Life Insurance Company ("APPL").
Finally, APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE"). The companies main business is the
solicitation and acquisition of life insurance.
POTENTIAL CONFLICTS
OF INTEREST The directors and officers of UTI
beneficially own 68.0% of the outstanding Common
Stock of UTI. UTI owns 40.6% of the issued and
outstanding Common Stock of UII. There is a
potential conflict of interest in the setting of the
exchange ratio for the Merger in that the officers
and directors of UTI beneficially own 68.0% of the
outstanding stock of UTI, and this group only owns
3.7% of the stock of UII. An exchange ratio that
favors UTI would benefit these officers and
directors. However, as a practical matter almost all
of the value of UTI comes from its direct and
indirect ownership of UTG, and almost all of the
value of UII also comes from its direct ownership of
UTG.
Prior to the merger, the officers and
directors of UTI own 49.4% of the ownership of UTG
through their ownership of UTI stock. After the
merger that group will own 51.5% of UTG through their
ownership of the stock of the merged company.
Because of the existence of minority
interests in the holding companies within the UTI
holding company system, potential conflicts of
interest exist with respect to intercompany
transactions.
CERTAIN
RELATIONSHIPS UTI and UII are members of an Insurance holding
company system of which UTI is the ultimate parent
company. UTI has a service agreement with UII to
perform services and provide personnel and facilities
which will be eliminated should the Merger be
consummated. UTI's and UII's insurance company
affiliates have similar agreements among the members
of the holding company system which will not be
effected by the Merger.
EQUITY INVESTMENT
IN UTI On November 20, 1998, First Southern Funding, Inc.,
a Kentucky corporation, ("FSF") and affiliates
acquired 929,904 shares of common stock of United
Trust, Inc., an Illinois corporation, ("UTI") from
UTI and certain UTI shareholders. As consideration
for the shares, FSF paid UTI $10,999,995 and certain
shareholders of UTI $999,990 in cash. FSF and
affiliates employed working capital to make these
purchases of common stock, including funds on hand
15
<PAGE>
and amounts drawn under existing lines of credit with
Star Bank, NA. FSF borrowed $7,082,878 and First
Southern Bancorp, Inc., an affiliate of FSF, borrowed
$495,775 in making the purchases. FSF and affiliates
expect to repay the borrowings through the sale of
assets they currently own.
Details of the transaction can be outlined as
follows: FSF acquired 389,715 shares of UTI common
stock at $10.00 per share. These shares represented
stock acquired during 1997 by UTI in private
transactions. Additionally, FSF acquired 473,523
shares of authorized but unissued common stock at
$15.00 per share. FSF acquired 66,666 shares of
common stock from UTI CEO Larry Ryherd, and his
family, at $15.00 per share. FSF has committed to
purchase $2,560,000 of face amount of UTI convertible
notes from certain officers and directors of UTI for
a cash price of $3,072,000 by March 1, 1999. FSF is
required to convert the notes to UTI common stock by
July 31, 2000. UTI has granted, for nominal,
consideration, an irrevocable, exclusive option to
FSF to purchase up to 1,450,000 shares of UTI common
stock for a purchase price in cash equal to $15.00
per share, with such option to expire on July 1,
2001. UTI has also caused three persons designated
by FSF to be appointed, as part of the maximum of 11,
to the Board of Directors of UTI.
Following the transactions described above, and
together with shares of UTI previously owned, FSF and
affiliates currently own 1,035,165 shares of UTI
common stock (41.6%) becoming the largest shareholder
of UTI. UTI CEO Larry Ryherd owns 487,901 shares of
UTI common stock (19.6%). Mr. Jesse T. Correll is
the majority shareholder of FSF, which is an
affiliate of First Southern Bancorp, Inc., a bank
holding company that owns five banks that operate out
of 14 locations in central Kentucky.
16
<PAGE>
RISK FACTORS
DEPENDENCE ON DISTRIBUTIONS FROM AFFILIATES
UTI is a holding company owning 53% of the outstanding capital stock
of UTG. Additionally, UTI owns 40.6% of UII, also a holding company, which
in turn owns the remaining 47% of the outstanding capital stock of UTG.
UTG is a holding company formed in 1992 as a vehicle to acquire
Commonwealth Industries Corporation (See "THE UTI HOLDING COMPANY SYSTEM").
UTG owns directly a majority of the outstanding capital stock of First
Commonwealth Corporation ("FCC"). FCC in turn owns 100% of Universal
Guaranty Life Insurance Company ("UG"). UG in turn owns 100% of United
Security Assurance Company ("USA"), and USA in turn owns 84% of Appalachian
Life Insurance Company ("APPL"). Finally, APPL owns 100% of Abraham
Lincoln Insurance Company ("ABE").
UTI has no operations of its own other than its holding companies and
investment activities. Sources of funds available to UTI are its
investment assets and the income, if any, from such assets, and service
fees and dividends from its operating affiliates. The fair market value of
the UTI's cash and cash equivalents and investment assets on June 30, 1998
was approximately $297,000. UTI's investment income for the three months
ended June 30, 1998 totaled $44,000.
UII has a service agreement with USA which states that USA is to pay
UII monthly fees equal to 22% of the amount of collected first year
premiums, 20% in second year and 6% of the renewal premiums in years three
and after. UII has a subcontract agreement with UTI which states that UII
is to pay UTI monthly fees equal to 60% of collected service fees from USA
as stated above. USA paid $989,295, $1,567,891 and $2,015,325 under their
agreement with UII for 1997, 1996 and 1995, respectively. UII paid
$593,577, $940,734 and $1,209,195 under their agreement with UTI for 1997,
1996 and 1995, respectively. Should the proposed Merger be approved the
service fees received by UII from USA would continue to be paid to UTI.
The payment of dividends to UTI from UTG will be dependent upon UTG's
receipt for dividends from FCC, directly and indirectly through the holding
company system. Should the Merger be approved the dividends from FCC, if
any, would be paid directly to UTI. Such dividends in turn depend upon
FCC's receipt of dividends from UG and UG's receipt of dividends from its
subsidiaries. The payment of dividends by life insurance companies is
regulated by state insurance laws, and generally dividends in any year are
limited to the net statutory earnings (earnings determined in accordance
with accounting rules required or permitted by applicable state insurance
laws and regulations) of UG and each of UG's insurance company
subsidiaries.
ISSUANCE OF PREFERRED STOCK
The Articles of Incorporation of UTI provide that in addition to UTI
Common Stock, the Board of Directors are authorized to issue 150,000 shares
of UTI Preferred Stock. There are no shares of Preferred Stock currently
outstanding. The rights of holders of UTI Common Stock may be materially
limited or adversely affected upon the issuance of Preferred Stock.
Preferred Stock may be issued with voting and conversion rights that could
adversely affect the voting power and other rights of holders of Common
Stock. UTI has no shares, which may be used in certain circumstances to
discourage tender offers or proxy contests or removal of incumbent
management.
CONTROL BY UTI
UTI owns 40.6% of the Common Stock of UII. Together, UTI and UII own
100% of the Common Stock of UTG. As a result of its equity ownership, UTI
is able to exercise substantial control over the Company's affairs. UTI
may effectively control the election of the directors and operations of
both UTG and UII. Additionally, UTI may effectively control the approval
or disapproval of any matters submitted for stockholder approval and it may
prevent a change of management or an acquisition or takeover of UII. The
Board of Directors of both UTI and UII intend to vote in favor of the
proposed Merger.
CHANGE IN OWNERSHIP INTEREST
If the Merger is approved, a shareholder of UTI will own a smaller
17
<PAGE>
percentage of UTI's equity as a result of the additional 826,153 shares of
UTI Common Stock issued to the UII shareholders; however, the additional
shares being issued will also cause an increase in UTI's equity (See "UTI
AND UII PROFORMA CONSOLIDATED FINANCIAL INFORMATION").
NO DIVIDENDS
UTI has not paid any cash dividends on its Common Stock and currently
intends to retain any earnings for the future development of its business.
COMPARATIVE MARKET VALUE OF SECURITIES
On March 24, 1997, the date prior to the day the agreement of the
proposed merger was entered into, UTI's common stock had a closing bid
price of $5.31 as quoted on NASDAQ.
There is no established public trading market for UII's common stock.
UII's common stock is not listed on any exchange. Therefore, no market
quote was available.
POTENTIAL CONFLICT OF INTEREST
The Chairman of the Board, Mr. Larry Ryherd and the President, Mr.
James Melville of UTI serve as directors and executive officers of both UTI
and UII. The board of directors of UTI, consists of thirteen in number, of
which ten are independent directors. Mr. Ryherd beneficially owns 501,701
(19.6%) shares of the issued and outstanding UTI Common Stock. The
directors and officers of UTI together beneficially own 68.0% of the issued
and outstanding UTI Common Stock. Additionally, UTI owns 40.6% of the
outstanding UII Common Stock. The board of directors of UII consists of
nine in number, of which six are independent directors who together
beneficially own 5.5% of the issued and outstanding UII Common Stock. The
board of directors of both UTI and UII and the management of UTI
representing the shares of UII owned by UTI intend to vote in favor of the
proposals.
There is a potential conflict of interest in the setting of the
exchange ratio for the Merger in that the officers and directors of UTI
beneficially own 68.0% of the outstanding stock of UTI, and this group only
owns 3.7% of the stock of UII. An exchange ratio that favors UTI would
benefit these officers and directors. However, as a practical matter
almost all of the value of UTI comes from its direct and indirect ownership
of UTG, and almost all of the value of UII also comes from its direct
ownership of UTG.
Because of the existence of minority interest in certain holding
companies within the UTI holding company system potential conflicts of
interest may arise with respect to intracompany transactions. Such
transactions may include mergers and allocation of expenses among the
companies in the UTI holding company system.
UTI has taken a number of steps to reduce potential conflicts of
interest by increasing the commonality of ownership interest in the
subsidiaries (See "THE UTI HOLDING COMPANY SYSTEM"). One of the reasons
for this Merger is to increase the commonality of ownership among UTI and
UII. (See "Information REGARDING THE PROPOSED MERGER" - Reasons for the
merger).
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<PAGE>
SELECTED FINANCIAL INFORMATION
PROPOSED MERGER OF UTI AND UII
(000's omitted except on per share data)
Nine Months Ended Year Ended
September 30, December 31,
1998 1997 1997 1996 1995
<TABLE>
<S> <C> <C> <C> <C> <C>
UTI - HISTORICAL
Revenues $ 31,551 $ 34,192 $ 43,992 $ 46,976 $ 49,869
Net Income (loss) $ 801 $ (376) $ (559)$ (938) $ (3,001)
Per common share:
Income (loss) $ .49 $ .21 $ (0.32)$ (0.50) $ (1.61)
Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0
Balance sheet data:
Assets $347,925 $349,300 $355,474 $356,305
Common stockholders equity:
Total $ 15,785 $ 15,357 $ 18,014 $ 19,022
Per Share $ 9.70 $ 9.39 $ 9.63 $ 10.19
UII - HISTORICAL
Revenues $ 814 $ 943 $ 1,186 $ 1,791 $ 2,234
Net Income (loss) $ 659 $ 4 $ (79)$ (319) $ (2,148)
Per common share:
Income (loss) $ .47 $ .00 $ (0.06)$ (0.23) $ (1.54)
Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0
Balance sheet data:
Assets $ 13,301 $ 12,840 $ 12,881 $ 13,386
Common Stockholders equity:
Total $ 12,396 $ 11,936 $ 11,977 $ 12,355
Per common share $ 8.91 $ 8.58 $ 8.60 $ 8.87
UTI AND UII - PRO FORMA:
Revenues $ 31,243 $ 43,363
Net Income (loss) $ 1,192 $ (615)
Per common share:
Income (loss) $ 0.49 $ (0.25)
Cash dividends $ 0 $ 0
Balance sheet data:
Assets $339,470
Common stockholders equity:
Total $ 23,760
Per Share $ 9.70
</TABLE>
19
<PAGE>
PROXY STATEMENT FOR SPECIAL MEETINGS OF
STOCKHOLDERS OF
UNITED TRUST, INC.
AND
UNITED INCOME, INC.
INTRODUCTION
This Proxy Statement is being provided to stockholders of United
Trust, Inc. an Illinois corporation ("UTI"), and to stockholders of United
Income, Inc. an Ohio corporation ("UII"), in connection with the
solicitation of proxies by and on behalf of the management of UTI and UII,
respectively, to be used in voting at the Special Meetings of Stockholders
of UTI and UII, respectively, in accordance with the foregoing Notices of
Special Meetings of UTI and UII. The mailing address and telephone number
of each UTI and UII is 5250 South Sixth Street, Springfield, Illinois 62703
and (217) 241-6300.
THE UTI HOLDING COMPANY SYSTEM
UTI and UII are members of an insurance holding company system of
which UTI is the ultimate parent company. The following is the current
organizational chart for the companies that are members of insurance
holding company system, and the acronyms that will be used herein to
reference the companies:
For purposes of this proxy statement, the term "affiliate life
insurance companies" shall mean UG, USA, APPL and ABE, and the term "non-
insurance affiliate companies" shall mean the affiliated companies other
than UG, USA, APPL and ABE.
All of these companies, either directly or through subsidiaries
operate principally in the individual life insurance business. The primary
business of the companies has been the servicing of existing insurance
business in force, the solicitation of new insurance business, and the
acquisition of other companies in similar lines of business.
20
<PAGE>
UTI was incorporated December 14, 1984, as an Illinois corporation.
During the next two and a half years, UTI was engaged in an intrastate
public offering of its securities, raising over $12,000,000 net of offering
costs. In 1986, UTI formed a life insurance subsidiary and by 1987 began
selling life insurance products.
At September 30, 1998, the parent, significant subsidiaries and affiliates
of United Trust Inc. were as depicted on the following organizational
chart.
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1998
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
UII was incorporated on November 2, 1987, as an Ohio corporation.
Between March 1988 and August 1990, UII raised a total of approximately
$15,000,000 in an intrastate public offering in Ohio. During 1990, UII
formed a life insurance subsidiary and began selling life insurance
products.
UTI currently owns 40.6% of the outstanding common stock of UII and
accounts for its investment in UII using the equity method. In 1987, UTI
made an initial investment in UII of approximately one third of the public
offering.
On February 20, 1992, UTI and UII, formed a joint venture, United
Trust Group, Inc. On June 16, 1992, UTI contributed $2.7 million in cash,
an $840,000 promissory note and 100% of the common stock of its wholly
owned life insurance subsidiary. UII contributed $7.6 million in cash and
100% of its life insurance subsidiary to UTG. After the contributions of
cash, subsidiaries, and the note, UII owns 47% and UTI owns 53% of UTG.
21
<PAGE>
On June 16, 1992, UTG acquired 67% of the outstanding common stock of
the now dissolved Commonwealth Industries Corporation ("CIC"), for a
purchase price of $15,567,000. Following the acquisition, UTI controlled
eleven life insurance subsidiaries. UTI and UII have taken several steps
to streamline and simplify the corporate structure following the
acquisitions.
On December 28, 1992, Universal Guaranty Life Insurance Company was
the surviving company of a merger with Roosevelt National Life Insurance
Company, United Trust Assurance Company, Cimarron Life Insurance and Home
Security Life Insurance Company. On June 30, 1993, Alliance Life Insurance
Company, a subsidiary of UG, was merged into UG.
On March 30, 1994, Farmers and Ranchers Life Insurance Company ("F&R)
was sold to an unrelated third party. F&R was a small life insurance
company which did not significantly contribute to the operations of the
group. F&R primarily represented a marketing opportunity. Management
determined it would not be able to allocate the time and resources
necessary to properly develop the opportunity, due to continued focus and
emphasis on certain other agency forces of the Company.
On July 31, 1994, Investors Trust Assurance Company was merged into
Abraham Lincoln Insurance Company.
On August 15, 1995, the shareholders of CIC, Investors Trust, Inc.,
and Universal Guaranty Investment Company, all intermediate holding
companies within the UTI group, voted to voluntarily liquidate each of the
companies and distribute the assets to the shareholders (consisting solely
of common stock of their respective subsidiary). As a result, the
shareholders of the liquidated companies became shareholders of FCC.
On November 20, 1998, First Southern Funding, Inc., a
Kentucky corporation, ("FSF") and affiliates acquired 929,904 shares of
common stock of United Trust, Inc., an Illinois corporation, ("UTI") from
UTI and certain UTI shareholders. As consideration for the shares, FSF
paid UTI $10,999,995 and certain shareholders of UTI $999,990 in cash. FSF
and affiliates employed working capital to make these purchases of common
stock, including funds on hand and amounts drawn under existing lines of
credit with Star Bank, NA. FSF borrowed $7,082,878 and First Southern
Bancorp, Inc., an affiliate of FSF, borrowed $495,775 in making the
purchases. FSF and affiliates expect to repay the borrowings through the
sale of assets they currently own.
Details of the transaction can be outlined as follows: FSF
acquired 389,715 shares of UTI common stock at $10.00 per share. These
shares represented stock acquired during 1997 by UTI in private
transactions. Additionally, FSF acquired 473,523 shares of authorized but
unissued common stock at $15.00 per share. FSF acquired 66,666 shares of
common stock from UTI CEO Larry Ryherd, and his family, at $15.00 per
share. FSF has committed to purchase $2,560,000 of face amount of UTI
convertible notes from certain officers and directors of UTI for a cash
price of $3,072,000 by March 1, 1999. FSF is required to convert the notes
to UTI common stock by July 31, 2000. UTI has granted, for nominal,
consideration, an irrevocable, exclusive option to FSF to purchase up to
1,450,000 shares of UTI common stock for a purchase price in cash equal to
$15.00 per share, with such option to expire on July 1, 2001. UTI has also
caused three persons designated by FSF to be appointed, as part of the
maximum of 11, to the Board of Directors of UTI.
Following the transactions described above, and together with
shares of UTI previously owned, FSF and affiliates currently own 1,035,165
shares of UTI common stock (41.6%) becoming the largest shareholder of UTI.
UTI CEO Larry Ryherd owns 487,901 shares of UTI common stock (19.6%). Mr.
Jesse T. Correll is the majority shareholder of FSF, which is an affiliate
of First Southern Bancorp, Inc., a bank holding company that owns five
banks that operate out of 14 locations in central Kentucky.
The proposed merger described in the Proxy Statement/Prospectus is a
further step in the consolidation and restructuring of the UTI holding
company system.
22
<PAGE>
PRINCIPAL STOCKHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT UII
The following tabulation sets forth the name and address of the entity
known to be the beneficial owners of more than 5% of the UII's Common Stock
and shows: (i) the total number of shares of Common Stock beneficially
owned by such person as of December 31, 1998 and the nature of such
ownership; and (ii) the percent of the issued and outstanding shares of
Common Stock so owned as of the same date.
Title Number of Shares Percent
Of Name and Address and Nature of of
Class of Beneficial Owner Beneficial Ownership Class
Common United Trust, Inc. (1)(2) 565,766 40.6%.
Stock no 5250 South Sixth Street
par value Springfield, IL 62703
(1) Because Larry E. Ryherd owns 501,701 shares of UTI's Common Stock
(19.6%), and UTI owns 565,766 shares of UII Common Stock (40.6%) Mr. Ryherd
may be considered a beneficial owner of UII; however, Mr. Ryherd disclaims
any beneficial interest in the shares of UII owned by UTI as the UTI's
board of directors controls the voting and investment decisions regarding
such shares.
(2) First Southern Funding, LLC & Affiliates owns 1,054,440 shares of
UTI's Common Stock (42.34%) and UTI owns 565,776 shares of UII Common
Stock (40.6%), and because Jesse T. Correll owns 83% of First Southern
Funding, LLC, Mr. Correll may be considered a beneficial owner of UII.
SECURITY OWNERSHIP OF MANAGEMENT OF UII
The following tabulation shows with respect to each of the directors and
nominees of UII, with respect to UII's chief executive officer and each of
UII's executive officers whose salary plus bonus exceeded $100,000 for
fiscal 1998, and with respect to all executive officers and directors of
UII as a group: (i) the total number of shares of all classes of stock of
UII or any of its parents or affiliates, beneficially owned as of December
31, 1998 and the nature of such ownership; and (ii) the percent of the
issued and outstanding shares of stock so owned as of the same date.
Title Directors, Named Executive Number of Shares Percent
of Officers, & All Directors & and Nature of of
Class Executive Officers as a Group Ownership Class
UTI's Randall L. Attkisson 0 *
Common Vincent T. Aveni 0 *
Stock, no Jesse T. Correll 0 (1) *
Par value Marvin W. Berschet 0 *
George E. Francis 4,600 (2) *
James E. Melville 52,500 (3) 2.0%
Charlie E. Nash 0 *
Millard V. Oakley 9,000 *
Larry E. Ryherd 501,701 (4) 19.6%
Robert W. Teater 0 *
All directors and
executive officers as
a group(ten in number) 567,801 21.8%
FCC's Randall L. Attkisson 0 *
Common Vincent T. Aveni 0 *
Stock,$1.00 Marvin W. Berschet 0 *
Par value Jesse T. Correll 0 *
George E. Francis 0 *
James E. Melville 544 (5) *
Charlie E. Nash 0 *
Millard V. Oakley 0 *
23
<PAGE>
Larry E. Ryherd 0 *
Robert W. Teater 0 *
All directors and executive
officers as a group
(ten in number) 544 *
UII's Randall L. Attkisson 0 *
Common Vincent T. Aveni 7,716 (6) *
Stock, no Marvin W. Berschet 7,161 (7) *
Par value Jesse T. Correll 0 *
George E. Francis 0 *
James E. Melville 0 *
Charlie E. Nash 7,052 *
Millard V. Oakley 0 *
Larry E. Ryherd 47,250 (8) (9) *
Robert W. Teater 7,380 (10) *
All directors and
executive officers as
a group (ten in number) 76,559 5.5%
(1)In addition, Mr. Correll is a director and officer of First Southern
Funding, LLC & Affiliates which own 1,054,440 shares (42.34%) of UTI.
(See Principle Holders of Securities)
(2)Includes 4,600 shares which may be acquired upon the exercise of
outstanding stock options.
(3)James E. Melville owns 2,500 shares individually and 14,000 shares
jointly with his spouse. Includes: (i) 3,000 shares of UTI's Common
Stock which are held beneficially in trust for his daughter, namely
Bonnie J. Melville; (ii) 3,000 shares of UTI's Common Stock, 750 shares
of which are in the name of Matthew C. Hartman, his nephew; 750 shares
of which are in the name of Zachary T. Hartman, his nephew; 750 shares
of which are in the name of Elizabeth A. Hartman, his niece; and 750
shares of which are in the name of Margaret M. Hartman, his niece; and
(iii) 30,000 shares which may be acquired by James E. Melville upon
exercise of outstanding stock options.
(4) Larry E. Ryherd owns 181,091 shares of UTI's Common Stock in his own
name. Includes: (i) 150,050 shares of UTI's Common Stock in the name of
Dorothy LouVae Ryherd, his wife; (ii) 150,000 shares of UTI's Common Stock
which are held beneficially in trust for the three children of Larry E.
Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek Scott
Ryherd and Jarad John Ryherd; (iii) 4,600 shares of UTI's Common Stock,
2,700 shares of which are in the name of Shari Lynette Serr, 1,900 shares
of which are in the name of Jarad John Ryherd; (iv) 2,000 shares held by
Dorothy LouVae Ryherd, his wife as custodian for granddaughter, (v) 160
shares held by Larry E. Ryherd as custodian for granddaughter; and (vi)
13,800 shares which may be acquired by Larry E. Ryherd upon exercise of
outstanding stock options.
(5) James E. Melville owns 168 shares individually and 376 shares jointly
with his spouse.
(6) Includes 272 shares owned directly by Mr. Aveni's brother and 210
shares owned directly by Mr. Aveni's son.
(7) Includes 42 shares owned directly by each of Mr. Berschet's two sons
and 77 shares owned directly by Mr. Berschet's daughter, a total of 161
shares.
(8) Includes 47,250 shares beneficially in trust for the three children of
Larry E. Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek
Scott Ryherd and Jarad John Ryherd.
(9) In addition, Mr. Ryherd is a director and officer of UTI, who owns
565,766 shares (29.9%) of the Company. Mr. Ryherd disclaims any beneficial
interest in the shares of the Company owned by UTI as the UTI board of
directors controls the voting and investment decisions regarding such
shares.
(10) Includes 210 shares owned directly by Mr. Teater's spouse.
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* Less than 1%.
Except as indicated above, the foregoing persons hold sole voting and
investment power.
Directors and officers of UII file periodic reports regarding ownership of
UII securities with the Securities and Exchange Commission pursuant to
Section 16(a) of the Securities Exchange Act of 1934 as amended, and the
rules promulgated thereunder.
PRINCIPAL STOCKHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT OF UTI
The following tabulation sets forth the name and address of the entity
known to be the beneficial owners of more than 5% of UTI's Common Stock and
shows: (i) the total number of shares of Common Stock beneficially owned
by such person as of December 31, 1998 and the nature of such ownership;
and (ii) the percent of the issued and outstanding shares of Common Stock
so owned as of the same date.
Title Number of Shares Percent
Of Name and Address and Nature of of
Class of Beneficial Owner Beneficial Ownership Class
Common First Southern Funding, LLC 1,054,440(1) 42.34%
Stock no 99 Lancaster Street
Par value P.O. Box 328
Stanford, KY 40484
Larry E. Ryherd 501,701(2) 19.63%
12 Red Bud Lane
Springfield, IL 62707
(1) Includes 123,241 shares owned by First Southern
Bancorp, 183,033 shares owned by First Southern Capital, and 22,135
shares owned by First Southern Investments, all affiliates of First
Southern Funding, LLC. Jesse T. Correll, Director of UTI, by reason of
ownership of 83% of the outstanding shares of First Southern Funding,
LLC may be considered a beneficial owner of UTI.
(2) Larry E. Ryherd owns 181,091 shares of UTI's Common Stock in his own
name. Includes: (i) 150,050 shares of UTI's common Stock in the name of
Dorothy LouVae Ryherd, his wife; (ii) 150,000 shares of UTI's Common Stock
which are held beneficially in trust for the three children of Larry E.
Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek Scott
Ryherd and Jarad John Ryherd; (iii) 4,600 shares of UTI's Common Stock,
2,700 shares of which are in the name of Shari Lynette Serr and 1,900
shares of which are in the name of Jarad John Ryherd; (iv) 2,000 shares
held by Dorothy LouVae Ryherd, his wife, as custodian for granddaughter;
(v) 160 shares held by Larry E. Ryherd as custodian for granddaughter; and
(vi) 13,800 shares which may be acquired by Larry E. Ryherd upon the
exercise of outstanding stock options.
SECURITY OWNERSHIP OF MANAGEMENT OF UTI
The following tabulation shows with respect to each of the directors and
nominees of UTI, with respect to UTI's chief executive officer and each of
UTI's executive officers whose salary plus bonus exceeded $100,000 for
fiscal 1998, and with respect to all executive officers and directors of
UTI as a group: (i) the total number of shares of all classes of stock of
UTI or any of its parents or subsidiaries, beneficially owned as of
December 31, 1998 and the nature of such ownership; and (ii) the percent of
the issued and outstanding shares of stock so owned as of the same date.
Title Directors, Named Executive Number of Shares Percent
of Officers, & All Directors & and Nature of of
Class Executive Officers as a Group Ownership Class
FCC's John S. Albin 0 *
Common Randall L. Attkisson 0 *
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Stock,$1.00 William F. Cellini 0 *
Par value Robert E. Cook 0 *
Jesse T. Correll 0 *
Larry R. Dowell 0 *
George E. Francis 0 *
Donald G. Geary 225 *
Raymond L. Larson 0 *
Dale E. McKee 0 *
James E. Melville 544 (1) *
Thomas F. Morrow 0 *
Millard V. Oakley 0 *
Larry E. Ryherd 0 *
All directors and
executive officers as a
group (fourteen in number) 769 *
UII's John S. Albin 0 *
Common Randall L. Attkisson 0 *
Stock, no William F. Cellini 0 *
Par value Robert E. Cook 4,025 *
Jesse T. Correll 0 *
Larry R. Dowell 0 *
George E. Francis 0 *
Donald G. Geary 0 *
Raymond L. Larson 0 *
Dale E. McKee 0 *
James E. Melville 0 *
Thomas F. Morrow 0 *
Millard V. Oakley 0 *
Larry E. Ryherd 47,250 (2) 3.4%
All directors and
executive officers
as a group
(fourteen in number) 51,275 3.7%
UTI's John S. Albin 10,503 (3) *
Common Randall L. Attkisson 0 *
Stock, no William F. Cellini 1,000 *
Par value Robert E. Cook 10,199 *
Jesse T. Correll 0 (4) *
Larry R. Dowell 10,142 *
George E. Francis 4,600 (5) *
Donald G. Geary 1,200 *
Raymond L. Larson 4,400 (6) *
Dale E. McKee 11,122 *
James E. Melville 52,500 (7) 2.1%
Thomas F. Morrow 40,555 (8) 1.6%
Millard V. Oakley 9,000 *
Larry E. Ryherd 501,701 (9) (10) 19.6%
All directors and
executive officers
as a group
(fourteen in number) 652,922 25.7%
(1) James E. Melville owns 168 shares individually and 376 shares owned
jointly with his spouse.
(2) Includes 47,250 shares beneficially in trust for the three children of
Larry E. Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek
Scott Ryherd and Jarad John Ryherd.
(3) Includes 392 shares owned directly by Mr. Albin's spouse.
(4) In addition, Mr. Correll is a director and officer of First Southern
Funding, LLC & Affiliates which owns 1,054,440 shares (42.34%) of the
Company. (See Principal Holders of Securities)
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(5) Includes 4,600 shares which may be acquired upon exercise of
outstanding stock options.
(6) Includes 375 shares owned directly by Mr. Larson's spouse.
(7) James E. Melville owns 2,500 shares individually and 14,000 shares
jointly with his spouse. Includes: (i) 3,000 shares of UTI's Common Stock
which are held beneficially in trust for his daughter, namely Bonnie J.
Melville; (ii) 3,000 shares of UTI's Common Stock, 750 shares of which are
in the name of Matthew C. Hartman, his nephew; 750 shares of which are in
the name of Zachary T. Hartman, his nephew; 750 shares of which are in the
name of Elizabeth A. Hartman, his niece; and 750 shares of which are in the
name of Margaret M. Hartman, his niece; and (iii) 30,000 shares which may
be acquired by James E. Melville upon exercise of outstanding stock
options.
(8) Includes 1,500 shares as custodian for grandchildren. Includes 17,200
shares which may be acquired upon exercise of outstanding stock options.
(9) Larry E. Ryherd owns 181,091 shares of UTI's Common Stock in his own
name. Includes: (i) 150,050 shares of UTI's Common Stock in the name of
Dorothy LouVae Ryherd, his wife; (ii) 150,000 shares of UTI's Common Stock
which are held beneficially in trust for the three children of Larry E.
Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek Scott
Ryherd and Jarad John Ryherd; (iii) 4,600 shares of UTI's Common Stock,
2,700 shares of which are in the name of Shari Lynette Serr, 1,900 shares
of which are in the name of Jarad John Ryherd; (iv) 2,000 shares held by
Dorothy LouVae Ryherd, his wife as custodian for granddaughter, (v) 160
shares held by Larry E. Ryherd as custodian for granddaughter; and (vi)
13,800 shares which may be acquired by Larry E. Ryherd upon exercise of
outstanding stock options
(10) In addition, Mr. Ryherd is a director and officer of UII. The Company
owns 565,766 shares of UII. Mr. Ryherd disclaims any beneficial interest
of the 565,766 shares of UII owned by the Company as the Company's Board of
directors controls the voting and investment decisions regarding such
shares.
* Less than 1%.
Except as indicated above, the foregoing persons hold sole voting and
investment power.
Directors and officers of UTI file periodic reports regarding ownership UTI
securities with the Securities and Exchange Commission pursuant to Section
16(a) of the Securities Exchange Act of 1934 as amended, and the rules
promulgated thereunder.
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INFORMATION REGARDING THE PROPOSED MERGER
On March 25, 1997, the Board of Directors of each UTI and UII
unanimously approved an Agreement and Plan of Reorganization (the "Merger
Agreement") providing for the merger of UII into UTI. UTI and UII jointly
own 100% of the outstanding capital stock of UTG. Simultaneously at
closing, UTG shall be liquidated and UTI's name will be changed to United
Trust Group, Inc. A summary of all material provisions of the Merger
Agreement is set forth below and is qualified in its entirety by reference
to the full text of the Merger Agreement dated as of March 30, 1998 which
is attached hereto as Appendix A to this Proxy Statement.
THE PROPOSED MERGER
The Merger Agreement provides that, if approved, UII will be merged
into UTI. UTI will continue in existence as the surviving company
("Surviving Company"), its name will be changed to United Trust Group, Inc.
and will be governed by the State of Illinois. The separate existence of
UII will cease, but its business will be continued by the Surviving
Company. No change in the present business of UII is now contemplated.
The Surviving Company will succeed to ownership of all of UII's assets and
will assume all of UII's liabilities.
The independent directors of UTI are Messrs. Albin, Attkisson,
Cellini, Cook, Dowell, Geary, Larson, McKee, Morrow and Oakley. The
independent directors of UII are Messrs. Attkisson, Aveni, Berschet, Nash,
Oakley, and Teater. Mr. Ryherd, Chairman and CEO and Mr. Melville,
President and COO are directors of UTI and UII. The directors of UII on
the effective date of the Merger will continue in office as directors of
UTI, until the next annual meeting of UTI stockholders or until their
successors are duly elected and qualified. UTI's articles of incorporation
as amended provide that 5 to 21 persons shall serve on the Board of
Directors. The addition of the UTI board members to UTI's board will
increase its members to a total of 14 directors.
The certificate of incorporation of UTI, as amended, will continue to
be the certificate of incorporation of the Surviving Company following the
Effective Date of the Merger (as hereinafter defined), and is not amended
by the Merger Agreement. The by-laws of UTI will continue as the by-laws
of the Surviving Company until altered, amended or repealed.
REASONS FOR THE MERGER UTI
In 1992, UTI and its subsidiary UII combined assets to form UTG as a
vehicle to acquire Commonwealth Industries Corporation. (See "UTI Holding
Company System). The acquisition increased the company's business by more
than ten fold. The organization at that time consisted of six separate
holding companies and eleven separate life insurance companies. The board
of director's short term and long term goals have been to realize operating
efficiencies through restructuring and simplification of the organization.
To that extent since then, the companies have eliminated through merger
three of its six holding companies and seven of its eleven life insurance
companies.
The exchange ratio of one share of UII Common Stock for one Share of
UTI Common Stock was arrived at based upon the relationship of the current
number of shares of UTI and UII common stock outstanding and the percentage
ownership of each company of UTG. To satisfy listing standards as
promulgated by the NASDAQ, UTI effected a 1 for 10 reverse stock split in
early 1997 to retain its listing. UII also effected a 1 for 14.2 reverse
stock split. This action placed the book value per share of both UTI and
UII on the same basis simplifying an exchange ratio in the event of a
merger of the two companies.
Economically speaking, almost all of the value of UTI comes from its
direct and indirect and indirect ownership of UTG. Similarly, almost all
of the value of UII comes from its ownership of UTG. The merging of UTI
and UII is not a merging of economic interest. Those interests were merged
in 1992 with the formation of UTG. The Merger simplifies the legal form of
the ownership of the value of UTG. A UTI shareholder who owned 1% of the
value of UTG prior to the Merger through its ownership of UTI common stock
will own .93% of UTG after the Merger. Similarly, a UII shareholder who
owned 1% of the value of UTG through his ownership of UII common stock will
own 1.19% of UTG after the Merger.
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The board of directors considered the potential conflict of interest
in the setting of the exchange ratio in that officers and directors of UTI
beneficially own 43.2% and 3.4% of the outstanding stock of UTI and UII,
respectively. Prior to the Merger, this group through its ownership of the
UTI Common Stock indirectly owns 31.1% of UTG and after the Merger, that
group would own 30.8% of the stock of the merged company. The board of
directors thought that the exchange ratio was fair and did not cause
material differences between the shareholders of UTI and UII nor did a
merger materially effect the beneficial ownership of the UTI Common Stock
by management.
The board of directors also considered a yearly cost savings of
approximately $150,000 from the Merger resulting from the elimination of
UII's associated franchise taxes and accounting costs for required record
keeping. Additionally, the board of directors considered that costs
associated with listing the UII Common Stock on an exchange would be
avoided as the UII shareholders in the Merger would receive a stock that is
listed on the NASDAQ. UTI COMMON STOCK IS A VERY THINLY TRADED STOCK ON
THE NASDAQ MARKET.
UTI's board of directors consisting of Messrs. Albin, Cellini, Cook,
Dowell, Geary, Larson and McKee as independent directors and Messrs. Ryherd
and Melville together reached a decision that it would be in the best
interests of the companies and the shareholders to merge at this time and
unanimously adopted the Agreement and Plan of Reorganization at the March
25th, 1998 board meeting. Because the transaction merely simplifies the
legal form of the ownership of UTG, and that economically speaking, the
value of UTI and UII is mostly made up of their ownership of UTG this
transaction is not a merging of economic interests that were in effect
merged in 1992 with the formation of UTG, the board of directors concluded
that it was unnecessary to consider alternative actions nor was it
necessary for the independent directors provide a separate evaluation of
the transaction.
REASONS FOR THE MERGER UII
In 1992, UII and its parent company UTI, combined assets to form UTG
as a vehicle to acquire Commonwealth Industries Corporation. (See "UTI
Holding Company System). The acquisition increased the company's business
by more than ten fold. The organization at that time consisted of six
separate holding companies and eleven separate life insurance companies.
The board of director's short term and long term goals have been to realize
operating efficiencies through restructuring and simplification of the
organization. To that extent since then, the companies have eliminated
through merger three of its six holding companies and seven of its eleven
life insurance companies.
The exchange ratio of one share of UII Common Stock for one Share of
UTI Common Stock was arrived at based upon the relationship of the current
number of shares of UTI and UII common stock outstanding and the percentage
ownership of each company of UTG. To satisfy listing standards as
promulgated by the NASDAQ, UTI effected a 1 for 10 reverse stock split in
early 1997 to retain its listing. UII also effected a 1 for 14.2 reverse
stock split. This action placed the book value per share of both UTI and
UII on the same basis simplifying an exchange ratio in the event of a
merger of the two companies.
Economically speaking, almost all of the value of UII comes from its
direct and indirect ownership of UTG. Similarly, almost all of the value
of UTI comes from its ownership of UTG. The merging of UII and UTI is not
a merging of economic interest. Those interests were merged in 1992 with
the formation of UTG. The Merger simplifies the legal form of the
ownership of the value of UTG. A UII shareholder who owned 1% of the value
of UTG prior to the Merger through its ownership of UII common stock will
own 1.19% of UTG after the Merger. Similarly, a UTI shareholder who owned
1% of the value of UTG through his ownership of UII common stock will own
.93% of UTG after the Merger.
The board of directors considered the potential conflict of interest
in the setting of the exchange ratio in that officers and directors of UTI
beneficially own 43.2% and 3.4% of the outstanding stock of UTI and UII,
respectively. Prior to the Merger, this group through its ownership of the
UTI Common Stock indirectly owns 31.1% of UTG and after the Merger, that
group would own 30.8% of the stock of the merged company. The board of
directors thought that the exchange ratio was fair and did not cause
material differences between the shareholders of UTI and UII nor did a
merger materially effect the beneficial ownership of the UTI Common Stock
by management.
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The board of directors also considered a yearly cost savings of
approximately $150,000 from the Merger resulting from the elimination of
UII's associated franchise taxes and accounting costs for required record
keeping. Additionally, the board of directors considered that costs
associated with listing the UII Common Stock on an exchange would be
avoided as the UII shareholders in the Merger would receive a stock that is
listed on the NASDAQ.
UII's board of directors consisting of Messrs. Aveni, Berschet, Nash
and Teater as independent directors and Messrs. Ryherd and Melville
together reached a decision that it would be in the best interests of the
companies and the shareholders to merge at this time and unanimously
adopted the Agreement and Plan of Reorganization at the March 25th , 1997
board meeting. Because the transaction merely simplifies the legal form of
the ownership of UTG, and that economically speaking, the value of UTI and
UII is mostly made up of their ownership of UTG this transaction is not a
merging of economic interests that were in effect merged in 1992 with the
formation of UTG, the board of directors concluded that it was unnecessary
to consider alternative actions nor was it necessary for the independent
directors provide a separate evaluation of the transaction.
EFFECTIVE DATE
The Merger would become effective after the adoption of the Merger
Agreement by the required two thirds affirmative vote of the UTI Common
Stock entitled to vote thereon and the required majority affirmative vote
of the UII Common Stock, the filing of the merger Agreement and Articles of
Merger with the Secretary of State of Illinois and the Secretary of State
of Ohio, and the issuance by the Secretary of State of Ohio, a certificate
of merger (the "Effective Date"). The closing of the transaction
contemplated by the merger Agreement shall take place at the executive
offices of UTI beginning at 2:00 P.M. on the first business day following
the day upon which the UTI and UII stockholder meetings to approve the
merger were held. It is anticipated that the Merger will occur on March
15, 1999.
CONVERSION OF UII SHARES AND DETERMINATION OF MERGER EXCHANGE RATIOS
The terms of the Merger Agreement provide that on the Effective Date,
each (one) issued and outstanding share of UII Common Stock, excluding
shares of UII capital stock held as treasury shares by UII or as to which
dissenters' rights have been perfected, shall immediately, without any
further action by UII, UTI or UII stockholders, be converted into one share
of UTI Common Stock. On the Effective Date of the Merger, all further
sales or transfers of UII shares will cease. All shares of UII Common
Stock held as treasury shares will be cancelled and no consideration issued
with respect thereto. In addition, UTI owns 565,766 shares of UII Common
Stock that will be canceled and no consideration in return with respect
thereto.
The exchange ratio of one share of UII Common Stock for one Share of
UTI Common Stock was arrived at based upon the relationship of the current
number of shares of UTI and UII common stock outstanding and the percentage
ownership of each company of UTG. To satisfy listing standards as
promulgated by the NASDAQ, UTI effected a 1 for 10 reverse stock split in
early 1997 to retain its listing. UII also effected a 1 for 14.2 reverse
stock split. This action placed the book value per share of both UTI and
UII on the same basis simplifying an exchange ratio in the event of a
merger of the two companies.
Economically speaking, almost all of the value of UII comes from its
direct and indirect ownership of UTG. Similarly, almost all of the value
of UTI comes from its ownership of UTG. The merging of UII and UTI is not
a merging of economic interest. Those interests were merged in 1992 with
the formation of UTG. The Merger simplifies the legal form of the
ownership of the value of UTG. A UII shareholder who owned 1% of the value
of UTG prior to the Merger through its ownership of UII Common Stock will
own 1.19% of UTG after the Merger. Similarly, a UTI shareholder who owned
1% of the value of UTG through his ownership of UII Common Stock will own
.93% of UTG after the Merger.
The exchange ratio was arrived at based upon a review of a number of
factors, including (1) the relationship of the current number of shares of
UTI and UII common stock outstanding and the percentage ownership of each
company of their common affiliate, United Trust Group, Inc. and (2) the
relative historical and projected earnings per share, the relative
historical book value per share, and the relative historical market value
per share of each of UTI and UII. Taking all these factors into account,
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the Board of Directors of each UTI and UII determined that the exchange
ratio of each (one) share of UII Common Stock for one share of UTI Common
Stock would be fair to the stockholders of UTI and UII respectively.
INCREASE IN AUTHORIZED UTI COMMON STOCK
The merger will require the issuance of almost all of the remaining
authorized but unissued shares of UTI. In order to provide UTI with
flexibility regarding future merger options, the raising of additional
capital or the granting of stock options, a proposal to amend UTI's
Certificate of Incorporation to increase the number of shares of UTI's
authorized Common Stock from 3,500,000 shares to 7,000,000 shares will be
voted upon by UTI's stockholders at the same special meeting on March 15,
1999 at which the proposed Merger will be voted upon by UTI stockholders.
UTI has no pending arrangements or plans for these additional authorized
shares at this time. The purpose of the Amendment is to provide UTI with
the flexibility to engage in future transactions that UTI's Board of
Directors may deem necessary or desirable without further shareholder
action. (See PROPOSED INCREASE IN THE AUTHORIZED COMMON STOCK OF UII)
EFFECT ON CURRENT STOCKHOLDERS
The Merger will have no effect on the rights and privileges of current
stockholders of UTI. The name of the company will be changed to United
Trust Group, Inc. and the shares of UTI Common Stock will be converted to
the new shares of United Trust Group, Inc.
After the Merger, assuming no stockholders execute their dissenters'
rights, the former UII stockholders would receive 826,153 New Shares which
would constitute 24.9% of the then issued and outstanding shares.
As soon as practicable after the closing of the Merger, UTG will
mail a letter of instruction and a new stock certificate of UTG Common
Stock ("the New Shares") to each UTI and UII shareholder replacing their
UTI Common Stock certificate and UII Common Stock certificate ("the Old
Shares"). The Old Shares will be considered null and void. SHAREHOLDERS
SHOULD NOT FORWARD THEIR CERTIFICATES REPRESENTING THE OLD SHARES BEFORE
RECEIVING THEIR INSTRUCTIONS.
After the Merger, assuming no stockholders execute their dissenters'
rights, UTI will have issued 826,153 New Shares which would constitute
24.9% of the then issued and outstanding shares of UTI Common Stock.
EXPENSES
Each of UTI and UII will bear its respective expenses relating to the
Merger.
TERMINATION AND AMENDMENT
The Merger Agreement may be terminated at any time before the Merger
becomes effective; (i) by mutual consent of the Boards of Directors of UTI
and UII; (ii) by the Board of Directors of either UTI or UII if the merger
is for any reason not consummated on or before December 31, 1998; or (iii)
by the Board of Directors of either UTI or UII if any of the conditions for
closing described below at "INFORMATION REGARDING THE PROPOSED MERGER -
Other Provisions" has not been met.
No material changes may be made to the terms of the Merger Agreement
either before or after the Special Meeting of Stockholders of UII and the
Special Meeting of Stockholders of UTI without the written agreement of the
Board of Directors of each of UTI and UII. Additionally, should the Merger
Agreement be approved by a vote of UTI and UII stockholders at their
respective Special Meetings, no amendment or modification that would
materially affect the rights of UTI or UII stockholders may be made to the
terms of the Merger Agreement. If any such change were made, UTI would
amend its registration statement and UTI and UII stockholders would be
notified and a resolicitation of the stockholders made.
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OTHER PROVISIONS
The Merger Agreement contains certain representations and warranties
of each of UTI and UII. In the Merger Agreement, UTI and UII each
represent and warrant regarding their current organization and standing;
the existence of subsidiaries; their current respective capitalizations;
the accuracy and completeness of financial statements delivered in
connection with the Merger; the absence of undisclosed liabilities; the
absence of certain materially adverse changes, events or conditions; the
absence of litigation or proceedings affecting each company or its
properties; the compliance by each company with all licensing and
regulatory laws and requirements; the accuracy and completeness of
information supplied by the respective company for this Proxy Statement;
the absence of conflicts between the Merger Agreement and any other
contract or document or any judgment or decree; the authority of the
respective company to execute, deliver and perform the Merger Agreement;
the absence of material undisclosed tax liabilities; and the absence of
material undisclosed liens against or encumbrances of each company's
respective assets.
The Merger Agreement also contains certain covenants by each of UTI
and UII. In the Merger Agreement, each of UTI and UII covenants to conduct
its business in the ordinary course; to refrain from materially amending
any employment contract, pension or retirement plan, or charter documents
and by-laws; to refrain from issuing securities or declaring or paying any
dividends; to refrain from incurring additional significant debt; to
provide access to the other company to properties, books and records of the
company; and to attempt to obtain all necessary consents for consummation
of the Merger including a favorable vote of stockholders.
Additionally, the Merger Agreement contains several conditions to the
obligation of each of UTI and UII to close the Merger Agreement and
consummate the Merger. Neither UTI nor UII is required to close the Merger
Agreement and consummate the Merger if any representation or warranty of
the other company is untrue; if any covenant is unfulfilled; if approval of
the other company's stockholders has not been obtained; if the Registration
Statement pertaining to the Merger is not fully effective; if all necessary
governmental approvals have not been obtained; if statements made in this
Proxy Statement are inaccurate or incomplete; if an action or proceedings
exist against any party or its officers or directors seeking to restrain or
prohibit or obtain damages or other relief in connection with the Merger;
or if all necessary third party consents have not been obtained.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase of UII by UTI at a cost
of $8,013,684. Value was determined using current book value per share of
UTI common stock of $9.70 per share.
TAX CONSEQUENCES
In the opinion of KPMG Peat Marwick LLP, in its capacity as tax
counsel, the following are the material U.S. federal income tax
consequences relevant to shareholders of UII whose shares of common stock
of UII would be exchanged for shares of common stock of UTI. This summary
does not purport to be a complete analysis of all potential tax
considerations relevant to the UII Shareholders. The summary is limited
solely to U.S. federal income tax matters. The summary discussion is based
upon the Internal Revenue Code of 1986, as amended, Treasury regulations,
administrative rulings and pronouncements of the Internal Revenue Service,
and judicial decisions, all as of the date hereof and all of which are
subject to change at any time, possibly with retroactive effect.
(a) no gain or loss will be recognized by UTI or UII.
(b) the basis of assets acquired by UTI in the Merger will be the same as
UII's basis in such assets;
(c) no gain or loss will be recognized by UII stockholders upon receipt of
UTI Common Stock;
(d) the basis of UTI Common Stock received by an UII stockholder will be
the same as that stockholder's basis in the stock held by him
immediately prior to the Merger;
(e) the holding period of UTI Common Stock received by an UII stockholder
will include that stockholder's holding period for the stock
previously held by him, provided that the stock was a capital
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asset in the stockholder's hands at the time of the Merger;
(f) no gain or loss will be recognized by current stockholders of UTI, and
no change in the basis of their shares will occur.
(g) dissenting shareholders of UTI or UII who elect to receive cash in
exchange for their stock should be treated as receiving a
distribution in redemption for their UTI or UII stock. Dissenting
shareholders should consult their own tax advisors with respect to
the tax character (e.g., capital gain ordinary income) of any
taxable gain (or loss) recognized in connection with the UII Merger.
COMPARATIVE RIGHTS UTI AND UII SHAREHOLDERS
If the merger is consummated, all holders of UII Common Stock will
become shareholders of UTI. The rights of holders of common stock of both
UTI and UII are governed by Illinois and Ohio law, respectively. In
addition, the rights and obligations of shareholders are also governed by
the Articles of Incorporation and Code of Regulation of the respective
companies.
Because both UTI and UII Articles of Incorporation and Codes of
Regulations are substantially the same, there will be no change the
relative rights and obligations of holders of common stock of UII when they
become holders of common stock of UTI. With regard to the State laws, the
following summary is intended to highlight some substantive differences in
stockholders' rights under Ohio and Illinois law, but does not purport to
be an exhaustive discussion of all distinctions. There are no
consequential effects of any differences on the UII shareholders.
Stockholder Approval of Significant Corporate Changes
Under Ohio law, amendment of the Articles of Incorporation requires
approval of the holders of two-thirds of the outstanding capital stock
entitled to vote. Similarly, a merger consolidation, acquisition by
exchange of shares or sale of substantially all of the assets of an
Ohio corporation requires the approval of the holders of two-thirds of
the outstanding capital stock entitled to vote. The articles of
incorporation of an Ohio corporation may modify this statutory two-
thirds vote requirement. UII has modified its articles of
incorporation requiring the affirmative vote of holders of the
majority of the outstanding shares. Thus, a majority of the
outstanding shares of UII entitled to vote will be required to merge
UII into UTI.
Under Illinois law, the vote of shareholders of the surviving
corporation to a merger is required if the authorized but unissued
common stock of the surviving corporation which is to be issued in the
merger exceeds 20% of the common stock of such corporation outstanding
immediately prior to the effective date of such merger. Because the
number of shares to be issued in the merger exceeds the 20% threshold
amount, the merger of UII into UTI must receive the affirmative vote
of holders of at least two-thirds of the outstanding common stock of
UTI.
Stockholder Voting in General
Under Ohio and Illinois laws, voting for directors is cumulative;
however, the articles of incorporation, may be amended to eliminate
cumulative voting. Both UTI and UII have amended their articles of
incorporation to eliminate cumulative voting.
Under Ohio and Illinois laws, proxies for stock are valid for 11
months unless a different period is stated in the proxy.
Dissenting Stockholders' Rights
Under the Illinois Law, each shareholder of UTI may, in lieu of
receiving the consideration set forth in the Merger Agreement, seek
the fair value of his or her shares of UTI common stock and, if the
Merger is consummated, receive payment of such fair value in cash from
UTI. To receive such payment, a dissenting shareholder must follow
the procedures set forth in Section 11.70 of the Illinois Law, a copy
of which Is attached hereto as Appendix C. Failure to follow such
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<PAGE>
procedures shall result in the loss of such shareholder's dissenters'
rights. Any UTI shareholder who returns a blank executed proxy card
will be deemed to have approved the Merger Agreement and to have
waived any dissenters' rights he or she may have. See `DISSENTERS'
RIGHTS OF SHAREHOLDERS OF UTI".
Pursuant to Section 1701.84 of the Ohio Revised Code, UII
Shareholders entitled to vote on the Merger who follow the procedures
set forth in Section 1701.85 of the Ohio Revised Code have the right
to demand payment of the "fair cash value" of their shares of UII
Common Stock if the Merger is consummated. See "DISSENTERS' RIGHTS OF
SHAREHOLDERS OF UII," Section 1701.85 of the Ohio Revised Code is
attached as Appendix B to this Proxy Statement/Prospectus.
Stockholder Rights to Inspect Books and Records
A shareholder of a corporation in both Illinois and Ohio may examine
the books and records of the corporation or have an agent examine such
books only for a proper purpose.
Removal of Directors
Both Ohio and Illinois allow stockholders to remove directors with
or without cause. Such action requires the affirmative vote of
holders of a majority of the voting power then entitled to vote in the
election of directors.
MANAGEMENT RECOMMENDATIONS
The board of directors of each UTI and UII has unanimously approved
the Merger Agreement and recommends to the stockholders of UTI and UII that
they vote for approval of the Merger Agreement. (See "INFORMATION
REGARDING PROPOSED MERGER - Reasons for the Merger"). Management of each
UTI and UII believes that the Merger is fair and equitable to its
stockholders. UTI intends to vote its shares of UII in favor of the Merger
and Merger Agreement.
DISSENTERS' RIGHTS OF SHAREHOLDERS OF UII
Section 1701.84 of the Ohio Revised Code provides that each
shareholder of UII Common Stock who is entitled to vote on the Merger may
dissent from the Merger. The following is a summary of the principal steps
a dissenting shareholder must take to perfect his or her dissenters' rights
under Section 1701.85 of the Ohio Revised Code. This summary does not
purport to be complete and is qualified in its entirety by reference to
Section 1701.85 of the Ohio Revised Code, a copy of which is attached as
Appendix B to this Proxy Statement/Prospectus.
To perfect his or her dissenters' rights, a dissenting UII
Shareholder must vote his proxy against the Merger and must deliver to UII,
within ten days after the vote on the Merger is taken, a written demand for
payment of the fair cash value of his or her shares of UII Common Stock. A
proxy that is returned signed but on which no voting preference is
indicated will be voted in favor of the Merger and will constitute a waiver
of dissenters' rights. A dissenting shareholder's written demand for
payment of the fair cash value of his or her shares should be delivered to
UII, 5250 South Sixth Street, Springfield, Illinois 62703, Attention:
Corporate Secretary. Voting against the Merger will not by itself
constitute a written demand.
The written demand for payment must identify the name and address of
the holder of record of such shareholder's UII Common Stock, the number of
shares of UII common stock held by such shareholder, and the amount claimed
by such shareholder as the fair cash value of his or her shares. A
beneficial owner of shares of UII common stock must, in all cases, have the
record holder of such shares deliver the written demand for payment. The
written demand for payment must be signed by the shareholder of record (or
by the duly authorized representative of the shareholder) exactly as the
shareholder's name appears on the shareholder records of UII. A written
demand for payment with respect to shares of common stock of UII owned
jointly by more than one person must identify and be signed by all of the
shareholders of record. Any person signing a written demand for payment on
behalf of a partnership or corporation or in any other representative
capacity (such as an attorney-in-fact, executor, administrator, trustee or
guardian) must indicate the nature of the representative capacity and, if
requested, must furnish written proof of this capacity and such person's
authority to sign such written demand.
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Because only shareholders of record on the Record Date may exercise
dissenters' rights, any person who beneficially owns shares that are held
of record by a broker, fiduciary, nominee or other holder and who wishes to
exercise dissenters' rights must instruct the record holder of shares to
satisfy the condition outlined above. If a record holder does not satisfy,
in a timely manner, all of the conditions outlined in this section entitled
"Rights of Dissenting Shareholders," the dissenters' rights for all of the
shares held by that shareholder will be lost.
Unless UII and the dissenting shareholder reach an agreement on the
fair cash value of the shares of UII Common Stock held by the dissenting
shareholder, the dissenting shareholder of UII may, within three months
after the dissenting shareholder has delivered his or her written demand
for payment to UII, file a complaint in the Court of Common Pleas of
Franklin County, Ohio (the "Common Pleas Court"), or join or be joined in
an action similarly brought by another dissenting UII shareholder, for a
judicial determination of the fair cash value (as defined below) of the
shares of UII Common Stock held by the dissenting shareholder.
Upon motion of the complainant, the Common Pleas Court will hold a
hearing to determine whether the dissenting UII shareholder is entitled to
be paid the fair cash value of his or her shares of UII Common Stock. If
the Common Pleas Court finds that the dissenting shareholder is so
entitled, it may appoint one or more appraisers to receive evidence and
recommend a decision on the amount of the fair cash value of the shares of
UII Common Stock held by such shareholder. The Common Pleas Court is
required to make a finding as to the fair cash value of the shares of UII
common stock and to render judgment against UII for the payment thereof,
with interest at such rate and from such date as the Common Pleas Court
considers equitable. Costs of the proceedings, including reasonable
compensation to the appraiser or appraisers to be fixed by the Common Pleas
Court, are to be apportioned or assessed as the Common Pleas Court
considers equitable. Payment of the fair cash value of the shares of UII
common stock held by the dissenting shareholder is required to be made
within 30 days after the date of final determination of such value or the
date on which the Merger is consummated, whichever is later, only upon
surrender to UII of the certificates representing such shares.
Under the Ohio Revised Code, "fair cash value" is the amount that a
willing seller, under no compulsion to sell, would be willing to accept,
and that a willing buyer, under no compulsion to buy, would be willing to
pay. The fair cash value is to be determined as of the date prior to the
day of the vote on the Merger, and, in computing the fair cash value, any
appreciation or depreciation in market value resulting from the Merger
shall be excluded from the computation. In no event may the fair cash
value exceed the amount specified in the written demand for payment
delivered to UII by a dissenting shareholder.
Under the Ohio Revised Code, a shareholder's dissenters' rights will
terminate if among other things, the dissenting shareholder has not
complied with Section 1701.85 of the Ohio Revised Code (unless the Board of
Directors of UII waives compliance), the Merger is abandoned or otherwise
not carried out or the dissenting shareholder, upon obtaining the consent
of the Board of Directors of UII, withdraws his or her written demand for
payment, or no agreement is reached between UII and the dissenting
shareholder with respect to the fair cash value of his or her shares of UII
Common Stock and no complaint is timely filed in the Common Pleas Court.
FAILURE TO COMPLY STRICTLY WITH THE FOREGOING PROCEDURES SHALL CAUSE
A SHAREHOLDER TO LOSE HIS OR HER DESSENTERS' RIGHTS. ANY SHAREHOLDER WHO
WISHES TO EXERCISE HIS OR HER DISSENTERS' RIGHTS IS URGED TO CONSULT LEGAL
COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
DISSENTERS' RIGHTS OF SHAREHOLDERS OF UTI
Section 11.65 and 11.70 of the Illinois Act provides that each
shareholder of UTI Common Stock who is entitled to vote on the Merger may
dissent from the Merger. The following is a summary of the principal steps
a dissenting shareholder must take to perfect his or her dissenters' rights
under Section 11.65 and 11.70 of the Illinois Act. This summary does not
purport to be complete and is qualified in its entirety by reference to
Section 11.65 and 11.70 of the Illinois Act, a copy of which is attached as
Appendix C to this Proxy Statement/Prospectus.
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<PAGE>
To perfect his or her dissenters' rights, a dissenting UTI
Shareholder must vote his or her proxy against the merger and must deliver
to UTI, before the vote on the merger is taken, a written demand for
payment of the fair value of his or her shares of UTI Common Stock. A
proxy that is returned signed but on which no voting preference is
indicated will be voted in favor of the Merger and will constitute a waiver
of dissenters' rights. A dissenting shareholder's written demand for
payment of the fair value of his or her shares should be delivered to UTI
at 5250 South Sixth Street, Springfield, Illinois 62703, Attention:
Corporate Secretary. Voting against the Merger will not by itself
constitute a written demand.
Within ten days after the date on which the Merger is effective or
thirty days after the dissenting shareholder delivers to UTI a written
demand for payment, whichever is later, UTI will send each shareholder who
has delivered a written demand for payment a statement setting forth UTI's
opinion as to the estimated fair value of the shares of UTI Common Stock, a
copy of UTI's latest balance sheet as of the end of a fiscal year ending
not earlier than sixteen months before the delivery of the foregoing
statement, together with the statement of income for that year and the
latest available interim financial statements, and a commitment to pay for
the shares of the dissenting shareholder at the estimated fair value of
such shares. A VOTE AGAINST THE MERGER, WHETHER BY PROXY OR IN PERSON WILL
NOT, BY ITSELF, BE REGARDED AS A WRITTEN DEMAND FOR PAYMENT FOR PURPOSES OF
ASSERTING DISSENTERS' RIGHTS.
Upon consummation of the merger, UTI will pay to each dissenting
shareholder who transmits to UTI the certificate or other evidence of
ownership of the shares of UTI Common Stock the amount that UTI estimates
to be the fair value of such shares, plus accrued interest, accompanied by
a written explanation of how the interest was calculated. Under the
Illinois Act, "fair value" means the value of shares of UTI Common Stock
immediately before the consummation of the Merger, exclusive of any
appreciation or depreciation of the value of such shares in anticipation of
the merger, unless such exclusion would be inequitable. "Interest" means
interest, at the average rate currently paid by UTI on its principal bank
loans or, if none, at a rate that is fair and equitable under all the
circumstances, from the effective date of the Merger until the date on
which UTI pays to the dissenting shareholder the fair value of his or her
shares. If the dissenting shareholder agrees with UTI's estimate as to the
fair value of UTI common stock, upon consummation of the Merger and payment
of the agreed fair value, the dissenting shareholder shall cease to have
any interest in shares of UTI Common Stock.
If a dissenting shareholder does not agree with the opinion of UTI
as to the estimated fair value of the shares or the amount of interest due,
such shareholder, within 30 days from the delivery of UTI's statement of
fair value, must notify UTI in writing of his or her estimated fair value
and amount of interest due and demand payment for the difference between
his or her estimate of fair value and interest due and the amount of
payment by UTI or the proceeds of sale by the shareholder, whichever is
applicable. If, within 60 days from delivery to UTI of the shareholder's
notification of estimate of fair value of the shares and interest due, UTI
and the dissenting shareholder have not agreed in writing upon the fair
value of the shares and interest due, UTI will either pay the difference in
value demanded by the shareholder, with interest, or file a petition in the
circuit court of the county in which either the registered office of the
principal office of UTI is located, asking such court to determine the fair
value of the shares and interest due. If such a petition is filed, UTI
will make all dissenting shareholders whose demands remain unsettled
parties to the proceeding, whether or not such shareholders are residents
of Illinois, and all such parties will be served with a copy of the
petition. The "fair value" determined by the court may be more or less
than the amount offered to UTI shareholders under the Merger Agreement.
Any judgment entered by the court with respect to the fair value of the
dissenting shareholders' shares will be payable only upon, and
simultaneously with, the surrender to UTI of the certificate or
certificates, or other evidence of ownership, representing shares of UTI
Common Stock. Upon the payment of such judgment, the dissenting
shareholders will cease to have any interest in shares of UTI common stock.
FAILURE TO COMPLY STRICTLY WITH THE FOREGOING PROCEDURES SHALL CAUSE
A SHAREHOLDER TO LOSE HIS OR HER DISSENTERS' RIGHTS. ANY SHAREHOLDER WHO
WISHES TO EXERCISE HIS OR HER DISSENTERS' RIGHTS IS URGED TO CONSULT LEGAL
COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
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SELECTED FINANCIAL DATA OF UII
THE FOLLOWING TABLE PROVIDES SELECTED FINANCIAL DATA FOR UII FOR THE PAST
FIVE YEARS.
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Net Operating Revenues $ 1,186 $ 1,791 $ 2,234 $ 1,667 $ 1,459
Operating Costs and
Expenses $ 909 $ 1,414 $ 1,976 $ 1,627 $ 1,384
Income taxes $ 0 $ 0 $ 0 $ 0 $ 0
Equity in loss of
investees $ (357)$ (696) $ (2,406)$ (384) $ (580)
Net loss $ (79)$ (319) $ (2,148)$ (344) $ (505)
Net loss per common
share $ (0.06)$ (0.23) $ (1.54)$ (0.25) $ (0.36)
Cash Dividend Declared
per common share $ 0 $ 0 $ 0 $ 0 $ 0
Total Assets $ 12,840 $ 12,881 $ 13,386 $ 15,414 $14,919
Long Term Obligations $ 902 $ 902 $ 902 $ 902 $ 0
</TABLE>
37
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UII MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
At December 31, 1997 and 1996, the balance sheet reflects the assets and
liabilities of UII and its 47% equity interest in UTG. The statements of
operations and statements of cash flows presented for 1997, 1996 and 1995
include the operating results of UII.
RESULTS OF OPERATIONS
1997COMPARED TO 1996
(A) REVENUES
UII's primary source of revenues is derived from service fee income, which
is provided via a service agreement with USA. The agreement was originally
established upon the formation of USA, which was a 100% owned subsidiary of
UII. Changes in the affiliate structure have resulted in USA no longer
being a direct subsidiary of UII, though still a member of the same
affiliated group. The original service agreement has remained in place
without modification. The fees are based on a percentage of premium
revenue ofUSA. The percentages are applied to both first year and renewal
premiums at different rates. Under the current structure, FCC pays all
general operating expenses of the affiliated group. FCC then receives
management and service fees from the various affiliates, including UTI and
UII. Pursuant to the terms of the agreement, USA pays UII monthly fees
equal to 22% of the amount of collected first year statutory premiums, 20%
in second year and 6% of the renewal premiums in years three and after.
The Company recognized service agreement income of $989,295, $1,567,891 and
$2,015,325 in 1997, 1996 and 1995, respectively, based on statutory
collected premiums in USA of $10,300,332, $13,298,597, and $14,128,199 in
1997,1996 and 1995, respectively. First year premium revenues of USA
decreased 54% in 1997 from 1996. This decline is primarily related to the
potential change in control of UTI over the last two years to two different
parties. The possible changes and resulting uncertainties have hurt USA's
ability to recruit and maintain sales agents. Management expects first
year production to decline slightly in 1998, and then growth is anticipated
in subsequent periods following the resolution of the change in control of
UTI.
UII holds $864,100 of notes receivable from affiliates. The notes
receivable from affiliates consists of three separate notes. The $700,000
note bears interest at the rate of 1% above the variable per annum rate of
interest most recently published by the Wall Street Journal as the prime
rate. Interest is payable quarterly with principal due at maturity on May
8, 2006. In February 1996, FCC borrowed an additional $150,000 from UII to
provide additional cash for liquidity. The note bears interest at the rate
of 1% over prime as published in the Wall Street Journal, with interest
payments due quarterly and principal due upon maturity of the note on June
1, 1999. The remaining $14,100 are 20 year notes of UTG with interest at
8.5% payable semi-annually. At current interest levels, the notes will
generate approximately $80,000 annually.
(B) EXPENSES
UII has a sub-contract service agreement with United Trust, Inc. ("UTI")
for certain administrative services. Through its facilities and personnel,
UTI performs such services as may be mutually agreed upon between the
parties. The fees are based on 60% of the fees paid to UII by USA. UII
has incurred $744,000, $1,241,000 and $1,809,000 in service fee expense in
1997, 1996, and 1995, respectively.
Interest expense of $85,000, $84,000 and $89,000 was incurred in 1997, 1996
and 1995, respectively. The interest expense is directly attributable to
the convertible debentures. The Debentures bear interest at a variable
rate equal to one percentage point above the prime rate published in the
Wall Street Journal from time to time.
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(C) EQUITY IN LOSS OF INVESTEES
Equity in earnings of investees represents UII's 47% share of the net loss
of UTG. Included with this filing as Exhibit 99(d) are audited financial
statements of UTG. Following is a discussion of the results of operations
of UTG:
Revenues of UTG
Premiums and policy fee revenues, net of reinsurance premiums and
policy fees, decreased 7% when comparing 1997 to 1996. UTG and its
subsidiaries currently writes little new traditional business,
consequently, traditional premiums will decrease as the amount of
traditional business in-force decreases. Collected premiums on
universal life and interest sensitive products is not reflected in
premiums and policy revenues because Generally Accepted Accounting
Principles ("GAAP") requires that premiums collected on these types of
products be treated as deposit liabilities rather than revenue. Unless
UTG and its subsidiaries' acquires a block of in-force business or
marketing changes its focus to traditional business, premium revenue
will continue to decline.
Another cause for the decrease in premium revenues is related to the
potential change in control of UTI over the last two years to two
different parties. During September of 1996, it was announced that
control of UTI would pass to an unrelated party, but the change in
control did not materialize. At this writing, negotiations are
progressing with a different unrelated party for the change in control
of UTI. Please refer to the Notes to the Consolidated Financial
Statements of UTG for additional information. The possible changes and
resulting uncertainties have hurt the insurance companies' ability to
recruit and maintain sales agents.
New business production decreased significantly over the last two
years. New business production decreased 43% or $3,935,000 when
comparing 1997 to 1996. In recent years, the insurance industry as a
whole has experienced a decline in the total number of agents who sell
insurance products, therefore competition has intensified for top
producing sales agents. The relatively small size of our companies,
and the resulting limitations, have made it challenging to compete in
this area.
A positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained in relation to
the previous year. The average persistency rate for all policies in
force for 1997 and 1996 has been approximately 89.4% and 87.9%,
respectively.
Net investment income decreased 6% when comparing 1997 to 1996. The
decrease relates to the decrease in invested assets from a coinsurance
agreement. UTG's insurance subsidiary UG entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC"), an
unrelated party, as of September 30, 1996. During 1997, FILIC changed
its name to Park Avenue Life Insurance Company ("PALIC"). Under the
terms of the agreement, UG ceded to FILIC substantially all of its paid-
up life insurance policies. Paid-up life insurance generally refers to
non-premium paying life insurance policies. At closing of the
transaction, UG received a coinsurance credit of $28,318,000 for policy
liabilities covered under the agreement. UG transferred assets equal
to the credit received. This transfer included policy loans of
$2,855,000 associated with policies under the agreement and a net cash
transfer of $19,088,000, after deducting the ceding commission due UG
of $6,375,000. To provide the cash required to be transferred under
the agreement, UG sold $18,737,000 of fixed maturity investments.
The overall investment yields for 1997, 1996 and 1995, are 7.25%, 7.31%
and 7.14%, respectively. Since 1995 investment yield improved due to
the fixed maturity investments. Cash generated from the sales of
universal life insurance products, has been invested primarily in our
fixed maturity portfolio.
The investments are generally managed to match related insurance and
policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates
is 1% on the "Century 2000" universal life insurance product, which
currently is the primary sales product. UTG and its subsidiaries'
monitor investment yields, and when necessary adjusts credited interest
rates on its insurance products to preserve targeted interest spreads.
39
<PAGE>
It is expected that monitoring of the interest spreads by management
will provide the necessary margin to adequately provide for associated
costs on the insurance policies the Company currently has in force and
will write in the future.
Realized investment losses were $279,000 and $466,000 in 1997 and 1996,
respectively. UTG and its subsidiaries sold two foreclosed real estate
properties that resulted in approximately $357,000 in realized losses
in 1996. There were other gains and losses during the period that
comprised the remaining amount reported but were immaterial in nature
on an individual basis.
Expenses of UTG
Life benefits, net of reinsurance benefits and claims, decreased 11% in
1997 as compared to 1996. The decrease in premium revenues resulted in
lower benefit reserve increases in 1997. In addition, policyholder
benefits decreased due to a decrease in death benefit claims of
$162,000.
In 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be
not insurable by UTG and its subsidiaries' standards. These non-
standard policies had a face amount of $22,700,000 and represented 1/2
of 1% of the insurance in-force in 1994. Management's initial analysis
indicated that expected death claims on the business in-force was
adequate in relation to mortality assumptions inherent in the
calculation of statutory reserves. Nevertheless, management determined
it was in the best interest of UTG and its subsidiaries' to repurchase
as many of the non-standard policies as possible. Through December 31,
1996, the UTG and its subsidiaries' spent approximately $7,099,000 for
the settlement of non-standard policies and for the legal defense of
related litigation. In relation to settlement of non-standard policies
UTG and its subsidiaries' incurred life benefit costs of $3,307,000,
and $720,000 in 1996 and 1995, respectively. UTG and its subsidiaries'
incurred legal costs of $906,000 and $687,000 in 1996 and 1995,
respectively. All policies associated with this issue have been
settled as of December 31, 1996. Therefore, expense reductions for
1997 would follow.
Commissions and amortization of deferred policy acquisition costs
decreased 14% in 1997 compared to 1996. The decrease is due primarily
due to a reduction in commissions paid. Commissions decreased 19% in
1997 compared to 1996. The decrease in commissions was due to the
decline in new business production. There is a direct relationship
premium revenues and commission expense. First year premium production
decreased 43% and first year commissions decreased 33% when comparing
1997 to 1996. Amortization of deferred policy acquisition costs
decreased 6% in 1997 compared to 1996. Management would expect
commissions and amortization of deferred policy acquisition costs to
decrease in the future if premium revenues continue to decline.
Amortization of cost of insurance acquired decreased 56% in 1997
compared to 1996. Cost of insurance acquired is established when an
insurance company is acquired. The Company assigns a portion of its
cost to the right to receive future cash flows from insurance contracts
existing at the date of the acquisition. The cost of policies
purchased represents the actuarially determined present value of the
projected future cash flows from the acquired policies. Cost of
insurance acquired is comprised of individual life insurance products
including whole life, interest sensitive whole life and universal life
insurance products. Cost of insurance acquired is amortized with
interest in relation to expected future profits, including direct
charge-offs for any excess of the unamortized asset over the projected
future profits. The interest rates utilized in the amortization
calculation are 9% on approximately 24% of the balance and 15% on the
remaining balance. The interest rates vary due to risk analysis
performed at the time of acquisition on the business acquired. The
amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are
revised UTG and its subsidiaries' did not have any charge-offs during
the periods covered by this report. The decrease in amortization
during the current period is a normal fluctuation due to the expected
future profits. Amortization of cost of insurance acquired is
particularly sensitive to changes in persistency of certain blocks of
insurance in-force. The improvement of persistency during the year had
a positive impact on amortization of cost of insurance acquired.
Persistency is a measure of insurance in force retained in relation to
the previous year. The average persistency rate for all policies in
force for 1997 and 1996 has been approximately 89.4% and 87.9%,
respectively.
40
<PAGE>
Operating expenses decreased 21% in 1997 compared to 1996. The
decrease in operating expenses is directly related to settlement of
certain litigation in December of 1996. UTG and its subsidiaries'
incurred legal costs of $0, $906,000 and $687,000 in 1997, 1996 and
1995, respectively in relation to the settlement of the non-standard
insurance policies.
Interest expense decreased 4% in 1997 compared to 1996. Since December
31, 1996, notes payable decreased approximately $758,000. Average
outstanding indebtedness was $19,461,000 with an average cost of 8.6%
in 1997 compared to average outstanding indebtedness of 20,652,000 with
an average cost of 8.5% in 1996. In March 1997, the base interest rate
for most of the notes payable increased a quarter of a point. The base
rate is defined as the floating daily, variable rate of interest
determined and announced by First of America Bank. Please refer to
Note 12 "Notes Payable" in the Notes to the Consolidated Financial
Statements of UTG for more information.
Net loss of UTG
UTG had a net loss of $923,000 in 1997 compared to a net loss of
$1,661,000 in 1996. The improvement is directly related to the
decrease in life benefits and operating expenses primarily associated
with the 1996 settlement and other related costs of the non-standard
life insurance policies.
(D) NET LOSS
UII recorded a net loss of $79,000 for 1997 compared to $319,000 for the
same period one year ago. The net loss is from the equity share of UTG's
operating results.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
(A) REVENUES
UII's source of revenues is derived from service fee income which is
provided via a service agreement with USA. The service agreement between
UII and USA is to provide USA with certain administrative services. The
fees are based on a percentage of premium revenue of USA. The percentages
are applied to both first year and renewal premiums at different rates.
UII holds $864,100 of notes receivable from affiliates. The notes
receivable from affiliates consists of three separate notes. The $700,000
note bears interest at the rate of 1% above the variable per annum rate of
interest most recently published by the Wall Street Journal as the prime
rate. Interest is payable quarterly with principal due at maturity on May
8, 2006. In February 1996, FCC borrowed an additional $150,000 from UII to
provide additional cash for liquidity. The note bears interest at the rate
of 1% over prime as published in the Wall Street Journal, with interest
payments due quarterly and principal due upon maturity of the note on June
1, 1999. The remaining $14,100 are 20 year notes of UTG with interest at
8.5% payable semi-annually. At current interest levels, the notes will
generate approximately $80,000 annually.
(B) EXPENSES
UII has a sub-contract service agreement with United Trust, Inc. ("UTI")
for certain administrative services. Through its facilities and personnel,
UTI performs such services as may be mutually agreed upon between the
parties. The fees are based on a percentage of the fees paid to UII by
USA. UII has incurred $1,241,000, $1,809,000, and $1,210,000 in service
fee expense in 1996, 1995, and 1994, respectively.
Interest expense of $84,000, $89,000 and $59,000 was incurred in 1996, 1995
and 1994, respectively. The interest expense is directly attributable to
the convertible debentures. The Debentures bear interest at a variable
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rate equal to one percentage point above the prime rate published in the
Wall Street Journal from time to time.
(C) EQUITY IN LOSS OF INVESTEES
Equity in earnings of investees represents UII's 47% share of the net loss
of UTG. Included with this filing as Exhibit 99(d) are audited financial
statements of UTG. Following is a discussion of the results of operations
of UTG:
Revenues of UTG
Premium and policy fee revenues, net of reinsurance premium, decreased
7% when comparing 1996 to 1995. The decrease in premium income is
primarily attributed to a 15% decrease in new business production. .
The decrease is due to two factors. The first factor is that UTG and
its subsidiaries' changed its focus from primarily a broker agency
distribution system to a captive agent system. The second factor is
that UTG and its subsidiaries' changed its product portfolio from
traditional life insurance to universal life insurance.
Business written by the broker agency force, in recent years, did
not meet UTG and its subsidiaries' expectations. With the change in
focus of distribution systems, most of the broker agents were
terminated. (The termination of the broker agency force caused a non-
recurring write down of the value of agency force asset in 1995, see
discussion of amortization of agency force for further details.). The
change in distribution systems effectively reduced the total number of
agents representing and producing business. Broker agents sell
insurance and related products for several companies. Captive agents
sell for only one company. The change from a brokerage agency system
to a captive agent system caused a decline in new premium writings as
the captive agents required training from the home office and often had
little or no previous insurance sales experience. Additionally, the
products sold were changed from traditional whole life to universal
life, resulting in veteran captive agents having to learn the features
of the new products. Broker agents typically sell products for several
companies and typically have more experience in the industry or have
experienced agents within the agency to assist and train them. The
captive agent approach, though slower and requiring more home office
training, is believed to be the best long term approach for UTG and its
subsidiaries' as agents will be trained in the procedures and practices
of the insurance subsidiaries and will be more familiar through the
training process. This will help in recruiting quality individuals
with the character and attitude conducive with UTG and its
subsidiaries' desires.
Universal life and interest sensitive products contribute only the risk
charge to premium income; however, traditional insurance products
contribute all monies received to premium income. UTG and its
subsidiaries' changed their product portfolio to remain competitive
based on consumer demand.
A positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained in relation to
the previous year. Average persistency rate for all policies in force
for 1996 and 1995 has been approximately 87.9% and 87.3%, respectively.
Net investment income increased 3% when comparing 1996 to 1995. The
overall investment yields for 1996 and 1995 are 7.31% and 7.14%,
respectively. The improvement in investment yield is primarily
attributed to fixed maturity investments. Cash generated from the
sales of universal life insurance products, has been invested primarily
in our fixed investment portfolio.
The investments are generally managed to match related insurance and
policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates
is 1% on the "Century 2000" universal life insurance product, which
currently is the primary sales product. UTG and its subsidiaries'
monitors investment yields, and when necessary adjusts credited
interest rates on its insurance products to preserve targeted interest
spreads. It is expected that monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
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associated costs on the insurance policies UTG and its subsidiaries'
currently has in force and will write in the future.
Realized investment losses were $466,000 and $114,000 in 1996 and 1995,
respectively. UTG and its subsidiaries' sold two foreclosed real
estate properties that resulted in approximately $357,000 in realized
losses in 1996. There were other gains and losses during the period
that comprised the remaining amount reported but were immaterial in
nature on an individual basis.
Expenses of UTG
Life benefits, net of reinsurance benefits and claims, increased 2%
compared to 1995. The increase in life benefits is due primarily to
settlement expenses discussed in the following paragraph:
In 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be
not insurable by UTG and its subsidiaries' standards. These non-
standard policies had a face amount of $22,700,000 and represented 1/2
of 1% of the insurance in-force in 1994. Management's initial analysis
indicated that expected death claims on the business in-force was
adequate in relation to mortality assumptions inherent in the
calculation of statutory reserves. Nevertheless, management determined
it was in the best interest of UTG and its subsidiaries' to repurchase
as many of the non-standard policies as possible. Through December 31,
1996, UTG and its subsidiaries' spent approximately $7,099,000 for the
settlement of non-standard policies and for the legal defense of
related litigation. In relation to settlement of non-standard policies
UTG and its subsidiaries incurred life benefits of $3,307,000 and
$720,000 in 1996 and 1995, respectively. UTG and its subsidiaries'
incurred legal costs of $906,000 and $687,000 in 1996 and 1995,
respectively. All the policies associated with this issue have been
settled as of December 31, 1996. UTG and its insurance subsidiaries'
has approximately $3,742,000 of insurance in-force and $1,871,000 of
reserves from the issuance of paid-up life insurance policies for
settlement of matters related to the original non-standard policies.
Management believes the reserves are adequate in relation to expected
mortality on this block of in-force.
Commissions and amortization of deferred policy acquisition costs
decreased 14% in 1996 compared to 1995. The decrease is due to a
decrease in commissions expense. Commissions decreased 15% in 1996
compared to 1995. The decrease in commissions was due to the decline
in new business production. There is a direct relationship between
premium revenues and commission expenses. First year premium
production decreased 15% and first year commissions decreased 32% when
comparing 1996 to 1995. Amortization of deferred policy acquisition
costs decreased 12% in 1996 compared to 1995. Management expects
commissions and amortization of deferred policy acquisition costs to
decrease in the future if premium revenues continue to decline.
Amortization of cost of insurance acquired increased 26% in 1996
compared to 1995. Cost of insurance acquired is established when an
insurance company is acquired. The Company assigns a portion of its
cost to the right to receive future cash flows from insurance contracts
existing at the date of the acquisition. The cost of policies
purchased represents the actuarially determined present value of the
projected future cash flows from the acquired policies. Cost of
insurance acquired is comprised of individual life insurance products
including whole life, interest sensitive whole life and universal life
insurance products. Cost of insurance acquired is amortized with
interest in relation to expected future profits, including direct
charge-offs for any excess of the unamortized asset over the projected
future profits. The interest rates utilized in the amortization
calculation are 9% on approximately 24% of the balance and 15% on the
remaining balance. The interest rates vary due to risk analysis
performed at the time of acquisition on the business acquired. The
amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are
revised. UTG and its subsidiaries' did not have any charge-offs during
the periods covered by this report. The increase in amortization
during the current period is a normal fluctuation due to the expected
future profits. Amortization of cost of insurance acquired is
particularly sensitive to changes in persistency of certain blocks of
insurance in-force.
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UTG and its subsidiaries' reported a non-recurring write down of value
of agency force of $0 and $8,297,000 in 1996 and 1995, respectively.
The write down was directly related to the change in distribution
systems. UTG and its subsidiaries' changed its focus from primarily a
broker agency distribution system to a captive agent system. Business
produced by the broker agency force in recent years did not meet
expectations. With the change in focus of distribution systems, most
of the broker agents were terminated. The termination of most of the
agents involved in the broker agency force caused management to re-
evaluate and write-off the value of the agency force carried on the
balance sheet.
Operating expenses increased 6% in 1996 compared to 1995. The primary
factor that caused the increase in operating expenses is directly
related to increased legal costs and reserves established for
litigation. The legal costs are due to the settlement of non-standard
insurance policies as was discussed in the review of life benefits.
UTG and its subsidiaries' incurred legal costs of $906,000 and $687,000
in 1996 and 1995, respectively in relation to the settlement of the non-
standard insurance policies.
Interest expense decreased 12% in 1996 compared to 1995. Since
December 31, 1995, notes payable decreased approximately $1,623,000
that has directly attributed to the decrease in interest expense during
1996. Interest expense was also reduced, as a result of the
refinancing of the senior debt under which the new interest rate is
more favorable. Please refer to Note 12 "Notes Payable" of the
Consolidated Notes to the Financial Statements of UTG for more
information on this matter.
Net loss of UTG
UTG and its subsidiaries' had a net loss of $1,661,000 in 1996 compared
to a net loss of $5,321,000 in 1995. The net loss in 1996 is
attributed to the increase in life benefits net of reinsurance and
operating expenses primarily associated with settlement and other
related costs of the non-standard life insurance policies.
(D) NET LOSS
UII recorded a net loss of $319,000 for 1996 compared to a net loss of
$2,148,000 for the same period one year ago. The net loss is from the
equity share of UTG's operating results.
FINANCIAL CONDITION
UII owns 47% equity interest in UTG which controls total assets of
approximately $348,000,000. Audited financial statements of UTG are
presented as Exhibit 99(d) of this filing.
LIQUIDITY AND CAPITAL RESOURCES
Since UII is a holding company, funds required to meet its debt service
requirements and other expenses are primarily provided by its affiliates.
UII's cash flow is dependent on revenues from a management agreement with
USA and its earnings received on invested assets and cash balances. At
December 31, 1997 and March 31, 1998, substantially all of the shareholders
equity represents investment in affiliates. UII does not have significant
day to day operations of its own. Cash requirements of UII primarily relate
to the payment of interest on its convertible debentures and expenses
related to maintaining UII as a corporation in good standing with the
various regulatory bodies which govern corporations in the jurisdictions
where UII does business. The payment of cash dividends to shareholders is
not legally restricted. However, insurance company dividend payments are
regulated by the state insurance department where UII is domiciled. UTI is
the ultimate parent of UG through ownership of several intermediary holding
companies. UG can not pay a dividend directly to UII due to the ownership
structure. However, if UG paid a dividend to its direct parent and each
subsequent intermediate company within the holding company structure paid a
dividend equal to the amount it received, UII would receive 37% of the
original dividend paid by UG. Please refer to Note 1 of the Notes to the
Financial Statements. UG's dividend limitations are described below
without effect of the ownership structure.
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Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,000.
At December 31, 1997, UG statutory capital and surplus amounted to
$10,997,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
At March 31, 1998, UII had $734,827 in cash and cash equivalents. UII
holds one mortgage loan. Operating activities of UII produced cash flows
of $324,097, $255,675 and $326,905 in 1997, 1996 and 1995, respectively.
UII had uses of cash from investing activities of $50,764, $180,402 and
$192,801 in 1997, 1996 and 1995, respectively. Cash flows from financing
activities were ($2,112), $33 and $0 in 1997, 1996 and 1995, respectively.
UII produced cash of $191,806 from operating activities as of March 31,
1998 and had used of cash from investing activities of $263,617 for the
same period.
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between UII and First of
America Bank - Southeast Michigan, N.A., as trustee. The Debentures are
general unsecured obligations of UII, subordinate in right of payment to
any existing or future senior debt of UII. The Debentures are exchangeable
and transferable, and are convertible at any time prior to March 31, 1999
into UII's Common Stock at a conversion price of $25 per share, subject to
adjustment in certain events. The Debentures bear interest from March 31,
1994, payable quarterly, at a variable rate equal to one percentage point
above the prime rate published in the Wall Street Journal from time to
time. The prime rate was 8.25% during first quarter 1997, increasing to
8.5% April 1, 1997, and has remained unchanged. On or after March 31,
1999, the Debentures will be redeemable at UII's option, in whole or in
part, at redemption prices declining from 103% of their principal amount.
No sinking fund will be established to redeem the Debentures. The
Debentures will mature on March 31, 2004. The Debentures are not listed on
any national securities exchange or the NASDAQ National Market System.
UII is not aware of any litigation that will have a material adverse effect
on the financial position of UII. In addition, UII does not believe that
the regulatory initiatives currently under consideration by various
regulatory agencies will have a material adverse impact on UII. UII is not
aware of any material pending or threatened regulatory action with respect
to UII or any of its affiliates. UII does not believe that any insurance
guaranty fund assessments will be materially different from amounts already
provided for in the financial statements.
Management believes that the overall sources of liquidity available to UII
will be more than sufficient to satisfy its financial obligations.
REGULATORY ENVIRONMENT
UII's insurance affiliates are assessed contributions by life and health
guaranty associations in almost all states to indemnify policyholders of
failed companies. In several states the company may reduce premium taxes
paid to recover a portion of assessments paid to the states' guaranty fund
association. This right of "offset" may come under review by the various
states, and the company cannot predict whether and to what extent
legislative initiatives may affect this right to offset. Also, some state
guaranty associations have adjusted the basis by which they assess the cost
of insolvencies to individual companies. UII believes that its reserve for
future guaranty fund assessments is sufficient to provide for assessments
related to known insolvencies. This reserve is based upon management's
current expectation of the availability of this right of offset, known
insolvencies and state guaranty fund assessment bases. However, changes in
the basis whereby assessments are charged to individual companies and
changes in the availability of the right to offset assessments against
premium tax payments could materially affect the UII's results.
Currently, UII's insurance affiliates are subject to government regulation
in each of the states in which they conduct business. Such regulation is
vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including the power to: (i) grant and
revoke licenses to transact business; (ii) regulate and supervise trade
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practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) approve premium rates for
some lines of business; (vii) establish reserve requirements; (viii)
prescribe the form and content of required financial statements and
reports; (ix) determine the reasonableness and adequacy of statutory
capital and surplus; and (x) regulate the type and amount of permitted
investments. Insurance regulation is concerned primarily with the
protection of policyholders. UII cannot predict the impact of any future
proposals, regulations or market conduct investigations. UII's insurance
affiliates, USA, UG, APPL and ABE are domiciled in the states of Ohio,
Ohio, West Virginia and Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners ("NAIC"). The NAIC is an association whose membership
consists of the insurance commissioners or their designees of the various
states. The NAIC has no direct regulatory authority over insurance
companies, however its primary purpose is to provide a more consistent
method of regulation and reporting from state to state. This is
accomplished through the issuance of model regulations, which can be
adopted by individual states unmodified, modified to meet the state's own
needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled by
other corporations licensed to transact business within their respective
jurisdictions. The insurance affiliates are subject to such legislation
and registered as controlled insurers in those jurisdictions in which such
registration is required. Statutes vary from state to state but typically
require periodic disclosure, concerning the corporation, that controls the
registered insurers and all affiliates of such corporation. In addition,
prior notice to, or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 9 in the notes to the consolidated financial
statements), and payment of dividends (see note 2 in the notes to the
consolidated financial statements) in excess of specified amounts by the
insurance subsidiary, within the holding company system, are required.
Each year the NAIC calculates financial ratio results (commonly referred to
as IRIS ratios) for each company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement.
The results are then compared to pre-established normal ranges determined
by the NAIC. Results outside the range typically require explanation to
the domiciliary insurance department.
At year-end 1997, the insurance companies had one ratio outside the normal
range. The ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last three years. A primary cause for
the decrease in premium revenues is related to the potential change in
control of UTI over the last two years to two different parties. During
September of 1996, it was announced that control of UTI would pass to an
unrelated party, but the transaction did not materialize. At this writing,
negotiations are progressing with a different unrelated party for the
change in control of UTI. Please refer to the Notes to the Consolidated
Financial Statements for additional information. The possible changes and
resulting uncertainties have hurt the insurance companies' ability to
recruit and maintain sales agents. The industry has experienced a downward
trend in the total number of agents who sell insurance products, and
competition for the top sales producers has intensified. As this trend
appears to continue, the recruiting focus of the Company has been on
introducing quality individuals to the insurance industry through an
extensive internal training program. UII feels this approach is conducive
to the mutual success of our new recruits and UII as these recruits market
our products in a professional, company structured manner.
The NAIC, in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC proposed changes
in the regulations governing insurance company investments and holding
company investments in subsidiaries and affiliates which were adopted by
the NAIC as model laws in 1996. The Company does not presently anticipate
any material adverse change in its business as a result of these changes.
Legislative and regulatory initiatives regarding changes in the regulation
of banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on UII by altering the competitive environment
for its products. The outcome and timing of any such changes cannot be
anticipated at this time, but the Company will continue to monitor
developments in order to respond to any opportunities or increased
competition that may occur.
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The NAIC adopted the Life Illustration Model Regulation. Many states have
adopted the regulation effective January 1, 1997. This regulation requires
products which contain non-guaranteed elements, such as universal life and
interest sensitive life, to comply with certain actuarially established
tests. These tests are intended to target future performance and
profitability of a product under various scenarios. The regulation does
not prevent a company from selling a product that does not meet the various
tests. The only implication is the way in which the product is marketed to
the consumer. A product that does not pass the tests uses guaranteed
assumptions rather than current assumptions in presenting future product
performance to the consumer. UII's insurance affiliates conduct an ongoing
thorough review of its sales and marketing process and continues to
emphasize its compliance efforts.
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
This project is not expected to be completed earlier than 1999. Specific
recommendations have been set forth in papers issued by the NAIC for
industry review. UII is monitoring the process, but the potential impact of
any changes in insurance accounting standards is not yet known.
ACCOUNTING AND LEGAL DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. The
Statement's objective is to simplify the computation of earnings per share,
and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS. Basic
EPS is calculated by dividing income available to common stockholders
(i.e., net income or loss adjusted for preferred stock dividends) by the
weighted-average number of common shares outstanding. Thus, in the most
significant change in current practice, options, warrants, and convertible
securities are excluded from the basic EPS calculation. Further,
contingently issuable shares are included in basic EPS only if all the
necessary conditions for the issuance of such shares have been satisfied by
the end of the period.
Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Income available to common stockholders continues to be
adjusted for assumed conversion of all potentially dilutive securities
using the treasury stock method to calculate the dilutive effect of options
and warrants. However, unlike the calculation of fully diluted EPS under
previous opinions, a new treasury stock method is applied using the average
market price or the ending market price. Further, prior opinion
requirement to use the modified treasury stock method when the number of
options or warrants outstanding is greater than 20% of the outstanding
shares also has been eliminated. SFAS 128 also includes certain shares
that are contingently issuable; however, the test for inclusion under the
new rules is much more restrictive.
SFAS No. 128 requires companies reporting discontinued operations,
extraordinary items, or the cumulative effect of accounting changes are to
use income from operations as the control number or benchmark to determine
whether potential common shares are dilutive or antidilutive. Only
dilutive securities are to be included in the calculation of diluted EPS.
This statement was adopted for the 1997 Financial Statements. For all
periods presented UII reported a loss from continuing operations so any
potential issuance of common shares would have an antidilutive effect on
EPS. Consequently, the adoption of SFAS No. 128 did not have an impact on
the Company's financial statement.
The FASB has issued SFAS No. 130 entitled Reporting Comprehensive Income
and SFAS No. 132 Employers' Disclosures about Pensions and Other
Postretirement Benefits. Both of the above statements are effective for
financial statements with fiscal years beginning after December 15, 1997.
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SFAS No. 130 defines how to report and display comprehensive income and its
components in a full set of financial statements. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity
as owners.
SFAS No. 132 addresses disclosure requirements for post-retirement
benefits. The statement does not change post-retirement measurement or
recognition issues.
UII will adopt both SFAS No. 130 and SFAS No. 132 for the 1998 financial
statements. Management does not expect either adoption to have a material
impact on the UII's financial statements.
UII is not aware of any litigation that will have a material adverse effect
on the financial position of the UII. In addition, UII does not believe
that the regulatory initiatives currently under consideration by various
regulatory agencies will have a material adverse impact on the UII. UII is
not aware of any material pending or threatened regulatory action with
respect to the Company or any of its affiliates. UII does not believe that
any insurance guaranty fund assessments will be materially different from
amounts already provided for in the financial statements.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results. This could have a significant effect on the Company's
business/financial systems as well as products and services, if not
corrected.
UII established a project to address year 2000 processing concerns in
September of 1996. In 1997 UII completed the review of its internally and
externally developed software, and made corrections to all year 2000 non-
compliant processing. UII also secured verification of current and future
year 2000 compliance from all major external software vendors. In December
of 1997, a separate computer operating environment was established with the
system dates advanced to December of 1999. A parallel model office was
established with all dates in the data advanced to December of 1999.
Parallel model office processing is being performed using dates from
December of 1999 to January of 2001, to insure all year 2000 processing
errors have been corrected. Testing should be completed by the end of the
first quarter of 1998. After testing is completed, periodic regression
testing will be performed to monitor continuing compliance. By addressing
year 2000 compliance in a timely manner, compliance will be achieved using
existing staff and without significant impact on UII operationally or
financially.
PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the third quarter of 1998.
SUBSEQUENT EVENT
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll, will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
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Upon completion of the transaction Mr. Correll will own 51% of UTI. Under
the terms of the letter of intent Mr. Correll will buy 2,000,000 authorized
but unissued shares of UTI common stock for $15.00 per share and will also
buy 389,715 shares of UTI common stock, representing stock of UTI and UII,
that UTI purchased during the last eight months in private transactions at
the average price UTI paid for such stock, plus interest, or approximately
$10.00 per share. Mr. Correll also will purchase 66,667 shares of UTI
common stock and $2,560,000 of face amount of convertible bonds (which are
due and payable on any change in control of UTI) in private transactions,
primarily from officers of UTI. Upon completion of the transaction, Mr.
Correll would be the largest shareholder of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF UII FOR THE PERIOD ENDED SEPTEMBER 30, 1998
At September 30, 1998 and December 31, 1997, the balance sheet reflects the
assets and liabilities of UII and its 47% equity interest in UTG. The
statements of operations and statements of cash flows presented include the
operating results of UII.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by UII and its affiliates or any of its officers,
directors or employees is qualified by the fact that actual results of UII
and its affiliates may differ materially from any such statement due to the
following important factors, among other risks and uncertainties inherent
in the business of UII and its affiliates:
1. Prevailing interest rate levels, which may affect the ability of UII
and its affiliates to sell its products, the market value of UII and
its affiliates investments and the lapse ratio of UII and its
affiliates policies, notwithstanding product design features intended
to enhance persistency of UII and its affiliates products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of UII and its affiliates products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for UII and its affiliates products.
4. Other factors affecting the performance of UII and its affiliates,
including, but not limited to, market conduct claims, insurance
industry insolvencies, stock market performance, and investment
performance.
RESULTS OF OPERATIONS
(A) REVENUES
UII's primary source of revenues is derived from service fee income, which
is provided via a service agreement with USA. The agreement was originally
established upon the formation of USA, which was a 100% owned subsidiary of
UII. Changes in the affiliate structure have resulted in USA no longer
being a direct subsidiary of UII, though still a member of the same
affiliated group. The original service agreement has remained in place
without modification. The fees are based on a percentage of premium
revenue of USA. The percentages are applied to both first year and renewal
premiums at different rates. Under the current structure, FCC pays all
general operating expenses of the affiliated group. FCC then receives
management and service fees from the various affiliates, including UTI and
UII.
UII holds $864,100 of notes receivable from affiliates. The notes
receivable from affiliates consists of three separate notes. The $700,000
note bears interest at the rate of 1% above the variable per annum rate of
interest most recently published by the Wall Street Journal as the prime
rate. Interest is payable quarterly with principal due at maturity on May
8, 2006. In February 1996, FCC borrowed an additional $150,000 from UII to
provide additional cash for liquidity. The note bears interest at the rate
of 1% over prime as published in the Wall Street Journal, with interest
payments due quarterly and principal due upon maturity of the note on June
1, 1999. The remaining $14,100 are 20 year notes of UTG with interest at
8.5% payable semi-annually. At current interest levels, the notes will
generate approximately $80,000 in interest income annually.
Interest income increased significantly when comparing the three and nine
months ended September 30, 1998 to the same periods one-year ago. The
increase in interest income is due to the increase in yield on UII's cash
and cash equivalent accounts. The increase in yield is directly related to
a change in banking relationships of UII. UII was able to obtain preferred
interest rates in conjunction with the financing of FCC's senior debt by
First of America Bank.
50
(B) EXPENSES
UII's primary source of expenses is derived from management fee expense,
which is derived from an agreement with UTI. The agreement between UII and
UTI was originally established upon the formation of USA, which was a 100%
owned subsidiary of UII. Changes in the affiliate structure have resulted
in USA no longer being a direct subsidiary of UII, though still a member of
the same affiliated group. The original management agreement has remained
in place without modification. The calculation of the management fee from
UII to UTI is 60% of the revenues derived from UII's service agreement with
USA. Under the current structure, FCC pays all general operating expenses
of the affiliated group. FCC then receives management and service fees
from the various affiliates, including UTI and UII.
Management fee incurred to UTI is comprised of $397,663 and $447,126 for
nine months ended September 30, 1998 and 1997, respectively and $139,022
and $128,111 for the three months ended September 30, 1998 and 1997,
respectively. Management fee incurred to FCC is comprised of $0 and
$180,000 for the nine months ended September 30, 1998 and 1997,
respectively and $0 and $25,000 for the three months ended September 30,
1998 and 1997, respectively.
Operating expenses consist primarily of governmental fees and other
expenses associated with maintaining a corporation in good standing with
various regulatory authorities. UII is a holding company and does not have
significant day to day operations of its own.
Interest expense increased slightly when comparing the first nine months of
1998 to the same period one-year ago. The interest expense is directly
attributable to the convertible debentures. The Debentures bear interest
at a variable rate equal to one percentage point above the prime rate
published in the Wall Street Journal from time to time.
(C) EQUITY IN INCOME OF INVESTEES
Equity in income of investees represents UII's 47% share of the net income
of UTG. Following is a discussion of the results of operations of UTG and
its consolidated subsidiaries ("UTG"):
Revenues of UTG
Premium and policy fees, net of reinsurance decreased 6% and 8% when
comparing the three and nine months ended September 30, 1998 to the
same periods in 1997, respectively. UTG currently writes little new
traditional business, consequently, traditional premiums will decrease
as the amount of traditional business in-force decreases. Collected
premiums on universal life and interest sensitive products is not
reflected in premiums and policy revenues because Generally Accepted
Accounting Principles ("GAAP") requires that premiums collected on
these types of products be treated as deposit liabilities rather than
revenue. Unless UTG acquires a block of in-force business or
marketing changes its focus to traditional business, premium revenue
will continue to decline.
Another cause for the decrease in premium revenues is related to the
potential change in control of UTI over the last two years to two
different parties. During September of 1996, it was announced that
control of UTI would pass to an unrelated party, but the change in
control did not materialize. At this writing, a contract is pending
with First Southern Funding "FSF" (FSF is an affiliate of First
Southern Bancorp, Inc., a bank holding company) for the change in
control of UTI. The possible changes and resulting uncertainties have
hurt the insurance companies' ability to recruit and maintain sales
agents. However, management believes the affiliation with FSF will
facilitate long-term growth opportunities. The expected long-term
benefits to UTI are an increase in capital, which will enable UTI and
its affiliates to pursue further growth through acquisitions.
Nationally there is a trend toward consolidation of the financial
service industry with proposed legislation to remove barriers between
banks and insurance companies.
Net investment income increased 3% when comparing the three months
ended September 30, 1998 to the same period one year-ago. The
increase in the current quarter is due to several factors. The
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<PAGE>
improvement in cash flow from operations compared to the previous
year. The companies changed banks during 1997, which provided an
improvement in yield on cash balances. Another factor that
contributed to the increase is the investment of funds in mortgage
loans. A higher percentage of investments acquired have been directed
to mortgage loans compared to previous periods. These loans provide
an investment yield, which are approximately 3% above the yield that
can be obtained from quality fixed maturities currently available.
Net investment income decreased slightly when comparing the nine
months ended September 30, 1998 to the same period one year ago. The
decrease in net investment income is due to the decrease in invested
assets. The decrease in invested assets and the increase in cash and
cash equivalents is a short-term fluctuation as management positions
UTG for the pending change in control of UTI. The effects of lost
investment revenue are partially offset by the factors discussed in
the above quarterly comparison of investment income.
UTG's investments are generally managed to match related insurance and
policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an
interest spread. The minimum interest spread between earned and
credited rates is 1% on the "Century 2000" universal life insurance
product, which currently is UTG's primary sales product. UTG monitors
investment yields, and when necessary adjusts credited interest rates
on its insurance products to preserve targeted interest spreads. It
is expected that monitoring of the interest spreads by management will
provide the necessary margin to adequately provide for associated
costs on the insurance policies the Company currently has in force and
will write in the future. At the September 1998 board of directors
meeting it was deemed necessary to reduce interest crediting rates one
half of a percentage point on certain products. This decision was
prompted by the overall decline in market interest rates. The change
in credited interest rates affects approximately $60,000,000 of policy
liabilities. The expected savings to UTG will be approximately
$300,000 per year. The change in credited interest rates is not
immediate. The change is effective on the anniversary of the policy.
Expenses of UTG
Benefits, claims and settlement expenses decreased 8% and 4% for the
nine and three months ended September 30, 1998 as compared to the same
periods one year-ago, respectively. The decrease in life benefits net
of reinsurance is due to the decrease in premium revenues that
resulted in lower benefit reserve increases. In addition,
policyholder benefits decreased due to a decrease in death benefit
claims of $1,059,000 for the nine months ended September 30, 1998
compared to the same period one year-ago. Policyholder benefits
increased due to an increase in death benefit claims of $270,000 for
the three months ended September 30, 1998 compared to the same period
one year-ago. There is no single event that caused death benefits to
increase or decrease. Death claims vary from period to period and
therefore, fluctuations in death benefits are to be expected and are
not considered unusual by management.
In future periods, benefits should decrease due to the reduction in
credited interest rates. At the September 1998 board of directors
meeting it was deemed necessary to reduce interest crediting rates one
half of a percentage point on certain products. This decision was
prompted by the overall decline in market interest rates. The change
in credited interest rates affects approximately $60,000,000 of policy
liabilities. The expected savings to UTG will be approximately
$300,000 per year. The change in credited interest rates is not
immediate. The change is effective on the anniversary of the policy.
Other expenses decreased 9% and 18% for the nine and three months
ended September 30, 1998 as compared to the same periods one year-ago,
respectively. The decrease in other expenses is due to the decrease
in salaries. The decrease in salaries is due to a 10% reduction in
staff compared to the previous year, including the retirement of an
executive officer. Interest expense decreased 10% for the nine months
ended September 30, 1998 as compared to the same period one year-ago.
The decrease in interest expense is due to the decrease in notes
payable.
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In future periods, interest expense is expected to decrease due to
scheduled principal reductions of notes payable. On November 8, 1998,
FCC prepaid $500,000 of the 1999 principal payment due on the senior
debt. In October 1998, the base interest rate of variable rate debt
decreased one half of one percentage point. This decrease affects
approximately $10,961,000 of the outstanding notes payable as of
September 30, 1998. The base rate is defined as the floating daily,
variable rate of interest determined and announced by First of America
Bank.
(D) NET INCOME
UII recorded net income of $658,697 for the first nine months of 1998
compared to $3,661 for the same period one-year ago. UII recorded net
income of $328,299 for third quarter of 1998 compared to $(136,852) for the
same period one-year ago. The improvement in net income is the result of a
combination of improved operating results of UII and improved earnings of
UTG.
FINANCIAL CONDITION
UII owns 47% equity interest in UTG, which controls total assets of
approximately $346,000,000
LIQUIDITY AND CAPITAL RESOURCES
Since UII is a holding company, funds required to meet its debt service
requirements and other expenses are primarily provided by its affiliates.
UII's cash flow is dependent on revenues from a management agreement with
USA and its earnings received on invested assets and cash balances. At
September 30, 1998, substantially all of the shareholders equity represents
investment in affiliates. UII does not have significant day to day
operations of its own. Cash requirements of UII primarily relate to the
payment of interest on its convertible debentures and expenses related to
maintaining UII as a corporation in good standing with the various
regulatory bodies which govern corporations in the jurisdictions where UII
does business. The payment of cash dividends to shareholders is not
legally restricted. However, insurance company dividend payments are
regulated by the state insurance department where the insurance company is
domiciled. UTI is the ultimate parent of UG through ownership of several
intermediary holding companies. UG can not pay a dividend directly to UII
due to the ownership structure. Please refer to Note 1 of the Notes to the
Financial Statements. UG's dividend limitations are described below
without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,000.
At December 31, 1997, UG statutory capital and surplus amounted to
$10,997,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
UII currently has $740,511 in cash and cash equivalents. UII holds two
mortgage loans. Operating activities of UII produced cash flows of
$297,871 and $234,698 for the nine months ended September 30, 1998 and
1997, respectively. UII had uses of cash from investing activities of
$268,257 and $18,165 for the nine months ended September 30, 1998 and 1997,
respectively.
UTI and UII acquired a 53% and 47%, respectively interest in a note
receivable from an outside party which was payable by UTG. Immediately
upon acquisition of the note, UTI and UII contributed their interest in the
note to UTG as a capital contribution. UTG did not have the cash available
to acquire the note the directly. UTI, UII and UTG deemed the retirement
of this debt advantageous in relation to the interest earned from cash
versus interest costs of the debt.
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between UII and First of
America Bank - Southeast Michigan, N.A., as trustee. The Debentures are
general unsecured obligations of UII, subordinate in right of payment to
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any existing or future senior debt of UII. The Debentures are exchangeable
and transferable, and are convertible at any time prior to March 31, 1999
into UII's Common Stock at a conversion price of $25 per share, subject to
adjustment in certain events. The Debentures bear interest from March 31,
1994, payable quarterly, at a variable rate equal to one percentage point
above the prime rate published in the Wall Street Journal from time to
time. On or after March 31, 1999, the Debentures will be redeemable at
UII's option, in whole or in part, at redemption prices declining from 103%
of their principal amount. No sinking fund will be established to redeem
the Debentures. The Debentures will mature on March 31, 2004. The
Debentures are not listed on any national securities exchange or the NASDAQ
National Market System.
UII and its affiliates are not aware of any litigation that will have a
material adverse effect on the financial position of UII and its
affiliates. In addition, UII and its affiliates do not believe that the
regulatory initiatives currently under consideration by various regulatory
agencies will have a material adverse impact on UII and its affiliates.
UII and its affiliates are not aware of any material pending or threatened
regulatory action with respect to UII or any of its affiliates. UII and
its affiliates do not believe that any insurance guaranty fund assessments
will be materially different from amounts already provided for in the
financial statements.
Management believes that the overall sources of liquidity available to UII
will be more than sufficient to satisfy its financial obligations.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results. This could have a significant effect on UII and its affiliates
business/financial systems as well as products and services, if not
corrected.
UII and its affiliates established a project to address year 2000
processing concerns in September of 1996. In 1997 UII and it affiliates
completed the review of internally and externally developed software, and
made corrections to all year 2000 non-compliant processing. UII and its
affiliates also secured verification of current and future year 2000
compliance from all major external software vendors. In December of 1997,
a separate computer operating environment was established with the system
dates advanced to December of 1999. A parallel model office was
established with all dates in the data advanced to December of 1999.
Parallel model office processing is being performed using dates from
December of 1999 to January of 2001, to insure all year 2000 processing
errors have been corrected. Testing was completed by the end of the first
quarter of 1998. Periodic regression testing will be performed to monitor
continuing compliance. By addressing year 2000 compliance in a timely
manner, compliance will be achieved using existing staff and without
significant impact on UII and its affiliates operationally or financially.
PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
54
PENDING CHANGE IN CONTROL OF UNITED TRUST INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds which are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter 1998, and there can be no assurance that the transaction
will be completed. The pending change in control of UTI is not contingent
upon the merger of UTI and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
ACCOUNTING AND LEGAL DEVELOPMENTS
THE FASB HAS ISSUED SFAS 130 ENTITLED REPORTING COMPREHENSIVE INCOME, WHICH
IS EFFECTIVE FOR FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNING AFTER
DECEMBER 15, 1997. SFAS 130 ESTABLISHES STANDARDS FOR REPORTING AND
PRESENTATION OF COMPREHENSIVE INCOME AND ITS COMPONENTS IN A FULL SET OF
FINANCIAL STATEMENTS. COMPREHENSIVE INCOME INCLUDES ALL CHANGES IN
SHAREHOLDERS' EQUITY, EXCEPT THOSE ARISING FROM TRANSACTIONS WITH
SHAREHOLDERS, AND INCLUDES NET INCOME AND NET UNREALIZED GAINS (LOSSES) ON
SECURITIES. SFAS 130 WAS ADOPTED AS OF JANUARY 1, 1998. ADOPTING THE NEW
STANDARD REQUIRED US TO MAKE ADDITIONAL DISCLOSURES IN THE CONSOLIDATED
FINANCIAL STATEMENTS, BUT DID NOT AFFECT UII'S FINANCIAL POSITION OR
RESULTS OF OPERATIONS.
ALL ITEMS OF OTHER COMPREHENSIVE INCOME REFLECT NO RELATED TAX EFFECT,
SINCE UII HAS AN ALLOWANCE AGAINST THE COLLECTION OF ANY FUTURE TAX
BENEFITS. IN ADDITION, THERE WAS NO SALE OR LIQUIDATION OF INVESTMENTS
REQUIRING A RECLASSIFICATION ADJUSTMENT FOR THE PERIOD PRESENTED.
THE FASB HAS ISSUED SFAS 131 ENTITLED, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, WHICH IS EFFECTIVE FOR FINANCIAL
STATEMENTS FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997. SFAS 131
REQUIRES THAT A PUBLIC BUSINESS ENTERPRISE REPORT FINANCIAL AND DESCRIPTIVE
INFORMATION ABOUT ITS REPORTABLE OPERATING SEGMENTS. OPERATING SEGMENTS
ARE COMPONENTS OF AN ENTERPRISE ABOUT WHICH SEPARATE FINANCIAL INFORMATION
IS AVAILABLE THAT IS EVALUATED REGULARLY IN DECIDING HOW TO ALLOCATE
RESOURCES AND IN ASSESSING PERFORMANCE. SFAS 131 WAS ADOPTED AS OF JANUARY
1, 1998. ADOPTING THE NEW STANDARD HAD NO AFFECT ON OUR FINANCIAL POSITION
OR RESULTS OF OPERATIONS, SINCE UII HAS NO REPORTABLE OPERATING SEGMENTS.
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SELECTED FINANCIAL DATA OF UTI
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1997 1996 1995 1994 1993
<TABLE>
<S> <C> <C> <C> <C> <C>
Premium income
net of reinsurance $ 28,639 $ 30,944 $ 33,099 $ 35,145 $ 33,530
Total revenues $ 43,992 $ 46,976 $ 49,869 $ 49,207 $ 48,541
Net loss* $ (559)$ (938)$ (3,001)$ (1,624)$ (862)
Net loss per share $ (0.32)$ (0.50)$ (1.61)$ (0.90)$ (0.50)
Total assets $ 349,300 $ 355,474 $ 356,305 $ 360,258 $ 375,755
Total long-term debt $ 21,460 $ 19,574 $ 21,447 $ 22,053 $ 24,359
Dividends paid per share NONE NONE NONE NONE NONE
</TABLE>
* Includes equity earnings of investees.
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UTI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
The purpose of this section is to discuss and analyze the Company's
consolidated results of operations, financial condition and liquidity and
capital resources. This analysis should be read in conjunction with the
consolidated financial statements and related notes which appear elsewhere
in this report. The Company reports financial results on a consolidated
basis. The consolidated financial statements include the accounts of UTI
and its subsidiaries at December 31, 1997.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
(A) REVENUES
Premiums and policy fee revenues, net of reinsurance premiums and policy
fees, decreased 7% when comparing 1997 to 1996. The Company currently
writes little new traditional business, consequently, traditional premiums
will decrease as the amount of traditional business in-force decreases.
Collected premiums on universal life and interest sensitive products is not
reflected in premiums and policy revenues because Generally Accepted
Accounting Procedures ("GAAP") requires that premiums collected on these
types of products be treated as deposit liabilities rather than revenue.
Unless the Company acquires a block of in-force business or marketing
changes its focus to traditional business, premium revenue will continue to
decline at a rate consistent with prior experience.
Another cause for the decrease in premium revenues is related to the
potential change in control of UTI over the last two years to two different
parties. During September of 1996, it was announced that control of UTI
would pass to an unrelated party, but the change in control did not
materialize. At this writing, negotiations are progressing with a
different unrelated party for the change in control of UTI. Please refer
to the Notes to the Consolidated Financial Statements for additional
information. The possible changes and resulting uncertainties have hurt
the insurance companies' ability to recruit and maintain sales agents.
New business production decreased significantly over the last two years.
New business production decreased 43% or $3,935,000 when comparing 1997 to
1996. In recent years, the insurance industry as a whole has experienced a
decline in the total number of agents who sell insurance products,
therefore competition has intensified for top producing sales agents. The
relatively small size of our companies, and the resulting limitations, have
made it challenging to compete in this area.
A positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained in relation to the
previous year. The Companies' average persistency rate for all policies in
force for 1997 and 1996 has been approximately 89.4% and 87.9%,
respectively.
Net investment income decreased 6% when comparing 1997 to 1996. The
decrease relates to the decrease in invested assets from a coinsurance
agreement. The Company's insurance subsidiary UG entered into a
coinsurance agreement with First International Life Insurance Company
("FILIC"), an unrelated party, as of September 30, 1996. During 1997,
FILIC changed its name to Park Avenue Life Insurance Company ("PALIC").
Under the terms of the agreement, UG ceded to FILIC substantially all of
its paid-up life insurance policies. Paid-up life insurance generally
refers to non-premium paying life insurance policies. At closing of the
transaction, UG received a coinsurance credit of $28,318,000 for policy
liabilities covered under the agreement. UG transferred assets equal to
the credit received. This transfer included policy loans of $2,855,000
associated with policies under the agreement and a net cash transfer of
$19,088,000, after deducting the ceding commission due UG of $6,375,000.
To provide the cash required to be transferred under the agreement, the
Company sold $18,737,000 of fixed maturity investments.
The overall investment yields for 1997, 1996 and 1995, are 7.24%, 7.29% and
7.12%, respectively. Since 1995, investment yield improved due to the
fixed maturity investments. Cash generated from the sales of universal
life insurance products, has been invested primarily in our fixed maturity
portfolio.
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The Company's investments are generally managed to match related insurance
and policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates is
1% on the "Century 2000" universal life insurance product, which currently
is the Company's primary sales product. The Company monitors investment
yields, and when necessary adjusts credited interest rates on its insurance
products to preserve targeted interest spreads. It is expected that
monitoring of the interest spreads by management will provide the necessary
margin to adequately provide for associated costs on the insurance policies
the Company currently has in force and will write in the future.
Realized investment losses were $279,000 and $988,000 in 1997 and 1996,
respectively. Approximately $522,000 of realized losses in 1996 are due to
the charge-off of two specific investments. The Company realized a loss of
$207,000 from a single loan and $315,000 from an investment in First
Fidelity Mortgage Company ("FFMC"). The charge-off of the loan represented
the entire loan balance at the time of the charge-off. Additionally, the
Company sold two foreclosed real estate properties that resulted in
approximately $357,000 in realized losses in 1996. The Company had other
gains and losses during the period that comprised the remaining amount
reported but were immaterial in nature on an individual basis.
(B) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 11% in
1997 as compared to 1996. The decrease in premium revenues resulted in
lower benefit reserve increases in 1997. In addition, policyholder
benefits decreased due to a decrease in death benefit claims of $162,000.
In 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be not
insurable by Company standards. These non-standard policies had a face
amount of $22,700,000 and represented 1/2 of 1% of the insurance in-force
in 1994. Management's initial analysis indicated that expected death
claims on the business in-force was adequate in relation to mortality
assumptions inherent in the calculation of statutory reserves.
Nevertheless, management determined it was in the best interest of the
Company to repurchase as many of the non-standard policies as possible.
Through December 31, 1996, the Company spent approximately $7,099,000 for
the settlement of non-standard policies and for the legal defense of
related litigation. In relation to settlement of non-standard policies the
Company incurred life benefit costs of $3,307,000, and $720,000 in 1996 and
1995, respectively. The Company incurred legal costs of $906,000 and
$687,000 in 1996 and 1995, respectively. All policies associated with this
issue have been settled as of December 31, 1996. Therefore, expense
reductions for 1997 would follow.
Commissions and amortization of deferred policy acquisition costs decreased
14% in 1997 compared to 1996. The decrease is due primarily due to a
reduction in commissions paid. Commissions decreased 19% in 1997 compared
to 1996. The decrease in commissions was due to the decline in new business
production. There is a direct relationship between premium revenues and
commission expense. First year premium production decreased 43% and first
year commissions decreased 33% when comparing 1997 to 1996. Amortization
of deferred policy acquisition costs decreased 6% in 1997 compared to 1996.
Management would expect commissions and amortization of deferred policy
acquisition costs to decrease in the future if premium revenues continue to
decline.
Amortization of cost of insurance acquired decreased 57% in 1997 compared
to 1996. Cost of insurance acquired is established when an insurance
company is acquired. The Company assigns a portion of its cost to the
right to receive future cash flows from insurance contracts existing at the
date of the acquisition. The cost of policies purchased represents the
actuarially determined present value of the projected future cash flows
from the acquired policies. Cost of insurance acquired is comprised of
individual life insurance products including whole life, interest sensitive
whole life and universal life insurance products. Cost of insurance
acquired is amortized with interest in relation to expected future profits,
including direct charge-offs for any excess of the unamortized asset over
the projected future profits. The interest rates utilized in the
amortization calculation are 9% on approximately 24% of the balance and 15%
on the remaining balance. The interest rates vary due to risk analysis
performed at the time of acquisition on the business acquired. The
amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are revised.
The Company did not have any charge-offs during the periods covered by this
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report. The decrease in amortization during the current period is a normal
fluctuation due to the expected future profits. Amortization of cost of
insurance acquired is particularly sensitive to changes in persistency of
certain blocks of insurance in-force. The improvement of persistency
during the year had a positive impact on amortization of cost of insurance
acquired. Persistency is a measure of insurance in force retained in
relation to the previous year. The Company's average persistency rate for
all policies in force for 1997 and 1996 has been approximately 89.4% and
87.9%, respectively.
Operating expenses decreased 23% in 1997 compared to 1996. Approximately
one-half of the decrease in operating expenses is related to the settlement
of certain litigation in December of 1996 regarding non-standard policies.
Included in this decrease were legal fees and payments to the litigants to
settle the issue. In 1992, as part of the acquisition of Commonwealth
Industries Corporation, an agreement was entered into between John Cantrell
and FCC for future payments to be made by FCC. A liability was established
at the date of the agreement. Upon the death of Mr. Cantrell in late 1997,
obligations under this agreement transferred to Mr. Cantrell's wife at a
reduced amount. This resulted in a reduction of approximately $600,000 of
the liability held for future payments under the agreement. In addition,
1997 Consulting fees, primarily in the area of actuarial services. were
reduced approximately $400,000 as the Company was able to hire an actuary,
on a part-time basis, at a cost less than fees paid in the previous year to
consulting actuaries. The remaining reduction in operating expenses is
attributable to reduced salary and employee benefit costs in 1997, as a
result of natural attrition.
Interest expense increased 5% in 1997 compared to 1996. Since December 31,
1996, notes payable increased approximately $1,886,000. Average
outstanding indebtedness was $20,517,000 with an average cost of 8.9% in
1997 compared to average outstanding indebtedness of 20,510,000 with an
average cost of 8.5% in 1996. The increase in outstanding indebtedness was
due to the issuance of convertible notes to seven individuals, all officers
or employees of UTI. In March 1997, the base interest rate for most of the
notes payable increased a quarter of a point. The base rate is defined as
the floating daily, variable rate of interest determined and announced by
First of America Bank. Please refer to Note 12 "Notes Payable" in the
Consolidated Notes to the Financial Statements for more information.
(C) NET LOSS
The Company had a net loss of $559,000 in 1997 compared to a net loss of
$938,000 in 1996. The improvement is directly related to the decrease in
life benefits and operating expenses primarily associated with the 1996
settlement and other related costs of the non-standard life insurance
policies.
1996 COMPARED TO 1995
(A) REVENUES
Premium and policy fee revenues, net of reinsurance premium, decreased 7%
when comparing 1996 to 1995. The decrease in premium income is primarily
attributed to a 15% decrease in new business production. The decrease is
due to two factors. The first factor is that the Company changed its focus
from primarily a broker agency distribution system to a captive agent
system. The second factor is that the Company changed its product
portfolio from primarily traditional life insurance to universal life
insurance.
Business written by the broker agency force, in recent years, did not meet
Company expectations. With the change in focus of distribution systems,
most of the broker agents were terminated. (The termination of the broker
agency force caused a non-recurring write down of the value of agency force
asset in 1995, see discussion of amortization of agency force for further
details.). The change in distribution systems effectively reduced the
total number of agents representing and producing business for the Company.
Broker agents sell insurance and related products for several companies.
Captive agents sell for only one company. The change from a brokerage
agency system to a captive agent system caused a decline in new premium
writings as the captive agents required training from the home office and
often had little or no previous insurance sales experience. Additionally,
the products sold were changed from traditional whole life to universal
life, resulting in veteran captive agents having to learn the features of
the new products. Broker agents typically sell products for several
companies and typically have more experience in the industry or have
experienced agents within the agency to assist and train them. The captive
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agent approach, though slower and requiring more home office training, is
believed to be the best long term approach for the Company as agents will
be trained in the procedures and practices of the Company and will be more
familiar to the Company through the training process. This will help in
recruiting quality individuals with the character and attitude conducive
with Company desires.
Universal life and interest sensitive products contribute only the risk
charge to premium income; however, traditional insurance products
contribute all monies received to premium income. The Company changed its
product portfolio to remain competitive based on consumer demand.
A positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained in relation to the
previous year. The Companies' average persistency rate for all policies in
force for 1996 and 1995 has been approximately 87.9% and 87.3%,
respectively.
Net investment income increased 3% when comparing 1996 to 1995. The
overall investment yields for 1996 and 1995 are 7.29% and 7.12%,
respectively. The improvement in investment yield is primarily attributed
to fixed maturity investments. Cash generated from the sales of universal
life insurance products, has been invested primarily in our fixed
investment portfolio.
The Company's investments are generally managed to match related insurance
and policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates is
1% on the "Century 2000" universal life insurance product, which currently
is the Company's primary sales product. The Company monitors investment
yields, and when necessary adjusts credited interest rates on its insurance
products to preserve targeted interest spreads. It is expected that
monitoring of the interest spreads by management will provide the necessary
margin to adequately provide for associated costs on the insurance policies
the Company currently has in force and will write in the future.
Realized investment losses were $988,000 and $124,000 in 1996 and 1995,
respectively. Approximately $522,000 of realized losses in 1996 are due to
the charge-off of two specific investments. The Company realized a loss of
$207,000 from a single loan and $315,000 from an investment in First
Fidelity Mortgage Company ("FFMC"). The charge-off of the loan represented
the entire loan balance at the time of the charge-off. Additionally, the
Company sold two foreclosed real estate properties that resulted in
approximately $357,000 in realized losses in 1996. The Company had other
gains and losses during the period that comprised the remaining amount
reported but were immaterial in nature on an individual basis.
(B) EXPENSES
Life benefits, net of reinsurance benefits and claims, increased 2%
compared to 1995. The increase in life benefits is due primarily to
settlement expenses discussed in the following paragraph:
In 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be not
insurable by Company standards. These non-standard policies had a face
amount of $22,700,000 and represented 1/2 of 1% of the insurance in-force
in 1994. Management's initial analysis indicated that expected death
claims on the business in-force was adequate in relation to mortality
assumptions inherent in the calculation of statutory reserves.
Nevertheless, management determined it was in the best interest of the
Company to repurchase as many of the non-standard policies as possible.
Through December 31, 1996, the Company spent approximately $7,099,000 for
the settlement of non-standard policies and for the legal defense of
related litigation. In relation to settlement of non-standard policies the
Company incurred life benefits of $3,307,000 and $720,000 in 1996 and 1995,
respectively. The Company incurred legal costs of $906,000 and $687,000 in
1996 and 1995, respectively. All the policies associated with this issue
have been settled as of December 31, 1996. The Company has approximately
$3,742,000 of insurance in-force and $1,871,000 of reserves from the
issuance of paid-up life insurance policies for settlement of matters
related to the original non-standard policies. Management believes the
reserves are adequate in relation to expected mortality on this block of in-
force.
Commissions and amortization of deferred policy acquisition costs decreased
14% in 1996 compared to 1995. The decrease is due to a decrease in
commissions expense. Commissions decreased 15% in 1996 compared to 1995.
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The decrease in commissions was due to the decline in new business
production. There is a direct relationship between premium revenues and
commission expenses. First year premium production decreased 15% and first
year commissions decreased 32% when comparing 1996 to 1995. Amortization
of deferred policy acquisition costs decreased 12% in 1996 compared to
1995. Management expects commissions and amortization of deferred policy
acquisition costs to decrease in the future if premium revenues continue to
decline.
Amortization of cost of insurance acquired increased 25% in 1996 compared
to 1995. Cost of insurance acquired is established when an insurance
company is acquired. The Company assigns a portion of its cost to the right
to receive future cash flows from insurance contracts existing at the date
of the acquisition. The cost of policies purchased represents the
actuarially determined present value of the projected future cash flows
from the acquired policies. Cost of insurance acquired is comprised of
individual life insurance products including whole life, interest sensitive
whole life and universal life insurance products. Cost of insurance
acquired is amortized with interest in relation to expected future profits,
including direct charge-offs for any excess of the unamortized asset over
the projected future profits. The interest rates utilized in the
amortization calculation are 9% on approximately 24% of the balance and 15%
on the remaining balance. The interest rates vary due to risk analysis
performed at the time of acquisition on the business acquired. The
amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are revised.
The Company did not have any charge-offs during the periods covered by this
report. The increase in amortization during the current period is a
fluctuation due to the expected future profits. Amortization of cost of
insurance acquired is particularly sensitive to changes in persistency of
certain blocks of insurance in-force.
The Company reported a non-recurring write down of value of agency force of
$0 and $8,297,000 in 1996 and 1995, respectively. The write down was
directly related to the Company's change in distribution systems. The
Company changed its focus from primarily a broker agency distribution
system to a captive agent system. Business produced by the broker agency
force in recent years did not meet Company expectations. With the change
in focus of distribution systems, most of the broker agents were
terminated. The termination of most of the agents involved in the broker
agency force caused management to re-evaluate and write-off the value of
the agency force carried on the balance sheet.
Operating expenses increased 4% in 1996 compared to 1995. The primary
factor that caused the increase in operating expenses is directly related
to increased legal costs and reserves established for litigation. The
legal costs are due to the settlement of non-standard insurance policies as
was discussed in the review of life benefits. The Company incurred legal
costs of $906,000 and $687,000 in 1996 and 1995, respectively in relation
to the settlement of the non-standard insurance policies.
Interest expense decreased 12% in 1996 compared to 1995. Since December
31, 1995, notes payable decreased approximately $1,873,000 that has
directly attributed to the decrease in interest expense during 1996.
Interest expense was also reduced, as a result of the refinancing of the
senior debt under which the new interest rate is more favorable. Please
refer to Note 11 "Notes Payable" of the Consolidated Notes to the Financial
Statements for more information on this matter.
(C) NET LOSS
The Company had a net loss of $938,000 in 1996 compared to a net loss of
$3,001,000 in 1995. The net loss in 1996 is attributed to the increase in
life benefits net of reinsurance and operating expenses primarily
associated with settlement and other related costs of the non-standard life
insurance policies.
FINANCIAL CONDITION
(A) ASSETS
Investments are the largest asset group of the Company. The Company's
insurance subsidiaries are regulated by insurance statutes and regulations
as to the type of investments that they are permitted to make and the
amount of funds that may be used for any one type of investment. In light
of these statutes and regulations, and the Company's business and
investment strategy, the Company generally seeks to invest in United States
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government and government agency securities and corporate securities rated
investment grade by established nationally recognized rating organizations.
The liabilities are predominantly long-term in nature and therefore, the
Company invests in long-term fixed maturity investments that are reported
in the financial statements at their amortized cost. The Company has the
ability and intent to hold these investments to maturity; consequently, the
Company does not expect to realize any significant loss from these
investments. The Company does not own any derivative investments or "junk
bonds". As of December 31, 1997, the carrying value of fixed maturity
securities in default as to principal or interest was immaterial in the
context of consolidated assets or shareholders' equity. The Company has
identified securities it may sell and classified them as "investments held
for sale". Investments held for sale are carried at market, with changes
in market value charged directly to shareholders' equity.
The following table summarizes the Company's fixed maturities distribution
at December 31, 1997 and 1996 by ratings category as issued by Standard and
Poor's, a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
1997 1996
<TABLE>
<S> <C> <C>
Investment Grade
AAA 31% 30%
AA 14% 13%
A 46% 46%
BBB 9% 10%
Below investment
grade 0% 1%
100% 100%
</TABLE>
Mortgage loans decreased 14% in 1997 as compared to 1996. The Company is
not actively seeking new mortgage loans, and the decrease is due to early
pay-offs from mortgagee's seeking refinancing at lower interest rates. All
mortgage loans held by the Company are first position loans. The Company
has $298,227 in mortgage loans, net of a $10,000 reserve allowance, which
are in default and in the process of foreclosure, this represents
approximately 3% of the total portfolio.
Investment real estate and real estate acquired in satisfaction of debt
decreased slightly in 1997 compared to 1996. Investment real estate
holdings represent approximately 3% of the total assets of the Company.
Total investment real estate is separated into three categories:
Commercial 38%, Residential Development 47% and Foreclosed Properties 15%.
Policy loans decreased 2% in 1997 compared to 1996. Industry experience
for policy loans indicates few policy loans are ever repaid by the
policyholder other than through termination of the policy. Policy loans
are systematically reviewed to ensure that no individual policy loan
exceeds the underlying cash value of the policy. Policy loans will
generally increase due to new loans and interest compounding on existing
policy loans.
Deferred policy acquisition costs decreased 6% in 1997 compared to 1996.
Deferred policy acquisition costs, which vary with, and are primarily
related to producing new business, are referred to as ("DAC"). DAC
consists primarily of commissions and certain costs of policy issuance and
underwriting, net of fees charged to the policy in excess of ultimate fees
charged. To the extent these costs are recoverable from future profits,
the Company defers these costs and amortizes them with interest in relation
to the present value of expected gross profits from the contracts,
discounted using the interest rate credited by the policy. The Company had
$586,000 in policy acquisition costs deferred, $425,000 in interest
accretion and $1,735,636 in amortization in 1997. The Company did not
recognize any impairment during the period.
Cost of insurance acquired decreased 5% in 1997 compared to 1996. At
December 31, 1997, cost of insurance acquired was $41,523,000 and
amortization totaled $2,394,000 for the year. When an insurance company is
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acquired, the Company assigns a portion of its cost to the right to receive
future cash flows from insurance contracts existing at the date of the
acquisition. The cost of policies purchased represents the actuarially
determined present value of the projected future cash flows from the
acquired policies. Cost of Insurance Acquired is amortized with interest
in relation to expected future profits, including direct charge-offs for
any excess of the unamortized asset over the projected future profits.
(B) LIABILITIES
Total liabilities increased slightly in 1997 compared to 1996. However,
future policy benefits which represented 81% of total liabilities at
December 31, 1997, decreased slightly in 1997.
Policy claims and benefits payable decreased 35% in 1997 compared to 1996.
There is no single event that caused this item to decrease. Policy claims
vary from year to year and therefore, fluctuations in this liability are to
be expected and are not considered unusual by management.
Other policyholder funds decreased 12% in 1997 compared to 1996. The
decrease can be attributed to a decrease in premium deposit funds. Premium
deposit funds are funds deposited by the policyholder with the insurance
company to accumulate interest and pay future policy premiums. The change
in marketing from traditional insurance products to universal life
insurance products is the primary reason for the decrease. Universal life
insurance products do not have premium deposit funds. All premiums
received from universal life insurance policyholders are credited to the
life insurance policy and are reflected in future policy benefits.
Dividend and endowment accumulations increased 7% in 1997 compared to 1996.
The increase is attributed to the significant amount of participating
business the Company has in force. Over 47% of all dividends paid were put
on deposit with the Company to accumulate with interest. Management
expects this liability to increase in the future.
Income taxes payable and deferred income taxes payable increased 7% in 1997
compared to 1996. The change in deferred income taxes payable is
attributable to temporary differences between Generally Accepted Accounting
Principles ("GAAP") and tax basis accounting. Federal income taxes are
discussed in more detail in Note 3 of the Consolidated Notes to the
Financial Statements.
Notes payable increased approximately $1,886,000 in 1997 compared to 1996.
On July 31, 1997, United Trust Inc. issued convertible notes totaling
$2,560,000 to seven individuals, all officers or employees of United Trust
Inc. The notes bear interest at a rate of 1% over prime, with interest
payments due quarterly and principal due upon maturity of July 31, 2004.
The conversion price of the notes are graded from $12.50 per share for the
first three years, increasing to $15.00 per share for the next two years
and increasing to $20.00 per share for the last two years. As of December
31, 1997, the notes were convertible into 204,800 shares of UTI common
stock with no conversion privileges having been exercised. The Company's
long-term debt is discussed in more detail in Note 12 of the Notes to the
Financial Statements.
(C) SHAREHOLDERS' EQUITY
Total shareholders' equity decreased 15% in 1997 compared to 1996. The
decrease is attributable to the Company's acquisition of treasury stock.
As indicated in the notes payable paragraph above, on July 31, 1997 UTI
issued convertible notes totaling $2,560,000. The notes were issued to
provide UTI with additional funds to be used for the following purposes.
A portion of the proceeds in combination with debt instruments were used to
acquire approximately 16% of the Larry E. Ryherd and family stock holdings
in UTI. This transaction reduced the largest shareholder's stock holdings
for the purpose of making UTI stock more attractive to the investment
community.
Additionally, a portion of the proceeds in combination with debt
instruments were used to acquire the stock holdings of Thomas F. Morrow and
family in UTI and UII. Simultaneous to this stock acquisition Mr. Morrow
retired as an executive officer of UTI. Mr. Morrow's retirement will
provide an annual cost savings to the Company in excess of debt service on
the new notes.
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The remaining proceeds of approximately $1,500,000, of the original
$2,560,000, will be used to reduce the outstanding debt of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has three principal needs for cash - the insurance companies'
contractual obligations to policyholders, the payment of operating expenses
and the servicing of its long-term debt. Cash and cash equivalents as a
percentage of total assets were 5% as of December 31, 1997, and 1996,
respectively. Fixed maturities as a percentage of total invested assets
were 82% as of December 31, 1997 and 1996.
Future policy benefits are primarily long-term in nature and therefore, the
Company's investments are predominantly in long-term fixed maturity
investments such as bonds and mortgage loans which provide sufficient
return to cover these obligations. The Company has the ability and intent
to hold these investments to maturity; consequently, the Company's
investment in long-term fixed maturities is reported in the financial
statements at their amortized cost.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to
cover the Company's unamortized deferred policy acquisition costs with
respect to the policy being surrendered.
Cash provided by operating activities was $23,000, $3,140,000 and 486,000
in 1997, 1996 and 1995, respectively. The net cash provided by operating
activities plus net policyholder contract deposits after the payment of
policyholder withdrawals equaled $3,412,000 in 1997, $9,952,000 in 1996 and
$9,499,000 in 1995. Management utilizes this measurement of cash flows as
an indicator of the performance of the Company's insurance operations,
since reporting regulations require cash inflows and outflows from
universal life insurance products to be shown as financing activities when
reporting on cash flows.
Cash provided by (used in) investing activities was ($2,989,000),
$15,808,000 and ($8,063,000), for 1997, 1996 and 1995, respectively. The
most significant aspect of cash provided by (used in) investing activities
are the fixed maturity transactions. Fixed maturities account for 70%, 81%
and 76% of the total cost of investments acquired in 1997, 1996 and 1995,
respectively. The net cash provided by investing activities in 1996, is
due to the fixed maturities sold in conjunction with the coinsurance
agreement with FILIC. The Company has not directed its investable funds to
so-called "junk bonds" or derivative investments.
Net cash provided by (used in) financing activities was $1,746,000,
($14,150,000) and $8,408,000 for 1997, 1996 and 1995, respectively. The
change between 1997 and 1996 is due to a coinsurance agreement with FILIC
as of September 30, 1996. At closing of the transaction, UG received a
reinsurance credit of $28,318,000 for policy liabilities covered under the
agreement. UG transferred assets equal to the credit received. This
transfer included policy loans of $2,855,000 associated with policies under
the agreement and a net cash transfer of $19,088,000 after deducting the
ceding commission due UG of $6,375,000.
Policyholder contract deposits decreased 20% in 1997 compared to 1996, and
decreased 11% in 1996 when compared to 1995. Policyholder contract
withdrawals has decreased 6% in 1997 compared to 1996, and decreased 4% in
1996 compared to 1995. The change in policyholder contract withdrawals is
not attributable to any one significant event. Factors that influence
policyholder contract withdrawals are fluctuation of interest rates,
competition and other economic factors.
At December 31, 1997, the Company had a total of $21,460,000 in long-term
debt outstanding. Long-term debt principal reductions are approximately
$1.5 million per year over the next four years. The debt structure is
described in the following paragraphs.
The senior debt is through First of America Bank - NA and is subject to a
credit agreement. As of December 31, 1997 the outstanding principal
balance of the senior debt is $6,900,000. The debt bears interest to a
rate equal to the "base rate" plus nine-sixteenths of one percent. The
Base rate is defined as the floating daily, variable rate of interest
determined and announced by First of America Bank from time to time as its
"base lending rate". The base rate at issuance of the loan was 8.25%, until
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March of 1997, when it changed to 8.5%. The base rate has remained
unchanged at 8.5% through the date of this filing. Interest is paid
quarterly and principal payments of $1,000,000 are due in May of each year
beginning in 1997, with a final payment due May 8, 2005. On November 8,
1997, the Company prepaid the $1,000,000 May 8,1998, principal payment.
Principal and interest payments expected to be paid on this debt are $0 and
$625,000 in 1998 and $1,000,000 and $580,000 in 1999, respectively.
The senior debt is through First of America Bank - NA and is subject to a
credit agreement. As of December 31, 1997 the outstanding principal
balance of the senior debt is $6,900,000. The debt bears interest to a
rate equal to the "base rate" plus nine-sixteenths of one percent. The
Base rate is defined as the floating daily, variable rate of interest
determined and announced by First of America Bank from time to time as its
"base lending rate". The base rate at issuance of the loan was 8.25%, until
March of 1997, when it changed to 8.5%. The base rate has remained
unchanged at 8.5% through the date of this filing. Interest is paid
quarterly and principal payments of $1,000,000 are due in May of each year
beginning in 1997, with a final payment due May 8, 2005. On November 8,
1997, the Company prepaid the $1,000,000 May 8,1998, principal payment.
Principal and interest payments expected to be paid on this debt are $0 and
$625,000 in 1998 and $1,000,000 and $580,000 in 1999, respectively.
The subordinated debt was incurred June 16, 1992 as a part of an
acquisition and consists of 10 and 20 year notes. As of December 31, 1997
the outstanding principal balance of the 10-year notes is $5,747,000 and
the 20-year notes is $3,902,000. The 10-year notes bear interest at the
rate of 7 1/2% per annum, payable semi-annually beginning December 16,
1992. These notes except for one $840,000 note provide for principal
payments equal to 1/20th of the principal balance due with each interest
installment beginning December 16, 1997, with a final payment due June 16,
2002. The $840,000 note provides for a lump sum principal payment due June
16, 2002. In June 1997, the Company refinanced $204,267 of its
subordinated 10-year notes to subordinated 20-year notes bearing interest
at the rate of 8.75%. The repayment terms of these notes are the same as
the original subordinated 20 year notes. The 20-year notes bear interest
at the rate of 8 1/2% per annum on $3,530,000 and 8.75% per annum on
$505,000, payable semi-annually with a lump sum principal payment due June
16, 2012. Principal and interest payments expected to be paid on the 10-
year notes are $516,000 and $412,000 in 1998 and $516,000 and $373,000 in
1999, respectively. Principal and interest payments expected to be paid on
the 20-year notes are $0 and $333,000 in 1998 and $0 and $333,000 in 1999,
respectively.
On July 31, 1997, United Trust Inc. issued convertible notes totaling
$2,560,000 to seven individuals, all officers or employees of United Trust
Inc. As of December 31, 1997 the outstanding principal balance of the
convertible notes is $2,560,000. The notes bear interest at a rate of 1%
over prime, which has remained unchanged at 8.5%, with interest payments
due quarterly and principal due upon maturity of July 31, 2004. The
conversion price of the notes are graded from $12.50 per share for the
first three years, increasing to $15.00 per share for the next two years
and increasing to $20.00 per share for the last two years. As of December
31, 1997, the notes were convertible into 204,800 shares of UTI common
stock with no conversion privileges having been exercised. Principal and
interest payments expected to be paid on the convertible notes are $0 and
$243,000 in 1998 and $0 and $243,000 in 1999, respectively.
As of December 31, 1997 the Company has a total $22,575,000 of cash and
cash equivalents, short-term investments and investments held for sale in
comparison to $21,460,000 of notes payable. UTI and FCC service this debt
through existing cash balances and management fees received from the
insurance subsidiaries. FCC is further able to service this debt through
dividends it may receive from UG. See Note 2 in the notes to the
consolidated financial statements for additional information regarding
dividends.
Since UTI is a holding company, funds required to meet its debt service
requirements and other expenses are primarily provided by its subsidiaries.
On a parent only basis, UTI's cash flow is dependent on revenues from a
management agreement with UII and its earnings received on invested assets
and cash balances. At December 31, 1997, substantially all of the
consolidated shareholders equity presents net assets of its subsidiaries.
Cash requirements of UTI primarily relate to servicing its long-term debt.
The Company's insurance subsidiaries have maintained adequate statutory
capital and surplus and have not used surplus relief or financial
reinsurance, which have come under scrutiny by many state insurance
departments. The payment of cash dividends to shareholders is not legally
restricted. However, insurance company dividend payments are regulated by
the state insurance department where the company is domiciled. UTI is the
ultimate parent of UG through ownership of several intermediary holding
companies. UG can not pay a dividend directly to UTI due to the ownership
structure. However, if UG paid a dividend to its direct parent and each
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subsequent intermediate company within the holding company structure paid a
dividend equal to the amount it received, UTI would receive 42% of the
original dividend paid by UG. Please refer to Note 1 of the Notes to the
Consolidated Financial Statements. UG's dividend limitations are described
below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,000.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners ("NAIC"),
as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting
principles and are intended to reflect a more conservative view by, for
example, requiring immediate expensing of policy acquisition costs. The
achievement of long-term growth will require growth in the statutory
capital of the Company's insurance subsidiaries. The subsidiaries may
secure additional statutory capital through various sources, such as
internally generated statutory earnings or equity contributions by the
Company from funds generated through debt or equity offerings.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. The
risk-based capital formula measures the adequacy of statutory capital and
surplus in relation to investment and insurance risks such as asset
quality, mortality and morbidity, asset and liability matching and other
business factors. The RBC formula is used by state insurance regulators as
an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized.
In addition, the formula defines new minimum capital standards that will
supplement the current system of low fixed minimum capital and surplus
requirements on a state-by-state basis. Regulatory compliance is
determined by a ratio of the insurance company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level RBC, as
defined by the NAIC. Insurance companies below specific trigger points or
ratios are classified within certain levels, each of which requires
specific corrective action.
The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1997, each of the insurance subsidiaries has a Ratio that
is in excess of 3, which is 300% of the authorized control level;
accordingly the insurance subsidiaries meet the RBC requirements.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. In addition, the
Company does not believe that the regulatory initiatives currently under
consideration by various regulatory agencies will have a material adverse
impact on the Company. The Company is not aware of any material pending or
threatened regulatory action with respect to the Company or any of its
subsidiaries. The Company does not believe that any insurance guaranty
fund assessments will be materially different from amounts already provided
for in the financial statements.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
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REGULATORY ENVIRONMENT
The Company's insurance subsidiaries are assessed contributions by life and
health guaranty associations in almost all states to indemnify
policyholders of failed companies. In several states the company may
reduce premium taxes paid to recover a portion of assessments paid to the
states' guaranty fund association. This right of "offset" may come under
review by the various states, and the company cannot predict whether and to
what extent legislative initiatives may affect this right to offset. Also,
some state guaranty associations have adjusted the basis by which they
assess the cost of insolvencies to individual companies. The Company
believes that its reserve for future guaranty fund assessments is
sufficient to provide for assessments related to known insolvencies. This
reserve is based upon management's current expectation of the availability
of this right of offset, known insolvencies and state guaranty fund
assessment bases. However, changes in the basis whereby assessments are
charged to individual companies and changes in the availability of the
right to offset assessments against premium tax payments could materially
affect the company's results.
Currently, the Company's insurance subsidiaries are subject to government
regulation in each of the states in which they conduct business. Such
regulation is vested in state agencies having broad administrative power
dealing with all aspects of the insurance business, including the power to:
(i) grant and revoke licenses to transact business; (ii) regulate and
supervise trade practices and market conduct; (iii) establish guaranty
associations; (iv) license agents; (v) approve policy forms; (vi)
approve premium rates for some lines of business; (vii) establish reserve
requirements; (viii) prescribe the form and content of required financial
statements and reports; (ix) determine the reasonableness and adequacy of
statutory capital and surplus; and (x) regulate the type and amount of
permitted investments. Insurance regulation is concerned primarily with
the protection of policyholders. The Company cannot predict the impact of
any future proposals, regulations or market conduct investigations. The
Company's insurance subsidiaries, USA, UG, APPL and ABE are domiciled in
the states of Ohio, Ohio, West Virginia and Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners ("NAIC"). The NAIC is an association whose membership
consists of the insurance commissioners or their designees of the various
states. The NAIC has no direct regulatory authority over insurance
companies, however its primary purpose is to provide a more consistent
method of regulation and reporting from state to state. This is
accomplished through the issuance of model regulations, which can be
adopted by individual states unmodified, modified to meet the state's own
needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled by
other corporations licensed to transact business within their respective
jurisdictions. The insurance subsidiaries are subject to such legislation
and registered as controlled insurers in those jurisdictions in which such
registration is required. Statutes vary from state to state but typically
require periodic disclosure, concerning the corporation, that controls the
registered insurers and all subsidiaries of such corporation. In addition,
prior notice to, or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 9 in the notes to the consolidated financial
statements), and payment of dividends (see note 2 in the notes to the
consolidated financial statements) in excess of specified amounts by the
insurance subsidiary, within the holding company system, are required.
Each year the NAIC calculates financial ratio results (commonly referred to
as IRIS ratios) for each company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement.
The results are then compared to pre-established normal ranges determined
by the NAIC. Results outside the range typically require explanation to
the domiciliary insurance department.
At year-end 1997, the insurance companies had one ratio outside the normal
range. The ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last three years. A primary cause for
the decrease in premium revenues is related to the potential change in
control of UTI over the last two years to two different parties. During
September of 1996, it was announced that control of UTI would pass to an
unrelated party, but the transaction did not materialize. At this writing,
negotiations are progressing with a different unrelated party for the
change in control of UTI. . Please refer to the Notes to the Consolidated
Financial Statements for additional information. The possible changes and
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resulting uncertainties have hurt the insurance companies' ability to
recruit and maintain sales agents. The industry has experienced a downward
trend in the total number of agents who sell insurance products, and
competition for the top sales producers has intensified. As this trend
appears to continue, the recruiting focus of the Company has been on
introducing quality individuals to the insurance industry through an
extensive internal training program. The Company feels this approach is
conducive to the mutual success of our new recruits and the Company as
these recruits market our products in a professional, company structured
manner.
The NAIC, in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC proposed changes
in the regulations governing insurance company investments and holding
company investments in subsidiaries and affiliates which were adopted by
the NAIC as model laws in 1996. The Company does not presently anticipate
any material adverse change in its business as a result of these changes.
Legislative and regulatory initiatives regarding changes in the regulation
of banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on the Company by altering the competitive
environment for its products. The outcome and timing of any such changes
cannot be anticipated at this time, but the Company will continue to
monitor developments in order to respond to any opportunities or increased
competition that may occur.
The NAIC adopted the Life Illustration Model Regulation. Many states have
adopted the regulation effective January 1, 1997. This regulation requires
products which contain non-guaranteed elements, such as universal life and
interest sensitive life, to comply with certain actuarially established
tests. These tests are intended to target future performance and
profitability of a product under various scenarios. The regulation does
not prevent a company from selling a product that does not meet the various
tests. The only implication is the way in which the product is marketed to
the consumer. A product that does not pass the tests uses guaranteed
assumptions rather than current assumptions in presenting future product
performance to the consumer. The Company conducts an ongoing thorough
review of its sales and marketing process and continues to emphasize its
compliance efforts.
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
This project is not expected to be completed earlier than 1999. Specific
recommendations have been set forth in papers issued by the NAIC for
industry review. The Company is monitoring the process, but the potential
impact of any changes in insurance accounting standards is not yet known.
ACCOUNTING AND LEGAL DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. The
Statement's objective is to simplify the computation of earnings per share,
and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS. Basic
EPS is calculated by dividing income available to common stockholders
(i.e., net income or loss adjusted for preferred stock dividends) by the
weighted-average number of common shares outstanding. Thus, in the most
significant change in current practice, options, warrants, and convertible
securities are excluded from the basic EPS calculation. Further,
contingently issuable shares are included in basic EPS only if all the
necessary conditions for the issuance of such shares have been satisfied by
the end of the period.
Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Income available to common stockholders continues to be
adjusted for assumed conversion of all potentially dilutive securities
using the treasury stock method to calculate the dilutive effect of options
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and warrants. However, unlike the calculation of fully diluted EPS under
previous opinions, a new treasury stock method is applied using the average
market price or the ending market price. Further, prior opinion
requirement to use the modified treasury stock method when the number of
options or warrants outstanding is greater than 20% of the outstanding
shares also has been eliminated. SFAS 128 also includes certain shares
that are contingently issuable; however, the test for inclusion under the
new rules is much more restrictive.
SFAS No. 128 requires companies reporting discontinued operations,
extraordinary items, or the cumulative effect of accounting changes are to
use income from operations as the control number or benchmark to determine
whether potential common shares are dilutive or antidilutive. Only
dilutive securities are to be included in the calculation of diluted EPS.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the Company reported a loss from continuing operations so
any potential issuance of common shares would have an antidilutive effect
on EPS. Consequently, the adoption of SFAS No. 128 did not have an impact
on the Company's financial statement.
The FASB has issued SFAS No. 130 entitled Reporting Comprehensive Income
and SFAS No. 132 Employers' Disclosures about Pensions and Other
Postretirement Benefits. Both of the above statements are effective for
financial statements with fiscal years beginning after December 15, 1997.
SFAS No. 130 defines how to report and display comprehensive income and its
components in a full set of financial statements. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity
as owners.
SFAS No. 132 addresses disclosure requirements for post-retirement
benefits. The statement does not change post-retirement measurement or
recognition issues.
The Company will adopt both SFAS No. 130 and SFAS No. 132 for the 1998
financial statements. Management does not expect either adoption to have a
material impact on the Company's financial statements.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. In addition, the
Company does not believe that the regulatory initiatives currently under
consideration by various regulatory agencies will have a material adverse
impact on the Company. The Company is not aware of any material pending or
threatened regulatory action with respect to the Company or any of its
subsidiaries. The Company does not believe that any insurance guaranty
fund assessments will be materially different from amounts already provided
for in the financial statements.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results. This could have a significant effect on the Company's
business/financial systems as well as products and services, if not
corrected.
The Company established a project to address year 2000 processing concerns
in September of 1996. In 1997 the Company completed the review of the
Company's internally and externally developed software, and made
corrections to all year 2000 non-compliant processing. The Company also
secured verification of current and future year 2000 compliance from all
major external software vendors. In December of 1997, a separate computer
operating environment was established with the system dates advanced to
December of 1999. A parallel model office was established with all dates
in the data advanced to December of 1999. Parallel model office processing
is being performed using dates from December of 1999 to January of 2001, to
insure all year 2000 processing errors have been corrected. Testing should
be completed by the end of the first quarter of 1998. After testing is
completed, periodic regression testing will be performed to monitor
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continuing compliance. By addressing year 2000 compliance in a timely
manner, compliance will be achieved using existing staff and without
significant impact on the Company operationally or financially.
PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the third quarter of 1998.
SUBSEQUENT EVENT
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
Upon completion of the transaction Mr. Correll will own 51% of UTI. Under
the terms of the letter of intent Mr. Correll will buy 2,000,000 authorized
but unissued shares of UTI common stock for $15.00 per share and will also
buy 389,715 shares of UTI common stock, representing stock of UTI and UII,
that UTI purchased during the last eight months in private transactions at
the average price UTI paid for such stock, plus interest, or approximately
$10.00 per share. Mr. Correll also will purchase 66,667 shares of UTI
common stock and $2,560,000 of face amount of convertible bonds (which are
due and payable on any change in control of UTI) in private transactions,
primarily from officers of UTI. Upon completion of the transaction, Mr.
Correll would be the largest shareholder of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from any such statement due to the following important
factors, among other risks and uncertainties inherent in the company's
business:
1. Prevailing interest rate levels, which may affect the ability of the
company to sell its products, the market value of the company's
investments and the lapse ratio of the company's policies,
notwithstanding product design features intended to enhance
persistency of the company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the company's products.
4. Other factors affecting the performance of the company, including, but
not limited to, market conduct claims, insurance industry
insolvencies, stock market performance, and investment performance.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF UTI FOR THE
PERIOD ENDED SEPTEMBER 30, 1998
The purpose of this section is to discuss and analyze the Company's
consolidated results of operations, financial condition and liquidity and
capital resources. This analysis should be read in conjunction with the
consolidated financial statements and related notes which appear elsewhere
in this report. The Company reports financial results on a consolidated
basis. The consolidated financial statements include the accounts of UTI
and its subsidiaries at September 30, 1998.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from any such statement due to the following important
factors, among other risks and uncertainties inherent in the company's
business:
1. Prevailing interest rate levels, which may affect the ability of the
company to sell its products, the market value of the company's
investments and the lapse ratio of the company's policies,
notwithstanding product design features intended to enhance
persistency of the company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the company's products.
4. Other factors affecting the performance of the company, including, but
not limited to, market conduct claims, insurance industry
insolvencies, stock market performance, and investment performance.
RESULTS OF OPERATIONS
(A) REVENUES
Premiums and policy fee revenues, net of reinsurance premiums and policy
fees, decreased 6% and 8% when comparing the three and nine months ended
September 30, 1998 to the same periods in 1997, respectively. The Company
currently writes little new traditional business, consequently, traditional
premiums will decrease as the amount of traditional business in-force
decreases. Collected premiums on universal life and interest sensitive
products is not reflected in premiums and policy revenues because Generally
Accepted Accounting Principles ("GAAP") requires that premiums collected on
these types of products be treated as deposit liabilities rather than
revenue. Unless the Company acquires a block of in-force business or
marketing changes its focus to traditional business, premium revenue will
continue to decline.
Another cause for the decrease in premium revenues is related to the
potential change in control of UTI over the last two years to two different
parties. During September of 1996, it was announced that control of UTI
would pass to an unrelated party, but the change in control did not
materialize. At this writing, a contract is pending with First Southern
Funding "FSF" (FSF is an affiliate of First Southern Bancorp, Inc., a bank
holding company) for the change in control of UTI. Please refer to the
Notes to the Consolidated Financial Statements for additional information.
The possible changes and resulting uncertainties have hurt the insurance
companies' ability to recruit and maintain sales agents. However,
management believes the affiliation with FSF will facilitate long-term
growth opportunities. The expected long-term benefits to UTI are an
increase in capital, which will enable the Company to pursue further growth
through acquisitions. Nationally there is a trend toward consolidation of
the financial service industry with proposed legislation to remove barriers
between banks and insurance companies.
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Net investment income increased 3% when comparing the three months
ended September 30, 1998 to the same period one year-ago. The increase in
the current quarter is due to several factors. The improvement in cash
flow from operations compared to the previous year. The Company changed
banks during 1997, which provided an improvement in yield on cash balances.
Another factor that contributed to the increase is the investment of funds
in mortgage loans. A higher percentage of investments acquired have been
directed to mortgage loans compared to previous periods. These loans
provide an investment yield, which are approximately 3% above the yield
that can be obtained from quality fixed maturities currently available.
Net investment income decreased slightly when comparing the nine months
ended September 30, 1998 to the same period one year ago. The decrease in
net investment income is due to the decrease in invested assets. The
decrease in invested assets and the increase in cash and cash equivalents
is a short-term fluctuation as management positions the Company for the
pending change in control of UTI. The effects of lost investment revenue
are partially offset by the factors discussed in the above quarterly
comparison of investment income.
The Company's investments are generally managed to match related insurance
and policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates is
1% on the "Century 2000" universal life insurance product, which currently
is the Company's primary sales product. The Company monitors investment
yields, and when necessary adjusts credited interest rates on its insurance
products to preserve targeted interest spreads. It is expected that
monitoring of the interest spreads by management will provide the necessary
margin to adequately provide for associated costs on the insurance policies
the Company currently has in force and will write in the future. At the
September 1998 board of directors meeting it was deemed necessary to reduce
interest crediting rates one half of a percentage point on certain
products. This decision was prompted by the overall decline in market
interest rates. The change in credited interest rates affects
approximately $60,000,000 of policy liabilities. The expected savings to
the Company will be approximately $300,000 per year. The change in
credited interest rates is not immediate. The change is effective on the
anniversary of the policy.
The Company had net realized investment losses of $835,488 and $143,015 for
the nine months ended September 30, 1998 and 1997, respectively. The
Company had net realized investment losses of $433,084 and $114,436 for the
three months end September 30, 1998 and 1997, respectively. During third
quarter of 1998 the Company entered into agreements to sell two non-income-
producing properties. The Company recorded a loss of $310,000 based on
these contracts. The foreclosed properties were subsequently sold for book
value. The Company realized a loss of $88,000 on the investment in John
Alden Financial Corporation common stock. Under the terms of an
acquisition agreement between Fortis, Inc. and John Alden all outstanding
common shares of John Alden were acquired. The foreclosure of three
mortgages during second quarter of 1998 resulted in realized losses of
$301,000.
(B) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 8% and 1%
for the nine and three months ended September 30, 1998 as compared to the
same periods one year-ago, respectively. The decrease in life benefits net
of reinsurance is due to the decrease in premium revenues that resulted in
lower benefit reserve increases. In addition, policyholder benefits
decreased due to a decrease in death benefit claims of $1,059,000 for the
nine months ended September 30, 1998 compared to the same period one year-
ago. Policyholder benefits increased due to an increase in death benefit
claims of $270,000 for the three months ended September 30, 1998 compared
to the same period one year-ago. There is no single event that caused
death benefits to increase or decrease. Death claims vary from period to
period and therefore, fluctuations in death benefits are to be expected and
are not considered unusual by management.
In future periods, life benefits should decrease due to the reduction in
credited interest rates. At the September 1998 board of directors meeting
it was deemed necessary to reduce interest crediting rates one half of a
percentage point on certain products. This decision was prompted by the
overall decline in market interest rates. The change in credited interest
rates affects approximately $60,000,000 of policy liabilities. The
expected savings to the Company will be approximately $300,000 per year.
The change in credited interest rates is not immediate. The change is
effective on the anniversary of the policy.
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Operating expenses decreased 17% and 18% for the nine and three months
ended September 30, 1998 as compared to the same periods one year-ago,
respectively. The decrease in operating expenses is due to the decrease in
salaries. The decrease in salaries is due to a 10% reduction in staff
compared to the previous year, including the retirement of an executive
officer.
Interest expense increased 10% for the nine months ended September 30, 1998
as compared to the same period one year-ago. Interest expense decreased 3%
for the three months ended September 30, 1998. The decrease for the third
quarter of 1998 is due to the decrease in notes payable compared to the
previous year. The increase in interest expense for the nine months ended
as of September 30, 1998 compared to one year ago is due to the $4,061,000
of debt incurred on July 31, 1997.
In future periods, interest expense is expected to decrease due to
scheduled principal reductions of notes payable. On November 8, 1998, the
Company prepaid $500,000 of the 1999 principal payment due on the senior
debt. In October 1998, the base interest rate of variable rate debt
decreased one half of one percentage point. This decrease affects
approximately $10,961,000 of the outstanding notes payable as of September
30, 1998. The base rate is defined as the floating daily, variable rate of
interest determined and announced by First of America Bank. Please refer
to Note 3 "Notes Payable" in the Notes to the Consolidated Financial
Statements for more information.
THE PROVISION FOR INCOME TAXES REFLECTED A SIGNIFICANT CHANGE FROM THE SAME
PERIODS ONE YEAR AGO. THIS IS THE RESULT OF CHANGES IN THE DEFERRED TAX
LIABILITY. DEFERRED TAXES ARE ESTABLISHED TO RECOGNIZE FUTURE TAX EFFECTS
ATTRIBUTABLE TO TEMPORARY DIFFERENCES BETWEEN THE FINANCIAL STATEMENTS AND
THE TAX RETURN. AS THESE DIFFERENCES ARE REALIZED IN THE FINANCIAL
STATEMENT OR TAX RETURN, THE DEFERRED INCOME TAX ESTABLISHED ON THE
DIFFERENCE IS RECOGNIZED IN THE FINANCIAL STATEMENTS AS AN INCOME TAX
EXPENSE OR CREDIT. DURING 1997, THE INSURANCE SUBSIDIARIES INCURRED A LOSS
ON THEIR FEDERAL INCOME TAX RETURN THAT WAS CARRIED FORWARD TO FUTURE
PERIODS. A TAX BENEFIT WAS NOT INCURRED IN THE FINANCIAL STATEMENTS AS A
CORRESPONDING ALLOWANCE WAS ESTABLISHED AGAINST THE DEFERRED TAX ASSET
ATTRIBUTABLE TO THE TAX LOSS CARRYFORWARD.
(C) NET INCOME
The improvement in net income for the current periods compared to the
previous year is directly related to the decrease in life benefits and
operating expenses AND THE CHANGE IN DEFERRED INCOME TAXES.
FINANCIAL CONDITION
The financial condition of the Company reflects a 3% increase in
shareholder's equity as of September 30, 1998 compared to December 31,
1997.
Investments and cash and cash equivalents represent approximately 69% and
68% of total assets at September 30, 1998 and December 31, 1997,
respectively. Accordingly, investments are the largest asset group of the
Company. The Company's insurance subsidiaries are regulated by insurance
statutes and regulations as to the type of investments that they are
permitted to make and the amount of funds that may be used for any one type
of investment. In light of these statutes and regulations, and the
Company's business and investment strategy, the Company generally seeks to
invest in United States government and government agency securities and
corporate securities rated investment grade by established nationally
recognized rating organizations.
The liabilities are predominantly long-term in nature and therefore, the
Company invests in long-term fixed maturity investments that are reported
in the financial statements at their amortized cost. The Company has the
ability and intent to hold these investments to maturity; consequently, the
Company does not expect to realize any significant loss from these
investments. The Company does not own any derivative investments or "junk
bonds". As of September 30, 1998, the carrying value of fixed maturity
securities in default as to principal or interest was immaterial in the
context of consolidated assets or shareholders' equity. The Company has
identified securities it may sell and classified them as "investments held
for sale". Investments held for sale are carried at market, with changes
in market value charged directly to shareholders' equity.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has three principal needs for cash - the insurance companies'
contractual obligations to policyholders, the payment of operating expenses
and the servicing of its long-term debt. Cash and cash equivalents as a
percentage of total assets were 8% and 5% as of September 30, 1998, and
December 31, 1997, respectively. Fixed maturities as a percentage of total
invested assets were 82% as of September 30, 1998 and December 31, 1997.
Future policy benefits are primarily long-term in nature and therefore, the
Company's investments are predominantly in long-term fixed maturity
investments such as bonds and mortgage loans which provide sufficient
return to cover these obligations. The Company has the ability and intent
to hold these investments to maturity; consequently, the Company's
investment in long-term fixed maturities is reported in the financial
statements at their amortized cost.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to
cover the Company's unamortized deferred policy acquisition costs with
respect to the policy being surrendered.
Cash provided by (used in) operating activities was $1,750,927 and
($863,768) in 1998 and 1997, respectively. The net cash provided by (used
in) operating activities plus net policyholder contract deposits after the
payment of policyholder withdrawals equaled $3,927,468 in 1998 and
$1,925,294 in 1997. Management utilizes this measurement of cash flows as
an indicator of the performance of the Company's insurance operations,
since reporting regulations require cash inflows and outflows from
universal life insurance products to be shown as financing activities when
reporting on cash flows.
Cash provided by (used in) investing activities was $8,864,581 and
($6,333,788), for 1998 and 1997, respectively. The most significant aspect
of cash provided by (used in) investing activities are the fixed maturity
transactions. The increase in fixed maturities matured is due to the
timing of the investment strategy, which was started six years ago. The
strategy was investing funds into fixed maturity investments with three to
seven year maturities. Over the past several years the difference between
a seven year maturity investment yield compared to a longer period
investment yield was inconsequential. The Company has not directed its
investable funds to so-called "junk bonds" or derivative investments.
Net cash provided by financing activities was $1,669,049 and $2,960,606 for
1998 and 1997, respectively. Policyholder contract deposits decreased 15%
in 1998 compared to 1997. Policyholder contract withdrawals has decreased
13% in 1998 compared to 1997. The change in policyholder contract
withdrawals is not attributable to any one significant event. Factors that
influence policyholder contract withdrawals are fluctuation of interest
rates, competition and other economic factors.
At September 30, 1998, the Company had a total of $20,615,335 in long-term
debt outstanding. Long-term debt principal reductions are approximately
$1.5 million per year over the next several years. The senior debt is
through First of America Bank - NA and is subject to a credit agreement.
The debt bears interest to a rate equal to the "base rate" plus nine-
sixteenths of one percent. The Base rate is defined as the floating daily,
variable rate of interest determined and announced by First of America Bank
from time to time as its "base lending rate". The base rate changed to
8.5% on March 1, 1997 and has remained unchanged through September 30,
1998. Interest is paid quarterly and principal payments of $1,000,000 are
due in May of each year, with a final payment due May 8, 2005. On November
8, 1998, the Company prepaid $500,000 of the May 8,1999, principal payment.
The base interest rate was reduced 0.5% during October 1998. Based on the
interest rate reduction on approximately $10,961,000 of the outstanding
notes payable as of September 30, 1998 it will save $55,000 of interest
expense over a one-year period.
The subordinated debt was incurred June 16, 1992 as a part of the
acquisition of the now dissolved Commonwealth Industries Corporation,
(CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum,
payable semi-annually beginning December 16, 1992. These notes, except for
one $840,000 note, provide for principal payments equal to 1/20th of the
principal balance due with each interest installment beginning December 16,
1997, with a final payment due June 16, 2002. The aforementioned $840,000
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<PAGE>
note provides for a lump sum principal payment due June 16, 2002.
Principal reductions of $516,500 per year are required on the
aforementioned notes.
As of September 30, 1998 the Company has a total $28,390,490 of cash and
cash equivalents, short-term investments and investments held for sale in
comparison to $20,615,335 of notes payable. UTI and FCC service this debt
through existing cash balances and management fees received from the
insurance subsidiaries. FCC is further able to service this debt through
dividends it may receive from UG.
Since UTI is a holding company, funds required to meet its debt service
requirements and other expenses are primarily provided by its subsidiaries.
On a parent only basis, UTI's cash flow is dependent on revenues from a
management agreement with UII and its earnings received on invested assets
and cash balances. At September 30, 1998, substantially all of the
consolidated shareholders equity represents net assets of its subsidiaries.
Cash requirements of UTI primarily relate to servicing its long-term debt.
The Company's insurance subsidiaries have maintained adequate statutory
capital and surplus and have not used surplus relief or financial
reinsurance, which have come under scrutiny by many state insurance
departments. The payment of cash dividends to shareholders is not legally
restricted. However, insurance company dividend payments are regulated by
the state insurance department where the insurance company is domiciled.
UTI is the ultimate parent of UG through ownership of several intermediary
holding companies. UG can not pay a dividend directly to UTI due to the
ownership structure. Please refer to Note 1 of the Notes to the
Consolidated Financial Statements. UG's dividend limitations are described
below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,000.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. In addition, the
Company does not believe that the regulatory initiatives currently under
consideration by various regulatory agencies will have a material adverse
impact on the Company. The Company is not aware of any material pending or
threatened regulatory action with respect to the Company or any of its
subsidiaries. The Company does not believe that any insurance guaranty
fund assessments will be materially different from amounts already provided
for in the financial statements.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results. This could have a significant effect on the Company's
business/financial systems as well as products and services, if not
corrected.
The Company established a project to address year 2000 processing concerns
in September of 1996. In 1997 the Company completed the review of the
Company's internally and externally developed software, and made
corrections to all year 2000 non-compliant processing. The Company also
secured verification of current and future year 2000 compliance from all
major external software vendors. In December of 1997, a separate computer
operating environment was established with the system dates advanced to
December of 1999. A parallel model office was established with all dates
in the data advanced to December of 1999. Parallel model office processing
is being performed using dates from December of 1999 to January of 2001, to
insure all year 2000 processing errors have been corrected. Testing was
completed by the end of the first quarter of 1998. Periodic regression
testing will be performed to monitor continuing compliance. By addressing
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year 2000 compliance in a timely manner, compliance will be achieved using
existing staff and without significant impact on the Company operationally
or financially.
PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI date February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds that are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three-year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter 1998. There can be no assurance that the transaction will
be completed. The pending change in control of UTI is not contingent upon
the merger of UTI and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
ACCOUNTING AND LEGAL DEVELOPMENTS
THE FASB HAS ISSUED SFAS 130 ENTITLED REPORTING COMPREHENSIVE INCOME, WHICH
IS EFFECTIVE FOR FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNING AFTER
DECEMBER 15, 1997. SFAS 130 ESTABLISHES STANDARDS FOR REPORTING AND
PRESENTATION OF COMPREHENSIVE INCOME AND ITS COMPONENTS IN A FULL SET OF
FINANCIAL STATEMENTS. COMPREHENSIVE INCOME INCLUDES ALL CHANGES IN
SHAREHOLDERS' EQUITY, EXCEPT THOSE ARISING FROM TRANSACTIONS WITH
SHAREHOLDERS, AND INCLUDES NET INCOME AND NET UNREALIZED GAINS (LOSSES) ON
SECURITIES. SFAS 130 WAS ADOPTED AS OF JANUARY 1, 1998. ADOPTING THE NEW
STANDARD REQUIRED US TO MAKE ADDITIONAL DISCLOSURES IN THE CONSOLIDATED
FINANCIAL STATEMENTS, BUT DID NOT AFFECT THE COMPANY'S FINANCIAL POSITION
OR RESULTS OF OPERATIONS.
ALL ITEMS OF OTHER COMPREHENSIVE INCOME REFLECT NO RELATED TAX EFFECT,
SINCE THE COMPANY HAS AN ALLOWANCE AGAINST THE COLLECTION OF ANY FUTURE TAX
BENEFITS. IN ADDITION, THERE WAS NO SALE OR LIQUIDATION OF INVESTMENTS
REQUIRING A RECLASSIFICATION ADJUSTMENT FOR THE PERIOD PRESENTED.
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THE FASB HAS ISSUED SFAS 131 ENTITLED, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, WHICH IS EFFECTIVE FOR FINANCIAL
STATEMENTS FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997. SFAS 131
REQUIRES THAT A PUBLIC BUSINESS ENTERPRISE REPORT FINANCIAL AND DESCRIPTIVE
INFORMATION ABOUT ITS REPORTABLE OPERATING SEGMENTS. OPERATING SEGMENTS
ARE COMPONENTS OF AN ENTERPRISE ABOUT WHICH SEPARATE FINANCIAL INFORMATION
IS AVAILABLE THAT IS EVALUATED REGULARLY IN DECIDING HOW TO ALLOCATE
RESOURCES AND IN ASSESSING PERFORMANCE. SFAS 131 WAS ADOPTED AS OF JANUARY
1, 1998. ADOPTING THE NEW STANDARD HAD NO AFFECT ON OUR FINANCIAL POSITION
OR RESULTS OF OPERATIONS, SINCE THE COMPANY HAS NO REPORTABLE OPERATING
SEGMENTS.
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FEDERAL INCOME TAXES
Under current federal income tax laws, qualifying life insurance
companies are, subject to a phase out limitation, entitled to a "small life
insurance company" deduction. This deduction is set at 60% of the life
insurance company's tentative life insurance taxable income up to
$3,000,000. For tentative life insurance taxable income in excess of
$3,000,000, the amount of the deduction is equal to $1,800,000 (the maximum
amount allowed to be deducted) less 15% of the excess of such income over
$3,000,000. In general, the small life insurance company deduction is
computed by treating all life insurance companies that are members of the
same controlled group as one company, whether these companies join in the
filing of a consolidated return or file separate returns. As a result, for
the years 1995, 1996 and 1997, the effective tax rate on life insurance
companies generally ranged from approximately 15% on companies with taxable
income of $3,000,000 or less to approximately 35% on companies with taxable
income of $15,000,000 or more.
Effective in 1984, the provisions of the federal income tax law
relating to the timing of the deduction for policy reserve increases were
amended. This change had the effect of increasing the portion of gain from
operations which is taxed currently.
The Tax Reform Act of 1986 effected major changes in the basic
structure of the federal income tax laws. The Act reduced the highest
general corporate tax rates. As a result, after giving effect to the small
life insurance company deduction, effective tax rates for life insurance
companies generally range from approximately 14% for companies with taxable
income of $3,000,000 or less to 35% for companies with taxable income of
$15,000,000 or more. The Act also created a new alternative minimum tax on
tax preference items of corporations (which includes as a tax preference
item 75% of the excess of adjusted current earnings over alternative
minimum taxable income).
UTI and its subsidiaries have net operating loss carry forwards for
federal income tax purposes totaling $1,493,000 for UTI, $2,135,000 for
FCC, and $3,832,000 for UG expiring as set forth in Note 3 of Notes to
Financial Statements of UTI.
CAPITALIZATION OF UTI AND UII
The following table sets forth the capitalizations on a GAAP basis of
UTI and UII as of September 30, 1998 and UTI's capitalization on a pro
forma combined basis at such date as if the proposed Merger had been
consummated on that date, accounting for the Merger as a purchase of UII by
UTI at a cost of $8,013,684. The pro forma combined capitalization is
based on the exchange ratio of one share of UTI Common Stock for each share
of UII Common Stock assumes that no stockholder dissents and exercises his
rights of appraisal. The table should be read in conjunction with the
financial statements and pro forma financial statements and related notes
of UTI and UII. (* inapplicable).
Outstanding at
September 30, 1998 Pro Forma
UTI UII Combined
<TABLE>
<S> <C> <C> <C>
Short-term debt 0 0 0
Long-term debt, less
current portion 20,615,000 902,000 20,654,000
Shareholders' equity:
Common Stock:
UTI, no par value
(.02 stated value) 33,000 * 49,000
UII, no par value
($.033 stated value) * 46,000 *
Paid-in Additional
Capital 16,420,000 15,242,000 24,379
Unrealized Depreciation
of Investments
Held for Sale (334,000) (218,000) (334,000)
Accumulated Deficit (334,000) (2,674,000) (334,000)
Total Shareholders'
Equity 15,785,000 12,396,000 23,760,000
Total Capitalization $15,785,000 $12,396,000 $23,760,000
</TABLE>
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UTI AND UII
PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL INFORMATION - UNAUDITED
The September 30, 1998 pro forma financial information included in
this Proxy Statement is based on the exchange ratio of one share of UTI
Common Stock for each one share of UII Common Stock and assumes that no
stockholder dissents and exercises his rights of appraisal. The pro forma
balance sheet assumes the transactions took place as of the balance sheet
date and the pro forma statement of operations is prepared as if the
transactions took place as of January 1.
The pro forma financial information included in this Proxy Statement
is not intended to reflect results of operations or the financial position
that would have actually resulted had the Merger been effective on the
dates indicated. The information shown is not necessarily indicative of
the results of future operations. These statements should be read in
conjunction with the financial statements of UTI and UII contained
elsewhere herein.
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UTI/UII PRO FORMA BALANCE SHEET
UNITED TRUST, INC.
UNITED INCOME, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
as of September 30, 1998
(Unaudited)
UTI UII Merger
ASSETS 36,433 36,433 Adjustments Pro Forma
<TABLE>
<S> <C> <C> <C> <C>
Investments:
Fixed maturities
at amortized
cost $ 173,273,717$ 0 $ $ 173,273,717
Investments held
for sale:
Fixed maturities,
at market 1,508,793 0 1,508,793
Equity securities,
at market 1,986,074 0 1,986,074
Mortgage loans on
real estate at
amortized
cost 9,724,950 170,431 9,895,381
Investment real
estate, at cost,
net of accumulated
depreciation 9,283,288 0 9,283,288
Real estate acquired
in satisfaction
of debt 1,646,001 0 1,646,001
Policy loans 13,972,263 0 13,972,263
Short term
investments 224,144 224,144
Other invested
assets 66,212 0 66,212
211,685,442 170,431 0 211,855,873
Cash and cash
equivalents 28,390,490 740,511 29,131,001
Investment in
Affiliates 5,823,726 11,458,930(1)(2)(6)(17,282,656) 0
Accrued investment
income 4,019,454 13,713 4,033,167
Reinsurance receivables:
Future policy
benefits 37,154,221 0 37,154,221
Policy claims and
other
benefits 3,539,631 0 3,539,631
Other accounts and
notes receivable 915,764 864,100 (8) (864,100) 915,764
Cost of insurance
acquired 39,804,518 0 (5) (910,420) 38,894,098
Deferred policy
acquisition costs 9,698,841 0 9,698,841
Costs in excess of
net assets purchased,
net of accumulated
amortization 2,665,309 0 (5)(2,665,309) 0
Property and equipment,
net of accumulated
depreciation 3,259,525 548 3,260,073
Receivable from
affiliate, net 0 33,789 (7) (33,789) 0
Other assets 968,442 18,496 986,938
Total assets $ 347,925,363$ 13,300,518$ (21,756,274)$339,469,607
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy
benefits $ 247,817,394 $ 0$ $ 247,817,394
Policy claims and
benefits
payable 2,086,070 0 2,086,070
Other policyholder
funds 2,263,474 0 2,263,474
Dividend and
endowment
accumulations 15,334,597 0 15,334,597
Income taxes payable:
Current 55,699 0 55,699
Deferred 13,119,824 0 13,119,824
Notes payable 20,615,335 0 (8) (864,100) 19,751,235
Convertible
debentures 0 902,300 902,300
Indebtedness to (from)
affiliates, net 33,789 0 (7) (33,789) 0
Other liabilities 4,178,581 2,072 4,180,653
Total
liabilities 305,504,763 904,372 (897,889) 305,511,246
Minority interests in
consolidated
subsidiaries 26,635,449 0 (3)(16,436,788)10,198,661
Shareholders' equity:
Common stock - no par value,
stated value
$.02 per share. 32,545 45,934 (4)(6)(9) (29,521) 48,958
Additional paid-in
Capital 16,420,441 15,242,365(4)(6)(9)(7,284,229) 24,378,577
Unrealized depreciation of
investments held
for sale (333,656) (218,107) (4) 218,107 (333,656)
Accumulated
deficit (334,179) (2,674,046) (4) 2,674,046 (334,179)
Total shareholders'
Equity 15,785,151 12,396,146 (4,421,597) 23,759,700
Total liabilities and
shareholders'
equity $ 347,925,363$ 13,300,518$ (21,756,274)339,469,607
</TABLE>
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UTI/UII PRO-FORMA INCOME STATEMENT
UNITED TRUST, INC.
UNITED INCOME, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
(Unaudited)
UTI UII Merger
September 30 September 30 Adjustments Pro Forma
<TABLE>
<S> <C> <C> <C> <C>
Revenues:
Premiums and policy $ 24,154,829$ 0 $ $ 24,154,829
Reinsurance premiums
and policy fees (3,568,400) 0 (3,568,400)
Net investment income 11,305,186 98,224 (3) (62,168) 11,341,242
Realized investment gains
and (losses), net (835,488) 0 (835,488)
Other income 495,224 716,002(1)(2)(1,060,470) 150,756
31,551,351 814,226 (1,122,638)31,242,939
Benefits and other expenses:
Benefits, claims and
settlement expenses:
Life 17,588,570 0 17,588,570
Reinsurance benefits
and claims (2,058,464) 0 (2,058,464)
Annuity 1,095,033 0 1,095,033
Dividends to
Policyholders 2,706,633 0 2,706,633
Commissions and
amortization of
deferred policy
acquisition
cost 2,644,751 0 2,644,751
Amortization of cost
of insurance
acquired 1,718,370 0 1,718,370
Operating expenses 6,428,800 468,450(1)(2)(1,060,470) 5,836,780
Interest expense 1,448,988 64,289(3) (62,168) 1,451,109
31,572,681 532,739 (1,122,638)30,982,782
Loss before income
taxes, minority interest
and equity in loss
of investees (21,330) 281,487 0 260,157
Income tax credit 1,001,812 0 1,001,812
Minority interest in loss
of consolidated
subsidiaries (447,072) 0 (6) 377,210 (69,862)
Equity in earnings
of investees 267,737 377,210(4)(5) (644,947) 0
Net income $ 801,147 $ 658,697 $ (267,737)$ 1,192,107
Basic earnings per
share from continuing
operations and
net income $ 0.49 $ 0.47 $ 0.49
Diluted earnings per
share from continuing
operations and
net income $ 0.50 $ 0.51 $ 0.50
Basic weighted average
shares outstanding 1,627,644 1,391,919 2,448,289
Diluted weighted average
shares outstanding 1,834,006 1,428,242 2,690,974
</TABLE>
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UTI/UII PRO-FORMA INCOME STATEMENT 12/31/97
UNITED TRUST, INC.
UNITED INCOME, INC .
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
Merger
UTI UII Adjustments Pro Forma
<TABLE>
<S> <C> <C> <C> <C>
Revenues:
Premiums and
policy fees $ 33,373,950$ 0$ $ 33,373,950
Reinsurance
premiums
and policy fees (4,734,705) 0 (4,734,705)
Net investment
income 14,857,297 109,706 (3) (82,579) 14,884,424
Realized
investment gains
and (losses), net (279,096) 0 (279,096)
Other income 774,884 1,076,416(1)(2)(1,732,872) 118,428
43,992,330 1,186,122 (1,815,451)43,363,001
Benefits and
other expenses:
Benefits, claims and
settlement expenses:
Life 23,644,252 0 23,644,252
Reinsurance benefits
and claims (2,078,982) 0 (2,078,982)
Annuity 1,560,828 0 1,560,828
Dividends to
policyholders 3,929,073 0 3,929,073
Commissions and
amortization of deferred
policy acquisition 3,616,365 0 3,616,365
Amortization of cost
of insurance acquired 2,394,392 0 2,394,392
Operating expenses 9,222,913 823,750(1)(2)(1,732,872)8,313,791
Interest expense 1,816,491 85,155(3) (82,579)1,819,067
44,105,332 908,905 (1,815,451)43,198,786
Loss before income
taxes, minority interest
and equity in loss
of investees (113,002) 277,217 0 164,215
Credit for income taxes (986,229) 0 (986,229)
Minority interest in loss
of consolidated
subsidiaries 563,699 0 (6) (356,533) 207,166
Equity in loss of investee (23,716) (356,533)(4)(5)380,249 0
Net loss $ (559,248)$ (79,316)$ 23,716 $ (614,848)
Net loss per
common share $ (.32)$ (0.06) $ (.25)
Weighted average common
shares outstanding 1,772,870 1,391,996 2,455,774
</TABLE>
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EXPLANATORY NOTES TO PRO FORMA FINANCIAL INFORMATION
A. The pro forma consolidated balance sheet reflects the following
adjustments:
1. Eliminate UII investment in UTG of $11,419,795
2. Eliminate UTI investment in UII of $5,823,726
3. Eliminate minority interest liability for UII ownership of UTG of
$16,436,788
4. Eliminate UII equity accounts:
Common stock $ 45,934
Additional paid in capital $15,242,365
Unrealized depreciation of investments
held for sale $ (218,107)
Accumulated deficit $(2,674,046)
5. Record reduction to intangibles from basis difference in equity
carrying value of UII and UII shareholders equity of $(3,575,729)
Costs in excess of net assets
purchased $(2,665,309)
Cost of insurance acquired $ (910,420)
6. Record as treasury shares 5,508 shares of UTI stock owned by UII
Common stock $ 110
Additional paid in capital $ 39,025
7. Reclassify due to/due from affiliate of 33,789
8. Eliminate UII notes receivable from affiliates of $864,100
9. To record the issuance of 826,153 shares of UTI common stock to
the shareholders of UII at a cost of $8,013,684. Value was
determined using September 30, 1998 book value per share of UTI
common stock of $9.70 per share.
Common stock $ 16,523
Additional paid in capital $ 7,997,161
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UTI/UII PRO-FORMA MERGER
INCOME STATEMENT ELIMINATION ENTRIES
09/30/98
B. The pro forma statement of operations for the nine months ended
September 30, 1998 reflects the following adjustments:
1. Eliminate management fee UII receives from USA of $662,807
2. Eliminate management fee UII pays to UTI Consolidated affiliates of
$397,663
3. Eliminate intercompany interest paid to UII by UTI Consolidated
affiliates of $62,168
4. Eliminate UTI equity in income of UII of $267,737
5. Eliminate UII equity in income of UTG of $377,210
6. Eliminate minority interest in income of UTG established for UII
ownership of $377,210
85
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UTI/UII PRO-FORMA MERGER
INCOME STATEMENT ELIMINATION ENTRIES
12/31/97
C. The pro forma statement of operations for the year ended December 31,
1997 reflects the following adjustments:
1. Eliminate management fee UII receives from USA of $989,295
2. Eliminate management fee UII pays to UTI Consolidated affiliates of
$743,577
3. Eliminate intercompany interest expense of $82,579
4. Eliminate UTI equity in loss of UII of $23,716
5. Eliminate UII equity in loss of UTG of $356,533
6. Eliminate minority interest in loss of UTG established for UII
ownership of $356,533
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MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDERS MATTERS
On June 18, 1990, UTI became a member of NASDAQ. Quotations began on that
date under the symbol UTIN. The following table shows the high and low bid
quotations for each quarterly period during the past two years, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
BID
PERIOD LOW HIGH
1997
First quarter 3 3/4 5 5/8
Second quarter 4 5/8 5 1/4
Third quarter 9 1/4 9 1/2
Fourth quarter 8 8
BID
PERIOD LOW HIGH
1996
First quarter 3 3/4 5 5/8
Second quarter 3 3/4 6 7/8
Third quarter 5 6 7/8
Fourth quarter 3 3/4 7 1/2
On May 13, 1997, UTI effected a 1 for 10 reverse stock split. Fractional
shares received a cash payment on the basis of $1.00 for each old share.
The reverse split was completed to enable UTI to meet new NASDAQ
requirements regarding market value of stock to remain listed on the NASDAQ
market and to increase the market value per share to a level where more
brokers will look at UTI and its stock. Prior period numbers have been
restated to give effect of the reverse split.
CURRENT MARKET MAKERS ARE:
M. H. Meyerson and Company
30 Montgomery Street
Jersey City, NJ 07303
Herzog, Heine, Geduld, Inc.
26 Broadway, 1st Floor
New York, NY 10004
As of December 31, 1997, no cash dividends had been declared on the common
stock of UTI.
See Note 2 in the accompanying consolidated financial statements for
information regarding dividend restrictions.
Number of Common Shareholders as of March 13, 1998 is 5,444.
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BUSINESS OF UII
UII and its affiliates operate principally in the individual life insurance
business. The primary business of UII and its affiliates has been the
servicing of existing insurance business in force, the solicitation of new
insurance business, and the acquisition of other companies in similar lines
of business.
United Income, Inc. ("UII"), was incorporated on November 2, 1987, as an
Ohio corporation. Between March 1988 and August 1990, UII raised a total
of approximately $15,000,000 in an intrastate public offering in Ohio.
During 1990, UII formed a life insurance subsidiary and began selling life
insurance products.
On February 20, 1992, UII and its affiliate, UTI, formed a joint venture,
United Trust Group, Inc., ("UTG"). On June 16, 1992, UII contributed $7.6
million in cash and 100% of the common stock of its wholly owned life
insurance subsidiary. UTI contributed $2.7 million in cash, an $840,000
promissory note and 100% of the common stock of its wholly owned life
insurance subsidiary. After the contributions of cash, subsidiaries, and
the note, UII owns 47% and UTI owns 53% of UTG.
On June 16, 1992, UTG acquired 67% of the outstanding common stock of the
now dissolved Commonwealth Industries Corporation, ("CIC") for a purchase
price of $15,567,000. Following the acquisition, UTG controlled eleven
life insurance subsidiaries. The Company has taken several steps to
streamline and simplify the corporate structure following the acquisitions.
On December 28, 1992, Universal Guaranty Life Insurance Company ("UG") was
the surviving company of a merger with Roosevelt National Life Insurance
Company ("RNLIC"), United Trust Assurance Company ("UTAC"), Cimarron Life
Insurance Company ("CIM") and Home Security Life Insurance Company
("HSLIC"). On June 30, 1993, Alliance Life Insurance Company ("ALLI"), a
subsidiary of UG, was merged into UG.
On July 31, 1994, Investors Trust Assurance Company ("ITAC") was merged
into Abraham Lincoln Insurance Company ("ABE").
On August 15, 1995, the shareholders of CIC, ITI, and UGIC voted to
voluntarily liquidate each of the companies and distribute the assets to
the shareholders (consisting solely of common stock of their respective
subsidiary). As a result, the shareholders of the liquidated companies
became shareholders of FCC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders. Neither UTI nor UII have
any other significant holdings or business dealings. The Board of
Directors of each company thus concluded a merger of the two companies
would be in the best interests of the shareholders. The merger will result
in certain cost savings, primarily related to costs associated with
maintaining a corporation in good standing in the states in which it
transacts business. A vote of the shareholders of UTI and UII regarding
the proposed merger is anticipated to occur sometime during the third
quarter of 1998.
The holding companies within the group, UTI, UII, UTG and FCC, are all life
insurance holding companies. These companies became members of the same
affiliated group through a history of acquisitions in which life insurance
companies were involved. The focus of the holding companies is the
acquisition of other companies in similar lines of business and management
of the insurance subsidiaries. The companies have no activities outside
the life insurance focus.
The insurance companies of the group, UG, USA, APPL and ABE, all operate in
the individual life insurance business. The primary focus of these
companies has been the servicing of existing insurance business in force
and the solicitation of new insurance business.
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
Under the terms of the letter of intent, Mr. Correll will buy 2,000,000
authorized but unissued shares of UTI common stock for $15.00 per share and
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will also buy 389,715 shares of UTI common stock, representing stock of UTI
and UII, that UTI purchased during the last eight months in private
transactions at the average price UTI paid for such stock, plus interest,
or approximately $10.00 per share. Mr. Correll also will purchase 66,667
shares of UTI common stock and $2,560,000 of face amount of convertible
bonds (which are due and payable on any change in control of UTI) in
private transactions, primarily from officers of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
PRODUCTS
The Company's portfolio consists of two universal life insurance products.
Universal life insurance is a form of permanent life insurance that is
characterized by its flexible premiums, flexible face amounts, and
unbundled pricing factors. The primary universal life insurance product is
referred to as the "Century 2000". This product was introduced to the
marketing force in 1993 and has become the cornerstone of current
marketing. This product has a minimum face amount of $25,000 and currently
credits 6% interest with a guaranteed rate of 4.5% in the first 20 years
and 3% in years 21 and greater. The policy values are subject to a $4.50
monthly policy fee, an administrative load and a premium load of 6.5% in
all years. The premium and administrative loads are a general expense
charge which is added to a policy's net premium to cover the insurer's cost
of doing business. A premium load is assessed upon the receipt of a
premium payment. An administrative load is a monthly maintenance charge.
The administrative load and surrender charge are based on the issue age,
sex and rating class of the policy. A surrender charge is effective for
the first 14 policy years. In general, the surrender charge is very high
in the first couple of years and then declines to zero at the end of 14
years.. Policy loans are available at 7% interest in advance. The
policy's accumulated fund will be credited the guaranteed interest rate in
relation to the amount of the policy loan.
The second universal life product referred to as the "UL90A", has a minimum
face amount of $25,000. The administrative load is based on the issue age,
sex and rating class of the policy. Policy fees vary from $1 per month in
the first year to $4 per month in the second and third years and $3 per
month each year thereafter. The UL90A currently credits 5.5% interest with
a 4.5% guaranteed interest rate. Partial withdrawals, subject to a
remaining minimum $500 cash surrender value and a $25 fee, are allowed once
a year after the first duration. Policy loans are available at 7% interest
in advance. The policy's accumulated fund will be credited the guaranteed
interest rate in relation to the amount of the policy loan. Surrender
charges are based on a percentage of target premium starting at 120% for
years 1-5 then grading downward to zero in year 15. This policy contains a
guaranteed interest credit bonus for the long term policyholder. From
years 10 through 20, additional interest bonuses are earned with a total in
the twentieth year of 1.375%. The bonus is calculated from the policy
issue date and is contractually guaranteed.
The Company's actual experience for earned interest, persistency and
mortality vary from the assumptions applied to pricing and for determining
premiums. Accordingly, differences between the Company's actual experience
and those assumptions applied may impact the profitability of the Company.
The minimum interest spread between earned and credited rates is 1% on the
"Century 2000" universal life insurance product. The Company monitors
investment yields, and when necessary adjusts credited interest rates on
its insurance products to preserve targeted interest spreads. Credited
rates are reviewed and established by the Board of Directors of the
respective life insurance affiliates.
The premium rates are competitive with other insurers doing business in the
states in which the Company is marketing its products.
The Company markets other products, none of which is significant to
operations. The Company has a variety of policies in force different from
those which are currently being marketed. The previously defined Universal
life and interest sensitive whole life, which is a type of indeterminate
premium life insurance which provides that the policy's cash value may be
greater than that guaranteed if changing assumptions warrant an increase,
account for approximately 46% of the insurance in force. Approximately 29%
of the insurance in force is participating business, which represents
policies under which the policyowner shares in the insurance companies
divisible surplus. The Company's average persistency rate for its policies
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in force for 1997 and 1996 has been 89.4% and 87.9%, respectively. The
Company does not anticipate any material fluctuations in these rates in the
future that may result from competition.
Interest-sensitive life insurance products have characteristics similar to
annuities with respect to the crediting of a current rate of interest at or
above a guaranteed minimum rate and the use of surrender charges to
discourage premature withdrawal of cash values. Universal life insurance
policies also involve variable premium charges against the policyholder's
account balance for the cost of insurance and administrative expenses.
Interest-sensitive whole life products generally have fixed premiums.
Interest-sensitive life insurance products are designed with a combination
of front-end loads, periodic variable charges, and back-end loads or
surrender charges. Traditional life insurance products have premiums and
benefits predetermined at issue; the premiums are set at levels that are
designed to exceed expected policyholder benefits and Company expenses.
Participating business is traditional life insurance with the added feature
of an annual return of a portion of the premium paid by the policyholder
through a policyholder dividend. This dividend is set annually by the
Board of Directors of each insurance company and is completely
discretionary.
MARKETING
The Company markets its products through separate and distinct agency
forces. The Company has approximately 45 captive agents who actively write
new business, and 15 independent agents who primarily service their
existing customers. Captive agents work under an ordinary agency
distribution system which relies on career agents to sell and service
insurance and annuity policies of a single company. Independent agents
work under a brokerage distribution system which relies on brokers to
distribute the insurance and annuity policies of more than one company.
Both captive and independent agents work on a contractual basis and are
paid commissions on a percentage of premiums written. No individual sales
agent accounted for over 10% of the Company's premium volume in 1997. The
Company's sales agents do not have the power to bind the Company.
Marketing is based on referrals from existing policyholders and new
prospect lists obtained from newly recruited sales agents. Recruiting of
sales agents is based on referrals from existing agents and the invitation
to attend our Company's comprehensive training school. The industry has
experienced a downward trend in the total number of agents who sell
insurance products, and competition for the top sales producers has
intensified. As this trend appears to continue, the recruiting focus of
the Company has been on introducing quality individuals to the insurance
industry through an extensive internal training program. The Company feels
this approach is conducive to the mutual success of our new recruits and
the Company as these recruits market our products in a professional,
company structured manner.
New sales are marketed by UG and USA through their agency forces using
contemporary sales approaches with personal computer illustrations.
Current marketing efforts are primarily focused on the Midwest region.
USA is licensed in Illinois, Indiana and Ohio. During 1997, Ohio accounted
for 99% of USA's direct premiums collected.
ABE is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1997, Illinois and Indiana accounted for 46% and 32%,
respectively of ABE's direct premiums collected.
APPL is licensed in Alabama, Arizona, Arkansas, Colorado, Georgia,
Illinois, Indiana, Kansas, Kentucky, Louisiana, Missouri, Montana,
Nebraska, Ohio, Oklahoma, Pennsylvania, Tennessee, Utah, Virginia, West
Virginia and Wyoming. During 1997, West Virginia accounted for 95% of
APPL's direct premiums collected.
UG is licensed in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma,
Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin.
During 1997, Illinois accounted for 33%, and Ohio accounted for 14% of
direct premiums collected. No other state accounted for more than 7% of
direct premiums collected in 1997.
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In 1997 $38,471,452 of total direct premium was written by USA, ABE, APPL
and UG. Ohio accounted for 35% , Illinois accounted for 21%, and West
Virginia accounted for 10% of total direct premiums collected.
New business production has decreased 15% from 1995 to 1996 and 43% from
1996 to 1997. Several factors have had a significant impact on new
business production. Over the last two years there has been the
possibility of a change in control of UTI. In September of 1996, an
agreement was reached effecting a change in control of UTI to an unrelated
party. The transaction did not materialize. At this writing negotiations
are progressing with a different unrelated party for change in control of
UTI. Please refer to the Notes to the Consolidated Financial Statements
for additional information. The possible changes in control, and the
uncertainty surrounding each potential event, have hurt the insurance
Companies' ability to attract and maintain sales agents. In addition,
increased competition for consumer dollars from other financial
institutions, product Illustration guideline changes by State Insurance
Departments, and a decrease in the total number of insurance sales agents
in the industry, have all had an impact, given the relatively small size of
the Company.
Management recognizes the aforementioned challenges and is responding. The
potential change in control of the Company is progressing, bringing the
possibility for future growth, efforts are being made to introduce
additional products, and the recruitment of quality individuals for
intensive sales training, are directed at reversing current marketing
trends.
UNDERWRITING
The underwriting procedures of the insurance affiliates are established by
management. Insurance policies are issued by the Company based upon
underwriting practices established for each market in which the Company
operates. Most policies are individually underwritten. Applications for
insurance are reviewed to determine additional information required to make
an underwriting decision, which depends on the amount of insurance applied
for and the applicant's age and medical history. Additional information
may include inspection reports, medical examinations, statements from
doctors who have treated the applicant in the past and, where indicated,
special medical tests. After reviewing the information collected, the
Company either issues the policy as applied for or with an extra premium
charge because of unfavorable factors or rejects the application.
Substandard risks may be referred to reinsurers for full or partial
reinsurance of the substandard risk.
The insurance affiliates require blood samples to be drawn with individual
insurance applications for coverage over $45,000 (age 46 and above) or
$95,000 (age 16-45). Blood samples are tested for a wide range of chemical
values and are screened for antibodies to the HIV virus. Applications also
contain questions permitted by law regarding the HIV virus which must be
answered by the proposed insureds.
RESERVES
The applicable insurance laws under which the insurance affiliates operate
require that each insurance company report policy reserves as liabilities
to meet future obligations on the policies in force. These reserves are
the amounts which, with the additional premiums to be received and interest
thereon compounded annually at certain assumed rates, are calculated in
accordance with applicable law to be sufficient to meet the various policy
and contract obligations as they mature. These laws specify that the
reserves shall not be less than reserves calculated using certain mortality
tables and interest rates.
Policy reserve liabilities for traditional life insurance and accident and
health insurance policy benefits are computed using a net level method,
where policy reserves are established on a consistent and uniform basis.
These liabilities include assumptions as to investment yields, mortality,
withdrawals, and other assumptions based on the life insurance affiliates'
experience adjusted to reflect anticipated trends and to include provisions
for possible unfavorable deviations. The Company makes these assumptions
at the time the contract is issued or, in the case of contracts acquired by
purchase, at the purchase date. Benefit reserves for traditional life
insurance policies include certain deferred profits on limited-payment
policies that are being recognized in income over the policy term. Policy
benefit claims are charged to expense in the period that the claims are
incurred. Current mortality rate assumptions are based on 1975-80 select
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and ultimate tables. Withdrawal rate assumptions are based upon Linton B
or Linton C, which are industry standard actuarial tables for forecasting
assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life
insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges.
Policy benefits and claims that are charged to expense include benefit
claims in excess of related policy account balances. Interest crediting
rates for universal life and interest sensitive products range from 5.0% to
6.0% in each of the years 1997, 1996 and 1995.
REINSURANCE
As is customary in the insurance industry, the insurance affiliates cede
insurance to other insurance companies under reinsurance agreements.
Reinsurance agreements are intended to limit a life insurer's maximum loss
on a large or unusually hazardous risk or to obtain a greater
diversification of risk. The ceding insurance company remains primarily
liable with respect to ceded insurance should any reinsurer be unable to
meet the obligations assumed by it, however it is the practice of insurers
to reduce their exposure to loss to the extent that they have been
reinsured with other insurance companies. The Company sets a limit on the
amount of insurance retained on the life of any one person. The Company
will not retain more than $125,000, including accidental death benefits, on
any one life. At December 31, 1997, the Company had insurance in force of
$3.692 billion of which approximately $1.022 billion was ceded to
reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The
Company believes the assuming companies are able to honor all contractual
commitments, based on the Company's periodic reviews of their financial
statements, insurance industry reports and reports filed with state
insurance departments.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover all new business of the Company.
The agreements are a yearly renewable term ("YRT") treaty where the Company
cedes amounts above its retention limit of $100,000 with a minimum cession
of $25,000.
One of the Company's insurance subsidiaries (UG) entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best assigned FILIC a Financial Performance Rating (FPR) of 7 (Strong)
on a scale of 1 to 9. A.M. Best assigned a Best's Rating of A++ (Superior)
to The Guardian Life Insurance Company of America ("Guardian"), parent of
FILIC, based on the consolidated financial condition and operating
performance of the company and its life/health affiliates. During 1997,
FILIC changed its name to Park Avenue Life Insurance Company ("PALIC").
The agreement with PALIC accounts for approximately 65% of the reinsurance
receivables as of December 31, 1997.
INVESTMENTS
At December 31, 1997, substantially all of the assets of UII represent
investments in or receivables from affiliates. UII does own one mortgage
loan as of December 31, 1997. The mortgage loan is in good standing.
Interest income was derived from mortgage loans and cash and cash
equivalents.
COMPETITION
The insurance business is a highly competitive industry and there are a
number of other companies, both stock and mutual, doing business in areas
where the Company operates. Many of these competing insurers are larger,
have more diversified lines of insurance coverage, have substantially
greater financial resources and have a greater number of agents. Other
significant competitive factors include policyholder benefits, service to
policyholders, and premium rates.
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The insurance industry is a mature industry. In recent years, the industry
has experienced virtually no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products.
The products offered (see Products) are similar to those offered by other
major companies. The product features are regulated by the states and are
subject to extensive competition among major insurance organizations. UII
believes a strong service commitment to policyholders, efficiency and
flexibility of operations, timely service to the agency force and the
expertise of its key executives help minimize the competitive pressures of
the insurance industry.
The industry has experienced a downward trend in the total number of agents
who sell insurance products, and competition for the top sales producers
has intensified. As this trend appears to continue, the recruiting focus
of the Company has been on introducing quality individuals to the insurance
industry through an extensive internal training program. UII feels this
approach is conducive to the mutual success of our new recruits and UII as
these recruits market our products in a professional, company structured
manner.
GOVERNMENT REGULATION
UII's insurance affiliates are assessed contributions by life and health
guaranty associations in almost all states to indemnify policyholders of
failed companies. In several states the company may reduce premium taxes
paid to recover a portion of assessments paid to the states' guaranty fund
association. This right of "offset" may come under review by the various
states, and the company cannot predict whether and to what extent
legislative initiatives may affect this right to offset. Also, some state
guaranty associations have adjusted the basis by which they assess the cost
of insolvencies to individual companies. UII believes that its reserve for
future guaranty fund assessments is sufficient to provide for assessments
related to known insolvencies. This reserve is based upon management's
current expectation of the availability of this right of offset, known
insolvencies and state guaranty fund assessment bases. However, changes in
the basis whereby assessments are charged to individual companies and
changes in the availability of the right to offset assessments against
premium tax payments could materially affect the UII's results.
Currently, UII's insurance affiliates are subject to government regulation
in each of the states in which they conduct business. Such regulation is
vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including the power to: (i) grant and
revoke licenses to transact business; (ii) regulate and supervise trade
practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) approve premium rates for
some lines of business; (vii) establish reserve requirements; (viii)
prescribe the form and content of required financial statements and
reports; (ix) determine the reasonableness and adequacy of statutory
capital and surplus; and (x) regulate the type and amount of permitted
investments. Insurance regulation is concerned primarily with the
protection of policyholders. UII cannot predict the form of any future
proposals or regulation. The Company's insurance affiliates, USA, UG, APPL
and ABE are domiciled in the states of Ohio, Ohio, West Virginia and
Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners ("NAIC"). The NAIC is an association whose membership
consists of the insurance commissioners or their designees of the various
states. The NAIC has no direct regulatory authority reporting from state
to state. This is accomplished through the issuance of model regulations,
which can be adopted by individual states unmodified, modified to meet the
state's own needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled by
other corporations licensed to transact business within their respective
jurisdictions. The insurance affiliates are subject to such legislation
and registered as controlled insurers in those jurisdictions in which such
registration is required. Statutes vary from state to state but typically
require periodic disclosure concerning the corporation that controls the
registered insurers and all subsidiaries of such corporation. In addition,
prior notice to, or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 9 of the Notes to the Financial Statements), and
payment of dividends (see Note 2 of the Notes to the Financial Statements)
in excess of specified amounts by the insurance subsidiary within the
holding company system are required.
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Each year the NAIC calculates financial ratio results (commonly referred to
as IRIS ratios) for each company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement.
The results are then compared to pre-established normal ranges determined
by the NAIC. Results outside the range typically require explanation to
the domiciliary insurance department.
At year end 1997, the insurance companies had one ratio outside the normal
range. The ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last three years. The cause for the
decrease in premium income is related to the possible change in control of
UTI over the last two years to two different parties. At year end 1996 it
was announced that UTI was to be acquired by an unrelated party, but the
sale did not materialize. At this writing negotiations are progressing
with a different unrelated party for the change in control of UTI. Please
refer to the Notes to the Consolidated Financial Statements for additional
information. The possible changes in control over the last two years have
hurt the insurance companies' ability to recruit new agents. The active
agents were apprehensive due to uncertainties in relation to the change in
control of UTI. In recent years, the industry experienced a decline in the
total number of agents selling insurance products and therefore competition
has increased for quality agents. Accordingly, new business production
decreased significantly over the last two years.
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners ("NAIC"),
as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting
principles and are intended to reflect a more conservative view by, for
example, requiring immediate expensing of policy acquisition costs. The
achievement of long-term growth will require growth in the statutory
capital of the Company's insurance affiliates. The affiliates may secure
additional statutory capital through various sources, such as internally
generated statutory earnings or equity contributions by the Company from
funds generated through debt or equity offerings.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. The
risk-based capital formula measures the adequacy of statutory capital and
surplus in relation to investment and insurance risks such as asset
quality, mortality and morbidity, asset and liability matching and other
business factors. The RBC formula is used by state insurance regulators as
an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized.
In addition, the formula defines new minimum capital standards that will
supplement the current system of low fixed minimum capital and surplus
requirements on a state-by-state basis. Regulatory compliance is
determined by a ratio of the insurance company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level RBC, as
defined by the NAIC. Insurance companies below specific trigger points or
ratios are classified within certain levels, each of which requires
specific corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1997, each of the insurance affiliates has a Ratio that is
in excess of 3, which is 300% of the authorized control level; accordingly
the insurance affiliates meet the RBC requirements.
The NAIC, in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC proposed changes
in the regulations governing insurance company investments and holding
company investments in subsidiaries and affiliates which were adopted by
the NAIC as model laws in 1996. UII and its affiliates do not presently
anticipate any material adverse change in its business as a result of these
changes.
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Legislative and regulatory initiatives regarding changes in the regulation
of banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on the company by altering the competitive
environment for its products. The outcome and timing of any such changes
cannot be anticipated at this time, but the company will continue to
monitor developments in order to respond to any opportunities or increased
competition that may occur.
The NAIC adopted the Life Illustration Model Regulation. Many states have
adopted the regulation effective January 1, 1997. This regulation requires
products which contain non-guaranteed elements, such as universal life and
interest sensitive life, to comply with certain actuarially established
tests. These tests are intended to target future performance and
profitability of a product under various scenarios. The regulation does
not prevent a company from selling a product that does not meet the various
tests. The only implication is the way in which the product is marketed to
the consumer. A product that does not pass the tests uses guaranteed
assumptions rather than current assumptions in presenting future product
performance to the consumer. UII conducts an ongoing thorough review of
its sales and marketing process and continues to emphasize its compliance
efforts.
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
This project is not expected to be completed earlier than 1999. Specific
recommendations have been set forth in papers issued by the NAIC for
industry review. The Company is monitoring the process, but the potential
impact of any changes in insurance accounting standards is not yet known.
EMPLOYEES
UII has no employees of its own. There are approximately 90 persons who
are employed by the UII's affiliates.
PROPERTIES
UII leases approximately 1,951 square feet of office space at 2500
Corporate Exchange Drive, Suite 345, Columbus, Ohio 43231. The lease
expires June 30, 1999 with annual lease rent of $23,000 unadjusted for
additional rent for the UII's pro rata share of building taxes, operating
expenses and management expenses. Under the current lease agreement, UII
will pay a minimum of $35,000 through the remaining term of the lease. The
rent expense will be approximately $35,000 for 1998. The lease contains no
renewal or purchase option clause. The leased space cannot be sublet
without written approval of lessor. Rent expense for 1997, 1996 and 1995
was approximately $35,000, $61,000 and $69,000, respectively.
LEGAL PROCEEDINGS
UII and its affiliates are named as defendants in a number of legal actions
arising primarily from claims made under insurance policies. Those actions
have been considered in establishing the UII's liabilities. Management is
of the opinion that the settlement of those actions will not have a
material adverse effect on the Company's financial position or results of
operations.
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BUSINESS OF UTI
The Registrant and its subsidiaries (the "Company") operate principally in
the individual life insurance business. The primary business of the
Company has been the servicing of existing insurance business in force, the
solicitation of new insurance business, and the acquisition of other
companies in similar lines of business.
United Trust, Inc., ("UTI") was incorporated December 14, 1984, as an
Illinois corporation. During the next two and a half years, UTI was
engaged in an intrastate public offering of its securities, raising over
$12,000,000 net of offering costs. In 1986, UTI formed a life insurance
subsidiary, United Trust Assurance Company ("UTAC"), and by 1987 began
selling life insurance products.
United Income, Inc. ("UII"), an affiliated company, was incorporated on
November 2, 1987, as an Ohio corporation. Between March 1988 and August
1990, UII raised a total of approximately $15,000,000 in an intrastate
public offering in Ohio. During 1990, UII formed a life insurance
subsidiary, United Security Assurance (USA), and began selling life
insurance products.
UTI currently owns 41% of the outstanding common stock of UII and accounts
for its investment in UII using the equity method.
On February 20, 1992, UTI and UII, formed a joint venture, United Trust
Group, Inc., ("UTG"). On June 16, 1992, UTI contributed $2.7 million in
cash, an $840,000 promissory note and 100% of the common stock of its
wholly owned life insurance subsidiary, (UTAC). UII contributed $7.6
million in cash and 100% of its life insurance subsidiary, (USA), to UTG.
After the contributions of cash, subsidiaries, and the note, UII owns 47%
and UTI owns 53% of UTG.
On June 16, 1992, UTG acquired 67% of the outstanding common stock of the
now dissolved Commonwealth Industries Corporation, ("CIC") for a purchase
price of $15,567,000. Following the acquisition UTI controlled eleven life
insurance subsidiaries. The Company has taken several steps to streamline
and simplify the corporate structure following the acquisitions.
On December 28, 1992, Universal Guaranty Life Insurance Company ("UG") was
the surviving company of a merger with Roosevelt National Life Insurance
Company ("RNLIC"), United Trust Assurance Company ("UTAC"), Cimarron Life
Insurance Company ("CIM") and Home Security Life Insurance Company
("HSLIC"). On June 30, 1993, Alliance Life Insurance Company ("ALLI"), a
subsidiary of UG, was merged into UG.
On July 31, 1994, Investors Trust Assurance Company ("ITAC") was merged
into Abraham Lincoln Insurance Company ("ABE").
On August 15, 1995, the shareholders of CIC, Investors Trust, Inc.,
("ITI"), and Universal Guaranty Investment Company, ("UGIC"), all
intermediate holding companies within the UTI group, voted to voluntarily
liquidate each of the companies and distribute the assets to the
shareholders (consisting solely of common stock of their respective
subsidiary). As a result, the shareholders of the liquidated companies
became shareholders of FCC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders. Neither UTI nor UII have
any other significant holdings or business dealings. The Board of
Directors of each company thus concluded a merger of the two companies
would be in the best interests of the shareholders. The merger will result
in certain cost savings, primarily related to costs associated with
maintaining a corporation in good standing in the states in which it
transacts business. A vote of the shareholders of UTI and UII regarding
the proposed merger is anticipated to occur sometime during the third
quarter of 1998.
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<PAGE>
The holding companies within the group, UTI, UII UTG and FCC, are all
life insurance holding companies.
These companies became members of the same affiliated group through a
history of acquisitions in which life insurance companies were involved.
The focus of the holding companies is the acquisition of other companies in
similar lines of business and management of the insurance subsidiaries.
The companies have no activities outside the life insurance focus.
The insurance companies of the group, UG, USA, APPL and ABE, all operate in
the individual life insurance business. The primary focus of these
companies has been the servicing of existing insurance business in force
and the solicitation of new insurance business.
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
Under the terms of the letter of intent Mr. Correll will buy 2,000,000
authorized but unissued shares of UTI common stock for $15.00 per share and
will also buy 389,715 shares of UTI common stock, representing stock of UTI
and UII, that UTI purchased during the last eight months in private
transactions at the average price UTI paid for such stock, plus interest,
or approximately $10.00 per share. Mr. Correll also will purchase 66,667
shares of UTI common stock and $2,560,000 of face amount of convertible
bonds (which are due and payable on any change in control of UTI) in
private transactions, primarily from officers of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
PRODUCTS
The Company's portfolio consists of two universal life insurance products.
Universal life insurance is a form of permanent life insurance that is
characterized by its flexible premiums, flexible face amounts, and
unbundled pricing factors. The primary universal life insurance product is
referred to as the "Century 2000". This product was introduced to the
marketing force in 1993 and has become the cornerstone of current
marketing. This product has a minimum face amount of $25,000 and currently
credits 6% interest with a guaranteed rate of 4.5% in the first 20 years
and 3% in years 21 and greater. The policy values are subject to a $4.50
monthly policy fee, an administrative load and a premium load of 6.5% in
all years. The premium and administrative loads are a general expense
charge which is added to a policy's net premium to cover the insurer's cost
of doing business. A premium load is assessed upon the receipt of a
premium payment. An administrative load is a monthly maintenance The
administrative load and surrender charge are based on the issue age, sex
and rating class of the policy. A surrender charge is effective for the
first 14 policy years. In general, the surrender charge is very high in
the first couple of years and then declines to zero at the end of 14 years.
Policy loans are available at 7% interest in advance. The policy's
accumulated fund will be credited the guaranteed interest rate in relation
to the amount of the policy loan.
The second universal life product referred to as the "UL90A", has a minimum
face amount of $25,000. The administrative load is based on the issue age,
sex and rating class of the policy. Policy fees vary from $1 per month in
the first year to $4 per month in the second and third years and $3 per
month each year thereafter. The UL90A currently credits 5.5% interest with
a 4.5% guaranteed interest rate. Partial withdrawals, subject to a
remaining minimum $500 cash surrender value and a $25 fee, are allowed once
a year after the first duration. Policy loans are available at 7% interest
in advance. The policy's accumulated fund will be credited the guaranteed
interest rate in relation to the amount of the policy loan. Surrender
charges are based on a percentage of target premium starting at 120% for
years 1-5 then grading downward to zero in year 15. This policy contains a
guaranteed interest credit bonus for the long-term policyholder. From
years 10 through 20, additional interest bonuses are earned with a total in
the twentieth year of 1.375%. The bonus is calculated from the policy
issue date and is contractually guaranteed.
The Company's actual experience for earned interest, persistency and
mortality vary from the assumptions applied to pricing and for determining
premiums. Accordingly, differences between the Company's actual experience
and those assumptions applied may impact the profitability of the Company.
The minimum interest spread between earned and credited rates is 1% on the
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<PAGE>
"Century 2000" universal life insurance product. The Company monitors
investment yields, and when necessary adjusts credited interest rates on
its insurance products to preserve targeted interest spreads. Credited
rates are reviewed and established by the Board of Directors of the
respective life insurance subsidiaries.
The premium rates are competitive with other insurers doing business in the
states in which the Company is marketing its products.
The Company markets other products, none of which is significant to
operations. The Company has a variety of policies in force different from
those which are currently being marketed. The previously defined Universal
life and interest sensitive whole life, which is a type of indeterminate
premium life insurance which provides that the policy's cash value may be
greater than that guaranteed if changing assumptions warrant an increase,
business account for approximately 46% of the insurance in force.
Approximately 29% of the insurance in force is participating business,
which represents policies under which the policyowner shares in the
insurance companies divisible surplus. The Company's average persistency
rate for its policies in force for 1997 and 1996 has been 89.4% and 87.9%,
respectively. The Company does not anticipate any material fluctuations in
these rates in the future that may result from competition.
Interest-sensitive life insurance products have characteristics similar to
annuities with respect to the crediting of a current rate of interest at or
above a guaranteed minimum rate and the use of surrender charges to
discourage premature withdrawal of cash values. Universal life insurance
policies also involve variable premium charges against the policyholder's
account balance for the cost of insurance and administrative expenses.
Interest-sensitive whole life products generally have fixed premiums.
Interest-sensitive life insurance products are designed with a combination
of front-end loads, periodic variable charges, and back-end loads or
surrender charges. Traditional life insurance products have premiums and
benefits predetermined at issue; the premiums are set at levels that are
designed to exceed expected policyholder benefits and Company expenses.
Participating business is traditional life insurance with the added feature
of an annual return of a portion of the premium paid by the policyholder
through a policyholder dividend. This dividend is set annually by the
Board of Directors of each insurance company and is completely
discretionary.
MARKETING
The Company markets its products through separate and distinct agency
forces. The Company has approximately 45 captive agents who actively write
new business, and 15 independent agents who primarily service their
existing customers. Captive agents work under an ordinary agency
distribution system which relies on career agents to sell and service
insurance and annuity policies of a single company. Independent agents
work under a brokerage distribution system which relies on brokers to
distribute the insurance and annuity policies of more than one company.
Both captive and independent agents work on a contractual basis and are
paid commissions on a percentage of premiums written. No individual sales
agent accounted for over 10% of the Company's premium volume in 1997. The
Company's sales agents do not have the power to bind the Company.
Marketing is based on referrals from existing policyholders and new
prospect lists obtained from newly recruited sales agents. Recruiting of
sales agents is based on referrals from existing agents and the invitation
to attend our Company's comprehensive training school. The industry has
experienced a downward trend in the total number of agents who sell
insurance products, and competition for the top sales producers has
intensified. As this trend appears to continue, the recruiting focus of
the Company has been on introducing quality individuals to the insurance
industry through an extensive internal training program. The Company feels
this approach is conducive to the mutual success of our new recruits and
the Company as these recruits market our products in a professional,
company structured manner.
New sales are marketed by UG and USA through their agency forces using
contemporary sales approaches with personal computer illustrations.
Current marketing efforts are primarily focused on the Midwest region.
USA is licensed in Illinois, Indiana and Ohio. During 1997, Ohio accounted
for 99% of USA's direct premiums collected.
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ABE is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1997, Illinois and Indiana accounted for 46% and 32%,
respectively of ABE's direct premiums collected.
APPL is licensed in Alabama, Arizona, Arkansas, Colorado, Georgia,
Illinois, Indiana, Kansas, Kentucky, Louisiana, Missouri, Montana,
Nebraska, Ohio, Oklahoma, Pennsylvania, Tennessee, Utah, Virginia, West
Virginia and Wyoming. During 1997, West Virginia accounted for 95% of
APPL's direct premiums collected.
UG is licensed in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma,
Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin.
During 1997, Illinois accounted for 33%, and Ohio accounted for 14% of
direct premiums collected. No other state accounted for more than 7% of
direct premiums collected in 1997.
In 1997 $38,471,452 of total direct premium was written by USA, ABE, APPL
and UG. Ohio accounted for 35% , Illinois accounted for 21%, and West
Virginia accounted for 10% of total direct premiums collected.
New business production has decreased 15% from 1995 to 1996 and 43% from
1996 to 1997. Several factors have had a significant impact on new
business production. Over the last two years there has been the
possibility of a change in control of UTI. In September of 1996, an
agreement was reached effecting a change in control of UTI to an unrelated
party. The transaction did not materialize. At this writing negotiations
are progressing with a different unrelated party for change in control of
UTI. Please refer to note 17 in the Notes to the Consolidated Financial
Statements for additional information. The possible changes in control,
and the uncertainty surrounding each potential event, have hurt the
insurance Companies' ability to attract and maintain sales agents. In
addition, increased competition for consumer dollars from other financial
institutions, product Illustration guideline changes by State Insurance
Departments, and a decrease in the total number of insurance sales agents
in the industry, have all had an impact, given the relatively small size of
the Company.
Management recognizes the aforementioned challenges and is responding. The
potential change in control of the Company is progressing, bringing the
possibility for future growth, efforts are being made to introduce
additional products, and the recruitment of quality individuals for
intensive sales training, are directed at reversing current marketing
trends.
UNDERWRITING
The underwriting procedures of the insurance subsidiaries are established
by management. Insurance policies are issued by the Company based upon
underwriting practices established for each market in which the Company
operates. Most policies are individually underwritten. Applications for
insurance are reviewed to determine additional information required to make
an underwriting decision, which depends on the amount of insurance applied
for and the applicant's age and medical history. Additional information
may include inspection reports, medical examinations, and statements from
doctors who have treated the applicant in the past and, where indicated,
special medical tests. After reviewing the information collected, the
Company either issues the policy as applied for or with an extra premium
charge because of unfavorable factors or rejects the application.
Substandard risks may be referred to reinsurers for full or partial
reinsurance of the substandard risk.
The Company's insurance subsidiaries require blood samples to be drawn with
individual insurance applications for coverage over $45,000 (age 46 and
above) or $95,000 (ages 16-45). Blood samples are tested for a wide range
of chemical values and are screened for antibodies to the HIV virus.
Applications also contain questions permitted by law regarding the HIV
virus which must be answered by the proposed insureds.
RESERVES
The applicable insurance laws under which the insurance subsidiaries
operate require that each insurance company report policy reserves as
liabilities to meet future obligations on the policies in force. These
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reserves are the amounts which, with the additional premiums to be received
and interest thereon compounded annually at certain assumed rates, are
calculated in accordance with applicable law to be sufficient to meet the
various policy and contract obligations as they mature. These laws specify
that the reserves shall not be less than reserves calculated using certain
mortality tables and interest rates.
The liabilities for traditional life insurance and accident and health
insurance policy benefits are computed using a net level method. These
liabilities include assumptions as to investment yields, mortality,
withdrawals, and other assumptions based on the life insurance
subsidiaries' experience adjusted to reflect anticipated trends and to
include provisions for possible unfavorable deviations. The Company makes
these assumptions at the time the contract is issued or, in the case of
contracts acquired by purchase, at the purchase date. Benefit reserves for
traditional life insurance policies include certain deferred profits on
limited-payment policies that are being recognized in income over the
policy term. Policy benefit claims are charged to expense in the period
that the claims are incurred. Current mortality rate assumptions are based
on 1975-80 select and ultimate tables. Withdrawal rate assumptions are
based upon Linton B or Linton C, which are industry standard actuarial
tables for forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life
insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges.
Policy benefits and claims that are charged to expense include benefit
claims in excess of related policy account balances. Interest crediting
rates for universal life and interest sensitive products range from 5.0% to
6.0% in each of the years 1997, 1996 and 1995.
REINSURANCE
As is customary in the insurance industry, the Company's insurance
subsidiaries cede insurance to other insurance companies under reinsurance
agreements. Reinsurance agreements are intended to limit a life insurer's
maximum loss on a large or unusually hazardous risk or to obtain a greater
diversification of risk. The ceding insurance company remains primarily
liable with respect to ceded insurance should any reinsurer be unable to
meet the obligations assumed by it, however it is the practice of insurers
to reduce their exposure to loss to the extent that they have been
reinsured with other insurance companies. The Company sets a limit on the
amount of insurance retained on the life of any one person. The Company
will not retain more than $125,000, including accidental death benefits, on
any one life. At December 31, 1997, the Company had insurance in force of
$3.692 billion of which approximately $1.022 billion was ceded to
reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The
Company believes the assuming companies are able to honor all contractual
commitments, based on the Company's periodic reviews of their financial
statements, insurance industry reports and reports filed with state
insurance departments.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover all new business of the Company.
The agreements are a yearly renewable term ("YRT") treaty where the Company
cedes amounts above its retention limit of $100,000 with a minimum cession
of $25,000.
One of the Company's insurance subsidiaries (UG) entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best assigned FILIC a Financial Performance Rating (FPR) of 7 (Strong)
on a scale of 1 to 9. A.M. Best assigned a Best's Rating of A++ (Superior)
to The Guardian Life Insurance Company of America ("Guardian"), parent of
FILIC, based on the consolidated financial condition and operating
performance of the company and its life/health subsidiaries. During 1997,
FILIC changed its name to Park Avenue Life Insurance Company ("PALIC").
The agreement with PALIC accounts for approximately 65% of the reinsurance
receivables as of December 31, 1997.
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The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long-duration reinsurance contracts on premiums
earned in 1997, 1996 and 1995 was as follows:
Shown in thousands
1997 1996 1995
Premiums Premiums Premiums
Earned Earned Earned
<TABLE>
<S> <C> <C> <C>
Direct $ 33,374 $ 35,891 $ 38,482
Assumed 0 0 0
Ceded (4,735) (4,947) (5,383)
Net
premiums $ 28,639 $ 30,944 $ 33,099
</TABLE>
INVESTMENTS
The Company retains the services of a registered investment advisor to
assist the Company in managing its investment portfolio. The Company may
modify its present investment strategy at any time, provided its strategy
continues to be in compliance with the limitations of state insurance
department regulations.
Investment income represents a significant portion of the Company's total
income. Investments are subject to applicable state insurance laws and
regulations which limit the concentration of investments in any one
category or class and further limit the investment in any one issuer.
Generally, these limitations are imposed as a percentage of statutory
assets or percentage of statutory capital and surplus of each company.
The following table reflects net investment income by type of investment.
December 31,
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Fixed maturities and fixed
maturities $ 12,677,348 $13,326,312 $13,190,121
held for sale
Equity securities 87,211 88,661 52,445
Mortgage loans 802,123 1,047,461 1,257,189
Real estate 745,502 794,844 975,080
Policy loans 976,064 1,121,538 1,041,900
Short-term investments 70,624 21,423 21,295
Other 696,486 691,111 642,632
Total consolidated
investment income 16,055,358 17,091,350 17,180,662
Investment expenses (1,198,061) (1,222,903) (1,724,438)
Consolidated net
investment income $ 14,857,297 $ 15,868,447 $15,456,224
</TABLE>
At December 31, 1997, the Company had a total of $5,797,000 of investments,
comprised of $3,848,000 in real estate and $1,949,000 in equity securities,
which did not produce income during 1997.
The following table summarizes the Company's fixed maturities distribution
at December 31, 1997 and 1996 by ratings category as issued by Standard and
Poor's, a leading ratings analyst.
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Fixed Maturities
Rating % of Portfolio
1997 1996
Investment Grade
AAA 31% 30%
AA 14% 13%
A 46% 46%
BBB 9% 10%
Below investment
grade 0% 1%
100% 100%
The following table summarizes the Company's fixed maturities and fixed
maturities held for sale by major classification.
Carrying Value
1997 1996
<TABLE>
<S> <C> <C>
U.S. government and
government agencies $ 29,701,879 $ 29,998,240
States, municipalities and
political subdivisions 22,814,301 14,561,203
Collateralized mortgage
obligations 11,093,926 13,246,780
Public utilities 48,064,818 51,941,647
Corporate 70,964,039 72,140,081
$ 182,638,963 $ 181,887,951
</TABLE>
The following table shows the composition and average maturity of the
Company's investment portfolio at December 31, 1997.
Carrying Average Average
Investments Value Maturity Yield
<TABLE>
<S> <C> <C> <C>
Fixed maturities and fixed
maturities held for
sale $182,638,963 4 years 6.95%
Equity securities 3,001,744 not applicable 3.63%
Mortgage loans 9,469,444 10 years 7.82%
Investment real estate 11,485,276 not applicable 6.48%
Policy loans 14,207,189 not applicable 6.81%
Short-term investments 1,798,878 330 days 6.33%
Total Investments $222,601,494 7.24%
</TABLE>
At December 31, 1997, fixed maturities and fixed maturities held for sale
have a combined market value of $186,451,198. Fixed maturities are carried
at amortized cost. Management has the ability and intent to hold these
securities until maturity. Fixed maturities held for sale are carried at
market.
The Company holds approximately $1,798,878 in short-term investments.
Management monitors its investment maturities and in their opinion is
sufficient to meet the Company's cash requirements. Fixed maturities of
$15,107,100 mature in one year and $120,382,870 mature in two to five
years.
The Company holds approximately $9,469,444 in mortgage loans which
represents 3% of the total assets. All mortgage loans are first position
loans. Before a new loan is issued, the applicant is subject to certain
criteria set forth by Company management to ensure quality control. These
criteria include, but are not limited to, a credit report, personal
financial information such as outstanding debt, sources of income, and
personal equity. Loans issued are limited to no more than 80% of the
appraised value of the property and must be first position against the
collateral.
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The Company has $298,000 of mortgage loans, net of a $10,000 reserve
allowance, which are in default and in the process of foreclosure. These
loans represent approximately 3% of the total portfolio. The Company has
one loan of $3,404 which is under a repayment plan. Letters are sent to
each mortgagee when the loan becomes 30 days or more delinquent. Loans 90
days or more delinquent are placed on a non-performing status and
classified as delinquent loans. Reserves for loan losses are established
based on management's analysis of the loan balances compared to the
expected realizable value should foreclosure take place. Loans are placed
on a non-accrual status based on a quarterly analysis of the likelihood of
repayment. All delinquent and troubled loans held by the Company are loans
which were held in portfolios by acquired companies at the time of
acquisition. Management believes the current internal controls
surrounding, the mortgage loan selection process provide a quality
portfolio with minimal risk of foreclosure and/or negative financial
impact.
The Company has in place a monitoring system to provide management with
information regarding potential troubled loans. Management is provided
with a monthly listing of loans that are 30 days or more past due along
with a brief description of what steps are being taken to resolve the
delinquency. Quarterly, coinciding with external financial reporting, the
Company determines how each delinquent loan should be classified. All
loans 90 days or more past due are classified as delinquent. Each
delinquent loan is reviewed to determine the classification and status the
loan should be given. Interest accruals are analyzed based on the
likelihood of repayment. In no event will interest continue to accrue when
accrued interest along with the outstanding principal exceeds the net
realizable value of the property. The Company does not utilize a specified
number of days delinquent to cause an automatic non-accrual status.
The mortgage loan reserve is established and adjusted based on management's
quarterly analysis of the portfolio and any deterioration in value of the
underlying property which would reduce the net realizable value of the
property below its current carrying value.
In addition, the Company also monitors that current and adequate insurance
on the properties are being maintained. The Company requires proof of
insurance on each loan and further requires to be shown as a lienholder on
the policy so that any change in coverage status is reported to the
Company. Proof of payment of real estate taxes is another monitoring
technique utilized by the Company. Management believes a change in
insurance status or non-payment of real estate taxes are indicators that a
loan is potentially troubled. Correspondence with the mortgagee is
performed to determine the reasons for either of these events occurring.
The following table shows a distribution of mortgage loans by type.
Mortgage Amount % of Total
Loans
<TABLE>
<S> <C> <C>
FHA/VA $ 536,443 5%
Commercial 1,565,643 17%
Residential 7,367,358 78%
</TABLE>
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<PAGE>
The following table shows a geographic distribution of the mortgage
loan portfolio and real estate held.
Mortgage Real
Loans Estate
<TABLE>
<S> <C> <C>
New Mexico 3% 0%
Illinois 10% 55%
Kansas 13% 0%
Louisiana 15% 14%
Mississippi 0% 20%
Missouri 2% 1%
North 7% 6%
Carolina
Oklahoma 5% 1%
Virginia 4% 0%
West Virginia 38% 2%
Other 3% 1%
Total 100% 100%
</TABLE>
The following table summarizes delinquent mortgage loan holdings.
<TABLE>
<S> <C> <C> <C>
Delinquent
31 Days or More 1997 1996 1995
Non-accrual status $ 0 $ 0 $ 0
Other 308,000 613,000 628,000
Reserve on
delinquent loans (10,000) (10,000) (10,000)
Total Delinquent $ 298,000 $ 603,000 $ 618,000
Interest income
foregone
(Delinquent loans) $ 29,000 $ 29,000 $ 16,000
In Process of
Restructuring $ 0 $ 0 $ 0
Restructuring on
other than market
terms 0 0 0
Other potential
problem loans 0 0 0
Total Problem Loans $ 0 $ 0 $ 0
Interest income
foregone
(Restructured loans)$ 0 $ 0 $ 0
</TABLE>
See Item 2, Properties, for description of real estate holdings.
COMPETITION
The insurance business is a highly competitive industry and there are a
number of other companies, both stock and mutual, doing business in areas
where the Company operates. Many of these competing insurers are larger,
have more diversified lines of insurance coverage, have substantially
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<PAGE>
greater financial resources and have a greater number of agents. Other
significant competitive factors include policyholder benefits, service to
policyholders, and premium rates.
The insurance industry is a mature industry. In recent years, the industry
has experienced virtually no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products.
The products offered (see Products) are similar to those offered by other
major companies. The product features are regulated by the states and are
subject to extensive competition among major insurance organizations. The
Company believes a strong service commitment to policyholders, efficiency
and flexibility of operations, timely service to the agency force and the
expertise of its key executives help minimize the competitive pressures of
the insurance industry.
The industry has experienced a downward trend in the total number of agents
who sell insurance products, and competition for the top sales producers
has intensified. As this trend appears to continue, the recruiting focus
of the Company has been on introducing quality individuals to the insurance
industry through an extensive internal training program. The Company feels
this approach is conducive to the mutual success of our new recruits and
the Company as these recruits market our products in a professional,
company structured manner.
GOVERNMENT REGULATION
The Company's insurance subsidiaries are assessed contributions by life and
health guaranty associations in almost all states to indemnify
policyholders of failed companies. In several states the company may
reduce premium taxes paid to recover a portion of assessments paid to the
states' guaranty fund association. This right of "offset" may come under
review by the various states, and the company cannot predict whether and to
what extent legislative initiatives may affect this right to offset. Also,
some state guaranty associations have adjusted the basis by which they
assess the cost of insolvencies to individual companies. The company
believes that its reserve for future guaranty fund assessments is
sufficient to provide for assessments related to known insolvencies. This
reserve is based upon management's current expectation of the availability
of this right of offset, known insolvencies and state guaranty fund
assessment bases. However, changes in the basis whereby assessments are
charged to individual companies and changes in the availability of the
right to offset assessments against premium tax payments could materially
affect the company's results.
Currently, the Company's insurance subsidiaries are subject to government
regulation in each of the states in which they conduct business. Such
regulation is vested in state agencies having broad administrative power
dealing with all aspects of the insurance business, including the power to:
(i) grant and revoke licenses to transact business; (ii) regulate and
supervise trade practices and market conduct; (iii) establish guaranty
associations; (iv) license agents; (v) approve policy forms; (vi)
approve premium rates for some lines of business; (vii) establish reserve
requirements; (viii) prescribe the form and content of required financial
statements and reports; (ix) determine the reasonableness and adequacy of
statutory capital and surplus; and (x) regulate the type and amount of
permitted investments. Insurance regulation is concerned primarily with
the protection of policyholders. The Company cannot predict the form of
any future proposals or regulation. The Company's insurance subsidiaries,
USA, UG, APPL and ABE are domiciled in the states of Ohio, Ohio, West
Virginia and Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners ("NAIC"). The NAIC is an association whose membership
consists of the insurance commissioners or their designees of the various
states. The NAIC has no direct regulatory authority over insurance
companies, however its primary purpose is to provide a more consistent
method of regulation and reporting from state to state. This is
accomplished through the issuance of model regulations, which can be
adopted by individual states unmodified, modified to meet the state's own
needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled by
other corporations licensed to transact business within their respective
jurisdictions. The insurance subsidiaries are subject to such legislation
and registered as controlled insurers in those jurisdictions in which such
registration is required. Statutes vary from state to state but typically
require periodic disclosure concerning the corporation that controls the
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registered insurers and all subsidiaries of such corporation. In addition,
prior notice to, or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 9 of the Notes to the Consolidated Financial
Statements), and payment of dividends (see Note 2 of the Notes to the
Consolidated Financial Statements) in excess of specified amounts by the
insurance subsidiary within the holding company system are required.
Each year the NAIC calculates financial ratio results (commonly referred to
as IRIS ratios) for each company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement.
The results are then compared to pre-established normal ranges determined
by the NAIC. Results outside the range typically require explanation to
the domiciliary insurance department.
At year end 1997, the insurance companies had one ratio outside the normal
range. The ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last three years. The cause for the
decrease in premium income is related to the possible change in control of
UTI over the last two years to two different parties. At year end 1996 it
was announced that UTI was to be acquired by an unrelated party, but the
sale did not materialize. At this writing negotiations are progressing
with a different unrelated party for the change in control of UTI. Please
refer to the Notes to the Consolidated Financial Statements for additional
information. The possible changes in control over the last two years have
hurt the insurance companies' ability to recruit new agents. The active
agents were apprehensive due to uncertainties in relation to the change in
control of UTI. In recent years, the industry experienced a decline in the
total number of agents selling insurance products and therefore competition
has increased for quality agents. Accordingly, new business production
decreased significantly over the last two years.
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners ("NAIC"),
as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting
principles and are intended to reflect a more conservative view by, for
example, requiring immediate expensing of policy acquisition costs. The
achievement of long-term growth will require growth in the statutory
capital of the Company's insurance subsidiaries. The subsidiaries may
secure additional statutory capital through various sources, such as
internally generated statutory earnings or equity contributions by the
Company from funds generated through debt or equity offerings.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. The
risk-based capital formula measures the adequacy of statutory capital and
surplus in relation to investment and insurance risks such as asset
quality, mortality and morbidity, asset and liability matching and other
business factors. The RBC formula is used by state insurance regulators as
an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized.
In addition, the formula defines new minimum capital standards that will
supplement the current system of low fixed minimum capital and surplus
requirements on a state-by-state basis. Regulatory compliance is
determined by a ratio of the insurance company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level RBC, as
defined by the NAIC. Insurance companies below specific trigger points or
ratios are classified within certain levels, each of which requires
specific corrective action.
The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1997, each of the insurance subsidiaries has a Ratio that
is in excess of 3, which is 300% of the authorized control level;
accordingly the insurance subsidiaries meet the RBC requirements.
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The NAIC, in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC proposed changes
in the regulations governing insurance company investments and holding
company investments in subsidiaries and affiliates which were adopted by
the NAIC as model laws in 1996. The Company does not presently anticipate
any material adverse change in its business as a result of these changes.
Legislative and regulatory initiatives regarding changes in the regulation
of banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on the company by altering the competitive
environment for its products. The outcome and timing of any such changes
cannot be anticipated at this time, but the company will continue to
monitor developments in order to respond to any opportunities or increased
competition that may occur.
The NAIC has recently released the Life Illustration Model Regulation.
Many states have adopted the regulation effective January 1, 1997. This
regulation requires products which contain non-guaranteed elements, such as
universal life and interest sensitive life, to comply with certain
actuarially established tests. These tests are intended to target future
performance and profitability of a product under various scenarios. The
regulation does not prevent a company from selling a product that does not
meet the various tests. The only implication is the way in which the
product is marketed to the consumer. A product that does not pass the
tests uses guaranteed assumptions rather than current assumptions in
presenting future product performance to the consumer. The Company
conducts an ongoing thorough review of its sales and marketing process and
continues to emphasize its compliance efforts.
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
This project is not expected to be completed earlier than 1999. Specific
recommendations have been set forth in papers issued by the NAIC for
industry review. The Company is monitoring the process, but the potential
impact of any changes in insurance accounting standards is not yet known.
EMPLOYEES
There are approximately 90 persons who are employed by the Company and its
affiliates.
PROPERTIES
The following table shows a breakout of property, net of accumulated
depreciation, owned and occupied by the Company and the distribution of
real estate by type.
<TABLE>
<S> <C> <C>
Property owned Amount % of Total
Home Office $ 2,815,241 20%
Investment real estate
Commercial $ 4,355,450 30%
Residential development $ 5,405,282 38%
Foreclosed real estate $ 1,724,544 12%
$11,485,276 80%
Grand total $14,300,517 100%
</TABLE>
Total investment real estate holdings represent approximately 3% of the
total assets of the Company net of accumulated depreciation of $539,366 and
$442,373 at year end 1997 and 1996 respectively. The Company owns an
office complex in Springfield, Illinois, which houses the primary insurance
operations. The office buildings contain 57,000 square feet of office and
warehouse space. The properties are carried at approximately $2,394,360.
In addition, an insurance subsidiary owns a home office building in
Huntington, West Virginia. The building has 15,000 square feet and is
carried at $165,882. The facilities occupied by the Company are adequate
relative to the Company's present operations.
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Commercial property consists primarily of former home office buildings of
acquired companies no longer used in the operations of the Company. These
properties are leased to various unaffiliated companies and organizations.
Residential development property is primarily located in Springfield,
Illinois, and entails several developments, each targeted for a different
segment of the population. These targets include a development primarily
for the first time home buyer, an upscale development for existing
homeowners looking for a larger home, and duplex condominiums for those who
desire maintenance free exteriors and surroundings. The Company's primary
focus is on the development and sale of lots, with an occasional home
construction to help stimulate interest.
Springfield is the State Capital of Illinois. The City's economy is
service oriented with the main employers being the State of Illinois, two
major area hospitals and two large insurance companies. This provides for
a very stable economy not as dramatically affected by economic conditions
in other parts of the United States.
Foreclosed property is carried at the unpaid loan principal balance plus
accrued interest on the loan and other costs associated with the
foreclosure process. The carrying value of foreclosed property does not
exceed management's estimate of net realizable value. Management's
estimate of net realizable value is based on significant internal real
estate experience, local market experience, independent appraisals and
evaluation of existing comparable property sales.
LEGAL PROCEEDINGS
The Company and its subsidiaries are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
liabilities. Management is of the opinion that the settlement of those
actions will not have a material adverse effect on the Company's financial
position or results of operations.
DIRECTORS AND EXECUTIVE OFFICERS OF UII
THE BOARD OF DIRECTORS
In accordance with the laws of Ohio and the Certificate of Incorporation
and Bylaws of UII as amended, the Company is managed by its executive
officers under the direction of the Board of Directors. The Board elects
executive officers, evaluates their performance, works with management in
establishing business objectives and considers other fundamental corporate
matters, such as the issuance of stock or other securities, the purchase or
sale of a business and other significant corporate business transactions.
In the fiscal year ended December 31, 1998, the Board met five times. All
directors attended at least 75% of all meetings of the board except for Mr.
Aveni.
The Board of Directors has an Audit Committee consisting of Messrs.
Berschet, Melville and Teater. The Audit Committee reviews and acts or
reports to the Board with respect to various auditing and accounting
matters, the scope of the audit procedures and the results thereof, the
internal accounting and control systems of UII, the nature of services
performed for UII and the fees to be paid to the independent auditors, the
performance of the UII's independent and internal auditors and the
accounting practices of UII. The Audit Committee also recommends to the
full Board of Directors the auditors to be appointed by the Board. The
Audit Committee met once in 1998. All members were present with the
exception of Mr. Teater.
The compensation of the UII's executive officers is determined by the full
Board of Directors (see report on Executive Compensation).
Under the UII's Certificate of Incorporation, the Board of Directors may be
comprised of between five and twenty-one directors. The Board currently
has a fixed number of directors at nine. Shareholders elect Directors to
serve for a period of one year at the UII's Annual Shareholders' meeting.
The following information with respect to business experience of the Board
of Directors has been furnished by the respective directors or obtained
from the records of UII.
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DIRECTORS
NAME, AGE POSITION WITH UII, BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
Randall L. Attkisson 53
Director of UII since 1998, Chief Financial
Officer, Treasurer, Director or First Southern Bancorp, Inc.
since 1986; Director of The Galilean Home, Liberty, KY since
1996; Treasurer, Director of First Southern Funding, Inc.
since 1992; Director of The River Foundation, Inc. since
1990; Treasurer, Director of Somerset Holdings, Inc. since
1987; President of Randall L. Attkisson & Associates from
1982 to 1986; Commissioner of Kentucky Department of Banking
& Securities from 1980 to 1982; Self-employed Banking
Consultant in Miami, FL from 1978 to 1980.
Vincent T. Aveni 72
Director of UII since 1987; Chairman Emeritus of
Realty One, Inc. and co-developer of the Three Village
Condominium; currently serving the Ohio Association of
Realtors as a trustee; past President of Ohio Association of
Realtors; past Regional Vice President of the Ohio and
Michigan National Association Marketing Institute, and Farm
and Land Institute.
Marvin W. Berschet 69
Director of UII since 1987; self-employed since
1956; charter member of National Cattlemen's Association;
Board member of Meat Export Federation for seven years and
Chairman of Beef Council for three years; served on the
National Livestock and Meat Board for 16 years; past
President of Ohio Cattlemen's Association.
Jesse T. Correll 42
Director of UII since 1998, Chairman, President,
Director of First Southern Bancorp, Inc. since 1983;
President, Director of First Southern Funding, Inc. since
1992; President, Director of Somerset Holdings, Inc. and
Lancaster Life Reinsurance Company and First Southern
Insurance Agency since 1987; President, Director of The
River Foundation since 1990; President, Director of Dyscim
Holdings Company, Inc. since 1990; Director or Adamas
Diamond Corporation since 1980; Secretary, Director Lovemore
Holding Company since 1987; President, Director of North
Plaza of Somerset since 1990; Director of St. Joseph
Hospital, Lexington, KY since 1997; Managing Partner of
World Wide Minerals from 1978 to 1983.
James E. Melville 53
Director, President and Chief Operating Officer
since July 1997; Chief Financial Officer of UII since 1993,
Senior Executive ;Vice President of UII since September
1992; President of certain Affiliate Companies from May 1989
until September 1991; Chief Operating Officer of FCC from
1989 to September 1991; Chief Operating Officer of certain
Affiliate Companies from 1984 until September 1991; Senior
Executive Vice President of certain Affiliate Companies from
1984 until September 1989; Consultant to UTI and UTG from
March to September, 1992; President and Chief Operating
Officer of certain affiliate life insurance companies and
Senior Executive Vice President of non-insurance affiliate
companies since 1992.
Charlie E. Nash 70
Director of UII since 1987; Executive Director and
State President of the Ohio Farmers Union; serves on the
Board of Directors for National Farmers Union Uniform
Pension Committee and a member of its Investment Committee
for pension funds; Chairman of the Putnam County Board of
Elections; serves on the Board of Directors of Farmers Union
Ventures, Inc., Green Thumb, Inc. and Farmers Education
Foundation; he is a farm owner.
Millard V. Oakley 68
Director of UII since 1998, Presently serves on Board
of Directors and Executive Committee of Thomas Nelson, a
publicly held publishing company based in Nashville, TN;
Director of First National Bank of the Cumberlands,
Livingston-Cooksville, TN; Lawyer with limited law practice
since 1980; State Insurance Commissioner for State of
Tennessee from 1975 to 1979; Served as General Counsel,
United States House of Representatives, Washington, D.C.,
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Congressional Committee on Small Business from 1971-1973;
Served four elective terms as County Attorney for Overton
County, Tennessee; Elected delegate to National Democratic
Convention in 1964; Served four elective terms in the
Tennessee General Assembly from 1956 to 1964; Lawyer in
Livingston, TN from 1953 to 1971; Elected to the Tennessee
Constitutional Convention in 1952.
Larry E. Ryherd 58
Chairman of the Board of Directors since 1987, CEO
since 1992; UTI Chairman of the Board of Directors and a
Director since 1984, CEO since 1991; Chairman, CEO and
Director of UTG since 1992; President, CEO and Director of
certain affiliate companies since 1992. Mr. Ryherd has
served has Chairman of the Board, CEO, President and COO of
certain affiliate life insurance companies since 1992.
Robert W. Teater 71
Director of UII since 1987; Director of UTG and certain
affiliate companies since 1992; member of Columbus School
Board since 1991, President of Columbus School Board since
1992; President of Robert W. Teater and Associates, a
comprehensive consulting firm in natural resources
development and organization management since 1983.
EXECUTIVE OFFICERS OF UII
More detailed information on the following officers of UII appears under
"Election of Directors":
Larry E. Ryherd Chairman of the Board and Chief
Executive Officer
James E. Melville President and Chief Operating Officer
Other officers of UII are set forth below:
NAME, AGE POSITION WITH UII, BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
George E. Francis 55
Executive Vice President since July 1997;
Secretary of UII since February 1993; Director of certain
Affiliate Companies since October 1992; Senior Vice
President and Chief Administrative Officer of certain
Affiliate Companies since 1989; Secretary of certain
Affiliate Companies since March 1993; Treasurer and Chief
Financial Officer of certain Affiliate Companies from 1984
until September 1992.
Theodore C. Miller 36
Senior Vice President and Chief Financial Officer
since July 1997; Vice President and Treasurer since October
1992; Vice President and Controller of certain Affiliate
Companies from 1984 to 1992.
EXECUTIVE COMPENSATION UII
EXECUTIVE COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid to or earned by UII's Chief Executive Officer and each of the
Executive Officers of UII whose salary plus bonus exceeded $100,000 during
each of UII's last three fiscal years. COMPENSATION FOR SERVICES PROVIDED
BY THE NAMED EXECUTIVE OFFICERS TO UII AND ITS AFFILIATES IS PAID BY FCC AS
SET FORTH IN THEIR EMPLOYMENT AGREEMENTS. (SEE EMPLOYMENT CONTRACTS).
SUMMARY COMPENSATION TABLE
Annual Compensation (1)(3)
Other Annual
Name and Compensation (2)
Principal Position Salary($) $
Larry E. Ryherd 1998 400,000 20,373
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Chairman of
the Board 1997 400,000 18,863
Chief Executive
Officer 1996 400,000 17,681
James E. Melville 1998 238,200 31,956
President, Chief 1997 238,200 29,538
Operating Officer 1996 238,200 27,537
George E. Francis 1998 126,200 8,791
Executive Vice 1997 122,000 8,187
President,Secretary 1996 119,000 7,348
(1) Compensation deferred at the election of named officers is included in
this section.
(2) Other annual compensation consists of interest earned on deferred
compensation amounts pursuant to their employment agreements and the
Company's matching contribution to the First Commonwealth Corporation
Employee Savings Trust 401(k) Plan.
(3) Neither UTI or UII pay compensation of any kind to the named executive
officers nor is a change of compensation contemplated after the Merger.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
The following table summarizes for fiscal year ending, December 31, 1998,
the number of shares subject to unexercised options and the value of
unexercised options of the Common Stock of UTI held by the named executive
officers. The values shown were determined by multiplying the applicable
number of unexercised share options by the difference between the per share
market price on December 31, 1998 and the applicable per share exercise
price. There were no options granted to the named executive officers for
the past three fiscal years.
Number of Shares Number of Securities Value of
Acquired on Value Underlying Unexercised Unexercised
Exercise (#) Realized($) Options/SARs In the Money/SARs
at FY-End(#) at FY-End ($)
Name Exercis- Unexer- Exercis- Unexer-
able cisable able cisable
Larry E. Ryherd - - 13,800 - - -
James E. Melville - - 30,000 - - -
George E. Francis - - 4,600 - - -
COMPENSATION OF DIRECTORS
UII's standard arrangement for the compensation of directors provide that
each director shall receive an annual retainer of $2,400, plus $300 for
each meeting attended and reimbursement for reasonable travel expenses.
UII's director compensation policy also provides that directors who are
either employees of UII or directors or officers of First Southern Funding,
LLC and affiliates do not receive any compensation for their services as
directors except for reimbursement for reasonable travel expenses for
attending each meeting; namely, Messrs. Ryherd, Melville, Attkisson,
Correll and Oakley.
EFFECT OF THE MERGER ON DIRECTORS
If the Merger is consummated, each of the independent director of UII,
namely, Messrs. Aveni, Berschet, Nash and Teater shall become directors of
UTI. The directors compensation shall remain the same as stated above.
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EMPLOYMENT CONTRACTS
On July 31, 1997, Larry E. Ryherd entered into an employment agreement with
FCC. Formerly, Mr. Ryherd had served as Chairman of the Board and Chief
Executive Officer of UII and its affiliates. Pursuant to the agreement,
Mr. Ryherd agreed to serve as Chairman of the Board and Chief Executive
Officer of UII and in addition, to serve in other positions of the
affiliated companies if appointed or elected. The agreement provides for
an annual salary of $400,000 as determined by the Board of Directors. The
term of the agreement is for a period of five years. Mr. Ryherd has
deferred portions of his income under a plan entitling him to a deferred
compensation payment on January 2, 2000 in the amount of $240,000 which
includes interest at the rate of approximately 8.5% per year.
Additionally, Mr. Ryherd was granted an option to purchase up to 13,800 of
the Common Stock of UTI at $17.50 per share. The option is immediately
exercisable and transferable. The option will expire December 31, 2000.
FCC entered into an employment agreement dated July 31, 1997 with James E.
Melville pursuant to which Mr. Melville is employed as President and Chief
Operating Officer and in addition, to serve in other positions of the
affiliated companies if appointed or elected at an annual salary of
$238,200. The term of the agreement expires July 31, 2002. Mr. Melville
has deferred portions of his income under a plan entitling him to a
deferred compensation payment on January 2, 2000 of $400,000 which includes
interest at the rate of approximately 8.5% annually. Additionally, Mr.
Melville was granted an option to purchase up to 30,000 shares of the
Common Stock of UTI at $17.50 per share. The option is immediately
exercisable and transferable. The option will expire December 31, 2000.
FCC entered into an employment agreement with George E. Francis on July 31,
1997. Under the terms of the agreement, Mr. Francis is employed as
Executive Vice President of UII at an annual salary of $126,200. Mr.
Francis also agreed to serve in other positions if appointed or elected to
such positions without additional compensation. The term of the agreement
expires July 31, 2000. Mr. Francis has deferred portions of his income
under a plan entitling him to a deferred compensation payment on January 2,
2000 of $80,000 which includes interest at the rate of approximately 8.5%
per year. Additionally, Mr. Francis was granted an option to purchase up
to 4,600 shares of the Common Stock of UTI at $17.50 per share. The option
is immediately exercisable and transferable. This option will expire on
December 31, 2000.
REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION
The compensation of UII's executive officers is determined by the full
Board of Directors. The Board of Directors strongly believes that UII's
executive officers directly impact the short-term and long-term performance
of UII. With this belief and the corresponding objective of making
decisions that are in the best interest of UII's shareholders, the Board of
Directors places significant emphasis on the design and administration of
UII's executive compensation plans.
EXECUTIVE COMPENSATION PLAN ELEMENTS
BASE SALARY. The Board of Directors establishes base salaries each year at
a level intended to be within the competitive market range of comparable
companies. In addition to the competitive market range, many factors are
considered in determining base salaries, including the responsibilities
assumed by the executive, the scope of the executive's position,
experience, length of service, individual performance and internal equity
considerations. During the last three fiscal years, there were no material
changes in the base salaries of the named executive officers.
STOCK OPTIONS. One of UII's priorities is for the executive officers to be
significant shareholders so that the interest of the executives are closely
aligned with the interests of UII's other shareholders. The Board of
Directors believes that this strategy motivates executives to remain
focused on the overall long-term performance of UII. Stock options are
granted at the discretion of the Board of Directors and are intended to be
granted at levels within the competitive market range of comparable
companies. During 1993, each of the named executive officers were granted
options under their employment agreements for UII's Common Stock as
described in the Employment Contracts section. There were no options
granted to the named executive officers during the last three fiscal years.
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DEFERRED COMPENSATION. A very significant component of overall Executive
Compensation Plans is found in the flexibility afforded to participating
officers in the receipt of their compensation. The availability, on a
voluntary basis, of the deferred compensation arrangements as described in
the Employment Contracts section may prove to be critical to certain
officers, depending upon their particular financial circumstance.
CHIEF EXECUTIVE OFFICER
Larry E. Ryherd has been Chairman of the Board and Chief Executive Officer
since 1987 and Chairman of the Board of the Company's parent, UTI, since
1984. The Board of Directors used the same compensation plan elements
described above for all executive officers to determine Mr. Ryherd's 1998
compensation.
In setting both the cash-based and equity-based elements of Mr. Ryherd's
compensation, the Board of Directors made an overall assessment of Mr.
Ryherd's leadership in achieving UII's long-term strategic and business
goals.
Mr. Ryherd's base salary reflects a consideration of both competitive
forces and UII's performance. The Board of Directors does not assign
specific weights to these categories.
UII surveys total cash compensation for chief executive officers at the
same group of companies described under "Base Salary" above. Based upon
its survey, UII then determines a median around which it builds a
competitive range of compensation for the CEO. As a result of this review,
the Board of Directors concluded that Mr. Ryherd's base salary was in the
low end of the competitive market, and his total direct compensation
(including stock incentives) was competitive for CEOs running companies
comparable in size and complexity to UII.
The Board of Directors considered UII's financial results as compared to
other companies within the industry, financial performance for fiscal 1998
as compared to fiscal 1997, UII's progress as it relates to UII's growth
through acquisitions and simplification of the organization, the fact that
since UII does not have a Chief Marketing Officer, Mr. Ryherd assumes
additional responsibilities of the Chief Marketing Officer, and Mr.
Ryherd's salary history, performance ranking and total compensation
history.
Through fiscal 1998, Mr. Ryherd's annual salary was $400,000, the amount
the Board of Directors set in January 1997. Following a review of the
above factors, the Board of Directors decided to recognize Mr. Ryherd's
performance by placing a greater emphasis on long-term incentive awards,
and therefore retained Mr. Ryherd's base salary at $400,000.
CONCLUSION.
The Board of Directors believes the mix of structured employment agreements
with certain key executives, conservative market based salaries,
competitive cash incentives for short-term performance and the potential
for equity-based rewards for long term performance represents an
appropriate balance. This balanced Executive Compensation Plan provides a
competitive and motivational compensation package to the executive officer
team necessary to continue to produce the results UII strives to achieve.
The Board of Directors also believes the Executive Compensation Plan
addresses both the interests of the shareholders and the executive team.
BOARD OF DIRECTORS
Randall L. Attkisson Charlie E. Nash
Vincent T. Aveni Millard V. Oakley
Marvin W. Berschet Larry E. Ryherd
Jesse T. Correll Robert W. Teater
James E. Melville
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PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
UII's Common Stock during the five fiscal years ended December 31, 1998,
with the cumulative total return on the NASDAQ Composite Index Performance
and the NASDAQ Insurance Stock Index (1):
1992 1993 1994 1995 1996 1997
UII 100 100 92 92 40 32
NASDAQ 100 115 112 159 195 239
NASDAQ
insurance 100 107 100 143 163 239
(1)UII selected the NASDAQ Composite Index Performance as an appropriate
comparison because UII's Common Stock is not listed on any exchange but
UII's Common Stock is traded in the over-the-counter market.
Furthermore, UII selected the NASDAQ Insurance Stock Index as the
second comparison because there is no similar single "peer company" in
the NASDAQ system with which to compare stock performance and the
closest additional line-of-business index which could be found was the
NASDAQ Insurance Stock Index. Trading activity in UII's Common Stock
is limited, which may be in part a result of UII's low profile from not
being listed on any exchange, and its reported operating losses. UII
has experienced a tremendous growth rate over the period shown in the
Return Chart with assets growing from approximately $9 million in 1991
to approximately $13 million in 1998. The growth rate has been the
result of acquisitions of other companies and new insurance writings.
UII has incurred costs of conversions and administrative consolidations
associated with the acquisitions which has contributed to the operating
losses. The Return Chart is not intended to forecast or be indicative
of possible future performance of UII's stock.
The foregoing graph shall not be deemed to be incorporated by reference
into any filing of UII under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that UII specifically
incorporates such information by reference.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as directors of UII during 1998 and were
officers or employees of UII or its affiliates during 1998: James E.
Melville and Larry E. Ryherd. Accordingly, these individuals have
participated in decisions related to compensation of executive officers of
UII and its affiliates.
During 1998, the following executive officers of UII were also members of
the Board of Directors of FCC, two of whose executive officers served on
the Board of Directors of UII: Messrs. Melville and Ryherd.
During 1998, Larry E. Ryherd and James E. Melville, executive officers of
UII, were also members of the Board of Directors of UTI, two of whose
executive officers served on the Board of Directors of UII: Messrs.
Melville, and Ryherd.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF UII
PRINCIPLE HOLDERS OF SECURITIES
The following tabulation sets forth the name and address of the entity
known to be the beneficial owners of more than 5% of UII's Common Stock and
shows: (i) the total number of shares of Common Stock beneficially owned
by such person as of December 31, 1998 and the nature of such ownership;
and (ii) the percent of the issued and outstanding shares of Common Stock
so owned as of the same date.
Title Number of Shares Percent
Of Name and Address and Nature of of
Class of Beneficial Owner Beneficial Ownership Class
Common United Trust, Inc. (1)(2) 565,766 40.6%.
Stock no 5250 South Sixth Street
par value Springfield, IL 62703
(1) Because
Larry E. Ryherd owns 501,701 shares of UTI's Common Stock (19.6%), and
UTI owns 565,766 shares of UII Common Stock (40.6%) Mr. Ryherd may be
considered a beneficial owner of UII; however, Mr. Ryherd disclaims any
beneficial interest in the shares of UII owned by UTI as the UTI's board
of directors controls the voting and investment decisions regarding such
shares.
(2) First Southern Funding, LLC & Affiliates owns
1,054,440 shares of UTI's Common Stock (42.3%) and UTI owns 565,776
shares of UII Common Stock (40.6%), and because Jesse T. Correll owns
83% of First Southern Funding, LLC, Mr. Correll may be considered a
beneficial owner of UII.
SECURITY OWNERSHIP OF MANAGEMENT OF UII
The following tabulation shows with respect to each of the directors and
nominees of UII, with respect to UII's chief executive officer and each of
UII's executive officers whose salary plus bonus exceeded $100,000 for
fiscal 1998, and with respect to all executive officers and directors of
UII as a group: (i) the total number of shares of all classes of stock of
UII or any of its parents or affiliates, beneficially owned as of December
31, 1998 and the nature of such ownership; and (ii) the percent of the
issued and outstanding shares of stock so owned as of the same date.
Title Directors, Named ExecutiveNumber of Shares Percent
of Officers, & All Directors &and Nature of of
ClassExecutive Officers as a Group Ownership Class
UTI's Randall L. Attkisson 0 *
Common Vincent T. Aveni 0 *
Stock, no Jesse T. Correll 0 (1) *
Par value Marvin W. Berschet 0 *
George E. Francis 4,600 (2) *
James E. Melville 52,500 (3) 2.0%
Charlie E. Nash 0 *
Millard V. Oakley 9,000 *
Larry E. Ryherd 501,701 (4) 19.6%
Robert W. Teater 0 *
All directors and
executive officers
as a group
(ten in number) 567,801 21.8%
FCC's Randall L. Attkisson 0 *
Common Vincent T. Aveni 0 *
Stock,$1.00 Marvin W. Berschet 0 *
Par value Jesse T. Correll 0 *
George E. Francis 0 *
James E. Melville 544 (5) *
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Charlie E. Nash 0 *
Millard V. Oakley 0 *
Larry E. Ryherd 0 *
Robert W. Teater 0 *
All directors and
executive officers
as a group
(ten in number) 544 *
UII's Randall L. Attkisson 0 *
Common Vincent T. Aveni 7,716 (6) *
Stock, no Marvin W. Berschet 7,161 (7) *
Par value Jesse T. Correll 0 *
George E. Francis 0 *
James E. Melville 0 *
Charlie E. Nash 7,052 *
Millard V. Oakley 0 *
Larry E. Ryherd 47,250 (8) (9) *
Robert W. Teater 7,380 (10) *
All directors and
executive officers
as a group
(ten in number) 76,559 5.5%
(1)In addition, Mr. Correll is a director and officer of First Southern
Funding, LLC & Affiliates which own 1,054,440 shares (42.34%) of UTI.
(See Principle Holders of Securities)
(2)Includes 4,600 shares which may be acquired upon the exercise of
outstanding stock options.
(3)James E. Melville owns 2,500 shares individually and 14,000 shares
jointly with his spouse. Includes: (i) 3,000 shares of UTI's Common
Stock which are held beneficially in trust for his daughter, namely
Bonnie J. Melville; (ii) 3,000 shares of UTI's Common Stock, 750 shares
of which are in the name of Matthew C. Hartman, his nephew; 750 shares
of which are in the name of Zachary T. Hartman, his nephew; 750 shares
of which are in the name of Elizabeth A. Hartman, his niece; and 750
shares of which are in the name of Margaret M. Hartman, his niece; and
(iii) 30,000 shares which may be acquired by James E. Melville upon
exercise of outstanding stock options.
(4) Larry E. Ryherd owns 181,091 shares of UTI's Common Stock in his own
name. Includes: (i) 150,050 shares of UTI's Common Stock in the name of
Dorothy LouVae Ryherd, his wife; (ii) 150,000 shares of UTI's Common Stock
which are held beneficially in trust for the three children of Larry E.
Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek Scott
Ryherd and Jarad John Ryherd; (iii) 4,600 shares of UTI's Common Stock,
2,700 shares of which are in the name of Shari Lynette Serr, 1,900 shares
of which are in the name of Jarad John Ryherd; (iv) 2,000 shares held by
Dorothy LouVae Ryherd, his wife as custodian for granddaughter, (v) 160
shares held by Larry E. Ryherd as custodian for granddaughter; and (vi)
13,800 shares which may be acquired by Larry E. Ryherd upon exercise of
outstanding stock options.
(5) James E. Melville owns 168 shares individually and 376 shares jointly
with his spouse.
(6) Includes 272 shares owned directly by Mr. Aveni's brother and 210
shares owned directly by Mr. Aveni's son.
(7) Includes 42 shares owned directly by each of Mr. Berschet's two sons
and 77 shares owned directly by Mr. Berschet's daughter, a total of 161
shares.
(8) Includes 47,250 shares beneficially in trust for the three children of
Larry E. Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek
Scott Ryherd and Jarad John Ryherd.
(9) In addition, Mr. Ryherd is a director and officer of UTI, who owns
565,766 shares (29.9%) of the Company. Mr. Ryherd disclaims any beneficial
interest in the shares of the Company owned by UTI as the UTI board of
directors controls the voting and investment decisions regarding such
shares.
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(10) Includes 210 shares owned directly by Mr. Teater's spouse.
* Less than 1%.
Except as indicated above, the foregoing persons hold sole voting and
investment power.
Directors and officers of UII file periodic reports regarding ownership of
UII securities with the Securities and Exchange Commission pursuant to
Section 16(a) of the Securities Exchange Act of 1934 as amended, and the
rules promulgated thereunder.
DIRECTORS AND EXECUTIVE OFFICERS OF UTI
THE BOARD OF DIRECTORS
In accordance with the laws of Illinois and the Certificate of
Incorporation and Bylaws of UTI, as amended, UTI is managed by its
executive officers under the direction of the Board of Directors. The
Board elects executive officers, evaluates their performance, works with
management in establishing business objectives and considers other
fundamental corporate matters, such as the issuance of stock or other
securities, the purchase or sale of a business and other significant
corporate business transactions. In the fiscal year ended December 31,
1998, the Board met five times. All directors attended at least 75% of all
meetings of the board except for Messers. Cellini and Larson.
The Board of Directors has an Audit Committee consisting of Messrs. Albin,
Geary, and Melville. The Audit Committee reviews and acts or reports to
the Board with respect to various auditing and accounting matters, the
scope of the audit procedures and the results thereof, the internal
accounting and control systems of UTI, the nature of services performed for
UTI and the fees to be paid to the independent auditors, the performance of
UTI's independent and internal auditors and the accounting practices of
UTI. The Audit Committee also recommends to the full Board of Directors
the auditors to be appointed by the Board. The Audit Committee met once in
1998. All members were present.
The compensation of UTI's executive officers is determined by the full
Board of Directors (see report on Executive Compensation).
Under UTI's Certificate of Incorporation, the Board of Directors may be
comprised of between five and twenty-one directors. The Board currently
has a fixed number of directors at thirteen. Shareholders elect Directors
to serve for a period of one year at UTI's Annual Shareholders' meeting.
The following information with respect to business experience of the Board
of Directors has been furnished by the respective directors or obtained
from the records of UTI.
DIRECTORS
NAME, AGE POSITION WITH THE COMPANY, BUSINESS EXPERIENCE AND OTHER
DIRECTORSHIPS
John S. Albin 70
Director of the Company since 1984; farmer in Douglas
and Edgar counties, Illinois, since 1951; Chairman of the
Board of Longview State Bank since 1978; President of the
Longview Capitol Corporation, a bank holding company, since
1978; Chairman of First National Bank of Ogden, Illinois,
since 1987; Chairman of the State Bank of Chrisman since
1988; Director and Secretary of Illini Community Development
Corporation since 1990; Chairman of Parkland College Board
of Trustees since 1990; board member of the Fisher National
Bank, Fisher, Illinois, since 1993.
Randall L. Attkisson 53
Director of UTI since 1998, Chief Financial
Officer, Treasurer, Director or First Southern Bancorp, Inc.
since 1986; Director of The Galilean Home, Liberty, KY since
1996; Treasurer, Director of First Southern Funding, Inc.
since 1992; Director of The River Foundation, Inc. since
1990; Treasurer, Director of Somerset Holdings, Inc. since
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1987; President of Randall L. Attkisson & Associates from
1982 to 1986; Commissioner of Kentucky Department of Banking
& Securities from 1980 to 1982; Self-employed Banking
Consultant in Miami, FL from 1978 to 1980.
William F. Cellini 64
Director of UTI since 1996 and Director of FCC and
certain affiliate companies since 1984; Chairman of the
Board of New Frontier Development Group, Chicago, Illinois
for more than the past five years; Executive Director of
Illinois Asphalt Pavement Association.
Robert E. Cook 73
Director of UTI since 1984, President of Cook-Witter,
Inc., a governmental consulting and lobbying firm with
offices in Springfield, Illinois, from 1985 until 1990.
Jesse T. Correll 42
Director of UTI since 1998, Chairman, President,
Director of First Southern Bancorp, Inc. since 1983;
President, Director of First Southern Funding, Inc. since
1992; President, Director of Somerset Holdings, Inc. and
Lancaster Life Reinsurance Company and First Southern
Insurance Agency since 1987; President, Director of The
River Foundation since 1990; President, Director of Dyscim
Holdings Company, Inc. since 1990; Director or Adamas
Diamond Corporation since 1980; Secretary, Director Lovemore
Holding Company since 1987; President, Director of North
Plaza of Somerset since 1990; Director of St. Joseph
Hospital, Lexington, KY since 1997; Managing Partner of
World Wide Minerals from 1978 to 1983.
Larry R. Dowell 64
Director of UTI since 1984; cattleman and farmer in
Stronghurst, Henderson County, Illinois since 1956; member
of the Illinois Beef Association; past Board and Executive
Committee member of Illinois Beef Council; Chairman of
Henderson County Board of Supervisors since 1992.
Donald G. Geary 75
Director of UTI since 1996, Director of FCC and certain
affiliate companies since 1984; industrial warehousing
developer and founder of Regal 8 Inns for more than the past
five years.
Raymond L. Larson 64
Director of UTI since 1984; cattleman and farmer
since 1953; Director of the Bank of Sugar Grove, Illinois
since 1977; Board member of National Livestock and Meat
Board since 1983 and currently Treasurer, Board member and
past President of Illinois Beef Council; member of National
Cattlemen's Association and Illinois Cattlemen's
Association.
Dale E. McKee 80
Director of UTI since 1984; pork producer and farmer in
Rio, Illinois since 1947; President of McKee and Flack,
Inc., an Iowa corporation engaged in farming since 1975;
director of St. Mary's Hospital of Galesburg since 1984.
James E. Melville 53
Director, President and Chief Operating Officer
since July 1997; Chief Financial Officer of UTI since 1993,
Senior Executive Vice President of UTI since September 1992;
President of certain Affiliate Companies from May 1989 until
September 1991; Chief Operating Officer of FCC from 1989
until September 1991; Chief Operating Officer of certain
Affiliate Companies from 1984 until September 1991; Senior
Executive Vice President of certain affiliate companies from
1984 until 1989; Consultant to UTI and UTG from March 1992
through September 1992; President and Chief Operating
Officer of certain affiliate life insurance companies and
Senior Executive Vice President of non-insurance affiliate
companies since 1992.
Thomas F. Morrow 54
Director of UTI since 1984; Director of certain
affiliate companies since 1992 and Treasurer since 1993.
Mr. Morrow has served as Vice Chairman and Director of
certain affiliate life insurance companies since 1992 as
well as having held similar positions with other affiliate
life insurance companies from 1987 to 1992.
Millard V. Oakley 68
Director of UTI since 1998; presently serves on Board
of Directors and Executive Committee of Thomas Nelson, a
publicly held publishing company based in Nashville, TN;
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Director of First National Bank of the Cumberlands,
Livingston-Cooksville, TN; Lawyer with limited law practice
since 1980; State Insurance Commissioner for State of
Tennessee from 1975 to 1979; Served as General Counsel,
United States House of Representatives, Washington, D.C.,
Congressional Committee on Small Business from 1971-1973;
Served four elective terms as County Attorney for Overton
County, Tennessee; Elected delegate to National Democratic
Convention in 1964; Served four elective terms in the
Tennessee General Assembly from 1956 to 1964; Lawyer in
Livingston, TN from 1953 to 1971; Elected to the Tennessee
Constitutional Convention in 1952.
Larry E. Ryherd 58
Chairman of the Board of Directors and a Director since
1984, CEO since 1991; Chairman of the Board of UII since
1987, CEO since 1992 and President since 1993; Chairman, CEO
and Director of UTG since 1992; Chairman of the Board, CEO,
President and COO of certain affiliate life insurance
companies since 1992.
EXECUTIVE OFFICERS OF UTI
More detailed information on the following officers of UTI appears under
"Election of Directors":
Larry E. Ryherd Chairman of the Board and
Chief Executive Officer
James E. Melville President and Chief Operating Officer
Other officers of UTI are set forth below:
NAME, AGE POSITION WITH UTI, BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
George E. Francis 55
Executive Vice President since July 1997;
Secretary of UTI since February 1993; Director of certain
Affiliate Companies since October 1992; Senior Vice
President and Chief Administrative Officer of certain
Affiliate Companies since 1989; Secretary of certain
Affiliate Companies since March 1993; Treasurer and Chief
Financial Officer of certain Affiliate Companies from 1984
until September 1992.
Theodore C. Miller 36
Senior Vice President and Chief Financial Officer
since July 1997; Vice President and Treasurer since October
1992; Vice President and Controller of certain Affiliate
Companies from 1984 to 1992.
ITEM 11. EXECUTIVE COMPENSATION UTI
EXECUTIVE COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid to or earned by UTI's Chief Executive Officer and each of the
Executive Officers of UTI whose salary plus bonus exceeded $100,000 during
each of UTI's last three fiscal years: COMPENSATION FOR SERVICES PROVIDED
BY THE NAMED EXECUTIVE OFFICERS TO UTI AND ITS AFFILIATES IS PAID BY FCC AS
SET FORTH IN THEIR EMPLOYMENT AGREEMENTS. (SEE EMPLOYMENT CONTRACTS).
SUMMARY COMPENSATION TABLE
Annual Compensation (1)(3)
Other Annual
Name and Compensation (2)
Principal Position Salary($) $
Larry E. Ryherd 1998 400,000 20,373
Chairman of
the Board 1997 400,000 18,863
Chief Executive
Officer 1996 400,000 17,681
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James E. Melville 1998 238,200 31,956
President, Chief 1997 238,200 29,538
Operating Officer 1996 238,200 27,537
George E. Francis 1998 126,200 8,791
Executive Vice 1997 123,200 8,187
President,Secretary 1996 120,200 7,348
(1) Compensation deferred at the election of named officers is included in
this section.
(2) Other annual compensation consists of interest earned on deferred
compensation amounts pursuant to their employment agreements and the
Company's matching contribution to the First Commonwealth Corporation
Employee Savings Trust 401(k) Plan.
(3) Neither UTI or UII pay compensation of any kind to the named executive
officers nor is a change of compensation contemplated after the Merger.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
The following table summarizes for fiscal year ending, December 31, 1998,
the number of shares subject to unexercised options and the value of
unexercised options of the Common Stock of UTI held by the named executive
officers. The values shown were determined by multiplying the applicable
number of unexercised share options by the difference between the per share
market price on December 31, 1998 and the applicable per share exercise
price. There were no options granted to the named executive officers for
the past three fiscal years.
Number of Shares Number of Securities Value of Unexercised
Acquired on Value Underlying Unexercised Unexercised in the
Exercise (#) Realized($) at FY-End(#) Money Options/SARs
at FY-End ($)
Name Exer- Unexer- Exer- Unexer-
cisable cisable cisable cisable
Larry E. Ryherd - - 13,800 - - -
James E. Melville - - 30,000 - - -
George E. Francis - - 4,600 - - -
COMPENSATION OF DIRECTORS
UTI's standard arrangement for the compensation of directors provide that
each director shall receive an annual retainer of $2,400, plus $300 for
each meeting attended and reimbursement for reasonable travel expenses.
UTI's director compensation policy also provides that directors who are
either employees of UTI or directors or officers of First Southern Funding,
LLC and affiliates do not receive any compensation for their services as
directors except for reimbursement for reasonable travel expenses for
attending each meeting; namely Messieurs Ryherd, Melville, Attkisson,
Correll and Oakley.
EMPLOYMENT CONTRACTS
On July 31, 1997, Larry E. Ryherd entered into an employment agreement with
FCC. Formerly, Mr. Ryherd had served as Chairman of the Board and Chief
Executive Officer of the Company and its affiliates. Pursuant to the
agreement, Mr. Ryherd agreed to serve as Chairman of the Board and Chief
Executive Officer of the Company and in addition, to serve in other
positions of the affiliated companies if appointed or elected. The
agreement provides for an annual salary of $400,000 as determined by the
Board of Directors. The term of the agreement is for a period of five
years. Mr. Ryherd has deferred portions of his income under a plan
entitling him to a deferred compensation payment on January 2, 2000 in the
amount of $240,000 which includes interest at the rate of approximately
8.5% per year. Additionally, Mr. Ryherd was granted an option to purchase
up to 13,800 of the Common Stock of the Company at $17.50 per share. The
option is immediately exercisable and transferable. The option will expire
December 31, 2000.
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FCC entered into an employment agreement dated July 31, 1997 with James E.
Melville pursuant to which Mr. Melville is employed as President and Chief
Operating Officer and in addition, to serve in other positions of the
affiliated companies if appointed or elected at an annual salary of
$238,200. The term of the agreement expires July 31, 2002. Mr. Melville
has deferred portions of his income under a plan entitling him to a
deferred compensation payment on January 2, 2000 of $400,000 which includes
interest at the rate of approximately 8.5% annually. Additionally, Mr.
Melville was granted an option to purchase up to 30,000 shares of the
Common Stock of the Company at $17.50 per share. The option is immediately
exercisable and transferable. The option will expire December 31, 2000.
FCC entered into an employment agreement with George E. Francis on July 31,
1997. Under the terms of the agreement, Mr. Francis is employed as
Executive Vice President of the Company at an annual salary of $126,200.
Mr. Francis also agreed to serve in other positions if appointed or elected
to such positions without additional compensation. The term of the
agreement expires July 31, 2000. Mr. Francis has deferred portions of his
income under a plan entitling him to a deferred compensation payment on
January 2, 2000 of $80,000 which includes interest at the rate of
approximately 8.5% per year. Additionally, Mr. Francis was granted an
option to purchase up to 4,600 shares of the Common Stock of the Company at
$17.50 per share. The option is immediately exercisable and transferable.
This option will expire on December 31, 2000.
On July 31, 1997, UTI entered into a severance agreement with Thomas F.
Morrow, Director of the Company since 1984. Mr. Morrow had certain
expectations and understandings as to the length of time he would be
employed by UTI and desired to retire effective July 31, 1997. Mr. Morrow
has agreed to continue as director of UTI and his duties as an executive
officer ceased. UTI paid Mr. Morrow six months' severance in a lump sum of
$150,000. In lieu of renewal commissions that Mr. Morrow was entitled to
under prior agreements, Mr. Morrow will be paid a monthly sum of $4,000 for
a period of 24 months commencing July 31, 1997. Thereafter, Morrow will be
paid a monthly sum of $3,000 for the next 24 month period ending July 31,
2001. Prior to his retirement, Mr. Morrow deferred portions of his income
under a plan entitling him to a deferred compensation payment on January 2,
2000 in the amount of $300,000 which includes interest at the rate of
approximately 8.5% annually. Additionally, Mr. Morrow was granted an
option to purchase up to 17,200 of UTI Common Stock at $17.50 per share.
The option is immediately exercisable and transferable. The option will
expire December 31, 2000. Mr. Morrow also redeemed the Common Stock of the
Company and UII held by himself and his family. See "Related Party
Transactions".
REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION
The compensation of UTI's executive officers is determined by the full
Board of Directors. The Board of Directors strongly believes that UTI's
executive officers directly impact the short-term and long-term performance
of UTI. With this belief and the corresponding objective of making
decisions that are in the best interest of UTI's shareholders, the Board of
Directors places significant emphasis on the design and administration of
UTI's executive compensation plans.
EXECUTIVE COMPENSATION PLAN ELEMENTS
BASE SALARY. The Board of Directors establishes base salaries each year at
a level intended to be within the competitive market range of comparable
companies. In addition to the competitive market range, many factors are
considered in determining base salaries, including the responsibilities
assumed by the executive, the scope of the executive's position,
experience, length of service, individual performance and internal equity
considerations. During the last three fiscal years, there were no material
changes in the base salaries of the named executive officers.
STOCK OPTIONS. One of UTI's priorities is for the executive officers to be
significant shareholders so that the interest of the executives are closely
aligned with the interests of UTI's other shareholders. The Board of
Directors believes that this strategy motivates executives to remain
focused on the overall long-term performance of UTI. Stock options are
granted at the discretion of the Board of Directors and are intended to be
granted at levels within the competitive market range of comparable
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companies. During 1993, each of the named executive officers were granted
options under their employment agreements for UTI's Common Stock as
described in the Employment Contracts section. There were no options
granted to the named executive officers during the last three fiscal years.
DEFERRED COMPENSATION. A very significant component of overall Executive
Compensation Plans is found in the flexibility afforded to participating
officers in the receipt of their compensation. The availability, on a
voluntary basis, of the deferred compensation arrangements as described in
the Employment Contracts section may prove to be critical to certain
officers, depending upon their particular financial circumstance.
CHIEF EXECUTIVE OFFICER
Larry E. Ryherd has been Chairman of the Board and Chief Executive Officer
since 1984. The Board of Directors used the same compensation plan
elements described above for all executive officers to determine Mr.
Ryherd's 1998 compensation.
In setting both the cash-based and equity-based elements of Mr. Ryherd's
compensation, the Board of Directors made an overall assessment of Mr.
Ryherd's leadership in achieving UTI's long-term strategic and business
goals.
Mr. Ryherd's base salary reflects a consideration of both competitive
forces and UTI's performance. The Board of Directors does not assign
specific weights to these categories.
UTI surveys total cash compensation for chief executive officers at the
same group of companies described under "Base Salary" above. Based upon
its survey, UTI then determines a median around which it builds a
competitive range of compensation for the CEO. As a result of this review,
the Board of Directors concluded that Mr. Ryherd's base salary was in the
low end of the competitive market, and his total direct compensation
(including stock incentives) was competitive for CEOs running companies
comparable in size and complexity to UTI.
The Board of Directors considered UTI's financial results as compared to
other companies within the industry, financial performance for fiscal 1998
as compared to fiscal 1997, UTI's progress as it relates to UTI's growth
through acquisitions and simplification of the organization, the fact that
since UTI does not have a Chief Marketing Officer, Mr. Ryherd assumes
additional responsibilities of the Chief Marketing Officer, and Mr.
Ryherd's salary history, performance ranking and total compensation
history.
Through fiscal 1998, Mr. Ryherd's annual salary was $400,000, the amount
the Board of Directors set in January 1997. Following a review of the
above factors, the Board of Directors decided to recognize Mr. Ryherd's
performance by placing a greater emphasis on long-term incentive awards,
and therefore retained Mr. Ryherd's base salary at $400,000.
Conclusion.
The Board of Directors believes the mix of structured employment agreements
with certain key executives, conservative market based salaries,
competitive cash incentives for short-term performance and the potential
for equity-based rewards for long term performance represents an
appropriate balance. This balanced Executive Compensation Plan provides a
competitive and motivational compensation package to the executive officer
team necessary to continue to produce the results UTI strives to achieve.
The Board of Directors also believes the Executive Compensation Plan
addresses both the interests of the shareholders and the executive team.
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BOARD OF DIRECTORS
John S. Albin Raymond L. Larson
Randall L. Attkisson Dale E. McKee
William F. Cellini James E. Melville
Robert E. Cook Thomas F. Morrow
Jesse T. Correll Millard V. Oakley
Larry R. Dowell Larry E. Ryherd
Donald G. Geary
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
UTI's Common Stock during the five fiscal years ended December 31, 1998,
with the cumulative total return on the NASDAQ Composite Index Performance
and the NASDAQ Insurance Stock Index (1):
1992 1993 1994 1995 1996 1997
UTI 100 63 25 19 32 40
100 115 112 159 195 239
NASDAQ
insurance 100 107 100 143 163 239
(1)UTI selected the NASDAQ Composite Index Performance as an appropriate
comparison as UTI's Common Stock is traded on the NASDAQ Small Cap
exchange under the sign "UTIN". Furthermore, UTI selected the NASDAQ
Insurance Stock Index as the second comparison because there is no
similar single "peer company" in the NASDAQ system with which to
compare stock performance and the closest additional line-of-business
index which could be found was the NASDAQ Insurance Stock Index.
Trading activity in UTI's Common Stock is limited, which may be due in
part as a result of UTI's low profile, and its reported operating
losses. UTI has experienced a tremendous growth rate over the period
shown in the Return Chart with assets growing from approximately $233
million in 1991 to approximately $347 million in 1998. The growth rate
has been the result of acquisitions of other companies and new
insurance writings. UTI has incurred costs of conversions and
administrative consolidations associated with the acquisitions which
has contributed to the operating losses. The Return Chart is not
intended to forecast or be indicative of possible future performance of
UTI's stock.
The foregoing graph shall not be deemed to be incorporated by reference
into any filing of UTI under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that UTI specifically
incorporates such information by reference.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as directors of UTI during 1998 and were
officers or employees of UTI or its subsidiaries during 1998: James E.
Melville and Larry E. Ryherd. Accordingly, these individuals have
participated in decisions related to compensation of executive officers of
UTI and its subsidiaries.
During 1998, the following executive officers of UTI were also members of
the Board of Directors of UII, two of whose executive officers served on
the Board of Directors of UTI: Messrs. Melville and Ryherd.
During 1998, Larry E. Ryherd and James E. Melville, executive officers of
UTI, were also members of the Board of Directors of FCC, two of whose
executive officers served on the Board of Directors of UTI: Messrs.
Melville and Ryherd.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF UTI
PRINCIPAL HOLDERS OF SECURITIES
The following tabulation sets forth the name and address of the entity
known to be the beneficial owners of more than 5% of UTI's Common Stock and
shows: (i) the total number of shares of Common Stock beneficially owned
by such person as of December 31, 1998 and the nature of such ownership;
and (ii) the percent of the issued and outstanding shares of Common Stock
so owned as of the same date.
Title Number of Shares Percent
Of Name and Address and Nature of of
Class of Beneficial Owner Beneficial Ownership Class
Common First Southern Funding, LLC 1,054,440(1) 42.34%
Stock no 99 Lancaster Street
Par value P.O. Box 328
Stanford, KY 40484
Larry E. Ryherd 501,701(2) 19.63%
12 Red Bud Lane
Springfield, IL 62707
(1) Includes 123,241 shares owned by First Southern
Bancorp, 183,033 shares owned by First Southern Capital, and 22,135
shares owned by First Southern Investments, all affiliates of First
Southern Funding, LLC. Jesse T. Correll, Director of UTI, by reason of
ownership of 83% of the outstanding shares of First Southern Funding,
LLC may be considered a beneficial owner of UTI.
(2) Larry E. Ryherd owns 181,091 shares of UTI's Common Stock in his own
name. Includes: (i) 150,050 shares of UTI's common Stock in the name of
Dorothy LouVae Ryherd, his wife; (ii) 150,000 shares of UTI's Common Stock
which are held beneficially in trust for the three children of Larry E.
Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek Scott
Ryherd and Jarad John Ryherd; (iii) 4,600 shares of UTI's Common Stock,
2,700 shares of which are in the name of Shari Lynette Serr and 1,900
shares of which are in the name of Jarad John Ryherd; (iv) 2,000 shares
held by Dorothy LouVae Ryherd, his wife, as custodian for granddaughter;
(v) 160 shares held by Larry E. Ryherd as custodian for granddaughter; and
(vi) 13,800 shares which may be acquired by Larry E. Ryherd upon the
exercise of outstanding stock options.
SECURITY OWNERSHIP OF MANAGEMENT OF UTI
The following tabulation shows with respect to each of the directors and
nominees of UTI, with respect to UTI's chief executive officer and each of
UTI's executive officers whose salary plus bonus exceeded $100,000 for
fiscal 1998, and with respect to all executive officers and directors of
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UTI as a group: (i) the total number of shares of all classes of stock of
UTI or any of its parents or subsidiaries, beneficially owned as of
December 31, 1998 and the nature of such ownership; and (ii) the percent of
the issued and outstanding shares of stock so owned as of the same date.
Title Directors, Named ExecutiveNumber of Shares Percent
of Officers, & All Directors &and Nature of of
ClassExecutive Officers as a Group Ownership Class
FCC's John S. Albin 0 *
Common Randall L. Attkisson 0 *
Stock,$1.00 William F. Cellini 0 *
Par value Robert E. Cook 0 *
Jesse T. Correll 0 *
Larry R. Dowell 0 *
George E. Francis 0 *
Donald G. Geary 225 *
Raymond L. Larson 0 *
Dale E. McKee 0 *
James E. Melville 544 (1) *
Thomas F. Morrow 0 *
Millard V. Oakley 0 *
Larry E. Ryherd 0 *
All directors and executive officers
as a group (fourteen in
number) 769 *
UII's John S. Albin 0 *
Common Randall L. Attkisson 0 *
Stock, no William F. Cellini 0 *
Par value Robert E. Cook 4,025 *
Jesse T. Correll 0 *
Larry R. Dowell 0 *
George E. Francis 0 *
Donald G. Geary 0 *
Raymond L. Larson 0 *
Dale E. McKee 0 *
James E. Melville 0 *
Thomas F. Morrow 0 *
Millard V. Oakley 0 *
Larry E. Ryherd 47,250 (2) 3.4%
All directors and executive officers
as a group (fourteen in
number) 51,275 3.7%
UTI's John S. Albin 10,503 (3) *
Common Randall L. Attkisson 0 *
Stock, no William F. Cellini 1,000 *
Par value Robert E. Cook 10,199 *
Jesse T. Correll 0 (4) *
Larry R. Dowell 10,142 *
George E. Francis 4,600 (5) *
Donald G. Geary 1,200 *
Raymond L. Larson 4,400 (6) *
Dale E. McKee 11,122 *
James E. Melville 52,500 (7) 2.1%
Thomas F. Morrow 40,555 (8) 1.6%
Millard V. Oakley 9,000 *
Larry E. Ryherd 501,701 (9) (10) 19.6%
All directors and executive officers
as a group (fourteen
in number) 656,922 25.7%
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(1) James E. Melville owns 168 shares individually and 376 shares owned
jointly with his spouse.
(2) Includes 47,250 shares beneficially in trust for the three children of
Larry E. Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek
Scott Ryherd and Jarad John Ryherd.
(3) Includes 392 shares owned directly by Mr. Albin's spouse.
(4) In addition, Mr. Correll is a director and officer of First Southern
Funding, LLC & Affiliates which owns 1,054,440 shares (42.34%) of the
Company. (See Principal Holders of Securities)
(5) Includes 4,600 shares which may be acquired upon exercise of
outstanding stock options.
(6) Includes 375 shares owned directly by Mr. Larson's spouse.
(7) James E. Melville owns 2,500 shares individually and 14,000 shares
jointly with his spouse. Includes: (i) 3,000 shares of UTI's Common Stock
which are held beneficially in trust for his daughter, namely Bonnie J.
Melville; (ii) 3,000 shares of UTI's Common Stock, 750 shares of which are
in the name of Matthew C. Hartman, his nephew; 750 shares of which are in
the name of Zachary T. Hartman, his nephew; 750 shares of which are in the
name of Elizabeth A. Hartman, his niece; and 750 shares of which are in the
name of Margaret M. Hartman, his niece; and (iii) 30,000 shares which may
be acquired by James E. Melville upon exercise of outstanding stock
options.
(8) Includes 1,500 shares as custodian for grandchildren. Includes 17,200
shares which may be acquired upon exercise of outstanding stock options.
(9) Larry E. Ryherd owns 181,091 shares of UTI's Common Stock in his own
name. Includes: (i) 150,050 shares of UTI's Common Stock in the name of
Dorothy LouVae Ryherd, his wife; (ii) 150,000 shares of UTI's Common Stock
which are held beneficially in trust for the three children of Larry E.
Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek Scott
Ryherd and Jarad John Ryherd; (iii) 4,600 shares of UTI's Common Stock,
2,700 shares of which are in the name of Shari Lynette Serr, 1,900 shares
of which are in the name of Jarad John Ryherd; (iv) 2,000 shares held by
Dorothy LouVae Ryherd, his wife as custodian for granddaughter, (v) 160
shares held by Larry E. Ryherd as custodian for granddaughter; and (vi)
13,800 shares which may be acquired by Larry E. Ryherd upon exercise of
outstanding stock options
(10) In addition, Mr. Ryherd is a director and officer of UII. The Company
owns 565,766 shares of UII. Mr. Ryherd disclaims any beneficial interest
of the 565,766 shares of UII owned by the Company as the Company's Board of
directors controls the voting and investment decisions regarding such
shares.
* Less than 1%.
Except as indicated above, the foregoing persons hold sole voting and
investment power.
Directors and officers of UTI file periodic reports regarding ownership UTI
securities with the Securities and Exchange Commission pursuant to Section
16(a) of the Securities Exchange Act of 1934 as amended, and the rules
promulgated thereunder.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
UTI has a service agreement with its affiliate, UII (equity investee), to
perform services and provide personnel and facilities. The services
included in the agreement are claim processing, underwriting, processing
and servicing of policies, accounting services, agency services, data
processing and all other expenses necessary to carry on the business of a
life insurance company.
UII has a service agreement with USA which states that USA is to pay UII
monthly fees equal to 22% of the amount of collected first year premiums,
20% in second year and 6% of the renewal premiums in years three and after.
UII's subcontract agreement with the Company states that UII is to pay the
Company monthly fees equal to 60% of collected service fees from USA as
stated above.
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On January 1, 1993, FCC entered into an agreement with UG pursuant to which
FCC provides management services necessary for UG to carry on its business.
In addition to the UG agreement, FCC and its affiliates have either
directly or indirectly entered into management and/or cost-sharing
arrangements for FCC's management services. FCC received net management
fees of $9,893,321, $9,927,000 and $10,464,000 under these arrangements in
1997, 1996 and 1995, respectively. UG paid $8,660,481, $9,626,559 and
$10,164,000 to FCC in 1997, 1996 and 1995, respectively.
USA paid $989,295, $1,567,891 and $2,015,325 under their agreement with UII
for 1997, 1996 and 1995, respectively. UII paid $593,577, $940,734 and
$1,209,195 under their agreement with the Company for 1997, 1996 and 1995,
respectively.
Their respective domiciliary insurance departments have approved the
agreements of the insurance companies and it is Management's opinion that
where applicable, costs have been allocated fairly and such allocations are
based upon generally accepted accounting principles. The costs paid by the
Company for these services include costs related to the production of new
business, which are deferred as policy acquisition costs and charged off to
the income statement through "Amortization of deferred policy acquisition
costs". Also included are costs associated with the maintenance of
existing policies that are charged as current period costs and included in
"general expenses".
On July 31, 1997, UTI issued convertible notes for cash received totaling
$2,560,000 to seven individuals, all officers or employees of UTI. The
notes bear interest at a rate of 1% over prime, with interest payments due
quarterly and principal due upon maturity of July 31, 2004. The conversion
price of the notes are graded from $12.50 per share for the first three
years, increasing to $15.00 per share for the next two years and increasing
to $20.00 per share for the last two years. Conditional upon the seven
individuals placing the funds with UTI were the acquisition of a portion of
the holdings of UTI owned by Larry E. Ryherd and his family and the
acquisition of common stock of UTI and UII held by Thomas F. Morrow and his
family and the simultaneous retirement of Mr. Morrow. Neither Mr. Morrow
nor Mr. Ryherd was a party to the convertible notes.
Approximately $1,048,000 of the cash received from the issuance of the
convertible notes was used to acquire stock holdings of UTI and UII of Mr.
Morrow and to acquire a portion of UTI's stock held by Larry E. Ryherd and
his family. The remaining cash received will be used by UTI to provide
additional operating liquidity and for future acquisitions of life
insurance companies. On July 31, 1997, UTI acquired a total of 126,921 of
its own shares of common stock and 47,250 shares of UII common stock from
Thomas F. Morrow and his family. Mr. Morrow simultaneously retired as an
executive officer of UTI. Mr. Morrow will remain as a member of the Board
of Directors of UTI. In exchange for his stock, Mr. Morrow and his family
received approximately $348,000 in cash, promissory notes valued at
$140,000 due in eighteen months, and promissory notes valued at $1,030,000
due January 31, 2005. These notes bear interest at a rate of 1% over
prime, with interest due quarterly and principal due upon maturity. The
notes do not contain any conversion privileges. Additionally, on July 31,
1997, UTI acquired a total of 97,499 shares of its common stock from Larry
E. Ryherd and his family. Mr. Ryherd and his family received approximately
$700,000 in cash and a promissory note valued at $251,000 due January 31,
2005. The acquisition of approximately 16% of Mr. Ryherd's stock holdings
of UTI was completed as a prerequisite to the convertible notes placed by
other management personnel to reduce the total holdings of Mr. Ryherd and
his family to make the stock more attractive to the investment community.
Following the transaction, Mr. Ryherd and his family own approximately 31%
of the outstanding common stock of UTI.
YEAR 2000 ISSUE UTI AND UII
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results. This could have a significant effect on UTI and UII's
business/financial systems as well as products and services, if not
corrected.
UTI and UII established a project to address year 2000 processing concerns
in September of 1996. In 1997 UTI and UII completed the review of UTI and
UII's internally and externally developed software, and made corrections to
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all year 2000 non-compliant processing. UTI and UII also secured
verification of current and future year 2000 compliance from all major
external software vendors. In December of 1997, a separate computer
operating environment was established with the system dates advanced to
December of 1999. A parallel model office was established with all dates
in the data advanced to December of 1999. Parallel model office processing
is being performed using dates from December of 1999 to January of 2001, to
insure all year 2000 processing errors have been corrected. Testing should
be completed by the end of the first quarter of 1998. After testing is
completed, periodic regression testing will be performed to monitor
continuing compliance. By addressing year 2000 compliance in a timely
manner, compliance will be achieved using existing staff and without
significant impact on UTI and UII operationally or financially.
RECENT DEVELOPMENT
Equity Investment in UTI
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Under the terms of the FSF
Agreement, FSF will buy 473,523 authorized but unissued shares of UTI
common stock for $15.00 a share and will also buy 389,715 shares of UTI
common stock that UTI purchased during the last year in private
transactions at the average price UTI paid for such stock, plus interest,
or approximately $10.00 per share. FSF will also purchase 66,667 shares of
UTI common stock and $2,560,000 of face amount convertible bonds which are
due and payable on any change in control of UTI, in private transactions,
primarily from officers of UTI. In addition, FSF will be granted a three
year option to purchase up to 1,450,000 shares of UTI common stock for
$15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life companies.
The transaction is subject to the receipt of regulatory and other
approvals; and the satisfaction of certain conditions. The transaction is
not expected to be completed before July 31, 1998, and there can be no
assurance that the transaction will be completed.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
Effect on Merger of UTI and UII
If the FSF Agreement is consummated, the transaction will have no effect on
the Merger, and in fact, will enhance the need to simplify the
organizational structure which is one of the reasons for the merger. (See
"INFORMATION REGARDING THE PROPOSED MERGER - Reasons for the merger UTI").
UTI has sufficient authorized and unissued shares to cover both the FSF
Agreement and the Merger and as such, the transactions are not conditioned
upon the UTI shareholders approving the proposed increase in authorized
common stock of UTI; however, the option granted to FSF in the FSF
Agreement to purchase up to 1,450,000 shares of UTI common stock will
require and increase in its authorized common stock (See "PROPOSED INCREASE
IN THE AUTHORIZED COMMON STOCK OF UTI").
Effects on Shareholders of UTI and UII
If the FSF Agreement is consummated, there will be no effect on the UII
shareholders. The effect on UTI shareholders will be positive to the
extent that UTI will have an increase in its stockholders' equity from the
FSF investment which will provide additional working capital to expand its
operations through acquisitions. The issuance of the shares to FSF will
have a dilutive ownership effect on UTI shareholders in that the
shareholders will own a smaller percentage of UTI; yet UTI shareholders'
equity will be increased. If the Merger is also consummated, the UII
shareholders will be effected in the same manner as the UTI shareholders.
Additionally, if the merger is consummated and should FSF exercise its
options, FSF would then own approximately 51% of the outstanding common
stock of UTI.
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DESCRIPTION OF UTI AND UII CAPITAL STOCK
UTI
UTI's Articles of Incorporation, as amended authorizes the issuance of
3,500,000 shares of Common Stock, no par value, and 150,000 shares of
Preferred Stock, par value $100 per share. As of January 5, 1998, there
were 1,655,200 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding. While shares of Preferred Stock may be issued
from time to time in the future, UTI has no current plans to issue any such
shares. The rights of holders of Common Stock may be materially limited or
qualified upon issuance of Preferred Stock, as described below under
"Preferred Stock".
DESCRIPTION OF COMMON STOCK
Voting Rights. All shares of Common Stock have equal voting rights,
with one vote per share, on all matters submitted to the shareholders for
their consideration. The shares of Common Stock do not have cumulative
voting rights.
Dividends. Subject to the prior rights of the holders of the
Preferred Stock, holders of Common Stock are entitled to receive dividends
when and if declared by the Board of Directors, out of funds of the Company
legally available therefrom.
Other. Holders of shares of Common Stock do not have any preemptive
rights or other rights to subscribe for additional shares, or any
conversion rights. Upon any liquidation, dissolution or winding up of the
affairs of the Company, holders of the Common Stock are entitled to share
ratably in the assets available for distribution to such shareholder after
the payment of all liabilities and after the liquidation preference of any
Preferred Stock outstanding at the time. There are no sinking fund
provisions applicable to the Common Stock. The outstanding shares of the
Company are fully paid and non-assessable. All shares of Common Stock
issuable upon the merger will likewise be fully paid and non-assessable.
Transfer Agent and Registrar. UTI serves as its own registrar and
transfer agent for the Common Stock.
DESCRIPTION OF PREFERRED STOCK
Under UTI's Articles of Incorporation, in addition to Common Stock,
the Board of Directors authorized to issue, from time to time, without any
further action on the part of its shareholders, up to 150,000 shares of
Preferred Stock in one or more series with such preferences, limitations
and relative rights are are determined by the Board of Directors at the
time of issuance. There are no shares of Preferred Stock currently
outstanding. The rights of holders of Common Stock may be materially
limited or adversely affected upon issuance of shares of Preferred Stock.
For example, the issuance of Preferred Stock could be used in certain
circumstances to render more difficult or discourage a merger, tender offer
or proxy contest or a removal of incumbent management. Preferred Stock may
be issued with voting and conversion rights that could adversely affect the
voting power and other rights of the holders of Common Stock. While shares
of Preferred Stock may be issued from time to time in the future, UTI has
no current plans to issue any such shares.
LIQUIDATION
Upon liquidation, after payment of the liquidation preferences of any
outstanding Preferred Stock, the remaining net assets of UTI will be
distributed pro rata to the holders of the Common Stock, in cash or in
kind.
UII
UII Articles of Incorporation, as amended authorizes the issuance of
2,310,001 shares of Common Stock, no par value, and 150,000 shares of
Preferred Stock, par value $100 per share. As of January 5, 1998, there
were 1,391,919 shares of Common Stock outstanding and no shares of
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Preferred Stock outstanding. The rights of holders of Common Stock may be
materially limited or qualified upon issuance of Preferred Stock, as
described below under "Preferred Stock".
Voting Rights. All shares of Common Stock have equal voting rights,
with one vote per share, on all matters submitted to the shareholders for
their consideration. The shares of Common Stock do not have cumulative
voting rights.
Dividends. Subject to the prior rights of the holders of the
Preferred Stock, holders of Common Stock are entitled to receive dividends
when and if declared by the Board of Directors, out of funds of the Company
legally available therefrom.
Other. Holders of shares of Common Stock do not have any preemptive
rights or other rights to subscribe for additional shares, or any
conversion rights. Upon any liquidation, dissolution or winding up of the
affairs of the Company, holders of the Common Stock are entitled to share
ratably in the assets available for distribution to such shareholder after
the payment of all liabilities and after the liquidation preference of any
Preferred Stock outstanding at the time. There are no sinking fund
provisions applicable to the Common Stock. The outstanding shares of the
Company are fully paid and non-assessable
Transfer Agent and Registrar. UII serves as its own registrar and
transfer agent for the Common Stock.
DESCRIPTION OF PREFERRED STOCK
Under UII's Articles of Incorporation, in addition to Common Stock,
the Board of Directors of the Company is authorized to issue, from time to
time, without any further action on the part of its shareholders, up to
150,000 shares of Preferred Stock in one ore more series with such
preferences, limitations and relative rights as are determined by the Board
of Directors at the time of issuance. There are no shares of Preferred
Stock currently outstanding. The rights of holders of Common Stock may be
materially limited or adversely affected upon issuance of shares of
Preferred Stock. For example, the issuance of Preferred Stock could be
used in certain circumstances to render more difficult or discourage a
merger, tender offer or proxy contest or a removal of incumbent management.
Preferred Stock may be issued with voting and conversion rights that could
adversely affect the voting power and other rights of the holders of Common
Stock. While shares of Preferred Stock may be issued from time to time in
the future, UII has no current plans to issue any such shares.
LIQUIDATION
Upon liquidation, after payment of the liquidation preferences of any
outstanding Preferred Stock, the remaining net assets of UII will be
distributed pro rata to the holders of the Common Stock, in cash or in
kind.
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PROPOSED INCREASE IN THE AUTHORIZED COMMON STOCK OF UTI
The Board of Directors of UTI has declared advisable and in the best
interests of UTI and its stockholders, and has recommended to the
stockholders, an amendment of Article Fourth of UTI's Articles of
Incorporation (the "Amendment") increasing UTI's authorized Common Stock
from 3,500,000 shares to 7,000,000 shares. Appendix D, to this Proxy
Statement contains the text of the Amendment. The following discussion of
the Amendment is qualified in its entirety by reference to the text of the
Amendment set forth in Appendix C.
At present, UTI's authorized capital stock consists of 3,500,000 shares
of Common Stock, no par value and 150,000 shares of Preferred Stock, par
value $100 per share. As of the record date there were no shares of the
Preferred Stock issued and outstanding. On that date there were 1,912,239
shares of Common Stock issued and outstanding with 257,039 shares being
held in UTI's treasury.
The proposed Amendment increases the number of authorized shares of
Common Stock from 3,500,000 shares to 7,000,000 shares. The Amendment has
no effect on the present authorization with respect to the Preferred Stock.
The purpose of the Amendment is to provide UTI with the flexibility to
engage in future transactions that UTI's Board of Directors may deem
necessary or desirable. For example, the increase in authorized shares of
Common Stock would allow UTI to declare and effectuate a stock dividend
without further shareholder action or to acquire another company by
exchanging shares of Common Stock of UTI for shares of the other company.
The Amendment would also enable UTI to grant options to purchase shares of
the authorized but unissued Common Stock to certain employees. Other than
the Proposed Merger, UTI has committed approximately 360,000 shares of
authorized but unissued Common Stock under current agreements.
The additional shares of authorized Common Stock resulting from the
Amendment would be identical in all respects to the existing Common Stock.
All outstanding Common Stock would continue to have one vote per share.
The authorized but currently unissued Preferred Stock would continue to be
issuable by the Board, from time to time, with the voting powers,
designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations, or restrictions, as
described at DESCRIPTION OF UTI AND UII CAPITAL STOCK - UTI -Preferred
Stock.
The Board is empowered to issue authorized shares of Common stock in
excess of those outstanding without further action by the stockholders,
unless such action is required by applicable law or regulatory agencies or
by the rules, if UTI shall choose to comply with such rules, of any stock
exchange on which UTI's securities may then be listed. Current
stockholders have no pre-emptive rights to subscribe to or to purchase any
securities of UTI of any kind or class. Additional shares might be issued
at such times and under such circumstances as to have a dilutive effect on
earnings per share and on the equity ownership of the present holders of
Common Stock. Such shares could also be used to make more difficult a
change in control of UTI. Under certain circumstances, the Board of
Directors of UTI could create impediments or frustrate persons seeking to
effect a takeover or otherwise gain control of UTI, by causing such shares
to be issued to a holder or holders who might side with the Board in
opposing a takeover bid that the Board determines is not in the best
interests of UTI and its stockholders. In addition, the existence of such
shares might have the effect of discouraging an attempt by another person
or entity to acquire control of UTI through the acquisition of a
substantial amount of Common Stock, since the issuance of such shares could
dilute the stock ownership of such person or entity.
The Board of Directors of UTI recommends to the stockholders of UTI that
they vote in favor of the Amendment. The affirmative vote of two thirds of
the outstanding shares of UTI Common Stock is required to approve the
proposal. Unless otherwise instructed, proxies will be voted in favor of
the proposal to adopt the Amendment. If approved, the Amendment will
become effective upon filing and recording as required by the Illinois
Business Corporation Act.
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RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Kerber, Eck and Braeckel LLP served as UTI's and UII's independent
certified public accounting firm for the fiscal year ended December 31,
1997 and for fiscal year ended December 31, 1996. In serving its primary
function as outside auditor, Kerber, Eck and Braeckel LLP performed the
following audit services: examination of annual consolidated financial
statements; assistance and consultation on reports filed with the
Securities and Exchange Commission and; assistance and consultation on
separate financial reports filed with the State insurance regulatory
authorities pursuant to certain statutory requirements. UTI and UII do not
expect that a representative of Kerber, Eck and Braeckel LLP will be
present at the Special Meeting of Shareholders. Kerber, Eck and Braeckel
LLP has been selected for fiscal year 1998.
OTHER MATTERS TO COME BEFORE THE MEETING
The management does not intend to bring any other business before the
meetings of the UTI and UII shareholders and has no reason to believe that
any will be presented in the meetings. If, however, any other business
should properly be presented to the meetings, the proxies named in the
enclosed form of proxy will vote the proxies in accordance with their best
judgement.
SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Proposals intended to be presented by Shareholders at the 1998 Annual
Meeting of Shareholders of UTI and UII must be received by UTI or UII, as
the case may be, not later than December 31, 1998, in order to be
considered for inclusion in the proxy statement and form of proxy relating
to that meeting. Any such proposal should be communicated in writing to
the particular company's Secretary at the address indicated above. If the
Merger is consummated, no such UII meeting will be held.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Springfield,
State of Illinois, on
UNITED TRUST, INC.
By /s/ Larry E. Ryherd
Larry E. Ryherd
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
/s/ John S. Albin
John S. Albin, Director
/s/ William F. Cellini
William F. Cellini, Director
/s/ Robert E. Cook
Robert E. Cook, Director
/s/ Larry R. Dowell
Larry R. Dowell, Director
/s/ Donald G. Geary
Donald G. Geary, Director
/s/ Raymond L. Larson
Raymond L. Larson, Director
/s/ Dale E. McKee
Dale E. McKee, Director
/s/ Thomas F. Morrow
Thomas F. Morrow, Director
/s/ Larry E. Ryherd
Larry E. Ryherd, Chairman of the Board,
Chief Executive Officer and Director
/s/ James E. Melville
James E. Melville, Chief Operating Officer,
President, and Director
/s/ Theodore C. Miller
Theodore C. Miller, Senior Vice President,
Chief Financial Officer (Principal Financial
and Accounting Officer)
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<PAGE> UTI INDEX TO EXHIBITS
Exhibit
Number
3(a) (1) Amended Articles of Incorporation for the Company dated
November 20, 1987.
3(b) (1) Amended Articles of Incorporation for the Company dated
December 6, 1991.
3(c) (1) Amended Articles of Incorporation for the Company dated
March 30, 1993.
3(d) (1) Code of By-Laws for the Company.
8(a) Tax Opinion of KPMG Peat Marwick LLP dated October 9, 1998.
10(a) (2) Credit Agreement dated May 8, 1996 between First of
America Bank - Illinois, N.A., as lender and First
Commonwealth Corporation, as borrower.
10(b) (2) $8,900,000 Term Note of First Commonwealth Corporation to
First of America Bank - Illinois, N.A. dated May 8, 1996.
10(c) (2) Coinsurance Agreement dated September 30, 1996 between
Universal Guaranty Life Insurance Company and First
International Life Insurance Company, including assumption
reinsurance agreement exhibit and amendments.
10(d) (1) Subcontract Agreement dated September 1, 1990 between
United Trust, Inc. and United Income, Inc.
10(e) (1) Service Agreement dated November 8, 1989 between United
Security Assurance Company and United Income, Inc.
10(f) (1) Management and Consultant Agreement dated as of January 1,
1993 between First Commonwealth Corporation and
Universal Guaranty Life Insurance Company.
10(g) (1) Management Agreement dated December 20, 1981 between
Commonwealth Industries Corporation, and Abraham
Lincoln Insurance Company.
10(h) (1) Reinsurance Agreement dated January 1, 1991 between
Universal Guaranty Life Insurance Company and Republic
Vanguard Life Insurance Company.
10(i) (1) Reinsurance Agreement dated July 1, 1992 between United
Security Assurance Company and Life Reassurance
Corporation of America.
10(j) (1) United Trust, Inc. Stock Option Plan.
10(k) (1) Board Resolution adopting United Trust, Inc.'s Officer
Incentive Fund.
10(l) (3) Employment Agreement dated as of July 31, 1997 between
Larry E. Ryherd and First Commonwealth Corporation
10(m) (3) Employment Agreement dated as of July 31, 1997 between
James E. Melville and First Commonwealth Corporation
10(n) (3) Employment Agreement dated as of July 31, 1997 between
George E. Francis and First Commonwealth Corporation.
Agreements containing the same terms and conditions
excepting title and current salary were also entered into
by Joseph H. Metzger, BradM. Wilson, Theodore C. Miller,
Michael K. Borden and Patricia G.Fowler.
134
<PAGE>
10(o) (1) Consulting Arrangement entered into June 15, 1987 between
Robert E. Cook and United Trust, Inc.
10(p) (1) Agreement dated June 16, 1992 between John K. Cantrell and
First Commonwealth Corporation.
10(q) (1) Termination Agreement dated as of January 29, 1993 between
Scott J. Engebritson and United Trust, Inc., United
Fidelity, Inc., United Income, Inc., First Commonwealth
Corporation and United Security Assurance Company.
10(r) (1) Stock Purchase Agreement dated February 20, 1992 between
United Trust Group, Inc. and Sellers.
10(s) (1) Amendment No. One dated April 20, 1992 to the Stock
Purchase Agreement between the Sellers and United Trust
Group, Inc.
10(t) (1) Security Agreement dated June 16, 1992 between United
Trust Group, Inc. and the Sellers.
10(u) (1) Stock Purchase Agreement dated June 16, 1992 between
United Trust Group, Inc. and First Commonwealth Corporation
Footnote:
(1) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-5392, as of December 31, 1993.
(2) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-5392, as of December 31, 1996.
(3) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-5392, as of December 31, 1997
135
<PAGE>
UII INDEX TO EXHIBITS
Exhibit
Number
3(i) (1) Articles of Incorporation for the Company dated November2, 1987.
3(i) (1) Amended Articles of Incorporation for the Company dated
January 27, 1988.
3(ii) (1) Code of Regulations for the Company.
10(a) (1) Service Agreement between United Income, Inc. and United
Security Assurance Company dated November 8, 1989.
10(b) (2) Subcontract Service Agreement between United Income, Inc.
and United Trust, Inc. dated September 1, 1990.
10(c) (2) Non-Qualified Stock Option Plan
10(d) (2) Stock Option Plan
10(e) (3) Credit Agreement dated May 8, 1996 between First of America
Bank - Illinois, N.A., as lender and First Commonwealth
Corporation, as borrower.
10(f) (3) $8,900,000 Term Note of First Commonwealth Corporation to
First of America Bank - Illinois, N.A. dated May 8, 1996.
10(g) (3) Coinsurance Agreement dated September 30, 1996 between
Universal Guaranty Life Insurance Company and First
International Life Insurance Company, including assumption
reinsurance agreement exhibit and amendments.
10(h) (4) Employment Agreement dated as of July 31, 1997 between
Larry E. Ryherd and First Commonwealth Corporation
10(i) (4) Employment Agreement dated as of July 31, 1997 between
James E. Melville and First Commonwealth Corporation
10(j) (4) Employment Agreement dated as of July 31, 1997 between
George E. Francis and First Commonwealth Corporation.
Agreements containing the same terms and conditions
excepting title and current salary were also entered into by
Joseph H. Metzger, Brad M. Wilson, Theodore C. Miller,
Michael K. Borden and Patricia G. Fowler.
99(a) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s securities dated March 9, 1988.
99(b) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s Securities dated April 5, 1989.
99(c) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s Securities dated April 23, 1990.
99(d) Audited financial statements of United Trust Group, Inc.
136
<PAGE>
FOOTNOTE
(1) Incorporated by reference from the Company's Registration
Statement on Form 10, File No. 0-18540, filed on April 30, 1990.
(2) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-18540, as of December 31,1991.
(3) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-18540, as of December 31, 1996.
(4) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-1854, as of December 31, 1997.
137
<PAGE>
INDEX TO FINANCIAL STATEMENTS
United Trust, Inc.
Annual Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996 136
Consolidated Statements of Operations Three Years
Ended December 31, 1997 137
Consolidated Statements of Shareholders' Equity Three Years
Ended December 31, 1997 138
Consolidated Statements of Cash Flows Three Years Ended
December 31, 1997 139
Notes to Financial Statements 140
Interim Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 175
Consolidated Statements of Operations Nine Months
Ended September 30, 1998 and 1997 176
Consolidated Statements of Cash Flows Nine Months Ended
September 30, 1998 and 1997 177
Notes to Consolidated Financial Statements 178
United Income, Inc.
Consolidated Balance Sheets as of December 31, 1997 and 1996 186
Consolidated Statements of Operations Three Years Ended
December 31, 1997 187
Consolidated Statements of Shareholders' Equity Three Years
Ended December 31, 1997 188
Consolidated Statements of Cash Flows Three Years Ended
December 31, 1997 189
Notes to Financial Statements 190
Exhibit Containing Audited Consolidated Financial Statements and
Notes of United Trust Group, Inc. 200
Interim Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 235
Consolidated Statements of Operations Nine Months
Ended Sept 30, 1998 and 1997 236
Consolidated Statements of Cash Flows Nine Months Ended
Sept 30, 1998 and 1997 237
Notes to Consolidated Financial Statements 238
138
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND SHAREHOLDERS
UNITED TRUST, INC.
We have audited the accompanying consolidated balance sheets of United
Trust, Inc. (an Illinois corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. 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
United Trust, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1997, and Schedules
II, IV and V as of December 31, 1997 and 1996, of United Trust, Inc. and
subsidiaries and Schedules II, IV and V for each of the three years in the
period then ended. In our opinion, these schedules present fairly, in all
material respects, the information required to be set forth therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1998
139
<PAGE>
UTI CONSOLIDATED BALANCE SHEETS AS OF 12/31/97
UNITED TRUST, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1996
<TABLE>
<S> <C> <C>
ASSETS
1997 1996
Investments:
Fixed maturities at amortized cost
(market $184,782,568 and
$181,815,225) $ 180,970,333 $ 179,926,785
Investments held for sale:
Fixed maturities, at market
(cost $1,672,298 and $1,984,661) 1,668,630 1,961,166
Equity securities, at market
(cost $3,184,357 and $2,086,159) 3,001,744 1,794,405
Mortgage loans on real estate
at amortized cost 9,469,444 11,022,792
Investment real estate, at cost, net
of accumulated depreciation 9,760,732 9,779,984
Real estate acquired in
satisfaction of debt 1,724,544 1,724,544
Policy loans 14,207,189 14,438,120
Short-term investments 1,798,878 430,983
222,601,494 221,078,779
Cash and cash equivalents 16,105,933 17,326,235
Investment in affiliates 5,636,674 4,826,584
Accrued investment income 3,686,562 3,461,799
Reinsurance receivables:
Future policy benefits 37,814,106 38,745,013
Policy claims and other benefits 3,529,078 3,856,124
Other accounts and notes receivable 845,066 894,321
Cost of insurance acquired 41,522,888 43,917,280
Deferred policy acquisition costs 10,600,720 11,325,356
Cost in excess of net assets purchased,
net of accumulated amortization 2,777,089 5,496,808
Property and equipment, net
of accumulated depreciation 3,412,956 3,255,171
Other assets 767,258 1,290,192
Total assets $ 349,299,824 $ 355,473,662
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 248,805,695 $ 248,879,317
Policy claims and benefits payable 2,080,907 3,193,806
Other policyholder funds 2,445,469 2,784,967
Dividend and endowment accumulations 14,905,816 13,913,676
Income taxes payable:
Current 15,730 70,663
Deferred 14,174,260 13,193,431
Notes payable 21,460,223 19,573,953
Indebtedness to affiliates, net 18,475 31,837
Other liabilities 3,790,051 5,975,483
Total liabilities 307,696,626 307,617,133
Minority interests in consolidated
subsidiaries 26,246,580 29,842,672
Shareholders' equity:
Common stock - no par value,
stated value $.02 per share.
Authorized 3,500,000 shares -
1,634,779 and 1,870,093 shares
issued after deducting treasury
shares of 277,460 and 42,384 32,696 37,402
Additional paid-in capital 16,488,375 18,638,591
Unrealized depreciation of
investments held for sale (29,127) (86,058)
Accumulated deficit (1,135,326) (576,078)
Total shareholders' equity 15,356,618 18,013,857
Total liabilities and
shareholders' equity $ 349,299,824 $ 355,473,662
</TABLE>
See accompanying notes
140
<PAGE>
UTI CONSOLIDATED STATEMENTS OF OPERATIONS AS OF 12/31/97
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1997
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Revenues:
Premiums and
policy fees $ 33,373,950$ 35,891,609$ 38,481,638
Reinsurance
premiums
and policy fees (4,734,705) (4,947,151) (5,383,102
Net investment
income 14,857,297 15,868,447 15,456,224
Realized investment
gains and
(losses), net (279,096) (987,930) (124,235)
Other income 774,884 1,151,395 1,438,559
43,992,330 46,976,370 49,869,084
Benefits and other expenses:
Benefits, claims and
settlement expenses:
Life 23,644,252 26,568,062 26,680,217
Reinsurance
benefits and
claims (2,078,982) (2,283,827) (2,850,228)
Annuity 1,560,828 1,892,489 1,797,475
Dividends to
Policyholders 3,929,073 4,149,308 4,228,300
Commissions and
amortization of deferred
policy
acquisition
costs 3,616,365 4,224,885 4,907,653
Amortization of cost
of insurance
acquired 2,394,392 5,524,815 4,303,237
Amortization of
agency force 0 0 396,852
Non-recurring write down
of value of
agency force 0 0 8,296,974
Operating expenses 9,222,913 11,994,464 11,517,648
Interest expense 1,816,491 1,731,309 1,966,776
44,105,332 53,801,505 61,244,904
Loss before income taxes,
minority interest
and equity in loss of
investees (113,002) (6,825,135) (11,375,820)
Income tax credit (expense) (986,229) 4,703,741 4,571,028
Minority interest in loss
of consolidated
subsidiaries 563,699 1,278,883 4,439,496
Equity in loss of investees (23,716) (95,392) (635,949)
Net loss $ (559,248)$ (937,903)$ (3,001,245)
Net loss per
common share $ (0.32)$ (0.50)$ (1.61)
Average common
shares outstanding 1,772,870 1,869,511 1,866,851
</TABLE>
See accompanying notes
141
<PAGE>
UTI CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY 12/31/97
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1997
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Common stock
Balance, beginning
of year $ 37,402 $ 37,352 $ 37,312
Issued during year 0 50 40
Stock retired from
purchase of fractional
shares of reverse
stock split (7) 0 0
Purchase treasury
stock (4,699) 0 0
Balance, end
of year $ 32,696 $ 37,402 $ 37,352
Additional paid-in capital
Balance, beginning
of year $ 18,638,591$ 18,624,578$ 18,612,118
Issued during year 0 14,013 12,460
Stock retired from
purchase of fractional
shares of reverse
stock split (2,374) 0 0
Purchase treasury
stock (2,147,842) 0 0
Balance, end
of year $ 16,488,375$ 18,638,591$ 18,624,578
Unrealized appreciation (depreciation) of
investments held for sale
Balance, beginning
of year $ (86,058)$ (1,499)$ (143,405)
Change during year 56,931 (84,559) 141,906
Balance, end
of year $ (29,127)$ (86,058)$ (1,499)
Retained earnings (accumulated deficit)
Balance, beginning
of year $ (576,078)$ 361,825 $ 3,363,070
Net loss (559,248) (937,903) (3,001,245)
Balance, end
of year $ (1,135,326)$ (576,078)$ 361,825
Total shareholders' equity,
end of year $ 15,356,618$ 18,013,857 $ 19,022,256
</TABLE>
See accompanying notes
142
<PAGE>
UTI CONSOLIDATED STATEMENT OF CASH FLOWS 12/31/97
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1997
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Increase (decrease) in cash
and cash equivalents
Cash flows from operating
activities:
Net loss $ (559,248)$ (937,903)$ (3,001,245)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities
net of changes in assets and
liabilities resulting from the
sales and purchases
of subsidiaries:
Amortization/accretion
of fixed
maturities 670,185 899,445 803,696
Realized investment
(gains) losses,
net 279,096 987,930 124,235
Policy acquisition
costs deferred (586,000) (1,276,000) (2,370,000)
Amortization of
deferred policy
acquisition
costs 1,310,636 1,387,372 1,567,748
Amortization of cost
of insurance
acquired 2,394,392 5,524,815 4,303,237
Amortization of value
of agency force 0 0 396,852
Non-recurring write
down of value of
agency force 0 0 8,296,974
Amortization of costs
in excess of net
assets purchased 155,000 185,279 423,192
Depreciation 469,854 390,357 720,605
Minority interest (563,699) (1,278,883) (4,439,496
Equity in loss of
investees 23,716 95,392 635,949
Change in accrued
investment income(224,763) 210,043 (171,257)
Change in reinsurance
receivables 1,257,953 83,871 (482,275)
Change in policy
liabilities and
accruals (547,081) 3,326,651 3,581,928
Charges for mortality
and administration
of universal life and
annuity
products (10,588,874) (10,239,476) (9,757,354)
Interest credited to
account balances 7,212,406 7,075,921 6,644,282
Change in income
taxes payable 925,896 (4,714,258) (4,595,571)
Change in indebtedness
(to) from affiliates(13,362) 119,706 (20,004)
Change in other assets
and liabilities,
net (1,593,358) 1,299,773 (2,175,839)
Net cash provided by (used in)
operating activities 22,749 3,140,035 485,657
Cash flows from investing activities:
Proceeds from investments
sold and matured:
Fixed maturities
held for sale 290,660 1,219,036 619,612
Fixed maturities sold 0 18,736,612 0
Fixed maturities
matured 21,488,265 20,721,482 16,265,140
Equity securities 76,302 8,990 104,260
Mortgage loans 1,794,518 3,364,427 2,252,423
Real estate 1,136,995 3,219,851 1,768,254
Policy loans 4,785,222 3,937,471 4,110,744
Short term 410,000 825,000 25,000
Total proceeds from
investments sold and
matured 29,981,962 52,032,869 25,145,433
Cost of investments acquired:
Fixed maturities (23,220,172) (29,365,111) (25,112,358)
Equity securities (1,248,738) 0 (1,000,000)
Mortgage loans (245,234) (503,113) (322,129)
Real estate (1,444,980) (813,331) (1,902,609)
Policy loans (4,554,291) (4,329,124) (4,713,471)
Short term (1,726,035) (830,983) (100,000)
Total cost of investments
acquired (32,439,450) (35,841,662) (33,150,567)
Purchase of property
and equipment (531,528) (383,411) (57,625)
Net cash provided by (used in)
investing activities (2,989,016) 15,807,796 (8,062,759)
Cash flows from financing activities:
Policyholder contract
deposits 17,905,246 22,245,369 25,021,983
Policyholder contract
withdrawals (14,515,576) (15,433,644) (16,008,462)
Net cash transferred
from coinsurance ceded 0 (19,088,371) 0
Proceeds from notes
payable 2,560,000 9,050,000 300,000
Payments of principal
on notes payable(1,874,597) (10,923,475) (905,861)
Payment for fractional
shares from reverse
stock split (2,381) 0 0
Payment for fractional
shares from reverse
stock split of
subsidiary (534,251) 0 0
Purchase of stock
of affiliates (865,877) 0 0
Purchase of
treasury stock (926,599) 0 0
Proceeds from issuance
of common stock 0 500 400
Net cash provided by (used in )
financing activities 1,745,965 (14,149,621) 8,408,060
Net increase (decrease) in
cash and cash equivalents(1,220,302) 4,798,210 830,958
Cash and cash equivalents
at beginning of year 17,326,235 12,528,025 11,697,067
Cash and cash equivalents
at end of year $ 16,105,933 $ 17,326,235$ 12,528,025
</TABLE>
See accompanying notes
143
<PAGE>
UNITED TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1997, the
parent, significant majority-owned subsidiaries and affiliates of
United Trust, Inc., were as depicted on the following organizational
chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
144
<PAGE>
The Company's significant accounting
policies consistently applied in the preparation of the accompanying
consolidated financial statements are summarized as follows.
B. NATURE OF OPERATIONS - United Trust, Inc.
is an insurance holding company, which sells individual life
insurance products through its subsidiaries. The Company's principal
market is the Midwestern United States. The primary focus of the
Company has been the servicing of existing insurance business in
force, the solicitation of new life insurance products and the
acquisition of other companies in similar lines of business.
C. PRINCIPLES OF CONSOLIDATION - The
consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. Investments in 20% to 50% owned
affiliates in which management has the ability to exercise
significant influence are included based on the equity method of
accounting and the Company's share of such affiliates' operating
results is reflected in Equity in loss of investees. Other
investments in affiliates are carried at cost. All significant
intercompany accounts and transactions have been eliminated.
D. BASIS OF PRESENTATION - The financial
statements of United Trust, Inc.'s life insurance subsidiaries have
been prepared in accordance with generally accepted accounting
principles which differ from statutory accounting practices permitted
by insurance regulatory authorities.
E. USE OF ESTIMATES - In preparing financial
statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
F. INVESTMENTS - Investments are shown on
the following bases:
Fixed maturities -- at cost, adjusted for
amortization of premium or discount and other-than-temporary market
value declines. The amortized cost of such investments differs from
their market values; however, the Company has the ability and intent
to hold these investments to maturity, at which time the full face
value is expected to be realized.
Investments held for sale -- at current
market value, unrealized appreciation or depreciation is charged
directly to shareholders' equity.
Mortgage loans on real estate -- at
unpaid balances, adjusted for amortization of premium or discount,
less allowance for possible losses.
Real estate - Investment real estate at
cost, less allowances for depreciation and, as appropriate,
provisions for possible losses. Foreclosed real estate is adjusted
for any impairment at the foreclosure date. Accumulated depreciation
on investment real estate was $539,366 and $442,373 as of December
31, 1997 and 1996, respectively.
Policy loans -- at unpaid balances
including accumulated interest but not in excess of the cash
surrender value.
Short-term investments -- at cost, which
approximates current market value.
Realized gains and losses on sales of
investments are recognized in net income on the specific
identification basis.
G. RECOGNITION OF REVENUES AND RELATED
EXPENSES - Premiums for traditional life insurance products, which
include those products with fixed and guaranteed premiums and
benefits, consist principally of whole life insurance policies,
limited-payment life insurance policies, and certain annuities with
life contingencies are recognized as revenues when due. . Limited
payment life insurance policies defer gross premiums received in
excess of net premiums, which is then recognized in income in a
constant relationship with insurance in force. Accident and health
insurance premiums are recognized as revenue pro rata over the terms
145
<PAGE>
of the policies. Benefits and related expenses associated with the
premiums earned are charged to expense proportionately over the lives
of the policies through a provision for future policy benefit
liabilities and through deferral and amortization of deferred policy
acquisition costs. For universal life and investment products,
generally there is no requirement for payment of premium other than
to maintain account values at a level sufficient to pay mortality and
expense charges. Consequently, premiums for universal life policies
and investment products are not reported as revenue, but as deposits.
Policy fee revenue for universal life policies and investment
products consists of charges for the cost of insurance and policy
administration fees assessed during the period. Expenses include
interest credited to policy account balances and benefit claims
incurred in excess of policy account balances.
H. DEFERRED POLICY ACQUISITION COSTS -
Commissions and other costs (salaries of certain employees involved
in the underwriting and policy issue functions, and medical and
inspection fees)of acquiring life insurance products that vary with
and are primarily related to the production of new business have been
deferred. Traditional life insurance acquisition costs are being
amortized over the premium-paying period of the related policies
using assumptions consistent with those used in computing policy
benefit reserves.
For universal life insurance and interest
sensitive life insurance products, acquisition costs are being
amortized generally in proportion to the present value of expected
gross profits from surrender charges and investment, mortality, and
expense margins. Under SFAS No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments," the Company
makes certain assumptions regarding the mortality, persistency,
expenses, and interest rates it expects to experience in future
periods. These assumptions are to be best estimates and are to be
periodically updated whenever actual experience and/or expectations
for the future change from initial assumptions. The amortization is
adjusted retrospectively when estimates of current or future gross
profits to be realized from a group of products are revised.
The following table summarizes deferred
policy acquisition costs and related data for the years shown.
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Deferred, beginning
of year $ 11,325,356 $ 11,436,728 $ 10,634,476
Acquisition costs deferred:
Commissions 312,000 845,000 1,838,000
Other expenses 274,000 431,000 532,000
Total 586,000 1,276,000 2,370,000
Interest accretion 425,000 408,000 338,000
Amortization
charged to income (1,735,636) (1,795,372) (1,905,748)
Net amortization (1,310,636) (1,387,372) (1,567,748)
Change for the year (724,636) (111,372) 802,252
Deferred, end of year $ 10,600,720 $ 11,325,356 $ 11,436,728
</TABLE>
146
<PAGE>
The following table reflects the components of the income statement
for the line item Commissions and amortization of deferred policy
acquisition costs:
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Net amortization of deferred
policy acquisition costs $ 1,310,636 $ 1,387,372 $ 1,567,748
Commissions 2,305,729 2,837,513 3,339,905
Total $ 3,616,365 $ 4,224,885 $ 4,907,653
Estimated net amortization expense of deferred policy acquisition
costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
</TABLE>
<TABLE>
<S> <C> <C> <C>
1998 $ 403,000 $ 1,530,000 $ 1,127,000
1999 365,000 1,359,000 994,000
2000 330,000 1,211,000 881,000
2001 299,000 1,082,000 783,000
2002 270,000 969,000 699,000
</TABLE>
I.COST OF INSURANCE ACQUIRED - When an insurance company is acquired,
the Company assigns a portion of its cost to the right to receive
future cash flows from insurance contracts existing at the date of
the acquisition. The cost of policies purchased represents the
actuarially determined present value of the projected future cash
flows from the acquired policies. The Company utilized 9% discount
rate on approximately 24% of the business and 15% discount rate on
approximately 76% of the business. Cost of Insurance Acquired is
amortized with interest in relation to expected future profits,
including direct charge-offs for any excess of the unamortized asset
over the projected future profits. The interest rates utilized in
the amortization calculation are 9% on approximately 24% of the
balance and 15% on the remaining balance. The interest rates vary
due to differences in the blocks of business. The amortization is
adjusted retrospectively when estimates of current or future gross
profits to be realized from a group of products are revised.
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Cost of insurance acquired,
beginning of year $ 43,917,280 $ 55,816,934 $ 60,120,171
Interest accretion 5,962,644 6,312,931 7,044,239
Amortization (8,357,036) (11,837,746) (11,347,476)
Net amortization (2,394,392) (5,524,815) (4,303,237)
Balance attributable to
coinsurance agreement 0 (6,374,839) 0
Cost of insurance acquired,
end of year $ 41,522,888 $ 43,917,280 $ 55,816,934
</TABLE>
Estimated net amortization expense of cost of insurance acquired for
the next five years is as follows:
Interest Net
Accretion Amortization Amortization
<TABLE>
<S> <C> <C> <C>
1998 $ 6,113,000 $ 8,261,000 $ 2,148,000
1999 5,787,000 7,271,000 1,484,000
2000 5,559,000 6,811,000 1,252,000
2001 5,367,000 6,828,000 1,461,000
2002 4,737,000 6,203,000 1,466,000
</TABLE>
147
<PAGE>
J.COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net
assets purchased is the excess of the amount paid to acquire a
company over the fair value of its net assets. Costs in excess of
net assets purchased are amortized on the straight-line basis over a
40-year period. Management continually reviews the value of goodwill
based on estimates of future earnings. As part of this review,
management determines whether goodwill is fully recoverable from
projected undiscounted net cash flows from earnings of the
subsidiaries over the remaining amortization period. If management
were to determine that changes in such projected cash flows no longer
supported the recoverability of goodwill over the remaining
amortization period, the carrying value of goodwill would be reduced
with a corresponding charge to expense (no such changes have
occurred). Accumulated amortization of cost in excess of net assets
purchased was $1,420,146 and $1,265,146 as of December 31, 1997 and
1996, respectively. A reverse stock split of FCC in May of 1997
created negative goodwill of $2,564,719. The credit to goodwill
resulted from the retirement of fractional shares. Please refer to
Note 11 to the Consolidated Financial Statements for additional
information concerning the reverse stock split.
K. PROPERTY AND EQUIPMENT - Company-
occupied property, data processing equipment and furniture and office
equipment are stated at cost less accumulated depreciation of
$1,990,314 and $1,617,453 at December 31, 1997 and 1996,
respectively. Depreciation is computed on a straight-line basis for
financial reporting purposes using estimated useful lives of three to
30 years. Depreciation expense was $372,861 and $418,449 for the
years ended December 31, 1997 and 1996, respectively.
L.FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for
traditional life insurance and accident and health insurance policy
benefits are computed using a net level method. These liabilities
include assumptions as to investment yields, mortality, withdrawals,
and other assumptions based on the life insurance subsidiaries'
experience adjusted to reflect anticipated trends and to include
provisions for possible unfavorable deviations. The Company makes
these assumptions at the time the contract is issued or, in the case
of contracts acquired by purchase, at the purchase date. Benefit
reserves for traditional life insurance policies include certain
deferred profits on limited-payment policies that are being
recognized in income over the policy term. Policy benefit claims are
charged to expense in the period that the claims are incurred.
Current mortality rate assumptions are based on 1975-80 select and
ultimate tables. Withdrawal rate assumptions are based upon Linton B
or Linton C, which are industry standard actuarial tables for
forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive
life insurance products are computed under a retrospective deposit
method and represent policy account balances before applicable
surrender charges. Policy benefits and claims that are charged to
expense include benefit claims in excess of related policy account
balances. Interest crediting rates for universal life and interest
sensitive products range from 5.0% to 6.0% in 1997, 1996 and 1995.
M.POLICY AND CONTRACT CLAIMS - Policy and contract claims include
provisions for reported claims in process of settlement, valued in
accordance with the terms of the policies and contracts, as well as
provisions for claims incurred and unreported based on prior
experience of the Company.
N.PARTICIPATING INSURANCE - Participating business represents 29% and
30% of the ordinary life insurance in force at December 31, 1997 and
1996, respectively. Premium income from participating business
represents 50%, 52%, and 55% of total premiums for the years ended
December 31, 1997, 1996 and 1995, respectively. The amount of
dividends to be paid is determined annually by the respective
insurance subsidiary's Board of Directors. Earnings allocable to
participating policyholders are based on legal requirements that vary
by state.
O.INCOME TAXES - Income taxes are reported under Statement of
Financial Accounting Standards Number 109. Deferred income taxes are
recorded to reflect the tax consequences on future periods of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at the end of each such period.
148
<PAGE>
P.BUSINESS SEGMENTS - The Company operates principally in the
individual life insurance business.
Q.EARNINGS PER SHARE - Earnings per share are based on the weighted
average number of common shares outstanding during each year,
retroactively adjusted to give effect to all stock splits. In
accordance with Statement of Financial Accounting Standards No. 128,
the computation of diluted earnings per share is not shown since the
Company has a loss from continuing operations in each period
presented, and any assumed conversion, exercise, or contingent
issuance of securities would have an antidilutive effect on earnings
per share. Had the Company not been in a loss position, the
outstanding dilutive instruments would have been convertible notes of
204,800, 0 and 0 shares in 1997, 1996 and 1995, respectively, and
stock options exercisable of 1,562, 1,562, and 4,062 shares in 1997,
1996, and 1995, respectively, UTI had stock options outstanding
during each of the periods presented for 105,000 shares of common
stock at a per share price in excess of the average market price, and
would therefore not have been included in the computation of diluted
earnings per share
R.CASH EQUIVALENTS - The Company considers certificates of deposit
and other short-term instruments with an original purchased maturity
of three months or less cash equivalents.
S.RECLASSIFICATIONS - Certain prior year amounts have been
reclassified to conform with the 1997 presentation. Such
reclassifications had no effect on previously reported net loss,
total assets, or shareholders' equity.
T.REINSURANCE - In the normal course of business, the Company seeks
to limit its exposure to loss on any single insured and to recover a
portion of benefits paid by ceding reinsurance to other insurance
enterprises or reinsurers under excess coverage and coinsurance
contracts. The Company retains a maximum of $125,000 of coverage per
individual life.
Amounts paid or deemed to have been paid for reinsurance contracts
are recorded as reinsurance receivables. Reinsurance receivables is
recognized in a manner consistent with the liabilities relating to
the underlying reinsured contracts. The cost of reinsurance related
to long-duration contracts is accounted for over the life of the
underlying reinsured policies using assumptions consistent with those
used to account for the underlying policies.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1997, substantially all of consolidated shareholders'
equity represents net assets of UTI's subsidiaries. The payment of cash
dividends to shareholders is not legally restricted. However, insurance
company dividend payments are regulated by the state insurance department
where the company is domiciled. UTI is the ultimate parent of UG through
ownership of several intermediary holding companies. UG can not pay a
dividend directly to UTI due to the ownership structure. UG's dividend
limitations are described below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,246.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,365. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
3. INCOME TAXES
Until 1984, the insurance companies were taxed under the provisions of the
Life Insurance Company Income Tax Act of 1959 as amended by the Tax Equity
and Fiscal Responsibility Act of 1982. These laws were superseded by the
Deficit Reduction Act of 1984. All of these laws are based primarily upon
statutory results with certain special deductions and other items available
149
<PAGE>
only to life insurance companies. Under the provision of the pre-1984 life
insurance company income tax regulations, a portion of "gain from
operations" of a life insurance company was not subject to current taxation
but was accumulated, for tax purposes, in a special tax memorandum account
designated as "policyholders' surplus account". Federal income taxes will
become payable on this account at the then current tax rate when and if
distributions to shareholders, other than stock dividends and other limited
exceptions, are made in excess of the accumulated previously taxed income
maintained in the "shareholders surplus account".
The following table summarizes the companies with this situation and the
maximum amount of income that has not been taxed in each.
Shareholder's Untaxed
Company Surplus Balance
<TABLE>
<S> <C> <C>
ABE $ 5,237,958 $ 1,149,693
APPL 5,417,825 1,525,367
UG 27,760,313 4,363,821
USA 0 0
</TABLE>
The payment of taxes on this income is not anticipated; and, accordingly,
no deferred taxes have been established.
The life insurance company subsidiaries file a consolidated federal income
tax return. The holding companies of the group file separate returns.
Life insurance company taxation is based primarily upon statutory results
with certain special deductions and other items available only to life
insurance companies. Income tax expense consists of the following
components:
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Current tax expense $ 5,400 $ (148,148) $ 2,641
Deferred tax
expense (credit) 980,829 (4,555,593) (4,573,669)
$ 986,229 $ (4,703,741) $(4,571,028)
</TABLE>
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
<TABLE>
<S> <C> <C> <C>
UTI UG FCC
2004 $ 597,103 $ 0 $ 163,334
2005 292,656 0 138,765
2006 212,852 2,400,574 33,345
2007 110,758 782,452 676,067
2008 0 939,977 4,595
2009 0 0 168,800
2010 0 0 19,112
2012 0 2,970,692 0
TOTAL $ 1,213,369 $ 7,093,695 $ 1,204,018
</TABLE>
The Company has established a deferred tax asset of $3,328,879 for its
operating loss carryforwards and has established an allowance of
$2,904,200.
150
<PAGE>
The following table shows the reconciliation of net income to taxable
income of UTI:
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Net income (loss) $ (559,248) $ (937,903) $ (3,001,245)
Federal income tax
provision (credit) 414,230 (59,780) 153,764
Loss of subsidiaries 356,422 714,916 2,613,546
Loss of investees 23,716 95,392 635,949
Write off of investment
in affilliate 0 315,000 10,000
Write off of note receivable 0 211,419 0
Depreciation 0 1,046 3,095
Other 44,059 25,528 22,091
Taxable income $ 279,179 $ 365,618 $ 437,200
</TABLE>
UTI has a net operating loss carryforward of $1,213,369 at December 31,
1997. UTI has averaged $300,000 in taxable income over the past four years
and must average taxable income of $122,000 per year to fully realize its
net operating loss carryforwards. UTI's operating loss carryforwards do
not begin to expire until the year 2004. Management believes future
earnings of UTI will be sufficient to fully utilize its net operating loss
carryforwards.
The expense or (credit) for income differed from the amounts computed by
applying the applicable United State statutory rate of 35% to the loss
before income taxes as a result of the following differences:
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Tax computed at
statutory rate $ (39,551) $ (2,388,797) $ (3,981,537)
Changes in taxes due to:
Cost in excess of net
assets purchased 54,250 64,848 60,594
Current year loss for
which no benefit
realized 1,039,742 0 0
Benefit of prior losses (324,705) (2,393,395) (601,563)
Other 256,493 13,603 (48,522)
Income tax expense
(credit) $ 986,229 $ (4,703,741) $ (4,571,028)
</TABLE>
151
<PAGE>
The following table summarizes the major components that comprise the
deferred tax liability as reflected in the balance sheets:
1997 1996
<TABLE>
<S> <C> <C>
Investments $ (228,027) $ (122,251)
Cost of insurance
acquired 15,753,308 16,637,884
Other assets (72,468) (187,747)
Deferred policy
acquisition costs 3,710,252 3,963,875
Agent balances (23,954) (65,609)
Property and
equipment (19,818) (37,683)
Discount of notes 1,097,352 922,766
Management/
consulting fees (573,182) (733,867)
Future policy
benefits (4,421,038) (5,906,087)
Gain on sale of
subsidiary 2,312,483 2,312,483
Net operating loss
carryforward (424,679) (522,392)
Other liabilities (756,482) (1,151,405)
Federal tax DAC (2,179,487) (1,916,536)
Deferred tax
liability $ 14,174,260 $ 13,193,431
</TABLE>
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A.NET INVESTMENT INCOME - The following table reflects net investment
income by type of investment:
December 31,
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Fixed maturities and fixed
maturities held for sale $ 12,677,348 $ 13,326,312 $ 13,190,121
Equity securities 87,211 88,661 52,445
Mortgage loans 802,123 1,047,461 1,257,189
Real estate 745,502 794,844 975,080
Policy loans 976,064 1,121,538 1,041,900
Short-term investments 70,624 21,423 21,295
Other 696,486 691,111 642,632
Total consolidated investment
income 16,055,358 17,091,350 17,180,662
Investment expenses (1,198,061) (1,222,903) (1,724,438)
Consolidated net investment
income $ 14,857,297 $ 15,868,447 $ 15,456,224
</TABLE>
At December 31, 1997, the Company had a total of $5,797,000 of
investments, comprised of $3,848,000 in real estate and $1,949,000 in
equity securities, which did not produce income during 1997.
152
<PAGE>
The following table summarizes the Company's fixed maturity holdings and
investments held for sale by major classifications:
Carrying Value
1997 1996
<TABLE>
<S> <C> <C>
Investments held for sale:
Fixed maturities $ 1,668,630 $ 1,961,166
Equity securities 3,001,744 1,794,405
Fixed maturities:
U.S. Government, government agencies
and authorities 28,259,322 28,554,631
State, municipalities and political
subdivisions 22,778,816 14,421,735
Collateralized mortgage obligations 11,093,926 13,246,781
Public utilities 47,984,322 51,821,989
All other corporate bonds 70,853,947 71,891,649
$ 185,640,707 $ 183,692,356
</TABLE>
By insurance statute, the majority of the Company's investment portfolio
is required to be invested in investment grade securities to provide
ample protection for policyholders. The Company does not invest in so-
called "junk bonds" or derivative investments.
Below investment grade debt securities generally provide higher yields
and involve greater risks than investment grade debt securities because
their issuers typically are more highly leveraged and more vulnerable to
adverse economic conditions than investment grade issuers. In addition,
the trading market for these securities is usually more limited than for
investment grade debt securities. Debt securities classified as below-
investment grade are those that receive a Standard & Poor's rating of BB
or below.
The following table summarizes by category securities held that are
below investment grade at amortized cost:
<TABLE>
<S> <C> <C> <C>
Below Investment
Grade Investments 1997 1996 1995
State,
Municipalities and
Political
Subdivisions $ 0 $ 10,042 $ 0
Public Utilities 80,497 117,609 116,879
Corporate 656,784 813,717 819,010
Total $ 737,281 $ 941,368 $ 935,889
</TABLE>
153
<PAGE>
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in
securities including investments held for sale are as follows:
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
<TABLE>
<S> <C> <C> <C> <C>
Investments Held
for Sale:
U.S. Government
and govt. agencies
and authorities $ 1,448,202 $ 0 $ (5,645) $ 1,442,557
States,
municipalities and
political subdivisions 35,000 485 0 35,485
Collateralized
mortgage Obligations 0 0 0 0
Public utilities 80,169 328 0 80,496
All other corporate
bonds 108,927 1,164 0 110,092
1,672,298 1,977 (5,645) 1,668,630
Equity securities 3,184,357 176,508 (359,121) 3,001,744
Total $ 4,856,655 $ 178,485 (364,766) $ 4,670,374
Held to Maturity Securities:
U.S. Government
and govt. agencies
and authorities$ 28,259,322 $ 415,419 $(51,771) $ 28,622,970
States,
municipalities and
political
subdivisions 22,778,816 672,676 (1,891) 23,449,601
Collateralized
mortgage Obligations 11,093,926 210,435 (96,714) 11,207,647
Public utilities 47,984,322 1,241,969 (84,754) 49,141,537
All other
corporate bonds 70,853,947 1,599,983 (93,117) 72,360,813
Total $ 180,970,333 $ 4,140,482 $ (328,247) $ 184,782,568
</TABLE>
154
<PAGE>
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
1996
<TABLE>
<S> <C> <C> <C> <C>
Investments Held for Sale:
U.S. Government
and govt. agencies and
authorities $ 1,461,068 $ 0 $ (17,458) $ 1,443,609
States,
municipalities and
political subdivisions 145,199 665 (6,397) 139,467
Collateralized
mortgage Obligations 0 0 0 0
Public utilities 119,970 363 (675) 119,658
All other corporate
bonds 258,424 4,222 (4,215) 258,432
1,984,661 5,250 (28,745) 1,961,166
Equity
securities 2,086,159 37,000 (328,754) 1,794,405
Total $ 4,070,820 $ 42,250 (357,499) $ 3,755,571
Held to Maturity Securities:
U.S. Government
and govt. agencies
and authorities $ 28,554,631 $ 421,523 (136,410) $ 28,839,744
States,
municipalities and
political
subdivisions 14,421,735 318,682 (28,084) 14,712,333
Collateralized
mortgage Obligations 13,246,780 175,163 (157,799) 13,264,145
Public utilities 51,821,990 884,858 (381,286) 52,325,561
All other corporate
bonds 71,881,649 1,240,230 (448,437) 72,673,442
Total $ 179,926,785 $ 3,040,456 $ (1,152,016) $ 181,815,225
</TABLE>
The amortized cost of debt securities at December 31, 1997, by
contractual maturity, are shown 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.
Fixed Maturities Held Estimated
for Sale Amortized Market
December 31, 1997 Cost Value
<TABLE>
<S> <C> <C>
Due in one year or less $ 83,927 $ 84,952
Due after one year
through five years 1,533,202 1,528,211
Due after five years
through ten years 55,169 55,467
Due after ten years 0 0
Collateralized mortgage obligations 0 0
Total $ 1,672,298 $ 1,668,630
</TABLE>
155
<PAGE>
Fixed Maturities Held to Amortized Estimated
Maturity Cost Market
December 31, 1997 Value
<TABLE>
<S> <C> <C>
Due in one year or less $ 15,023,173 $ 15,003,728
Due after one year
through five years 118,849,668 120,857,201
Due after five years
through ten years 30,266,228 31,726,265
Due after ten years 5,737,338 5,987,726
Collateralized mortgage
obligations 11,093,926 11,207,648
Total $ 180,970,333 $ 184,782,568
</TABLE>
An analysis of sales, maturities and principal repayments of the
Company's fixed maturities portfolio for the years ended December 31,
1997, 1996 and 1995 is as follows:
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December Cost Gains Losses Sale
31, 1997
<TABLE>
<S> <C> <C> <C> <C>
Scheduled principal repayments, calls and tenders:
Held for sale $ 299,390 $ 931 $ (9,661) $ 290,660
Held to maturity 21,467,552 21,435 (722) 21,488,265
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
Total $ 21,766,942 $ 22,366 $(10,383) $ 21,778,925
</TABLE>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December Cost Gains Losses Sale
31, 1996
<TABLE>
<S> <C> <C> <C> <C>
Scheduled principal repayments, calls and tenders:
Held for sale $ 699,361 $ 6,035 $ (813) $ 704,583
Held to maturity 20,900,159 13,469 (192,146) 20,721,482
Sales:
Held for sale 517,111 0 (2,658) 514,453
Held to maturity 18,735,848 81,283 (80,519) 18,736,612
Total $ 40,852,479 $ 100,787 (276,136) $ 40,677,130
</TABLE>
156
<PAGE>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December Cost Gains Losses Sale
31, 1995
<TABLE>
<S> <C> <C> <C> <C>
Scheduled principal repayments, calls and tenders:
Held for sale $ 621,461 $ 0 $ (1,849) $ 619,612
Held to maturity 16,383,921 125,740 (244,521) 16,265,140
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
Total $ 17,005,382 $ 125,740 (246,370) $ 16,884,752
</TABLE>
C.INVESTMENTS ON DEPOSIT - At December 31, 1997, investments carried at
approximately $17,801,000 were on deposit with various state insurance
departments.
D.INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES - The Company's
investment in United Income, Inc., a 40% owned affiliate, is carried at
an amount equal to the Company's share of the equity of United Income.
The Company's equity in United Income, Inc. includes the original
investment of $194,304, an increase of $4,359,749 resulting from a
public offering of stock and the Company's share of earnings and losses
since inception.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information
at December 31, 1997 and 1996, as required by Statement of Financial
Accounting Standards 107, Disclosure about Fair Value of Financial
Instruments ("SFAS 107"). Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in
that Statement and does not purport to represent the aggregate net fair
value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value:
(a) Cash and Cash equivalents
The carrying amount in the financial statements approximates fair value
because of the relatively short period of time between the origination of
the instruments and their expected realization.
(b) Fixed maturities and investments held for sale
Quoted market prices, if available, are used to determine the fair value.
If quoted market prices are not available, management estimates the fair
value based on the quoted market price of a financial instrument with
similar characteristics.
(c) Mortgage loans on real estate
The fair values of mortgage loans are estimated using discounted cash flow
analyses and interest rates being offered for similar loans to borrowers
with similar credit ratings.
(d) Investment real estate and real estate acquired in satisfaction of
debt
An estimate of fair value is based on management's review of the individual
real estate holdings. Management utilizes sales of surrounding properties,
current market conditions and geographic considerations. Management
conservatively estimates the fair value of the portfolio is equal to the
carrying value.
157
<PAGE>
(e) Policy loans
It is not practicable to estimate the fair value of policy loans as they
have no stated maturity and their rates are set at a fixed spread to
related policy liability rates. Policy loans are carried at the aggregate
unpaid principal balances in the consolidated balance sheets, and earn
interest at rates ranging from 4% to 8%. Individual policy liabilities in
all cases equal or exceed outstanding policy loan balances.
(f) Short-term investments
For short-term instruments, the carrying amount is a reasonable estimate of
fair value. Short-term instruments represent United States Government
Treasury Bills and certificates of deposit with various banks that are
protected under FDIC.
(g) Notes and accounts receivable and uncollected premiums
The Company holds a $840,066 note receivable for which the determination of
fair value is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Accounts
receivable and uncollected premiums are primarily insurance contract
related receivables which are determined based upon the underlying
insurance liabilities and added reinsurance amounts, and thus are excluded
for the purpose of fair value disclosure by paragraph 8(c) of SFAS 107.
(h) Notes payable
For borrowings under the senior loan agreement, which is subject to
floating rates of interest, carrying value is a reasonable estimate of fair
value. For subordinated borrowings fair value was determined based on the
borrowing rates currently available to the Company for loans with similar
terms and average maturities.
The estimated fair values of the Company's financial instruments required
to be valued by SFAS 107 are as follows as of December 31:
1997 1996
Estimated Estimated
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
<TABLE>
<S> <C> <C> <C> <C>
Fixed
maturities $ 180,970,333 $ 184,782,568 $ 179,926,785 $ 181,815,225
Fixed
maturities
held for sale 1,668,630 1,668,630 1,961,166 1,961,166
Equity
securities 3,001,744 3,001,744 1,794,405 1,794,405
Mortgage
loans on
real estate 9,469,444 9,837,530 11,022,792 11,022,792
Policy loans 14,207,189 14,207,189 14,438,120 14,438,120
Short-term
Investments 1,798,878 1,798,878 430,983 430,983
Investment
in real Estate 9,760,732 9,760,732 9,779,984 9,779,984
Real estate
acquired
in satisfaction
of debt 1,724,544 1,724,544 1,724,544 1,724,544
Notes receivable 840,066 784,831 840,066 783,310
Liabilities
Notes payable 21,460,223 20,925,184 19,573,953 18,937,055
</TABLE>
155
<PAGE>
6. STATUTORY EQUITY AND GAIN FROM OPERATIONS
The Company's insurance subsidiaries are domiciled in Ohio, Illinois and
West Virginia and prepare their statutory-based financial statements in
accordance with accounting practices prescribed or permitted by the
respective insurance department. These principles differ significantly
from generally accepted accounting principles. "Prescribed" statutory
accounting practices include state laws, regulations, and general
administrative rules, 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, from company to
company within a state, and may change in the future. The NAIC currently
is in the process of codifying statutory accounting practices, the result
of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project, which has not
yet been completed, will likely change prescribed statutory accounting
practices and may result in changes to the accounting practices that
insurance enterprises use to prepare their statutory financial statements.
UG's total statutory shareholders' equity was $10,997,365 and $10,226,566
at December 31, 1997 and 1996, respectively. The Company's insurance
subsidiaries reported combined statutory gain from operations (exclusive of
intercompany dividends) was $3,978,000, $10,692,000 and $4,076,000 for
1997, 1996 and 1995, respectively.
7. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.
The Company assumes risks from, and reinsures certain parts of its risks
with other insurers under yearly renewable term and coinsurance agreements
that are accounted for by passing a portion of the risk to the reinsurer.
Generally, the reinsurer receives a proportionate part of the premiums less
commissions and is liable for a corresponding part of all benefit payments.
While the amount retained on an individual life will vary based upon age
and mortality prospects of the risk, the Company generally will not carry
more than $125,000 individual life insurance on a single risk.
The Company has reinsured approximately $1.022 billion, $1.109 billion and
$1.088 billion in face amount of life insurance risks with other insurers
for 1997, 1996 and 1995, respectively. Reinsurance receivables for future
policy benefits were $37,814,106 and $38,745,093 at December 31, 1997 and
1996, respectively, for estimated recoveries under reinsurance treaties.
Should any reinsurer be unable to meet its obligation at the time of a
claim, obligation to pay such claim would remain with the Company.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover all new business of the Company.
The agreements are a yearly renewable term ("YRT") treaty where the Company
cedes amounts above its retention limit of $100,000 with a minimum cession
of $25,000.
One of the Company's insurance subsidiaries (UG) entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. The transaction resulted in no gain or loss in the
GAAP financial statements. The transaction was entered into to increase
the statutory surplus position of UG. The ceding commission received was
equal to the value reflected on this block of business in the Cost of
Insurance Acquired asset. The ceding commission reduced this asset. Under
the terms of the agreement, UG ceded to FILIC substantially all of its paid-
up life insurance policies. Paid-up life insurance generally refers to non-
premium paying life insurance policies. A.M. Best assigned FILIC a
Financial Performance Rating (FPR) of 7 (Strong) on a scale of 1 to 9.
A.M. Best assigned a Best's Rating of A++ (Superior) to The Guardian Life
Insurance Company of America ("Guardian"), parent of FILIC, based on the
consolidated financial condition and operating performance of the company
and its life/health subsidiaries. During 1997, FILIC changed its name to
Park Avenue Life Insurance Company ("PALIC"). The agreement with PALIC
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accounts for approximately 65% of the reinsurance receivables as of
December 31, 1997.
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long-duration reinsurance contracts on premiums
earned in 1997, 1996 and 1995 was as follows:
Shown in thousands
1997 1996 1995
Premiums Premiums Premiums
Earned Earned Earned
<TABLE>
<S> <C> <C> <C>
Direct $ 33,374 $ 35,891 $ 38,482
Assumed 0 0 0
Ceded (4,735) (4,947) (5,383)
Net
premiums $ 28,639 $ 30,944 $ 33,099
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. Some of the lawsuits have resulted in the award
of substantial judgments against the insurer, including material amounts of
punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances.
Under the insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed insurance
companies. Although the Company cannot predict the amount of any future
assessments, most insurance guaranty fund laws currently provide that an
assessment may be excused or deferred if it would threaten an insurer's
financial strength. Mandatory assessments may be partially recovered
through a reduction in future premium tax in some states. The Company does
not believe such assessments will be materially different from amounts
already provided for in the financial statements.
The Company and its subsidiaries are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
liabilities. Management and its legal counsel are of the opinion that the
settlement of those actions will not have a material adverse effect on the
Company's financial position or results of operations.
9. RELATED PARTY TRANSACTIONS
Under the current structure, FCC pays a majority of the general operating
expenses of the affiliated group. FCC then receives management, service
fees and reimbursements from the various affiliates.
UII has a service agreement with USA. The agreement was originally
established upon the formation of USA which was a 100% owned subsidiary of
UII. Changes in the affiliate structure have resulted in USA no longer
being a direct subsidiary of UII, though still a member of the same
affiliated group. The original service agreement has remained in place
without modification. USA is to pay UII monthly fees equal to 22% of the
amount of collected first year premiums, 20% in second year and 6% of the
renewal premiums in years three and after. UII has a subcontract agreement
with UTI to perform services and provide personnel and facilities. The
services included in the agreement are claim processing, underwriting,
processing and servicing of policies, accounting services, agency services,
data processing and all other expenses necessary to carry on the business
of a life insurance company. UII's subcontract agreement with UTI states
that UII is to pay UTI monthly fees equal to 60% of collected service fees
from USA as stated above. The service fees received from UII are recorded
in UTI's financial statements as other income.
USA paid $989,295, $1,567,891 and $2,015,325 under their agreement with UII
for 1997, 1996 and 1995, respectively. UII paid $593,577, $940,734 and
$1,209,195 under their agreement with UTI for 1997, 1996 and 1995,
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respectively. Additionally, UII paid FCC $150,000, $300,000 and $600,000
in 1997, 1996 and 1995, respectively for reimbursement of costs attributed
to UII. These reimbursements are reflected as a credit to general
expenses.
Respective domiciliary insurance departments have approved the agreements
of the insurance companies and it is Management's opinion that where
applicable, costs have been allocated fairly and such allocations are based
upon generally accepted accounting principles. The costs paid by UTI for
services include costs related to the production of new business, which are
deferred as policy acquisition costs and charged off to the income
statement through "Amortization of deferred policy acquisition costs".
Amounts recorded by USA as deferred acquisition costs are no greater than
what would have been recorded had all such expenses been directly incurred
by USA. Also included are costs associated with the maintenance of
existing policies that are charged as current period costs and included in
"general expenses".
On July 31, 1997, United Trust Inc. issued convertible notes for cash
received totaling $2,560,000 to seven individuals, all officers or
employees of United Trust Inc. The notes bear interest at a rate of 1%
over prime, with interest payments due quarterly and principal due upon
maturity of July 31, 2004. The conversion price of the notes are graded
from $12.50 per share for the first three years, increasing to $15.00 per
share for the next two years and increasing to $20.00 per share for the
last two years. Conditional upon the seven individuals placing the funds
with the Company were the acquisition by UTI of a portion of the holdings
of UTI owned by Larry E. Ryherd and his family and the acquisition of
common stock of UTI and UII held by Thomas F. Morrow and his family and the
simultaneous retirement of Mr. Morrow. Neither Mr. Morrow nor Mr. Ryherd
was a party to the convertible notes.
Approximately $1,048,000 of the cash received from the issuance of the
convertible notes was used to acquire stock holdings of United Trust Inc.
and United Income, Inc. of Mr. Morrow and to acquire a portion of the
United Trust Inc. holdings of Larry E. Ryherd and his family. The
remaining cash received will be used by the Company to provide additional
operating liquidity and for future acquisitions of life insurance
companies. On July 31, 1997, the Company acquired a total of 126,921
shares of United Trust Inc. common stock and 47,250 shares of United
Income, Inc. common stock from Thomas F. Morrow and his family. Mr. Morrow
simultaneously retired as an executive officer of the Company. Mr. Morrow
will remain as a member of the Board of Directors. In exchange for his
stock, Mr. Morrow and his family received approximately $348,000 in cash,
promissory notes valued at $140,000 due in eighteen months, and promissory
notes valued at $1,030,000 due January 31, 2005. These notes bear interest
at a rate of 1% over prime, with interest due quarterly and principal due
upon maturity. The notes do not contain any conversion privileges.
Additionally, on July 31, 1997, the Company acquired a total of 97,499
shares of United Trust Inc. common stock from Larry E. Ryherd and his
family. Mr. Ryherd and his family received approximately $700,000 in cash
and a promissory note valued at $251,000 due January 31, 2005. The
acquisition of approximately 16% of Mr. Ryherd's stock holdings in United
Trust Inc. was completed as a prerequisite to the convertible notes placed
by other management personnel to reduce the total holdings of Mr. Ryherd
and his family in the Company to make the stock more attractive to the
investment community. Following the transaction, Mr. Ryherd and his family
own approximately 31% of the outstanding common stock of United Trust Inc.
THE MARKET PRICE OF UTI COMMON STOCK ON JULY 31, 1997 WAS $6.00 PER SHARE.
THE STOCK ACQUIRED IN THE ABOVE TRANSACTION WAS FROM THE LARGEST TWO
SHAREHOLDERS OF UTI STOCK. THERE WERE NO ADDITIONAL STATED OR UNSTATED
ITEMS OR AGREEMENTS RELATING TO THE STOCK PURCHASE.
On September 23, 1997, the Company acquired 10,056 shares of UTI common
stock from Paul Lovell, a director, for $35,000 and a promissory note
valued at $61,000 due September 23, 2004. The note bears interest at a
rate of 1% over prime, with interest due quarterly and principal reductions
of $10,000 annually until maturity. Simultaneous with the stock purchase,
Mr. Lovell resigned his position on the UTI board.
On July 31,1997, the Company entered into employment agreements with eight
individuals, all officers or employees of the Company. The agreements have
a term of three years, excepting the agreements with Mr. Ryherd and Mr.
Melville, which have five-year terms. The agreements secure the services
of these key individuals, providing the Company a stable management
environment and positioning for future growth.
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10. CAPITAL STOCK TRANSACTIONS
A. STOCK OPTION PLAN
In 1985, the Company initiated a nonqualified stock option plan for
employees, agents and directors of the Company under which options to
purchase up to 44,000 shares of UTI's common stock are granted at a
fixed price of $.20 per share. Through December 31, 1997 options for
42,438 shares were granted and exercised. Options for 1,562 shares
remain available for grant.
A summary of the status of the Company's stock option plan for the three
years ended December 31, 1997, and changes during the years ending on
those dates is presented below.:
1997 1996 1995
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,562 $ 0.20 4,062 $ 0.20 6,062 $0.20
Granted 0 0.00 0 0.00 0 0.00
Exercised 0 0.00 (2,500) 0.20 (2,000) 0.20
Forfeited 0 0.00 0 0.00 0 0.00
Outstanding at end
of year 1,562 $ 0.20 1,562 $ 0.20 4,062 $0.20
Options exercisable at
year end 1,562 $ 0.20 1,562 $ 0.20 4,062 $0.20
Fair value of options granted
during the year $ 0.00 $ 5.43 $6.05
</TABLE>
The following information applies to options outstanding at December 31, 1997:
Number outstanding 1,562
Exercise price $ 0.20
Remaining contractual life Indefinite
B. DEFERRED COMPENSATION PLAN
UTI and FCC established a deferred compensation plan during 1993
pursuant to which an officer or agent of FCC, UTI or affiliates of UTI,
could defer a portion of their income over the next two and one-half
years in return for a deferred compensation payment payable at the end
of seven years in the amount equal to the total income deferred plus
interest at a rate of approximately 8.5% per annum and a stock option
to purchase shares of common stock of UTI. At the beginning of the
deferral period an officer or agent received an immediately exercisable
option to purchase 2,300 shares of UTI common stock at $17.50 per share
for each $25,000 ($10,000 per year for two and one-half years) of total
income deferred. The option expires on December 31, 2000. A total of
105,000 options were granted in 1993 under this plan. As of December
31, 1997 no options were exercised. At December 31, 1997 and 1996, the
Company held a liability of $1,376,384 and $1,267,598, respectively,
relating to this plan. At December 31, 1997, UTI common stock had a bid
price of $8.00 and an ask price of $9.00 per share.
The following information applies to deferred compensation plan stock
options outstanding at December 31, 1997:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 3 years
C. CONVERTIBLE NOTES
On July 31, 1997, United Trust Inc. issued convertible notes for cash
in the amount of $2,560,000 to seven individuals, all officers or
employees of United Trust Inc. The notes bear interest at a rate of 1%
over prime, with interest payments due quarterly and principal due upon
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maturity of July 31, 2004. The conversion price of the notes are
graded from $12.50 per share for the first three years, increasing to
$15.00 per share for the next two years and increasing to $20.00 per
share for the last two years. As of December 31, 1997, the notes were
convertible into 204,800 shares of UTI common stock with no conversion
privileges having been exercised. At December 31, 1997, UTI common
stock had a bid price of $8.00 and an ask price of $9.00 per share.
D. REVERSE STOCK SPLIT
On May 13, 1997, UTI effected a 1 for 10 reverse stock split.
Fractional shares received a cash payment on the basis of $1.00 for
each old share. The reverse split was completed to enable UTI to meet
new NASDAQ requirements regarding market value of stock to remain
listed on the NASDAQ market and to increase the market value per share
to a level where more brokers will look at UTI and its stock. Prior
period numbers have been restated to give effect of the reverse split.
11. REVERSE STOCK SPLIT OF FCC
On May 13, 1997, FCC effected a 1 for 400 reverse stock split. Fractional
shares received a cash payment on the basis of $.25 for each old share.
FCC maintained a significant number of shareholder accounts with less than
$100 of market value of stock. The reverse stock split enabled these
smaller shareholders to receive cash for their shares without incurring
broker costs and will save the Company administrative costs associated with
maintaining these small accounts.
12. NOTES PAYABLE
At December 31, 1997 and 1996, the Company has $21,460,223 and $19,573,953
in long-term debt outstanding, respectively. The debt is comprised of the
following components:
1997 1996
<TABLE>
<S> <C> <C>
Senior debt $ 6,900,000 $ 8,400,000
Subordinated 10 yr.
notes 5,746,774 6,209,293
Subordinated 20 yr.
notes 3,902,582 3,814,660
Convertible notes 2,560,000 0
Other notes payable 2,350,867 1,150,000
$ 21,460,223 $ 19,573,953
</TABLE>
A. Senior debt
The senior debt is through First of America Bank - Illinois NA and is
subject to a credit agreement. The debt bears interest at a rate equal to
the "base rate" plus nine-sixteenths of one percent. The Base rate is
defined as the floating daily, variable rate of interest determined and
announced by First of America Bank from time to time as its "base lending
rate." The base rate at December 31, 1997 was 8.5%. Interest is paid
quarterly. Principal payments of $1,000,000 are due in May of each year
beginning in 1997, with a final payment due May 8, 2005. On November 8,
1997, the Company prepaid the May 1998 principal payment.
The credit agreement contains certain covenants with which the Company must
comply. These covenants contain provisions common to a loan of this type
and include such items as; a minimum consolidated net worth of FCC to be no
less than 400% of the outstanding balance of the debt; Statutory capital
and surplus of Universal Guaranty Life Insurance Company be maintained at
no less than $6,500,000; an earnings covenant requiring the sum of the pre-
tax earnings of Universal Guaranty Life Insurance Company and its
subsidiaries (based on Statutory Accounting Practices) and the after-tax
earnings plus non-cash charges of FCC (based on parent only GAAP practices)
shall not be less than two hundred percent (200%) of the Company's interest
expense on all of its debt service. The Company is in compliance with all
of the covenants of the agreement.
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B. Subordinated debt
The subordinated debt was incurred June 16, 1992 as a part of the
acquisition of the now dissolved Commonwealth Industries Corporation,
(CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum,
payable semi-annually beginning December 16, 1992. These notes, except for
one $840,000 note, provide for principal payments equal to 1/20th of the
principal balance due with each interest installment beginning December 16,
1997, with a final payment due June 16, 2002. The aforementioned $840,000
note provides for a lump sum principal payment due June 16, 2002. In June
1997, the Company refinanced a $204,267 subordinated 10-year note as a
subordinated 20-year note bearing interest at the rate of 8.75% per annum.
The repayment terms of the refinanced note are the same as the original
subordinated 20 year notes. The original 20-year notes bear interest at
the rate of 8 1/2% per annum on $3,397,620 and 8.75% per annum on $504,962
(of which the $204,267 note refinanced in the current year is included),
payable semi-annually with a lump sum principal payment due June 16, 2012.
C. Convertible notes
On July 31, 1997, United Trust Inc. issued convertible notes for cash in
the amount of $2,560,000 to seven individuals, all officers or employees of
United Trust Inc. The notes bear interest at a rate of 1% over prime, with
interest payments due quarterly and principal due upon maturity of July 31,
2004. The conversion price of the notes are graded from $12.50 per share
for the first three years, increasing to $15.00 per share for the next two
years and increasing to $20.00 per share for the last two years.
D. Other notes payable
United Income, Inc. holds two promissory notes receivable totaling $850,000
due from FCC. Each note bears interest at the rate of 1% over prime as
published in the Wall Street Journal, with interest payments due quarterly.
Principal of $150,000 is due upon the maturity date of June 1, 1999, with
the remaining principal payment of $700,000 becoming due upon the maturity
date of May 8, 2006.
As partial proceeds in the acquisition of common stock from certain
officers and directors in the third quarter of 1997, the Company issued
unsecured promissory notes. These notes bear interest at 1% over prime
with interest payments due quarterly. Principal comes due at varying times
with $150,000 maturing on January 31, 1999, $1,654,507 maturing on July 31,
2005 and one note of $70,392 requiring annual principal reductions of
$10,000 until maturity on September 23, 2004. The interest rates were
deemed favorable to UTI and as a result, the Company has discounted the
notes to reflect a 15% effective rate of interest for financial statement
purposes. The notes have a total face maturity value of $1,874,899 and a
discounted value at December 31, 1997 of $1,500,867.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1998 $ 526,504
1999 1,826,504
2000 1,526,504
2001 1,526,504
2002 4,690,758
13. OTHER CASH FLOW DISCLOSURES
On a cash basis, the Company paid $1,800,110, $1,700,973 and $1,934,326 in
interest expense for the years 1997, 1996 and 1995, respectively. The
Company paid $57,277, $17,634 and $25,821 in federal income tax for 1997,
1996 and 1995, respectively.
As partial proceeds for the acquisition of common stock of UTI and UII
during 1997, UTI issued promissory notes of $140,000 due in eighteen
months, $61,000 due in seven years and $1,281,000 due in seven and one-half
years.
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One of the Company's insurance subsidiaries ("UG") entered into a
coinsurance agreement with Park Avenue Life Insurance Company ("PALIC") at
September 30, 1996. At closing of the transaction, UG received a
coinsurance credit of $28,318,000 for policy liabilities covered under the
agreement. UG transferred assets equal to the credit received. This
transfer included policy loans of $2,855,000 associated with policies under
the agreement and a net cash transfer of $19,088,000 after deducting the
ceding commission due UG of $6,375,000. The transaction resulted in no gain
or loss in the GAAP financial statements. The transaction was entered into
to increase the statutory surplus position of UG. The ceding commission
received was equal to the value reflected on this block of business in the
Cost of Insurance Acquired asset. The ceding commission reduced this
asset. To provide the cash required to be transferred under the agreement,
the Company sold $18,737,000 of fixed maturity investments held to
maturity.
14. NON-RECURRING WRITE DOWN OF VALUE OF AGENCY FORCE ACQUIRED
During the year-ended December 31, 1995, the Company recognized a non-
recurring write down of $8,297,000 on its value of agency force acquired.
The write down released $2,904,000 of the deferred tax liability and
$3,327,000 was attributed to minority interest in loss of consolidated
subsidiaries. In addition, equity loss of investees was negatively
impacted by $542,000. The effect of this write down resulted in an
increase in the net loss of $2,608,000. This write down is directly
related to the Company's change in distribution systems. Due to the broker
agency force not meeting management's expectations and lack of production,
the Company has changed its focus from a primarily broker agency
distribution system to a captive agent system. With the change in focus,
most of the broker agents were terminated and therefore, management re-
evaluated the value of the agency force carried on the balance sheet. For
purposes of the write-down, the broker agency force has no future expected
cash flows and therefore warranted a write-off of the value. The write
down is reported as a separate line item "non-recurring write down of value
of agency force acquired" and the release of the deferred tax liability is
reported in the credit for income taxes payable in the Statement of
Operations. In addition, the impact to minority interest in loss of
consolidated subsidiaries and equity loss of investees is in the Statement
of Operations.
15. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions that at times
may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
16. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. The
Statement's objective is to simplify the computation of earnings per share,
and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS. Basic
EPS is calculated by dividing income available to common stockholders
(i.e., net income or loss adjusted for preferred stock dividends) by the
weighted-average number of common shares outstanding. Thus, in the most
significant change in current practice, options, warrants, and convertible
securities are excluded from the basic EPS calculation. Further,
contingently issuable shares are included in basic EPS only if all the
necessary conditions for the issuance of such shares have been satisfied by
the end of the period.
Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Income available to common stockholders continues to be
adjusted for assumed conversion of all potentially dilutive securities
using the treasury stock method to calculate the dilutive effect of options
and warrants. However, unlike the calculation of fully diluted EPS under
previous opinions, a new treasury stock method is applied using the average
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market price or the ending market price. Further, prior opinion
requirement to use the modified treasury stock method when the number of
options or warrants outstanding is greater than 20% of the outstanding
shares also has been eliminated. SFAS 128 also includes certain shares
that are contingently issuable; however, the test for inclusion under the
new rules is much more restrictive.
SFAS No. 128 requires companies reporting discontinued operations,
extraordinary items, or the cumulative effect of accounting changes are to
use income from operations as the control number or benchmark to determine
whether potential common shares are dilutive or antidilutive. Only
dilutive securities are to be included in the calculation of diluted EPS.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the Company reported a loss from continuing operations so
any potential issuance of common shares would have an antidilutive effect
on EPS. Consequently, the adoption of SFAS No. 128 did not have an impact
on the Company's financial statement.
The FASB has issued SFAS No. 130 entitled Reporting Comprehensive Income
and SFAS No. 132 Employers' Disclosures about Pensions and Other
Postretirement Benefits. Both of the above statements are effective for
financial statements with fiscal years beginning after December 15, 1997.
SFAS No. 130 defines how to report and display comprehensive income and its
components in a full set of financial statements. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity
as owners.
SFAS No. 132 addresses disclosure requirements for post-retirement
benefits. The statement does not change post-retirement measurement or
recognition issues.
The Company will adopt both SFAS No. 130 and SFAS No. 132 for the 1998
financial statements. Management does not expect either adoption to have a
material impact on the Company's financial statements.
17. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
Upon completion of the transaction Mr. Correll will own 51% of UTI. Under
the terms of the letter of intent Mr. Correll will buy 2,000,000 authorized
but unissued shares of UTI common stock for $15.00 per share and will also
buy 389,715 shares of UTI common stock, representing stock of UTI and UII,
that UTI purchased during the last eight months in private transactions at
the average price UTI paid for such stock, plus interest, or approximately
$10.00 per share. Mr. Correll also will purchase 66,667 shares of UTI
common stock and $2,560,000 of face amount of convertible bonds (which are
due and payable on any change in control of UTI) in private transactions,
primarily from officers of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
18. PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
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best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the third quarter of 1998.
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<PAGE>
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
03/31/98 06/30/98 09/30/98
<TABLE>
<S> <C> <C> <C>
Premium income and
Other $ 7,231,481 $ 7,111,079 $ 6,243,869
considerations, net
Net investment income 3,727,002 3,786,410 3,791,774
Total revenues 11,226,760 10,557,065 9,767,526
Policy benefits
including Dividends 6,827,040 6,287,460 6,217,272
Commissions and
amortization of DAC 1,043,677 776,558 824,516
Operating expenses 2,237,840 2,237,899 1,953,061
Operating income (loss) 19,707 163,392 (204,429)
Net income (loss) 114,441 228,704 458,002
Basic earnings per share .07 .14 .28
Diluted earnings per share .08 .15 .27
</TABLE>
1997
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Premium income and
other considerations,
net $ 7,926,386 $ 7,808,782 $ 6,639,394 $ 6,264,683
Net investment income 3,844,899 3,825,457 3,686,861 3,500,080
Total revenues 11,965,571 11,871,953 10,354,133 9,800,673
Policy benefits
including dividends 7,718,015 6,861,699 6,467,739 6,007,718
Commissions and
amortization of DAC 1,110,410 553,913 1,083,006 869,036
Operating expenses 2,589,176 2,777,409 2,378,618 1,477,710
Operating income (loss) (393,242) 683,223 (679,495) 276,512
Net income (loss) 47,026 101,812 (524,441) (183,645)
Basic earnings per share .03 .05 (.28) (.12)
Diluted earnings per share .03 .06 (.28) (.12)
</TABLE>
1996
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Premium income and
other considerations,
net $ 8,481,511 $ 8,514,175 $ 7,348,199 $ 6,600,573
Net investment income 3,973,349 3,890,127 4,038,831 3,966,140
Total revenues 12,870,140 12,455,875 11,636,614 10,013,741
Policy benefits
including dividends 6,528,760 7,083,803 8,378,710 8,334,759
Commissions and
amortization of DAC 1,161,850 924,174 703,196 1,435,665
Operating expenses 3,447,329 2,851,752 3,422,654 2,272,729
Operating income (loss) (71,615) (137,198) (2,346,452) (4,269,870)
Net income (loss) 304,737 9,038 (892,761) (358,917)
Basic earnings per share .16 0.0 (.48) (.18)
Diluted earnings per share .18 0.0 (.48) (.18)
</TABLE>
168
<PAGE>
1995
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Premium income and
other considerations,
net $ 9,445,222 $ 8,765,804 $ 7,868,803 $ 7,018,707
Net investment income 3,850,161 3,843,518 3,747,069 4,015,476
Total revenues 13,694,471 12,933,370 11,829,921 11,411,322
Policy benefits
including dividends 8,097,830 9,113,933 5,978,795 6,665,206
Commissions and
amortization of DAC 1,556,526 1,960,458 1,350,662 40,007
Operating expenses 3,204,217 2,492,689 2,232,938 3,587,804
Operating income (loss) (495,966) (1,939,361) 120,393 (9,060,886)
Net income (loss) 179,044 (689,602) 198,464 (2,689,151)
Basic earnings per share .10 (.37) .11 (1.45)
Diluted earnings per share .11 (.37) .12 (1.45)
</TABLE>
169
<PAGE>
UNITED TRUST, INC.
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1997 Schedule I
Column A Column B Column C Column D
Amount at
Which Shown
in Balance
Cost Value Sheet
<TABLE>
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States
Goverment and
government agencies
and
authorities $ 28,259,322 $ 28,622,970 $ 28,259,322
State, municipalities, and
political
subdiaries 22,778,816 23,449,601 22,778,816
Collateralized mortgage
obligations 11,093,926 11,207,647 11,093,926
Public
utilities 47,984,322 49,141,537 47,984,322
All other
corporate
bonds 70,853,947 72,360,813 70,853,947
Total fixed maturities 180,970,333$ 184,782,568 180,970,333
Investments held for sale:
Fixed maturities:
United States Goverment and
government agencies
and authorities 1,448,202 $ 1,442,557 1,442,557
State, municipalities,
and political
subdivisions 35,000 35,485 35,485
Public
utilities 80,169 80,496 80,496
All other
corporate
bonds 108,927 110,092 110,092
1,672,298 $ 1,668,630 1,668,630
Equity securities:
Banks, trusts
and insurance
companies 2,473,969 $ 2,167,368 2,167,368
All other
corporate
securities 710,388 834,376 834,376
3,184,357 $ 3,001,744 3,001,744
Mortgage loans on
real estate 9,469,444 9,469,444
Investment real estate 9,760,732 9,760,732
Real estate acquired in
satisfaction of debt 1,724,544 1,724,544
Policy loans 14,207,189 14,207,189
Short term investments 1,798,878 1,798,878
Total investments $ 222,787,775 $ 222,601,494
</TABLE>
170
<PAGE>
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996 SCHEDULE II
(A) THE CONDENSED FINANCIAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES OF UNITED TRUST, INC. AND
CONSOLIDATED SUBSIDIARIES.
171
<PAGE>
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1997 and 1996 Schedule II
1997 1996
ASSETS
<TABLE>
<S> <C> <C>
Investment in
affiliates $ 19,974,098$ 19,475,431
Cash and cash
equivalents 342,294 422,446
Notes receivable
from affiliate 1,682,245 265,900
Receivable from
affiliates, net 31,502 30,247
Accrued interest
income 21,334 2,051
Other assets 225,986 262,927
Total assets 22,277,459$ 20,459,002
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 4,060,866 $ 0
Notes payable
to affiliate 840,000 840,000
Deferred income
taxes 2,016,575 1,602,345
Other liabilities 3,400 2,800
Total liabilities 6,920,841 2,445,145
Shareholders' equity:
Common stock 32,696 37,402
Additional paid-in
capital 16,488,375 18,638,591
Unrealized
depreciation of
investments held
for sale of
affiliates (29,127) (86,058)
Accumulated
deficit (1,135,326) (576,078)
Total shareholders'
equity 15,356,618 18,013,857
Total liabilities and
shareholders'
equity $ 22,277,459$ 20,459,002
</TABLE>
172
<PAGE>
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1997 Schedule II
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Revenues:
Management fees
from
affiliates $ 593,577 $ 940,734 $1,209,196
Other income
from affiliates 73,515 115,235 113,869
Interest income
from affiliates 53,492 21,264 13,583
Interest income 37,620 29,340 21,678
Realized investment
losses 0 (207,051) 0
Loss from write down
of investee 0 (315,000) (10,000)
758,204 584,522 1,348,326
Expenses:
Management fee
to affiliate 200,000 575,000 800,000
Interest expense 194,543 0 0
Interest expense
to affiliates 63,000 63,000 63,000
Operating expenses 65,541 133,897 83,312
523,084 771,897 946,312
Operating income
(loss) 235,120 (187,375) 402,014
Income tax credit
(expense) (414,230) 59,780 (153,764)
Equity in loss
of investees (23,716) (95,392) (635,949)
Equity in loss of
subsidiaries (356,422) (714,916)(2,613,546)
Net loss$ (559,248)$(937,903)(3,001,245)
</TABLE>
173
<PAGE>
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1997 Schedule II
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Increase (decrease) in cash
and cash equivalents
Cash flows from
operating activities:
Net loss $ (559,248)$ (937,903)$ (3,001,245)
Adjustments to reconcile
net loss to net
cash provided by
operating activities:
Equity in loss of
subsidiaries 56,422 714,916 2,613,546
Equity in loss
of investees 23,716 95,392 635,949
Compensation expense
through stock option
plan 0 13,563 12,100
Change in accrued
interest income (19,283) 14,222 2,260
Depreciation 12,439 18,366 26,412
Realized investment
losses 0 207,051 0
Loss from writedown
of investee 0 315,000 10,000
Change in deferred
income taxes 414,230 (60,524) 153,764
Change in indebtedness
(to) from
affiliates, net (1,255) (104,766) (23,027)
Change in other assets
and liabilities 44,029 (728) (274,167)
Net cash provided by
operating activities 271,050 274,589 155,592
Cash flows from investing activities:
Purchase of stock
of affiliates (865,877) 0 (325,000)
Change in notes
receivable
from affiliate(1,116,345) (250,000) 300,000
Capital contribution
to affiliate 0 (106,000) (53,000)
Net cash used in
investing activities (1,982,222) (356,000) (78,000)
Cash flows from financing activities:
Purchase of
treasury stock (926,599) 0 0
Proceeds from issuance
of notes
payable 2,560,000 0 0
Payment for fractional
shares from reverse
stock split (2,381) 0 0
Proceeds from issuance
of common stock 0 500 400
Net cash provided by
financing activities 1,631,020 500 400
Net increase (decrease) in
cash and cash equivalent (80,152) (80,911) 77,992
Cash and cash equivalents
at beginning of year 422,446 503,357 425,365
Cash and cash equivalents
at end of year $ 342,294 $ 422,446 $ 503,357
</TABLE>
174
<PAGE>
UTI REINSURANCE 12/31/97
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1997 and the year ended December 31, 1997 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<TABLE>
<S> <C> <C> <C> <C> <C>
Life
insurance
in force3,691,867,000$1,022,458,000$1,079,885,000$3,749,294,000 28.80%
Premiums and
policy fees:
Life
insurance$ 33,133,414 $ 4,681,928 $ 0 $ 28,451,486 0.00%
Accident
and health
insurance 240,536 52,777 0 187,759 0.00%
$ 33,373,950 $ 4,734,705 $ 0 $ 28,639,245 0.00%
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
175
<PAGE>
UTI REINSURANCE 12/31/96
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1996 and the year ended December 31, 1996 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<TABLE>
<S>
Life <C> <C> <C> <C> <C>
insurance
in force 3,952,958,000 1,108,534,000 1,271,766,000 4,116,190,000 30.90%
Premiums and
policy fees:
Life
insurance $35,633,232 $ 4,896,896 $ 0 $ 30,736,336 0.00%
Accident
and health
insurance 258,377 50,255 0 208,122 0.00%
$ 35,891,609 $ 4,947,151 $ 0 30,944,458 0.00%
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
176
<PAGE>
UTI REINSURANCE 12/31/95
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1995 and the year ended December 31, 1995 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<TABLE>
<S> <C> <C> <C> <C> <C>
Life
insurance
in force 4,207,695,000 1,087,774,000 1,039,517,000 4,159,438,000 25.00%
Premiums and
policy fees:
Life
insurance 38,233,190 5,330,351 0 32,902,839 0.00%
Accident
and health
insurance 248,448 52,751 0 195,697 0.00%
$ 38,481,638 $ 5,383,102 $ 0 $ 33,098,536 0.00%
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
177
<PAGE>
UTI VALUATION AND QUALIFYING ACCOUNTS
UNITED TRUST, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended
December 31, 1997, 1996 and 1995 Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
31-Dec-97
<TABLE>
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts -
mortgage
loans$ 10,000 $ 0 $ 0 $ 10,000
31-Dec-96
Allowance for
doubtful accounts -
mortgage
loans$ 10,000 $ 0 $ 0 $ 10,000
31-Dec-95
Allowance for
doubtful accounts -
mortgage
loans$ 26,000 $ 0 $ 16,000 $ 10,000
</TABLE>
178
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,December 31,
ASSETS 1998 1997
<TABLE>
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $180,997,557
and $184,782,568) $ 173,273,717$ 180,970,333
Investments held for sale:
Fixed maturities, at market
(cost $1,498,095 and $1,672,298) 1,508,793 1,668,630
Equity securities, at market
(cost $2,820,685 and $3,184,357) 1,986,074 3,001,744
Mortgage loans on real estate
at amortized cost 9,724,950 9,469,444
Investment real estate, at cost,
net of accumulated depreciation 9,283,288 9,760,732
Real estate acquired in satisfaction
of debt 1,646,001 1,724,544
Policy loans 13,972,263 14,207,189
Short-term investments 224,144 1,798,878
Other invested assets 66,212 0
211,685,442 222,601,494
Cash and cash equivalents 28,390,490 16,105,933
Investment in affiliates 5,823,726 5,636,674
Accrued investment income 4,019,454 3,686,562
Reinsurance receivables:
Future policy benefits 37,154,221 37,814,106
Policy claims and other benefits 3,539,631 3,529,078
Other accounts and notes receivable 915,764 845,066
Cost of insurance acquired 39,804,518 41,522,888
Deferred policy acquisition costs 9,698,841 10,600,720
Costs in excess of net assets purchased,
net of accumulated amortization 2,665,309 2,777,089
Property and equipment,
net of accumulated depreciation 3,259,525 3,412,956
Other assets 968,442 767,258
Total assets $ 347,925,363$ 349,299,824
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 247,817,394$ 248,805,695
Policy claims and benefits payable 2,086,070 2,080,907
Other policyholder funds 2,263,474 2,445,469
Dividend and endowment accumulations 15,334,597 14,905,816
Income taxes payable:
Current 55,699 15,730
Deferred 13,119,824 14,174,260
Notes payable 20,615,335 21,460,223
Indebtedness to affiliates, net 33,789 18,475
Other liabilities 4,178,581 3,790,051
Total liabilities 305,504,763 307,696,626
Minority interests in
consolidated subsidiaries 26,635,449 26,246,580
Shareholders' equity:
Common stock - no par value,
stated value $.02 per share
Authorized 3,500,000 shares -
1,627,200 and 1,634,779 shares
issued after deducting treasury shares
of 285,039 and 277,460 32,545 32,696
Additional paid-in capital 16,420,441 16,488,375
Unrealized depreciation of
investments held for sale (333,656) (29,127)
Accumulated deficit (334,179) (1,135,326)
Total shareholders' equity 15,785,151 15,356,618
Total liabilities and shareholders'
Equity $ 347,925,363$ 349,299,824
</TABLE>
See accompanying notes
179
<PAGE>
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30 September 30 September 30 September 30,
1998 1997 1998 1997
<TABLE>
<S> <C> <C> <C> <C>
Revenues:
Premiums and
policy fees $ 7,504,326$ 8,079,691 $24,154,829$ 26,038,285
Reinsurance premiums
and policy fees (1,260,457)(1,440,297) (3,568,400) (3,663,723)
Net investment income 3,791,774 3,686,861 11,305,186 11,357,217
Realized investment
gains and (losses), net (433,084) (114,436) (835,488) (143,015)
Other income 164,967 142,314 495,224 602,893
9,767,526 10,354,133 31,551,351 34,191,657
Benefits and other expenses:
Benefits, claims and
settlement expenses:
Life 6,044,255 5,615,588 17,588,570 18,242,132
Reinsurance benefits
and claims (961,031) (481,468) (2,058,464) (1,447,716)
Annuity 352,619 411,395 1,095,033 1,178,807
Dividends to policyholders 781,429 922,224 2,706,633 3,074,230
Commissions and
amortization of deferred
policy acquisition costs 824,516 1,083,006 2,644,751 2,747,329
Amortization of cost
of insurance acquired 497,926 612,007 1,718,370 1,724,294
Operating expenses 1,953,061 2,378,618 6,428,800 7,745,203
Interest expense 479,180 492,258 1,448,988 1,316,892
9,971,955 11,033,628 31,572,681 34,581,171
Loss before
income taxes, minority
interest and equity in
earnings of investees (204,429) (679,495) (21,330) (389,514)
Credit (provision)
for income taxes 880,800 (157,919) 1,001,812 (285,126)
Minority interest in (gain) loss
of consolidated
subsidiaries (351,811) 353,893 (447,072) 297,943
Equity in earnings
(loss) of investees 133,442 (40,920) 267,737 1,094
Net income (loss) $ 458,002 $ (524,441)$ 801,147 $ (375,603)
Basic earnings per
share from continuing
operations and net
income (loss) $ 0.28 $ (0.30)$ 0.49 $ (0.21)
Diluted earnings per
share from continuing
operations and net
income (loss) $ 0.27 $ (0.30)$ 0.50 $ (0.21)
Basic weighted average
shares outstanding 1,627,200 1,719,806 1,627,644 1,819,398
Diluted weighted average
shares outstanding 1,833,562 1,719,806 1,834,006 1,819,398
</TABLE>
See accompanying notes
180
<PAGE>
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the Period ended September 30,1998
<TABLE>
<S> <C> <C>
COMMON STOCK
BALANCE, BEGINNING OF YEAR $ 32,696
ISSUED DURING YEAR 0
PURCHASE TREASURY STOCK (151)
BALANCE, END OF PERIOD 32,545
ADDITIONAL PAID-IN CAPITAL
BALANCE, BEGINNING OF YEAR 16,488,375
ISSUED DURING YEAR 0
PURCHASE TREASURY STOCK (67,934)
BALANCE, END OF PERIOD 16,420,441
RETAINED EARNINGS (ACCUMULATED DEFICIT)
BALANCE, BEGINNING OF YEAR (1,135,326)
NET INCOME 801,147 $ 801,147
BALANCE, END OF PERIOD (334,179)
ACCUMULATED OTHER COMPREHENSIVE INCOME
BALANCE, BEGINNING OF YEAR (29,127)
UNREALIZED DEPRECIATION ON SECURITIES (304,529)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 0
MINIMUM PENSION LIABILITY ADJUSTMENT 0
OTHER COMPREHENSIVE INCOME (304,529) (304,529)
COMPREHENSIVE INCOME $ 496,618
BALANCE, END OF PERIOD (333,656)
TOTAL SHAREHOLDER'S EQUITY,
END OF PERIOD $ 15,785,151
</TABLE>
See accompanying notes
181
<PAGE>
UTI 10Q CASH FLOWS
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended
September 30 September 30,
1998 1997
<TABLE>
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ 801,147 $ (375,603)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities net
of changes in assets and
liabilities resulting from the sales and
purchases of subsidiaries:
Amortization/accretion of fixed maturities 507,219 505,440
Realized investment (gains) losses, net 835,488 143,015
Policy acquisition costs deferred (135,000) (557,000)
Amortization of deferred policy
acquisition costs 1,036,879 984,977
Amortization of cost of insurance acquired1,718,370 1,724,294
Amortization of costs in excess of net
assets purchased 67,500 116,250
Depreciation 357,682 333,653
Minority interest 447,072 (297,943)
Equity in earnings of investees (267,737) (1,094)
Change in accrued investment income (332,892) (632,561)
Change in reinsurance receivables 649,332 986,960
Change in policy liabilities and accruals (118,794) (153,240)
Charges for mortality and administration of
universal life and annuity products (8,116,570) (7,996,086)
Interest credited to account balances 5,322,471 5,432,922
Change in income taxes payable (1,014,467) 210,864
Change in indebtedness
(to) from affiliates, net 15,314 (31,820)
Change in other assets and liabilities,
net (22,087) (1,256,796)
Net cash provided by
(used in) operating activities 1,750,927 (863,768)
Cash flows from investing activities:
Proceeds from investments
sold and matured:
Fixed maturities held for sale 164,097 0
Fixed maturities sold 0 0
Fixed maturities matured 32,371,454 8,186,791
Equity securities 450,000 105,261
Mortgage loans 943,156 1,146,863
Real estate 1,039,924 510,806
Policy loans 2,941,532 3,799,553
Short-term 1,581,203 410,000
Total proceeds from investments
sold and matured 39,491,366 14,159,274
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (25,166,178)(14,301,690)
Equity securities (79,053) (710,387)
Mortgage loans (1,577,694) (134,314)
Real estate (941,618) (937,268)
Policy loans (2,706,606) (3,573,018)
Other invested assets (66,212) 0
Short-term 0 (404,475)
Total cost of investments acquired (30,537,361)(20,061,152)
Purchase of property and equipment (89,424) (431,910)
Net cash provided by
(used in) investing activities 8,864,581 (6,333,788)
Cash flows from financing activities:
Policyholder contract deposits 11,989,493 14,069,987
Policyholder contract withdrawals (9,812,952) (11,280,925)
Purchase of treasury stock (26,527) (926,599)
Purchase of additional shares
of equity investee 0 (165,374)
Proceeds from issuance of notes payable 0 2,560,000
Payments of principal on notes payable (480,965) (758,251)
Payment for fractional shares
from reverse stock split 0 (2,381)
Payment for fractional shares from
reverse stock split of subsidiary 0 (535,851)
Net cash provided by financing activities 1,669,049 2,960,606
Net increase (decrease) in
cash and cash equivalents 12,284,557 (4,236,950)
Cash and cash equivalents
at beginning of period 16,105,933 17,326,235
Cash and cash equivalents
at end of period $ 28,390,490$ 13,089,285
</TABLE>
182
<PAGE>
UNITED TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements 09/30/98
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
United Trust Inc. ("UTI") and its consolidated subsidiaries ("Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission. Although the Company believes the disclosures are adequate to
make the information presented not be misleading, it is suggested that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto presented in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1997.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary
for a fair presentation of the results of operations for the periods
presented. Operating results for interim periods are not necessarily
indicative of operating results to be expected for the year or of the
Company's future financial condition.
At September 30, 1998, the parent, significant subsidiaries and affiliates
of United Trust Inc. were as depicted on the following organizational
chart.
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1998
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
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2. INVESTMENTS
As of September 30, 1998, fixed maturities and fixed maturities held for
sale represented 83% of total invested assets. As prescribed by the
various state insurance department statutes and regulations, the insurance
companies' investment portfolio is required to be invested in investment
grade securities to provide ample protection for policyholders. The
Company does not invest in so-called "junk bonds" or derivative
investments. The liabilities of the insurance companies are predominantly
long term in nature and therefore, the companies invest primarily in long
term fixed maturity investments. The Company has analyzed its fixed
maturity portfolio and reclassified those securities expected to be sold
prior to maturity as investments held for sale. The investments held for
sale are carried at market. Management has the intent and ability to hold
its fixed maturity portfolio to maturity and as such carries these
securities at amortized cost. As of September 30, 1998, the carrying value
of fixed maturity securities in default as to principal or interest was
immaterial in the context of consolidated assets or shareholders' equity.
3. NOTES PAYABLE
At September 30, 1998 and December 31, 1997, the Company has $20,615,335
and $21,460,223 in long-term debt outstanding, respectively. The debt is
comprised of the following components:
1998 1997
<TABLE>
<S> <C> <C>
Senior debt $ 6,900,000 $ 6,900,000
Subordinated 10 yr.
Notes 5,488,523 5,746,774
Subordinated 20 yr.
Notes 3,252,071 3,902,582
Convertible notes 2,560,000 2,560,000
Other notes payable 2,414,741 2,350,867
$ 20,615,335 $ 21,460,223
</TABLE>
A. SENIOR DEBT
The senior debt is through First of America Bank - Illinois NA and is
subject to a credit agreement. The debt bears interest at a rate equal to
the "base rate" plus nine-sixteenths of one percent. The Base rate is
defined as the floating daily, variable rate of interest determined and
announced by First of America Bank from time to time as its "base lending
rate." The base rate at September 30, 1998 was 8.5%. Interest is paid
quarterly. Principal payments of $1,000,000 are due in May of each year,
with a final payment due May 8, 2005. On November 8, 1998, the Company
prepaid one half or $500,000 of the May 1999 principal payment. The base
rate dropped one half a percentage point during October. The base rate at
October 31, 1998 was 8.0%.
The credit agreement contains certain covenants with which the Company must
comply. These covenants contain provisions common to a loan of this type
and include such items as; a minimum consolidated net worth of FCC to be no
less than 400% of the outstanding balance of the debt; Statutory capital
and surplus of Universal Guaranty Life Insurance Company be maintained at
no less than $6,500,000; an earnings covenant requiring the sum of the pre-
tax earnings of Universal Guaranty Life Insurance Company and its
subsidiaries (based on Statutory Accounting Practices) and the after-tax
earnings plus non-cash charges of FCC (based on parent only GAAP practices)
shall not be less than two hundred percent (200%) of the Company's interest
expense on all of its debt service. The Company is in compliance with all
of the covenants of the agreement.
B. SUBORDINATED DEBT
The subordinated debt was incurred June 16, 1992 as a part of the
acquisition of the now dissolved Commonwealth Industries Corporation,
(CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum,
payable semi-annually beginning December 16, 1992. These notes, except for
one $840,000 note, provide for principal payments equal to 1/20th of the
principal balance due with each interest installment beginning December 16,
1997, with a final payment due June 16, 2002. The aforementioned $840,000
note provides for a lump sum principal payment due June 16, 2002. The 20-
year notes bear interest at the rate of 8.5% per annum, interest payable
semi-annually, with a lump sum principal payment due June 16, 2012. The
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Company refinanced a total of $504,962 of subordinated 10-year notes to
subordinated 20-year notes bearing interest at the rate of 8.75% per annum.
The terms, other than interest rate, of the refinanced notes are the same
as the original subordinated 20-year notes.
C. CONVERTIBLE NOTES
On July 31, 1997, United Trust Inc. issued convertible notes for cash in
the amount of $2,560,000 to seven individuals, all officers or employees of
United Trust Inc. The notes bear interest at a rate of 1% over prime, with
interest payments due quarterly and principal due upon maturity of July 31,
2004. The conversion price of the notes are graded from $12.50 per share
for the first three years, increasing to $15.00 per share for the next two
years and increasing to $20.00 per share for the last two years.
D. OTHER NOTES PAYABLE
United Income, Inc. holds two promissory notes receivable totaling $850,000
due from FCC. Each note bears interest at the rate of 1% over prime as
published in the Wall Street Journal, with interest payments due quarterly.
Principal of $150,000 is due upon the maturity date of June 1, 1999, with
the remaining principal payment of $700,000 becoming due upon the maturity
date of May 8, 2006.
As partial proceeds in the acquisition of common stock from certain
officers and directors in the third quarter of 1997, the Company issued
unsecured promissory notes. These notes bear interest at 1% over prime
with interest payments due quarterly. Principal comes due at varying times
with $150,000 maturing on January 31, 1999, $1,654,507 maturing on July 31,
2005 and one note of $70,392 requiring annual principal reductions of
$10,000 until maturity on September 23, 2004. The interest rates were
deemed favorable to UTI and as a result, the Company has discounted the
notes to reflect a 15% effective rate of interest for financial statement
purposes. The notes have a total face maturity value of $1,864,899 and a
discounted value at September 30, 1998 of $1,522,377.
On January 16, 1998, UTI acquired 7,579 shares of its common stock from the
estate of Robert Webb, a former director, for $26,527 and a promissory note
valued at $41,819 due January 16, 2005. The note bears interest at a rate
of 1% over prime, with interest due quarterly and principal due on
maturity. The note has been discounted to reflect a 15% effective rate for
financial statement purposes.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1998 $ 258,251
1999 1,826,504
2000 1,526,504
2001 1,526,504
2002 4,690,758
On November 8, 1998, the Company prepaid $500,000 of the 1999 principal
payment due on the senior debt.
4. CAPITAL STOCK TRANSACTIONS
A. STOCK OPTION PLAN
In 1985, UTI initiated a nonqualified stock option plan for employees,
agents and directors of UTI under which options to purchase up to 44,000
shares of UTI's common stock are granted at a fixed price of $.20 per
share. Through September 30, 1998 options for 42,438 shares were granted
and exercised. Options for 1,562 shares remain available for grant.
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<PAGE>
A summary of the status of UTI's stock option plan through September 30,
1998 and December 31, 1997 is presented below.
1998 1997
Exercise Exercise
Shares Price Shares Price
<TABLE>
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 1,562 $ 0.20 1,562 $ 0.20
Granted 0 0.00 0 0.00
Exercised 0 0.00 0 0.20
Forfeited 0 0.00 0 0.00
Outstanding at end
of period 1,562 $ 0.20 1,562 $ 0.20
Options exercisable at
end of period 1,562 $ 0.20 1,562 $ 0.20
Fair value of options granted
during the period $ 0.00 $ 0.00
</TABLE>
The following information applies to options outstanding at September 30,
1998:
Number outstanding 1,562
Exercise price $ 0.20
Remaining contractual life Indefinite
B. DEFERRED COMPENSATION PLAN
UTI and FCC established a deferred compensation plan during 1993 pursuant
to which an officer or agent of FCC, UTI or affiliates of UTI, could defer
a portion of their income over the next two and one-half years in return
for a deferred compensation payment payable at the end of seven years in
the amount equal to the total income deferred plus interest at a rate of
approximately 8.5% per annum and a stock option to purchase shares of
common stock of UTI. At the beginning of the deferral period an officer or
agent received an immediately exercisable option to purchase 2,300 shares
of UTI common stock at $17.50 per share for each $25,000 ($10,000 per year
for two and one-half years) of total income deferred. The option expires
on December 31, 2000. A total of 105,000 options were granted in 1993
under this plan. As of September 30, 1998 no options were exercised. At
September 30, 1998 and December 31, 1997, the Company held a liability of
$1,464,616 and $1,376,384, respectively, relating to this plan. At
September 30, 1998, UTI common stock had a closing price of $6.50 per
share.
The following information applies to deferred compensation plan stock
options outstanding at September 30, 1998:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 2.25 years
C. CONVERTIBLE NOTES
On July 31, 1997, United Trust Inc. issued convertible notes for cash in
the amount of $2,560,000 to seven individuals, all officers or employees of
United Trust Inc. The notes bear interest at a rate of 1% over prime, with
interest payments due quarterly and principal due upon maturity of July 31,
2004. The conversion price of the notes are graded from $12.50 per share
for the first three years, increasing to $15.00 per share for the next two
years and increasing to $20.00 per share for the last two years. As of
September 30, 1998, the notes were convertible into 204,800 shares of UTI
common stock with no conversion privileges having been exercised. At
September 30, 1998, UTI common stock had a closing price of $6.50 per
share.
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<PAGE>
D. PURCHASE OF TREASURY STOCK
On January 16, 1998, UTI acquired 7,579 shares of its common stock from the
estate of Robert Webb, a former director, for $26,527 and a promissory note
valued at $41,819 due January 16, 2005. The note bears interest at a rate
of 1% over prime, with interest due quarterly and principal due on
maturity.
5. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations as presented on the income statement.
For the YTD period ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<TABLE>
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 801,147 1,627,644 $ 0.49
EFFECT OF DILUTIVE SECURITIES
Convertible notes 118,236 204,800
Options 1,562
DILUTED EPS
Income available to common
shareholders and assumed
conversions 919,383 1,834,006 $ 0.50
</TABLE>
For the third quarter ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<TABLE>
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 458,002 1,627,200 $ 0.28
EFFECT OF DILUTIVE SECURITIES
Convertible notes 39,847 204,800
Options 1,562
DILUTED EPS
Income available to common
shareholders and assumed
conversions 497,849 1,833,562 $ 0.27
</TABLE>
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<PAGE>
For the YTD period ended September 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<TABLE>
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ (375,603) 1,819,398 $ (0.21)
EFFECT OF DILUTIVE SECURITIES
0 0
DILUTED EPS
Income available to common $
shareholders and assumed
conversions (375,603) 1,819,398 $ (0.21)
</TABLE>
For the third quarter ended September 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<TABLE>
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ (524,441) 1,719,806 $ (0.30)
EFFECT OF DILUTIVE SECURITIES
0 0
DILUTED EPS
Income available to common
shareholders and assumed
conversions (524,441) 1,719,806 $ (0.30)
</TABLE>
UTI has stock options outstanding during the third quarter of 1998 and 1997
for 105,000 shares of common stock at $17.50 per share that were not
included in the computation of diluted EPS because the exercise price was
greater than the average market price of the common shares.
Had UTI not incurred losses in the third quarter of 1997 and for the year
to date period ending September 30, 1997, convertible notes for 204,800
shares and options for 1,562 shares would have been included in the diluted
earnings per share calculations.
6. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. Some of the lawsuits have resulted in the award
of substantial judgments against the insurer, including material amounts of
punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances.
Under the insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed insurance
companies. Although the Company cannot predict the amount of any future
assessments, most insurance guaranty fund laws currently provide that an
assessment may be excused or deferred if it would threaten an insurer's
financial strength. Mandatory assessments may be partially recovered
through a reduction in future premium tax in some states. The Company does
not believe such assessments will be materially different from amounts
already provided for in the financial statements.
The Company and its subsidiaries are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
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<PAGE>
liabilities. Management is of the opinion that the settlement of those
actions will not have a material adverse effect on the Company's financial
position or results of operations.
7. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $1,232,658 and $1,107,090 in interest
expense through the third quarter of 1998 and 1997, respectively. The
Company paid $15,730 and $60,044 of federal income tax through the third
quarter of 1998 and 1997, respectively.
As partial proceeds for the acquisition of treasury common stock of UTI
during 1998, UTI issued promissory notes of $41,819 due January 16, 2005.
During the second quarter of 1998, the Company foreclosed on three mortgage
loans, transferring a total value of $70,000 to real estate acquired in
satisfaction of debt.
8. PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
9. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds which are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter 1998. There can be no assurance that the transaction will
be completed. The pending change in control of UTI is not contingent upon
the merger of UTI and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
10. ACCOUNTING AND LEGAL DEVELOPMENTS
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<PAGE>
THE FASB HAS ISSUED SFAS 130 ENTITLED REPORTING COMPREHENSIVE INCOME, WHICH
IS EFFECTIVE FOR FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNING AFTER
DECEMBER 15, 1997. SFAS 130 ESTABLISHES STANDARDS FOR REPORTING AND
PRESENTATION OF COMPREHENSIVE INCOME AND ITS COMPONENTS IN A FULL SET OF
FINANCIAL STATEMENTS. COMPREHENSIVE INCOME INCLUDES ALL CHANGES IN
SHAREHOLDERS' EQUITY, EXCEPT THOSE ARISING FROM TRANSACTIONS WITH
SHAREHOLDERS, AND INCLUDES NET INCOME AND NET UNREALIZED GAINS (LOSSES) ON
SECURITIES. SFAS 130 WAS ADOPTED AS OF JANUARY 1, 1998. ADOPTING THE NEW
STANDARD REQUIRED US TO MAKE ADDITIONAL DISCLOSURES IN THE CONSOLIDATED
FINANCIAL STATEMENTS, BUT DID NOT AFFECT THE COMPANY'S FINANCIAL POSITION
OR RESULTS OF OPERATIONS.
ALL ITEMS OF OTHER COMPREHENSIVE INCOME REFLECT NO RELATED TAX EFFECT,
SINCE THE COMPANY HAS AN ALLOWANCE AGAINST THE COLLECTION OF ANY FUTURE TAX
BENEFITS. IN ADDITION, THERE WAS NO SALE OR LIQUIDATION OF INVESTMENTS
REQUIRING A RECLASSIFICATION ADJUSTMENT FOR THE PERIOD PRESENTED.
THE FASB HAS ISSUED SFAS 131 ENTITLED, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, WHICH IS EFFECTIVE FOR FINANCIAL
STATEMENTS FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997. SFAS 131
REQUIRES THAT A PUBLIC BUSINESS ENTERPRISE REPORT FINANCIAL AND DESCRIPTIVE
INFORMATION ABOUT ITS REPORTABLE OPERATING SEGMENTS. OPERATING SEGMENTS
ARE COMPONENTS OF AN ENTERPRISE ABOUT WHICH SEPARATE FINANCIAL INFORMATION
IS AVAILABLE THAT IS EVALUATED REGULARLY IN DECIDING HOW TO ALLOCATE
RESOURCES AND IN ASSESSING PERFORMANCE. SFAS 131 WAS ADOPTED AS OF JANUARY
1, 1998. ADOPTING THE NEW STANDARD HAD NO AFFECT ON OUR FINANCIAL POSITION
OR RESULTS OF OPERATIONS, SINCE THE COMPANY HAS NO REPORTABLE OPERATING
SEGMENTS.
THE FASB HAS ISSUED SFAS 132 ENTITLED, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS, WHICH IS EFFECTIVE FOR
FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997.
SFAS 132 REVISES CURRENT DISCLOSURE REQUIREMENTS FOR EMPLOYER PROVIDED POST-
RETIREMENT BENEFITS. THE STATEMENT DOES NOT CHANGE RETIREMENT MEASUREMENT
OR RECOGNITION ISSUES. . SFAS 132 WAS ADOPTED AS OF JANUARY 1, 1998.
ADOPTING THE NEW STANDARD HAD NO AFFECT ON OUR FINANCIAL POSITION OR
RESULTS OF OPERATIONS, SINCE THE COMPANY HAS NO PENSION PLAN OR OTHER
OBLIGATION FOR POST-RETIREMENT BENEFITS.
THE FASB HAS ISSUED SFAS 133 ENTITLED, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, WHICH IS EFFECTIVE FOR ALL FISCAL
QUARTERS OF FISCAL YEARS BEGINNING AFTER JUNE 15, 1999. SFAS 133 REQUIRES
THAT AN ENTITY RECOGNIZE ALL DERIVATIVES AS EITHER ASSETS OR LIABILITIES IN
THE STATEMENT OF FINANCIAL POSITION AND MEASURE THOSE INSTRUMENTS AT FAIR
VALUE. IF CERTAIN CONDITIONS ARE MET, A DERIVATIVE MAY BE SPECIFICALLY
DESIGNATED AS A SPECIFIC TYPE OF EXPOSURE HEDGE. THE ACCOUNTING FOR
CHANGES IN THE FAIR VALUE OF A DERIVATIVE DEPENDS ON THE INTENDED USE OF
THE DERIVATIVE AND THE RESULTING DESIGNATION. THE ADOPTION OF SFAS 133 IS
NOT EXPECTED TO HAVE A MATERIAL EFFECT ON OUR FINANCIAL POSITION OR RESULTS
OF OPERATIONS, SINCE THE COMPANY HAS NO DERIVATIVE OR HEDGING TYPE
INVESTMENTS.
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INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND SHAREHOLDERS
UNITED INCOME,, INC.
We have audited the accompanying consolidated balance sheets of United
Income, Inc. (an Ohio corporation) and subsidiaries as of December 31,
1997and 1996, and the related statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1997. 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
United Income, Inc. as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1998
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<PAGE>
UNITED INCOME, INC.
BALANCE SHEETS
As of December 31, 1997 and 1996
ASSETS
1997 1996
<TABLE>
<S> <C> <C>
Cash and cash equivalents $ 710,897 $ 439,676
Mortgage loans 121,520 122,853
Notes receivable from affiliate 864,100 864,100
Accrued interest income 12,068 11,784
Property and equipment (net of accumulated
depreciation of $93,648 and $92,140) 1,070 2,578
Investment in affiliates 11,060,682 11,324,947
Receivable from affiliate 23,192 31,837
Other assets (net of accumulated amortization
of $138,810 and $101,794) 46,258 83,274
Total assets $ 12,839,787 $ 12,881,049
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 1,534 1,273
Total liabilities 903,834 903,573
Shareholders' equity:
Common stock - no par value, stated value
$.033 per share. 'Authorized 2,310,001 shares -
1,391,919 and 1,392,130 shares issued after
deducting treasury shares of
177,590 and 177,590 45,934 45,940
Additional paid-in capital 15,242,365 15,244,471
Unrealized depreciation of investments held
for (19,603) (59,508)
sale of affiliate
Accumulated deficit (3,332,743) (3,253,427)
Total shareholders' equity 11,935,953 11,977,476
Total liabilities and
shareholder' equity $ 12,839,787 $ 12,881,049
</TABLE>
See accompanying notes
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<PAGE>
UNITED INCOME, INC.
STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1997
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Revenues:
Interest income $ 27,127 $ 13,099 $ 16,516
Interest income from affiliates 82,579 79,433 71,646
Service agreement income
from affiliates 989,295 1,567,891 2,015,325
Other income from affiliates 87,073 127,922 129,627
Realized investment gains 0 2,599 905
Other income 48 3 130
1,186,122 1,790,947 2,234,149
Expenses:
Management fee to affiliate 743,577 1,240,735 1,809,195
Operating expenses 80,173 89,529 78,505
Interest expense 85,155 84,027 88,538
908,905 1,414,291 1,976,238
Gain before income taxes and equity
in loss of investees 277,217 376,656 257,911
Provision for income taxes 0 0 0
Equity in loss of investees (356,533) (695,739) (2,405,813)
Net loss $ (79,316)$ (319,083)$(2,147,902)
Net loss per
common share $ (.06)$ (.23)$ (1.54)
Average common
shares outstanding 1,391,996 1,392,084 1,392,060
</TABLE>
See accompanying notes
193
<PAGE>
UNITED INCOME, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1997
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Common stock
Balance, beginning of year $ 45,940 $ 45,938 $ 45,938
Exercise of stock options 0 2 0
Stock retired from purchase of fractional
shares of reverse stock split (6) 0 0
Balance, end of year $ 45,934 $ 45,940 $ 45,938
Additional paid-in capital
Balance, beginning of year $15,244,471$ 15,243,773$ 15,243,773
Exercise of stock options 0 698 0
Stock retired from purchase of fractional
shares of reverse stock split (2,106) 0 0
Balance, end of year $15,242,365$ 15,244,471$ 15,243,773
Unrealized appreciation (depreciation) of
investments held for sale
Balance, beginning of year $ (59,508)$ (236)$ (99,907)
Change during year 39,905 (59,272) 99,671
Balance, end of year $ (19,603)$ (59,508)$ (236)
Accumulated deficit
Balance, beginning of year $(3,253,427)$(2,934,344)$ (786,442)
Net loss (79,316) (319,083) (2,147,902)
Balance, end of year $(3,332,743)$(3,253,427)$(2,934,344)
Total shareholders' equity,
end of year $ 11,935,953 $11,977,476 $12,355,131
</TABLE>
See accompanying notes
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<PAGE>
UNITED INCOME, INC.
STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1997
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (79,316)$ (319,083)$(2,147,902)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 38,524 45,331 52,169
Gain on payoff of mortgage loan 0 (2,599) 0
Accretion of discount on mortgage
loans (266) (481) (1,591)
Compensation expense through
stock option plan 0 667 0
Equity in loss of investees 356,533 695,739 2,405,813
Changes in assets and liabilities:
Change in accrued interest income (284) (4,744) (1,713)
Change in receivable from affiliate 8,645 (119,706) 25,598
Change in other liabilities 261 (39,449) (5,469)
Net cash provided by
operating activities 324,097 255,675 326,905
Cash flows from investing activities:
Change in notes receivable
from affiliates 0 (150,000) 0
Purchase of investments
in affiliates (52,363) 0 (26,091)
Capital contribution to investee 0 (94,000) (47,000)
Sale of investments in affiliates 0 0 1,810
Payments of principal on mortgage
loans 1,599 62,434 4,480
Purchase of mortgage loan 0 0 (126,000)
Proceeds from sale of property and 0 1,164 0
Net cash used in investing activities (50,764) (180,402) (192,801)
Cash flows from financing activities:
Proceeds from sale of common stock 0 33 0
Payment for fractional shares from
reverse stock split (2,112) 0 0
Net cash provided by
(used in) financing activities (2,112) 33 0
Net increase in cash and
cash equivalents 271,221 75,306 134,104
Cash and cash equivalents
at beginning of year 439,676 364,370 230,266
Cash and cash equivalents
at end of year $ 710,897 $ 439,676 $ 364,370
</TABLE>
See accompanying notes
195
<PAGE>
UNITED INCOME, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A.ORGANIZATION - At December 31, 1997, the affiliates of United Income,
Inc. were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
196
<PAGE>
The summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying consolidated
financial statements follows.
B.NATURE OF OPERATIONS - United Income, Inc. ("UII"), referred to as the
("Company"), was incorporated November 2, 1987, and commenced its
activities January 20, 1988. UII is an insurance holding company that
through its insurance affiliates sells individual life insurance
products. UII is an affiliate of UTI, an Illinois insurance holding
company. UTI owns 40.6% of UII. The officers of UII are the same as
those of its parent UTI.
C.MORTGAGE LOANS - at unpaid balances, adjusted for amortization premium
or discount, less allowance for possible losses. Realized gains and
losses on sales of mortgage loans are recognized in net income on a
specific identification basis.
D.PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost.
Depreciation is provided using a straight-line method. Accumulated
depreciation was $93,648 in 1997 and $92,140 in 1996. Depreciation
expense for the years ended December 1997, 1996, and 1995 was $1,508,
$8,315, and $11,265 respectively.
E.CASH AND CASH EQUIVALENTS - The Company considers certificates of
deposit and other short-term investment instruments with an original
purchased maturity of three months or less as cash equivalents.
F.EARNINGS PER SHARE - Earnings per share are based on the weighted
average number of common shares outstanding during each year,
retroactively adjusted to give effect to all stock splits. In
accordance with Statement of Financial Accounting Standards No. 128, the
computation of diluted earnings per share is not shown since the Company
has a loss from continuing operations in each period presented, and any
assumed conversion, exercise, or contingent issuance of securities would
have an antidilutive effect on earnings per share. . HAD UII NOT BEEN
IN A LOSS POSITION, THE OUTSTANDING DILUTIVE INSTRUMENTS WOULD HAVE BEEN
CONVERTIBLE NOTES OF 36,092, 36,092 AND 36,092 SHARES IN 1997, 1996 AND
1995, RESPECTIVELY, AND STOCK OPTIONS EXERCISABLE OF 231, 231, AND 301
SHARES IN 1997, 1996, AND 1995, RESPECTIVELY, UII HAD STOCK OPTIONS
OUTSTANDING FOR SHARES OF COMMON STOCK IN 1997, 1996, AND 1995
RESPECTIVELY, AT A PER SHARE PRICE IN EXCESS OF THE AVERAGE MARKET
PRICE, AND WOULD THEREFORE NOT HAVE BEEN INCLUDED IN THE COMPUTATION OF
DILUTED EARNINGS PER SHARE FOR PURPOSES OF THIS CALCULATION, BOOK
VALUE PER SHARE WAS UTILIZED TO REPRESENT MARKET VALUE.
G.USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
H.RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the current year presentation. Such reclassifications had
no effect on previously reported net income (loss), total assets, or
shareholders' equity.
2. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value:
(a) Mortgage loans
The fair values of mortgage loans are estimated using discounted cash flow
analyses and interest rates being offered for similar loans to borrowers
with similar credit ratings. As of December 31, 1997 the estimated fair
value and carrying amountt were $138,519 and $121,520, respectively. As of
December 31, 1996 the estimated fair value and carrying amount were each
$122,853.
197
<PAGE>
(b) Notes receivable from affiliate
For notes receivable from affiliate, which is subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
198
<PAGE>
(c) Convertible debentures
For the convertible debentures, which are subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
3. RELATED PARTY TRANSACTIONS
Effective November 8, 1989, United Security Assurance Company ("USA")
entered a service agreement with its then direct parent, UII, for certain
administrative services. Pursuant to the terms of the agreement, USA pays
UII monthly fees equal to 22% of the amount of collected first year
premiums, 20% in second year and 6% of the renewal premiums in years three
and after. The Company recognized service agreement income of $989,295,
$1,567,891 and $2,015,325 in 1997, 1996 and 1995, respectively.
Effective September 1, 1990, UII entered a service agreement with United
Trust, Inc. (UTI) for certain administrative services. Through its
personnel, UTI performs such services as may be mutually agreed upon
between the parties. In compensation for its services, UII pays UTI a
contractually established fee. The Company incurred expenses of $593,577,
$940,735 and $1,209,195 during 1997, 1996 and 1995, respectively, pursuant
to the terms of the service agreement with UTI. In addition, the Company
incurred $150,000, $300,000 and $600,000 during 1997, 1996 and 1995,
respectively, as reimbursement for services performed on its behalf by FCC.
At December 31, 1997, the Company owns $864,100 in notes receivable from
affiliates. The notes carry interest at a rate of 1% above prime.
Interest is received quarterly. Principal is due upon maturity, with
$150,000 maturing in 1999, $700,000 maturing in 2006 and $14,100 maturing
in 2012.
4. STOCK OPTION PLANS
The Company has a stock option plan under which certain directors, officers
and employees may be issued options to purchase up to 31,500 shares of
common stock at $13.07 per share. Options become exercisable at 25%
annually beginning one year after date of grant and expire generally in
five years. In November 1992, 10,437 option shares were granted. At
December 31, 1997, options for 451 shares were exercisable and options for
20,576 shares were available for grant. Options for 10,437 shares expired
during 1997. No options were exercised during 1997.
A summary of the status of the Company's stock option plan for the three
years ended December 31, 1997, and changes during the years ending on those
dates is presented below.
1997 1996 1995
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning
of year 10,888 $ 13.07 10,888 $ 13.07 10,437 $13.07
Granted 0 0.00 0 0.00 451 13.07
Exercised 0 0.00 0 0.00 0 0.00
Forfeited 10,437 13.07 0 0.00 0 0.00
Outstanding at
end of year 451 $ 13.07 10,888 $ 13.07 10,888 $13.07
Options exercisable
at year end 451 $ 13.07 10,888 $ 13.07 10,888 $13.07
199
<PAGE>
The following information applies to options outstanding at December 31, 1997:
Number outstanding 451
Exercise price $ 13.07
Remaining contractual life 3 years
On January 15, 1991, the Company adopted an additional Non-Qualified Stock
Option Plan under which certain employees and sales personnel may be
granted options. The plan provides for the granting of up to 42,000
options at an exercise price of $.47 per share. The options generally
expire five years from the date of grant. Options for 10,220 shares of
common stock were granted in 1991, options for 1,330 shares were granted in
1993 and options for 301 shares were granted in 1995. A total of 11,620
option shares have been exercised as of December 31, 1997. At December 31,
1997, 231 options have been granted and are exercisable. Options for 0 and
70 shares were exercised during 1997 and 1996, respectively.
A summary of the status of the Company's stock option plan for the three
years ended December 31, 1997, and changes during the years ending on
those dates is presented below.
1997 1996 1995
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning
of year 231 $ 0.47 301 $ 0.47 0 $0.47
Granted 0 0.00 0 0.00 301 0.47
Exercised 0 0.00 (70) 0.47 0 0.00
Forfeited 0 0.00 0 0.00 0 0.00
Outstanding at end
of year 231 $ 0.47 231 $ 0.47 301 $ 0.47
Options exercisable
at year end 231 $ 0.47 231 $ 0.47 301 $0.47
Fair value of options
granted during the year $ 0.00 $ 0.00 $8.40
The following information applies to options outstanding at December 31, 1997:
Number outstanding 231
Exercise price $ 0.47
Remaining contractual life 3 years
5. INCOME TAXES
The Company has net operating loss carryforwards for federal income tax
purposes expiring as follows:
UII
2006 $ 41,314
2007 531,747
$ 573,061
TOTAL
The Company has established a deferred tax asset of $200,571 for its
operating loss carryforwards and has established an allowance of $200,571
against this asset. The Company has no other deferred tax components which
would be reflected in the balance sheets.
200
<PAGE>
The provision for income taxes shown in the statements of operations does
not bear the normal relationship to pre-tax income as a result of certain
permanent differences. The sources and effects of such differences are
summarized in the following table:
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Income tax at statutory
rate of 35% of income
before income taxes $ 97,026 $ 131,830 $ 90,269
Utilization of net
operating loss carryforward (97,026) (133,866) (92,049)
Depreciation 0 2,036 1,780
Provision for income taxes $ 0 $ 0 $ 0
</TABLE>
6. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for the Company's
50% or less owned affiliate:
December 31, December 31,
ASSETS 1997 1996
<TABLE>
<S> <C> <C>
Total investments $222,601,494 $ 221,078,779
Cash and cash equivalents 15,763,639 16,903,789
Cost of insurance acquired 45,009,452 47,536,812
Other assets 64,576,450 69,480,242
TOTAL ASSETS $347,951,035 $ 354,999,622
LIABILITIES AND
SHAREHOLDERS' EQUITY
Policy liabilities $268,237,887 $ 268,771,766
Notes payable 19,081,602 19,839,853
Deferred taxes 12,157,685 11,591,086
Other liabilities 4,053,293 6,335,866
TOTAL LIABILITIES 303,530,467 306,538,571
Minority interests in
consolidated subsidiaries 10,130,024 13,332,034
Shareholders' equity
Common stock no par value 45,926,705 45,926,705
Authorized 10,000 shares - 100 issued
Unrealized depreciation of
investment in stocks (41,708) (126,612)
Accumulated deficit (11,594,453) (10,671,076)
TOTAL SHAREHOLDERS' EQUITY 34,290,544 35,129,017
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 347,951,035 $ 354,999,622
</TABLE>
201
<PAGE>
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Premiums and policy fees,
net of reinsurance $ 28,639,245 $ 30,944,458 $ 33,098,536
Net investment income 14,882,677 15,902,107 15,497,547
Other (171,304) (370,454) 1,237
43,350,618 46,476,111 48,597,320
Benefits, claims and
settlement expenses 27,055,171 30,326,032 29,855,764
Other expenses 16,776,537 22,953,093 30,725,908
43,831,708 53,279,125 60,581,672
Loss before income tax and
minority interest (481,090) (6,803,014) (11,984,352)
Income tax credit (provision) (571,999) 4,643,961 4,724,792
Minority interest in loss of
consolidated subsidiaries 129,712 498,356 1,938,684
Net loss $ (923,377) $ (1,660,697) $ (5,320,876)
</TABLE>
7. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1997, substantially all of consolidated shareholders'
equity represents investment in affiliates. The payment of cash dividends
to shareholders is not legally restricted. However, insurance company
dividend payments are regulated by the state insurance department where the
company is domiciled. UTI is the ultimate parent of UG through ownership
of several intermediary holding companies. UG can not pay a dividend
directly to UII due to the ownership structure. UG's dividend limitations
are described below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,246.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,365. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
8. CONVERTIBLE DEBENTURES
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and
First of America Bank - Southeast Michigan, N.A., as trustee. The
Debentures are general unsecured obligations of UII, subordinate in right
of payment to any existing or future senior debt of UII. The Debentures
are exchangeable and transferable, and are convertible at any time prior to
March 31, 1999 into UII's Common Stock at a conversion price of $25.00 per
share, subject to adjustment in certain events. The Debentures bear
interest from March 31, 1994, payable quarterly, at a variable rate equal
to one percentage point above the prime rate published in the Wall Street
Journal from time to time. On or after March 31, 1999, the Debentures will
be redeemable at UII's option, in whole or in part, at redemption prices
declining from 103% of their principal amount. No sinking fund will be
established to redeem Debentures. The Debentures will mature on March 31,
2004. The Debentures are not listed on any national securities exchange or
the NASDAQ National Market System.
202
<PAGE>
9. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. The
Statement's objective is to simplify the computation of earnings per share,
and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS. Basic
EPS is calculated by dividing income available to common stockholders
(i.e., net income or loss adjusted for preferred stock dividends) by the
weighted-average number of common shares outstanding. Thus, in the most
significant change in current practice, options, warrants, and convertible
securities are excluded from the basic EPS calculation. Further,
contingently issuable shares are included in basic EPS only if all the
necessary conditions for the issuance of such shares have been satisfied by
the end of the period.
Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Income available to common stockholders continues to be
adjusted for assumed conversion of all potentially dilutive securities
using the treasury stock method to calculate the dilutive effect of options
and warrants. However, unlike the calculation of fully diluted EPS under
previous opinions, a new treasury stock method is applied using the average
market price or the ending market price. Further, prior opinion
requirement to use the modified treasury stock method when the number of
options or warrants outstanding is greater than 20% of the outstanding
shares also has been eliminated. SFAS 128 also includes certain shares
that are contingently issuable; however, the test for inclusion under the
new rules is much more restrictive.
SFAS No. 128 requires companies reporting discontinued operations,
extraordinary items, or the cumulative effect of accounting changes are to
use income from operations as the control number or benchmark to determine
whether potential common shares are dilutive or antidilutive. Only
dilutive securities are to be included in the calculation of diluted EPS.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the Company reported a loss from continuing operations so
any potential issuance of common shares would have an antidilutive effect
on EPS. Consequently, the adoption of SFAS No. 128 did not have an impact
on the Company's financial statement.
The FASB has issued SFAS No. 130 entitled Reporting Comprehensive Income
and SFAS No. 132 Employers' Disclosures about Pensions and Other
Postretirement Benefits. Both of the above statements are effective for
financial statements with fiscal years beginning after December 15, 1997.
SFAS No. 130 defines how to report and display comprehensive income and its
components in a full set of financial statements. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity
as owners.
SFAS No. 132 addresses disclosure requirements for post-retirement
benefits. The statement does not change post-retirement measurement or
recognition issues.
The Company will adopt both SFAS No. 130 and SFAS No. 132 for the 1998
financial statements. Management does not expect either adoption to have a
material impact on the Company's financial statements.
203
<PAGE>
10. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a three year period of
time. . Upon completion of the transaction Mr. Correll will own 51% of
UTI. Under the terms of the letter of intent, Mr. Correll will buy
2,000,000 authorized but unissued shares of UTI common stock for $15.00 per
share and will also buy 389,715 shares of UTI common stock, representing
stock of UTI and UII, that UTI purchased during the last eight months in
private transactions at the average price UTI paid for such stock, plus
interest, or approximately $10.00 per share. Mr. Correll also will
purchase 66,667 shares of UTI common stock and $2,560,000 of face amount of
convertible bonds (which are due and payable on any change in control of
UTI) in private transactions, primarily from officers of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
11. REVERSE STOCK SPLIT
On May 13, 1997, UII effected a 1 for 14.2857 reverse stock split.
Fractional shares received a cash payment on the basis of $0.70 for each
old share. Prior period numbers have been restated to give effect of the
reverse split.
12. PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the third quarter of 1998.
204
<PAGE>
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
03/31/98 06/30/98 09/30/98
<TABLE>
<S> <C> <C> <C>
Interest income $ 11,551 12,220 12,285
Interest
income/affil. 20,488 20,708 20,972
Service agreement
income 237,358 197,581 227,868
Total revenues 287,351 250,471 276,404
Management fee 142,415 116,226 139,022
Operating expenses 50,140 10,203 10,444
Interest expense 21,430 21,429 21,430
Operating income 73,366 102,613 105,508
Net income (loss) 105,177 225,221 328299
Basic earnings per
share .08 .16 .24
Diluted earnings per
share .09 .17 .24
</TABLE>
1997
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Interest income $ 2,659 $ 2,680 $ 10,806 $ 10,982
Interest
income/affil. 19,956 20,171 21,521 20,931
Service agreement
income 294,095 287,596 213,518 194,086
Total revenues 342,657 333,661 266,816 242,988
Management fee 226,457 247,558 153,111 116,451
Operating expenses 50,318 9,682 9,912 10,261
Interest expense 20,866 21,430 21,429 21,430
Operating income 45,016 54,991 82,364 94,846
Net income (loss) 55,572 84,941 (136,852) (82,977)
Basic earnings per
share .04 .06 (.10) (.06)
Diluted earnings per
share .05 .07 (.10) (.06)
</TABLE>
1996
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Net investment
income $ 3,673 $ 3,793 $ 2,893 $ 2,740
Interest
income/affil. 18,078 20,717 20,249 20,389
Service agreement
income 536,604 459,454 406,952 164,881
Total revenues 583,627 535,094 456,715 215,511
Management fee 421,963 425,672 294,170 98,930
Operating expenses 51,804 14,514 12,045 11,166
Interest expense 21,430 20,865 20,866 20,866
Operating income 88,430 74,043 129,634 84,549
Net income (loss) 235,469 50,795 (583,728) (21,619)
Basic earnings
per share .01 .00 (.03) .00
Diluted earnings
per share .01 .00 (.03) .00
</TABLE>
205
<PAGE>
1995
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Net investment
income $ 1,431 $ 7,283 $ 4,064 $ 3,738
Investment
income/affil. 22,111 13,830 17,778 17,927
Service agreement
income 505,118 529,411 494,867 485,929
Total revenues 570,284 587,002 540,031 536,832
Management fee 437,041 483,677 452,935 435,542
Operating expenses 46,264 23,951 12,243 (3,953)
Interest expense 21,485 22,676 22,384 21,993
Operating income (loss)65,494 56,698 52,469 83,250
Net income (loss) 137,752 (530,781) 132,804 (1,887,677)
Basic earnings
per share .01 (.03) .01 (.11)
Diluted earnings
per share .01 (.03) .01 (.11)
</TABLE>
206
<PAGE>
EXHIBIT 99(D)
AUDITED FINANCIAL STATEMENTS OF
UNITED TRUST GROUP, INC.
207
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
United Trust Group, Inc.
We have audited the accompanying consolidated balance sheets of United
Trust Group, Inc. (an Illinois corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. 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
United Trust Group, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1997, and Schedules
II, IV and V as of December 31, 1997 and 1996, of United Trust Group, Inc.
and subsidiaries and Schedules II, IV and V for each of the three years in
the period then ended. In our opinion, these schedules present fairly, in
all material respects, the information required to be set forth therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1998
208
<PAGE>
UNITED TRUST GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1996
ASSETS
1997 1996
<TABLE>
<S> <C> <C>
Investments:
Fixed maturities at
amortized cost$ 180,970,333$ 179,926,785
(market $184,782,568
and $181,815,225)
Investments held
for sale:
Fixed maturities, at market
(cost $1,672,298
and $1,984,661) 1,668,630 1,961,166
Equity securities, at market
(cost $3,184,357 and
$2,086,159) 3,001,744 1,794,405
Mortgage loans on
real estate at
amortized cost 9,469,444 11,022,792
Investment real estate,
at cost, net of
accumulated
depreciation 9,760,732 9,779,984
Real estate acquired
in satisfaction 1,724,544 1,724,544
Policy loans 14,207,189 14,438,120
Short-term
Investments 1,798,878 430,983
222,601,494 221,078,779
Cash and cash equivalents 15,763,639 16,903,789
Investment in affiliates 350,000 350,000
Accrued investment income 3,665,228 3,459,748
Reinsurance receivables:
Future policy
Benefits 37,814,106 38,745,013
Policy claims and
other benefits 3,529,078 3,856,124
Other accounts and
notes receivable 1,680,066 1,734,321
Cost of insurance
Acquired 45,009,452 47,536,812
Deferred policy
acquisition costs 10,600,720 11,325,356
Cost in excess of net assets
purchased,
net of accumulated
amortization 2,777,089 5,496,808
Property and equipment,
net of accumulated
depreciation 3,392,905 3,255,171
Other assets 767,258 1,257,701
Total assets $ 347,951,035$ 354,999,622
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy
benefits $ 248,805,695$ 248,879,317
Policy claims and
benefits payable 2,080,907 3,193,806
Other policyholder 2,445,469 2,784,967
Dividend and endowment
accumulations 14,905,816 13,913,676
Income taxes payable:
Current 15,730 70,663
Deferred 12,157,685 11,591,086
Notes payable 19,081,602 19,839,853
Indebtedness to affiliates 49,977 62,084
Other liabilities 3,987,586 6,203,119
Total
Liabilities 303,530,467 306,538,571
Minority interests in
consolidated
subsidiaries 10,130,024 13,332,034
Shareholders' equity:
Common stock - no par value
Authorized 10,000 shares
- 100 shares
- issued 45,926,705 45,926,705
Unrealized depreciation of
investments held for sale (41,708) (126,612)
Accumulated deficit (11,594,453) (10,671,076)
Total shareholders'
equity 34,290,544 35,129,017
Total liabilities and
shareholders'
equity $ 347,951,035$ 354,999,622
</TABLE>
See accompanying notes
209
<PAGE>
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years
Ended December 31, 1997 1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Revenues:
Premiums and
policy fees $ 33,373,950$ 35,891,609$ 38,481,638
Reinsurance premiums
and policy fees (4,734,705) (4,947,151) (5,383,102
Net investment
Income 14,882,677 15,902,107 15,497,547
Realized investment
gains and (losses),
net (279,096) (465,879) (114,235)
Other income 107,792 95,425 115,472
43,350,618 46,476,111 48,597,320
Benefits and other expenses:
Benefits, claims and
settlement expenses:
Life 23,644,252 26,568,062 26,680,217
Reinsurance
benefits and
claims (2,078,982) (2,283,827)(2,850,228)
Annuity 1,560,828 1,892,489 1,797,475
Dividends to
Policyholders 3,929,073 4,149,308 4,228,300
Commissions and
amortization of deferred
policy acquisition
costs 3,616,365 4,224,885 4,907,653
Amortization of cost
of insurance
acquired 2,527,360 5,690,069 4,509,755
Amortization of
agency force 0 0 396,852
Non-recurring write
down of value of
agency force 0 0 8,296,974
Operating expenses 8,957,372 11,285,566 10,634,314
Interest expense 1,675,440 1,752,573 1,980,360
43,831,708 53,279,125 60,581,672
Loss before income taxes,
minority interest
and equity in loss
of investees (481,090) (6,803,014)(11,984,352)
Credit (provision) for
income taxes (571,999) 4,643,961 4,724,792
Minority interest in loss
of consolidated
subsidiaries 129,712 498,356 1,938,684
Net loss $ (923,377)$ (1,660,697)$(5,320,876)
Net loss per
common share $ (9,234)$ (16,607)$ (53,209)
Average common
shares outstanding 100 100 100
</TABLE>
210
<PAGE>
UNITED TRUST GROUP, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1997
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Common stock
Balance, beginning
of year $ 45,926,705 $ 45,726,705 $ 45,626,705
Capital contribution 0 200,000 100,000
Balance, end of year$ 45,926,705 $ 45,926,705 $ 45,726,705
Unrealized appreciation
(depreciation) of
investments held for sale
Balance, beginning
of year $ (126,612)$ (501)$ (212,567)
Change during year 84,904 (126,111) 212,066
Balance, end of year$ (41,708)$ (126,612)$ (501)
Accumulated deficit
Balance, beginning
of year $ (10,671,076)$ (9,010,379)$ (3,689,503)
Net loss (923,377) (1,660,697) (5,320,876)
Balance, end of year$ (11,594,453)$ (10,671,076)$ (9,010,379)
Total shareholders' equity,
end of year $ 34,290,544 $ 35,129,017 $ 36,715,825
</TABLE>
211
<PAGE>
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1997
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Increase (decrease) in cash
and cash equivalents
Cash flows from operating activities:
Net loss $ (923,377)$(1,660,697)$(5,320,876)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities
net of changes in assets and
liabilities resulting from the
sales and purchases of subsidiaries:
Amortization/accretion
of fixed maturities 670,185 899,445 803,696
Realized investment
(gains) losses, net 279,096 465,879 114,235
Policy acquisition
costs deferred (586,000) (1,276,000) (2,370,000)
Amortization of deferred
policy acquisition 1,310,636 1,387,372 1,567,748
Amortization of cost of
insurance acquired 2,527,360 5,690,069 4,509,755
Amortization of value
of agency force 0 0 396,852
Non-recurring write down
of value of
agency force 0 0 8,296,974
Amortization of costs in
excess of net assets
purchased 155,000 185,279 423,192
Depreciation 457,415 371,991 694,194
Minority interest 129,712 498,356 (1,938,684)
Change in accrued
investment income (205,480) 195,821 (173,517)
Change in reinsurance
receivables 1,257,953 83,871 (482,275)
Change in policy
liabilities and (547,081) 3,326,651 3,581,928
Charges for mortality
and administration of
universal life and annuity
products (10,588,874)(10,239,476) (9,757,354)
Interest credited to
account
balance 7,212,406 7,075,921 6,644,282
Change in income
taxes payable 511,666 (4,653,734) (4,749,335)
Change in indebtedness
(to) from affilies (12,107) 224,472 (3,023)
Change in other assets
and liabilities,
net (1,893,811) 396,226 (1,529,727)
Net cash provided by (used in)
operating activities (245,301) 2,971,446 708,065
Cash flows from investing activities:
Proceeds from investments
sold and matured:
Fixed maturities
held for sale 290,660 1,219,036 619,612
Fixed
maturities sold 0 18,736,612 0
Fixed maturities
matured 21,488,265 20,721,482 16,265,140
Equity securities 76,302 8,990 104,260
Mortgage loans 1,794,518 3,364,427 2,252,423
Real estate 1,136,995 3,219,851 1,768,254
Policy loans 4,785,222 3,937,471 4,110,744
Short term 410,000 825,000 25,000
Total proceeds from
investments sold and
matured 29,981,962 52,032,869 25,145,433
Cost of investments acquired:
Fixed maturities(23,220,172)(29,365,111)(25,112,358)
Equity securities(1,248,738) 0 (1,000,000)
Mortgage loans (245,234) (503,113) (322,129)
Real estate (1,444,980) (813,331) (1,902,609)
Policy loans (4,554,291) (4,329,124) (4,713,471)
Short term (1,726,035) (830,983) (100,000)
Total cost of investments
acquired (32,439,450)(35,841,662)(33,150,567)
Purchase of property
and equipment (531,528) (383,411) (57,625)
Net cash provided by (used in)
investing activities (2,989,016) 15,807,796 (8,062,759)
Cash flows from
financing activities:
Policyholder contract
deposits 17,902,246 22,245,369 25,021,983
Policyholder contract
withdrawals (14,515,576)(15,433,644)(16,008,462)
Net cash transferred
from coinsurance
ceded 0 (19,088,371) 0
Proceeds from
notes payable 1,000,000 9,300,000 300,000
Payments on principal
of notes
payable (1,758,252)(10,923,475) (1,205,861)
Payment for fractional
shares from reverse
stock split
of subsidiary (534,251) 0 0
Net cash provided by
financing activities 2,094,167 (13,900,121) 8,107,660
Net increase (decrease) in
cash and cash
equivalents (1,140,150) 4,879,121 752,966
Cash and cash equivalents
at beginning of year 16,903,789 12,024,668 11,271,702
Cash and cash equivalents
at end of year $ 15,763,639$ 16,903,789$ 12,024,668
</TABLE>
212
<PAGE>
UNITED TRUST, GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1997, the
parent, significant majority-owned subsidiaries and affiliates of
United Trust Group, Inc., were as depicted on the following
organizational chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
213
<PAGE> The Company's significant accounting
policies consistently applied in the preparation of the accompanying
consolidated financial statements are summarized as follows.
B. NATURE OF OPERATIONS - United Trust
Group, Inc. is an insurance holding company, which sells individual
life insurance products through its subsidiaries. The Company's
principal market is the Midwestern United States. The primary focus
of the Company has been the servicing of existing insurance business
in force, the solicitation of new life insurance products and the
acquisition of other companies in similar lines of business.
C. PRINCIPLES OF CONSOLIDATION - The
consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
D. BASIS OF PRESENTATION - The financial
statements of United Trust Group, Inc.'s life insurance subsidiaries
have been prepared in accordance with generally accepted accounting
principles which differ from statutory accounting practices permitted
by insurance regulatory authorities.
E. USE OF ESTIMATES - In preparing financial
statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
F. INVESTMENTS - Investments are shown on
the following bases:
Fixed maturities -- at cost, adjusted for
amortization of premium or discount and other-than-temporary market
value declines. The amortized cost of such investments differs from
their market values; however, the Company has the ability and intent
to hold these investments to maturity, at which time the full face
value is expected to be realized.
Investments held for sale -- at current
market value, unrealized appreciation or depreciation is charged
directly to shareholders' equity.
Mortgage loans on real estate -- at
unpaid balances, adjusted for amortization of premium or discount,
less allowance for possible losses.
Real estate - Investment real estate at cost, less allowances for
depreciation and, as appropriate, provisions for possible losses.
Foreclosed real estate is adjusted for any impairment at the
foreclosure date. Accumulated depreciation on investment real estate
was $539,366 and $442,373 as of December 31, 1997 and 1996,
respectively.
Policy loans -- at unpaid balances
including accumulated interest but not in excess of the cash
surrender value.
Short-term investments -- at cost, which
approximates current market value.
Realized gains and losses on sales of
investments are recognized in net income on the specific
identification basis.
G. RECOGNITION OF REVENUES AND RELATED
EXPENSES - Premiums for traditional life insurance products, which
include those products with fixed and guaranteed premiums and
benefits, consist principally of whole life insurance policies,
limited-payment life insurance policies, and certain annuities with
life contingencies are recognized as revenues when due. Limited
payment life insurance policies defer gross premiums received in
excess of net premiums which is then recognized in income in a
constant relationship with insurance in force. Accident and health
insurance premiums are recognized as revenue pro rata over the terms
of the policies. Benefits and related expenses associated with the
premiums earned are charged to expense proportionately over the lives
of the policies through a provision for future policy benefit
214
<PAGE>
liabilities and through deferral and amortization of deferred policy
acquisition costs. For universal life and investment products,
generally there is no requirement for payment of premium other than
to maintain account values at a level sufficient to pay mortality and
expense charges. Consequently, premiums for universal life policies
and investment products are not reported as revenue, but as deposits.
Policy fee revenue for universal life policies and investment
products consists of charges for the cost of insurance and policy
administration fees assessed during the period. Expenses include
interest credited to policy account balances and benefit claims
incurred in excess of policy account balances.
H. DEFERRED POLICY ACQUISITION COSTS -
Commissions and other costs (salaries of certain employees involved
in the underwriting and policy issue functions, and medical and
inspection fees) of acquiring life insurance products that vary with
and are primarily related to the production of new business have been
deferred. Traditional life insurance acquisition costs are being
amortized over the premium-paying period of the related policies
using assumptions consistent with those used in computing policy
benefit reserves.
For universal life insurance and interest
sensitive life insurance products, acquisition costs are being
amortized generally in proportion to the present value of expected
gross profits from surrender charges and investment, mortality, and
expense margins. Under SFAS No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments," the Company
makes certain assumptions regarding the mortality, persistency,
expenses, and interest rates it expects to experience in future
periods. These assumptions are to be best estimates and are to be
periodically updated whenever actual experience and/or expectations
for the future change from initial assumptions. The amortization is
adjusted retrospectively when estimates of current or future gross
profits to be realized from a group of products are revised.
The following table summarizes deferred
policy acquisition costs and related data for the years shown.
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Deferred, beginning
of year $ 11,325,356 $ 11,436,728 $ 10,634,476
Acquisition costs
deferred:
Commissions 312,000 845,000 1,838,000
Other expenses 274,000 431,000 532,000
Total 586,000 1,276,000 2,370,000
Interest accretion 425,000 408,000 338,000
Amortization charged
to income (1,735,636) (1,795,372) (1,905,748)
Net amortization (1,310,636) (1,387,372) (1,567,748)
Change for the year (724,636) (111,372) 802,252
Deferred, end of year $ 10,600,720 $ 11,325,356 $ 11,436,728
</TABLE>
215
<PAGE>
The following table reflects the components of the income statement
for the line item Commissions and amortization of deferred policy
acquisition costs:
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Net amortization of
deferred policy
acquisition costs $ 1,310,636 $ 1,387,372 $ 1,567,748
Commissions 2,305,729 2,837,513 3,339,905
Total $ 3,616,365 $ 4,224,885 $ 4,907,653
</TABLE>
Estimated net amortization expense of deferred policy acquisition
costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
<TABLE>
<S> <C> <C> <C>
1998 $ 403,000 $ 1,530,000 $ 1,127,000
1999 365,000 1,359,000 994,000
2000 330,000 1,211,000 881,000
2001 299,000 1,082,000 783,000
2002 270,000 969,000 699,000
</TABLE>
I.COST OF INSURANCE ACQUIRED - When an insurance company is acquired,
the Company assigns a portion of its cost to the right to receive
future cash flows from insurance contracts existing at the date of
the acquisition. The cost of policies purchased represents the
actuarially determined present value of the projected future cash
flows from the acquired policies. The Company utilized a 9% discount
rate on approximately 24% of the business and a 15% discount rate on
approximately 76% of the business. Cost of Insurance Acquired is
amortized with interest in relation to expected future profits,
including direct charge-offs for any excess of the unamortized asset
over the projected future profits.. The interest rates utilized in
the amortization calculation are 9% on approximately 24% of the
balance and 15% on the remaining balance. The interest rates vary
due to differences in the blocks of business. The amortization is
adjusted retrospectively when estimates of current or future gross
profits to be realized from a group of products are revised.
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Cost of insurance
acquired, beginning
of year $ 47,536,812 $ 59,601,720 $ 64,111,475
Interest accretion 6,288,402 6,649,203 7,044,239
Amortization (8,815,762) (12,339,272) (11,553,994)
Net amortization (2,527,360) (5,690,069) (4,509,755)
Balance attributable
to coinsurance agreement 0 (6,374,839) 0
Cost of insurance
acquired,
end of year $ 45,009,452 $ 47,536,812 $ 59,601,720
</TABLE>
216
<PAGE>
Estimated net amortization expense of cost of insurance acquired for
the next five years is as follows:
Interest Net
Accretion Amortization Amortization
<TABLE>
<S> <C> <C> <C>
1998 $ 6,427,000 $ 8,696,000 $ 2,269,000
1999 6,090,000 7,688,000 1,598,000
2000 5,851,000 7,229,000 1,378,000
2001 5,649,000 7,229,000 1,580,000
2002 5,008,000 6,569,000 1,561,000
</TABLE>
J.COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net
assets purchased is the excess of the amount paid to acquire a
company over the fair value of its net assets. Costs in excess of
net assets purchased are amortized on the straight-line basis over a
40-year period. Management continually reviews the value of goodwill
based on estimates of future earnings. As part of this review,
management determines whether goodwill is fully recoverable from
projected undiscounted net cash flows from earnings of the
subsidiaries over the remaining amortization period. If management
were to determine that changes in such projected cash flows no longer
supported the recoverability of goodwill over the remaining
amortization period, the carrying value of goodwill would be reduced
with a corresponding charge to expense (no such changes have
occurred). Accumulated amortization of cost in excess of net assets
purchased was $1,420,146 and $1,265,146 as of December 31, 1997 and
1996, respectively. A reverse stock split of FCC in May of 1997
created negative goodwill of $2,564,719. The credit to goodwill
resulted from the retirement of fractional shares. Please refer to
Note 11 to the Consolidated Financial Statements for additional
information concerning the reverse stock split.
K. PROPERTY AND EQUIPMENT - Company-
occupied property, data processing equipment and furniture and office
equipment are stated at cost less accumulated depreciation of
$1,375,105 and $1,014,683 at December 31, 1997 and 1996,
respectively. Depreciation is computed on a straight-line basis for
financial reporting purposes using estimated useful lives of three to
thirty years. Depreciation expense was $360,422 and $277,567 for the
years ended December 31, 1997 and 1996, respectively.
L.FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for
traditional life insurance and accident and health insurance policy
benefits are computed using a net level method. These liabilities
include assumptions as to investment yields, mortality, withdrawals,
and other assumptions based on the life insurance subsidiaries'
experience adjusted to reflect anticipated trends and to include
provisions for possible unfavorable deviations. The Company makes
these assumptions at the time the contract is issued or, in the case
of contracts acquired by purchase, at the purchase date. Benefit
reserves for traditional life insurance policies include certain
deferred profits on limited-payment policies that are being
recognized in income over the policy term. Policy benefit claims are
charged to expense in the period that the claims are incurred.
Current mortality rate assumptions are based on 1975-80 select and
ultimate tables. Withdrawal rate assumptions are based upon Linton B
or Linton C, which are industry standard actuarial tables for
forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive
life insurance products are computed under a retrospective deposit
method and represent policy account balances before applicable
surrender charges. Policy benefits and claims that are charged to
expense include benefit claims in excess of related policy account
balances. Interest crediting rates for universal life and interest
sensitive products range from 5.0% to 6.0% in 1997, 1996 and 1995.
M.POLICY AND CONTRACT CLAIMS - Policy and contract claims include
provisions for reported claims in process of settlement, valued in
accordance with the terms of the policies and contracts, as well as
provisions for claims incurred and unreported based on prior
experience of the Company.
217
<PAGE>
N.PARTICIPATING INSURANCE - Participating business represents 29% and
30% of the ordinary life insurance in force at December 31, 1997 and
1996, respectively. Premium income from participating business
represents 50%, 52%, and 55% of total premiums for the years ended
December 31, 1997, 1996 and 1995, respectively. The amount of
dividends to be paid is determined annually by the respective
insurance subsidiary's Board of Directors. Earnings allocable to
participating policyholders are based on legal requirements that vary
by state.
O.INCOME TAXES - Income taxes are reported under Statement of
Financial Accounting Standards Number 109. Deferred income taxes are
recorded to reflect the tax consequences on future periods of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at the end of each such period.
P.BUSINESS SEGMENTS - The Company operates principally in the
individual life insurance business.
Q. EARNINGS PER SHARE - Earnings per share are based on the weighted
average number of common shares outstanding during each year,
RETROACTIVELY ADJUSTED TO GIVE EFFECT TO ALL STOCK SPLITS. IN
ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.
128, THE COMPUTATION OF DILUTED EARNINGS PER SHARE IS NOT SHOWN
SINCE THE COMPANY HAS A LOSS FROM CONTINUING OPERATIONS IN EACH
PERIOD PRESENTED, AND ANY ASSUMED CONVERSION, EXERCISE, OR
CONTINGENT ISSUANCE OF SECURITIES WOULD HAVE AN ANTIDILUTIVE EFFECT
ON EARNINGS PER. DURING 1997, 1996, AND 1995 RESPECTIVELY, THE COMPANY
HAD NO DILUTIVE INSTRUMENTS.
R.CASH EQUIVALENTS - The Company considers certificates of deposit
and other short-term instruments with an original purchased maturity
of three months or less cash equivalents.
S.RECLASSIFICATIONS - Certain prior year amounts have been
reclassified to conform with the 1997 presentation. Such
reclassifications had no effect on previously reported net loss,
total assets, or shareholders' equity.
T.REINSURANCE - In the normal course of business, the Company seeks
to limit its exposure to loss on any single insured and to recover a
portion of benefits paid by ceding reinsurance to other insurance
enterprises or reinsurers under excess coverage and coinsurance
contracts. The Company retains a maximum of $125,000 of coverage per
individual life.
Amounts paid or deemed to have been paid for reinsurance contracts
are recorded as reinsurance receivables. Reinsurance receivables is
recognized in a manner consistent with the liabilities relating to
the underlying reinsured contracts. The cost of reinsurance related
to long-duration contracts is accounted for over the life of the
underlying reinsured policies using assumptions consistent with those
used to account for the underlying policies.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1997, substantially all of consolidated shareholders'
equity represents net assets of UTG's subsidiaries. The payment of cash
dividends to shareholders is not legally restricted. However, insurance
company dividend payments are regulated by the state insurance department
where the company is domiciled. UTI is the ultimate parent of UG through
ownership of several intermediary holding companies. UG can not pay a
dividend directly to UII due to the ownership structure. UG's dividend
limitations are described below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,246.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,365. Extraordinary dividends (amounts in excess of ordinary
218
<PAGE>
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
219
<PAGE>
3. INCOME TAXES
Until 1984, the insurance companies were taxed under the provisions of the
Life Insurance Company Income Tax Act of 1959 as amended by the Tax Equity
and Fiscal Responsibility Act of 1982. These laws were superseded by the
Deficit Reduction Act of 1984. All of these laws are based primarily upon
statutory results with certain special deductions and other items available
only to life insurance companies. Under the provision of the pre-1984 life
insurance company income tax regulations, a portion of "gain from
operations" of a life insurance company was not subject to current taxation
but was accumulated, for tax purposes, in a special tax memorandum account
designated as "policyholders' surplus account". Federal income taxes will
become payable on this account at the then current tax rate when and if
distributions to shareholders, other than stock dividends and other limited
exceptions, are made in excess of the accumulated previously taxed income
maintained in the "shareholders surplus account".
The following table summarizes the companies with this situation and the
maximum amount of income that has not been taxed in each.
Company Shareholders' Untaxed
Surplus Balance
<TABLE>
<S> <C> <C>
ABE $ 5,237,958 $ 1,149,693
APPL 5,417,825 1,525,367
UG 27,760,313 4,363,821
USA 0 0
</TABLE>
The payment of taxes on this income is not anticipated; and, accordingly,
no deferred taxes have been established.
The life insurance company subsidiaries file a consolidated federal income
tax return. The holding companies of the group file separate returns.
Life insurance company taxation is based primarily upon statutory results
with certain special deductions and other items available only to life
insurance companies. Income tax expense consists of the following
components:
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Current tax
expense $ 5,400 $ (148,148) $ 1,897
Deferred tax
expense (credit) 566,599 (4,495,813) (4,726,689)
$ 571,999 $ (4,643,961) $ (4,724,792)
</TABLE>
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
UG FCC
<TABLE>
<S> <C> <C>
2004 $ 0 $ 163,334
2005 0 138,765
2006 2,400,574 33,345
2007 782,452 676,067
2008 939,977 4,595
2009 0 168,800
2010 0 19,112
2012 2,970,692 0
TOTAL $ 7,093,695 $ 1,204,018
</TABLE>
220
<PAGE>
The Company has established a deferred tax asset of $2,904,200 for its
operating loss carryforwards and has established an allowance of
$2,904,200.
The expense or (credit) for income taxes differed from the amounts computed
by applying the applicable United States statutory rate of 35% to the loss
before taxes as a result of the following differences:
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Tax computed at statutory
rate $ (168,382) $ (2,381,055) $ (4,194,523)
Changes in taxes due to:
Cost in excess of net
assets purchased 54,250 64,848 60,594
Current year loss for which
no benefit realized 1,039,742 0 0
Benefit of prior losses (324,705) (2,393,395) (598,563)
Other (28,906) 65,641 7,700
Income tax expense
(credit) $ 571,999 $ (4,643,961) $ (4,724,792)
</TABLE>
The following table summarizes the major components that comprise the
deferred tax liability as reflected in the balance sheets:
1997 1996
<TABLE>
<S> <C> <C>
Investments $ (228,027) $ (122,251)
Cost of insurance
acquired 15,753,308 16,637,883
Deferred policy
acquisition costs 3,710,252 3,963,875
Agent balances (23,954) (65,609)
Property and
equipment (19,818) (37,683)
Discount of notes 896,113 922,766
Management/
consulting fees (573,182) (733,867)
Future policy
benefits (4,421,038) (5,906,087)
Other liabilities (756,482) (1,151,405)
Federal tax DAC (2,179,487) (1,916,536)
Deferred tax
liability $ 12,157,685 $ 11,591,086
</TABLE>
221
<PAGE>
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A.NET INVESTMENT INCOME - The following table reflects net investment
income by type of investment:
December 31,
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Fixed maturities and fixed
maturities held for sale $ 12,677,348 $ 13,326,312 $ 13,253,122
Equity securities 87,211 88,661 52,445
Mortgage loans 802,123 1,047,461 1,257,189
Real estate 745,502 794,844 975,080
Policy loans 976,064 1,121,538 1,041,900
Short-term investments 70,624 21,423 21,295
Other 721,866 724,771 620,954
Total consolidated investment
income 16,080,738 17,125,010 17,221,985
Investment expenses (1,198,061) (1,222,903) (1,724,438)
Consolidated net investment
income $ 14,882,677 $ 15,902,107 $ 15,497,547
</TABLE>
At December 31, 1997, the Company had a total of $5,797,000 of investments,
comprised of $3,848,000 in real estate and $1,949,000 in equity securities,
which did not produce income during 1997.
The following table summarizes the Company's fixed maturity holdings and
investments held for sale by major classifications:
Carrying Value
1997 1996
<TABLE>
<S> <C> <C>
Investments held for sale:
Fixed maturities $ 1,668,630 $ 1,961,166
Equity securities 3,001,744 1,794,405
Fixed maturities:
U.S. Government, government
agencies and authorities 28,259,322 28,554,631
State, municipalities and
political subdivisions 22,778,816 14,421,735
Collateralized mortgage obligations 11,093,926 13,246,781
Public utilities 47,984,322 51,821,989
All other corporate bonds 70,853,947 71,891,649
$ 185,640,707 $ 183,692,356
</TABLE>
By insurance statute, the majority of the Company's investment portfolio is
required to be invested in investment grade securities to provide ample
protection for policyholders. The Company does not invest in so-called
"junk bonds" or derivative investments.
Below investment grade debt securities generally provide higher yields and
involve greater risks than investment grade debt securities because their
issuers typically are more highly leveraged and more vulnerable to adverse
economic conditions than investment grade issuers. In addition, the
trading market for these securities is usually more limited than for
investment grade debt securities. Debt securities classified as below-
investment grade are those that receive a Standard & Poor's rating of BB or
below.
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<PAGE>
The following table summarizes by category securities held that are
below investment grade at amortized cost:
Below Investment
Grade Investments 1997 1996 1995
<TABLE>
<S> <C> <C> <C>
State,
Municipalities and political
subdivisions $ 0 $ 10,042 $ 0
Public Utilities 80,497 117,609 116,879
Corporate 656,784 813,717 819,010
Total $ 737,281 $ 941,368 $ 935,889
</TABLE>
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in
securities including investments held for sale are as follows:
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
<TABLE>
<S> <C> <C> <C> <C>
Investments Held for Sale:
U.S. Government
and govt. agencies and
authorities $ 1,448,202 $ 0 $ (5,645) $ 1,442,557
States,
municipalities and political
subdivisions 35,000 485 0 35,485
Collateralized
mortgage obligations 0 0 0 0
Public utilities 80,169 328 0 80,497
All other corporate
bonds 108,927 1,164 0 110,091
1,672,298 1,977 (5,645) 1,668,630
Equity securities 3,184,357 176,508 (359,121) 3,001,744
Total $ 4,856,655 $ 178,485 $ (364,766) $ 4,670,374
Held to Maturity Securities:
U.S. Government
and govt. agencies
and authorities$ 28,259,322 $ 415,419 $ (51,771) $ 28,622,970
States,
municipalities and
political
subdivisions 22,778,816 672,676 (1,891) 23,449,601
Collateralized
mortgage
obligations 11,093,926 210,435 (96,714) 11,207,647
Public utilities 47,984,322 1,241,969 (84,754) 49,141,537
All other corporate
bonds 70,853,947 1,599,983 (93,117) 72,360,813
Total $ 180,970,333 $ 4,140,482 $ (328,247) $ 184,782,568
</TABLE>
223
<PAGE> Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
<TABLE>
<S> <C> <C> <C> <C>
Investments Held for Sale:
U.S. Government
and govt. agencies
and authorities $ 1,461,068 $ 0 $ (17,458) $ 1,443,609
States,
municipalities and
political subdivisions 145,199 665 (6,397) 139,467
Collateralized
mortgage obligations 0 0 0 0
Public utilities 119,970 363 (675) 119,658
All other corporate
bonds 258,424 4,222 (4,215) 258,432
1,984,661 5,250 (28,745) 1,961,166
Equity securities 2,086,159 37,000 (328,754) 1,794,405
Total $ 4,070,820 $ 42,250 $ (357,499) $ 3,755,571
Held to Maturity Securities:
U.S. Government
and govt. agencies
and authorities $ 28,554,631 $ 421,523 $ (136,410) $ 28,839,744
States,
municipalities and
political
subdivisions 14,421,735 318,682 (28,084) 14,712,333
Collateralized
mortgage obligations 13,246,780 175,163 (157,799) 13,264,145
Public utilities 51,821,990 884,858 (381,286) 52,325,561
All other corporate
bonds 71,881,649 1,240,230 (448,437) 72,673,442
Total $ 179,926,785 $ 3,040,456 $ (1,152,016) $ 181,815,225
</TABLE>
The amortized cost of debt securities at December 31, 1997, by
contractual maturity, are shown 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.
Fixed Maturities Held Estimated
for Sale Amortized Market
December 31, 1997 Cost Value
<TABLE>
<S> <C> <C>
Due in one year or less $ 83,927 $ 84,952
Due after one year through
five years 1,533,202 1,528,211
Due after five years through
ten years 55,169 55,467
Due after ten years 0 0
Collateralized mortgage
obligations 0 0
Total $ 1,672,298 $ 1,668,630
</TABLE>
224
<PAGE>
Fixed Maturities Held to Amortized Estimated
Maturity Cost Market
December 31, 1997 Value
<TABLE>
<S> <C> <C>
Due in one year or less $ 15,023,173 $ 15,003,728
Due after one year through
five years 118,849,668 120,857,201
Due after five years through
ten years 30,266,228 31,726,265
Due after ten years 5,737,338 5,987,726
Collateralized mortgage
obligations 11,093,926 11,207,648
Total $ 180,970,333 $ 184,782,568
</TABLE>
An analysis of sales, maturities and principal repayments of the
Company's fixed maturities portfolio for the years ended December 31,
1997, 1996 and 1995 is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended Cost Gains Losses Sale
December 31, 1997
Scheduled principal repayments,
calls and tenders:
Held for sale $ 299,390 $ 931 $ (9,661) $ 290,660
Held to maturity 21,467,552 21,435 (722) 21,488,265
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
Total $ 21,766,942 $ 22,366 $ (10,383) $ 21,778,925
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended Cost Gains Losses Sale
December 31, 1996
Scheduled principal repayments, calls and tenders:
Held for sale $ 699,361 $ 6,035 $ (813) $ 704,583
Held to maturity 20,900,159 13,469 (192,146) 20,721,482
Sales:
Held for sale 517,111 0 (2,658) 514,453
Held to maturity 18,735,848 81,283 (80,519) 18,736,612
Total $ 40,852,479 $ 100,787 $ (276,136) $ 40,677,130
</TABLE>
225
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended Cost Gains Losses Sale
December 31, 1995
Scheduled principal repayments,
calls and tenders:
Held for sale $ 621,461 $ 0 $ (1,849) $ 619,612
Held to maturity 16,383,921 125,740 (244,521) 16,265,140
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
Total $ 17,005,382 $ 125,740 $ (246,370) $ 16,884,752
</TABLE>
C.INVESTMENTS ON DEPOSIT - At December 31, 1997, investments carried at
approximately $17,801,000 were on deposit with various state insurance
departments.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information
at December 31, 1997 and 1996, as required by Statement of Financial
Accounting Standards 107, Disclosure about Fair Value of Financial
Instruments ("SFAS 107"). Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in
that Statement and does not purport to represent the aggregate net fair
value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value:
(a) Cash and Cash equivalents
The carrying amount in the financial statements approximates fair value
because of the relatively short period of time between the origination of
the instruments and their expected realization.
(b) Fixed maturities and investments held for sale
Quoted market prices, if available, are used to determine the fair value.
If quoted market prices are not available, management estimates the fair
value based on the quoted market price of a financial instrument with
similar characteristics.
(c) Mortgage loans on real estate
The fair values of mortgage loans are estimated using discounted cash flow
analyses and interest rates being offered for similar loans to borrowers
with similar credit ratings.
(d) Investment real estate and real estate acquired in satisfaction of
debt
An estimate of fair value is based on management's review of the individual
real estate holdings. Management utilizes sales of surrounding properties,
current market conditions and geographic considerations. Management
conservatively estimates the fair value of the portfolio is equal to the
carrying value.
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<PAGE>
(e) Policy loans
It is not practicable to estimate the fair value of policy loans as they
have no stated maturity and their rates are set at a fixed spread to
related policy liability rates. Policy loans are carried at the aggregate
unpaid principal balances in the consolidated balance sheets, and earn
interest at rates ranging from 4% to 8%. Individual policy liabilities in
all cases equal or exceed outstanding policy loan balances.
(f) Short-term investments
For short-term instruments, the carrying amount is a reasonable estimate of
fair value. Short-term instruments represent United States Government
Treasury Bills and certificates of deposit with various banks that are
protected under FDIC.
(g) Notes and accounts receivable and uncollected premiums
The Company holds a $840,066 note receivable for which the determination of
fair value is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Accounts
receivable and uncollected premiums are primarily insurance contract
related receivables which are determined based upon the underlying
insurance liabilities and added reinsurance amounts, and thus are excluded
for the purpose of fair value disclosure by paragraph 8(c) of SFAS 107.
(h) Notes payable
For borrowings under the senior loan agreement, which is subject to
floating rates of interest, carrying value is a reasonable estimate of fair
value. For subordinated borrowings fair value was determined based on the
borrowing rates currently available to the Company for loans with similar
terms and average maturities.
The estimated fair values of the Company's financial instruments required
to be valued by SFAS 107 are as follows as of December 31:
<TABLE>
<S> <C> <C> <C> <C>
1997 1996
Estimated Estimated
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
Fixed
maturities $ 180,970,333 $ 184,782,568 $ 179,926,785 $ 181,815,225
Fixed
maturities
held for sale 1,668,630 1,668,630 1,961,166 1,961,166
Equity
securities 3,001,744 3,001,744 1,794,405 1,794,405
Mortgage
loans on
real estate 9,469,444 9,837,530 11,022,792 11,022,792
Policy loans 14,207,189 14,207,189 14,438,120 14,438,120
Short-term
investments 1,798,878 1,798,878 430,983 430,983
Investment
in real estate 9,760,732 9,760,732 9,779,984 9,779,984
Real estate
acquired
in satisfaction
of debt 1,724,544 1,724,544 1,724,544 1,724,544
Notes receivable 1,680,066 1,569,603 1,680,066 1,566,562
Liabilities
Notes payable 19,081,602 18,539,301 19,839,853 18,671,155
</TABLE>
227
<PAGE>
6. STATUTORY EQUITY AND GAIN FROM OPERATIONS
The Company's insurance subsidiaries are domiciled in Ohio, Illinois and
West Virginia and prepare their statutory-based financial statements in
accordance with accounting practices prescribed or permitted by the
respective insurance department. These principles differ significantly
from generally accepted accounting principles. "Prescribed" statutory
accounting practices include state laws, regulations, and general
administrative rules, 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, from company to
company within a state, and may change in the future. The NAIC currently
is in the process of codifying statutory accounting practices, the result
of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project, which has not
yet been completed, will likely change prescribed statutory accounting
practices and may result in changes to the accounting practices that
insurance enterprises use to prepare their statutory financial statements.
UG's total statutory shareholders' equity was $10,997,365 and $10,226,566
at December 31, 1997 and 1996, respectively. The Company's insurance
subsidiaries reported combined statutory gain from operations (exclusive of
intercompany dividends) was $3,978,000, $10,692,000 and $4,076,000 for
1997, 1996 and 1995, respectively.
7. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.
The Company assumes risks from, and reinsures certain parts of its risks
with other insurers under yearly renewable term and coinsurance agreements
that are accounted for by passing a portion of the risk to the reinsurer.
Generally, the reinsurer receives a proportionate part of the premiums less
commissions and is liable for a corresponding part of all benefit payments.
While the amount retained on an individual life will vary based upon age
and mortality prospects of the risk, the Company generally will not carry
more than $125,000 individual life insurance on a single risk.
The Company has reinsured approximately $1.022 billion, $1.109 billion and
$1.088 billion in face amount of life insurance risks with other insurers
for 1997, 1996 and 1995, respectively. Reinsurance receivables for future
policy benefits were $37,814,106 and $38,745,093 at December 31, 1997 and
1996, respectively, for estimated recoveries under reinsurance treaties.
Should any reinsurer be unable to meet its obligation at the time of a
claim, obligation to pay such claim would remain with the Company.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover all new business of the Company.
The agreements are a yearly renewable term ("YRT") treaty where the Company
cedes amounts above its retention limit of $100,000 with a minimum cession
of $25,000.
One of the Company's insurance subsidiaries (UG) entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best assigned FILIC a Financial Performance Rating (FPR) of 7 (Strong)
on a scale of 1 to 9. A.M. Best assigned a Best's Rating of A++ (Superior)
to The Guardian Life Insurance Company of America ("Guardian"), parent of
FILIC, based on the consolidated financial condition and operating
performance of the company and its life/health subsidiaries. During 1997,
FILIC changed its name to Park Avenue Life Insurance Company ("PALIC").
The agreement with PALIC accounts for approximately 65% of the reinsurance
receivables as of December 31, 1997.
228
<PAGE>
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long-duration reinsurance contracts on premiums
earned in 1997, 1996 and 1995 was as follows:
Shown in thousands
1997 1996 1995
Premiums Premiums Premiums
Earned Earned Earned
<TABLE>
<S> <C> <C> <C>
Direct $ 33,374 $ 35,891 $ 38,482
Assumed 0 0 0
Ceded (4,735) (4,947) (5,383)
Net
premiums $ 28,639 $ 30,944 $ 33,099
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. Some of the lawsuits have resulted in the award
of substantial judgments against the insurer, including material amounts of
punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances.
Under the insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed insurance
companies. Although the Company cannot predict the amount of any future
assessments, most insurance guaranty fund laws currently provide that an
assessment may be excused or deferred if it would threaten an insurer's
financial strength. Mandatory assessments may be partially recovered
through a reduction in future premium tax in some states. The Company does
not believe such assessments will be materially different from amounts
already provided for in the financial statements.
The Company and its subsidiaries are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
liabilities. Management and its legal counsel are of the opinion that the
settlement of those actions will not have a material adverse effect on the
Company's financial position or results of operations.
9. RELATED PARTY TRANSACTIONS
UII has a service agreement with USA which states that USA is to pay UII
monthly fees equal to 22% of the amount of collected first year premiums,
20% in second year and 6% of the renewal premiums in years three and after.
UII's subcontract agreement with UTI states that UII is to pay UTI monthly
fees equal to 60% of collected service fees from USA as stated above.
USA paid $989,295, $1,567,891 and $2,015,325 under their agreement with UII
for 1997, 1996 and 1995, respectively. UII paid $593,577, $940,734 and
$1,209,195 under their agreement with UTI for 1997, 1996 and 1995,
respectively.
Respective domiciliary insurance departments have approved the agreements
of the insurance companies and it is Management's opinion that where
applicable, costs have been allocated fairly and such allocations are based
upon generally accepted accounting principles. The costs paid by UTG for
services include costs related to the production of new business, which are
deferred as policy acquisition costs and charged off to the income
statement through "Amortization of deferred policy acquisition costs".
Also included are costs associated with the maintenance of existing
policies that are charged as current period costs and included in "general
expenses".
On July 31,1997, the Company entered into employment agreements with eight
individuals, all officers or employees of the Company. The agreements have
a term of three years, excepting the agreements with Mr. Ryherd and Mr.
Melville, which have five-year terms. The agreements secure the services
229
<PAGE>
of these key individuals, providing the Company a stable management
environment and positioning for future growth.
10. DEFERRED COMPENSATION PLAN
UTI and FCC established a deferred compensation plan during 1993 pursuant
to which an officer or agent of FCC, UTI or affiliates of UTI, could defer
a portion of their income over the next two and one-half years in return
for a deferred compensation payment payable at the end of seven years in
the amount equal to the total income deferred plus interest at a rate of
approximately 8.5% per annum and a stock option to purchase shares of
common stock of UTI. At the beginning of the deferral period an officer or
agent received an immediately exercisable option to purchase 2,300 shares
of UTI common stock at $17.50 per share for each $25,000 ($10,000 per year
for two and one-half years) of total income deferred. The option expires
on December 31, 2000. A total of 105,000 options were granted in 1993
under this plan. As of December 31, 1997 no options were exercised. At
December 31, 1997 and 1996, the Company held a liability of $1,376,384 and
$1,267,598, respectively, relating to this plan. At December 31, 1997, UTI
common stock had a bid price of $8.00 and an ask price of $9.00 per share.
The following information applies to deferred compensation plan stock
options outstanding at December 31, 1997:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 3 years
11. REVERSE STOCK SPLIT OF FCC
On May 13, 1997, FCC effected a 1 for 400 reverse stock split. Fractional
shares received a cash payment on the basis of $.25 for each old share.
FCC maintained a significant number of shareholder accounts with less than
$100 of market value of stock. The reverse stock split enabled these
smaller shareholders to receive cash for their shares without incurring
broker costs and will save the Company administrative costs associated with
maintaining these small accounts.
12. NOTES PAYABLE
At December 31, 1997 and 1996, the Company has $19,081,602 and $19,839,853
in long-term debt outstanding, respectively. The debt is comprised of the
following components:
<TABLE>
<S> <C> <C>
1997 1996
Senior debt $ 6,900,000 $ 8,400,000
Subordinated 10 yr.
notes 5,746,774 6,209,293
Subordinated 20 yr.
notes 4,034,828 3,830,560
Other notes payable 2,400,000 1,400,000
$ 19,081,602 $ 19,839,853
</TABLE>
A. Senior debt
The senior debt is through First of America Bank - Illinois NA and is
subject to a credit agreement. The debt bears interest at a rate equal to
the "base rate" plus nine-sixteenths of one percent. The Base rate is
defined as the floating daily, variable rate of interest determined and
announced by First of America Bank from time to time as its "base lending
rate." The base rate at December 31, 1997 was 8.5%. Interest is paid
quarterly. Principal payments of $1,000,000 are due in May of each year
beginning in 1997, with a final payment due May 8, 2005. On November 8,
1997, the Company prepaid the May 1998 principal payment.
The credit agreement contains certain covenants with which the Company must
comply. These covenants contain provisions common to a loan of this type
and include such items as; a minimum consolidated net worth of FCC to be no
230
<PAGE>
less than 400% of the outstanding balance of the debt; Statutory capital
and surplus of Universal Guaranty Life Insurance Company be maintained at
no less than $6,500,000; an earnings covenant requiring the sum of the pre-
tax earnings of Universal Guaranty Life Insurance Company and its
subsidiaries (based on Statutory Accounting Practices) and the after-tax
earnings plus non-cash charges of FCC (based on parent only GAAP practices)
shall not be less than two hundred percent (200%) of the Company's interest
expense on all of its debt service. The Company is in compliance with all
of the covenants of the agreement.
B. Subordinated debt
The subordinated debt was incurred June 16, 1992 as a part of the
acquisition of the now dissolved Commonwealth Industries Corporation,
(CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum,
payable semi-annually beginning December 16, 1992. These notes, except for
one $840,000 note, provide for principal payments equal to 1/20th of the
principal balance due with each interest installment beginning December 16,
1997, with a final payment due June 16, 2002. The aforementioned $840,000
note provides for a lump sum principal payment due June 16, 2002. In June
1997, the Company refinanced a $204,267 subordinated 10-year note as a
subordinated 20-year note bearing interest at the rate of 8.75% per annum.
The repayment terms of the refinanced note are the same as the original
subordinated 20 year notes. The original 20-year notes bear interest at
the rate of 8 1/2% per annum on $3,397,620 and 8.75% per annum on $504,962
(of which the $204,267 note refinanced in the current year is included),
payable semi-annually with a lump sum principal payment due June 16, 2012.
C. Other notes payable
United Income, Inc. holds two promissory notes receivable totaling $850,000
due from FCC. Each note bears interest at the rate of 1% over prime as
published in the Wall Street Journal, with interest payments due quarterly.
Principal of $150,000 is due upon the maturity date of June 1, 1999, with
the remaining principal payment of $700,000 becoming due upon the maturity
date of May 8, 2006.
United Trust, Inc. holds three promissory notes receivable totaling
$1,550,000 due from FCC. Each note bears interest at the rate of 1% over
prime as published in the Wall Street Journal, with interest payments due
quarterly. Principal of $250,000 is due upon the maturity date of June 1,
1999, with the remaining principal payment of $1,300,000 becoming due upon
maturity in 2006.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1998 $ 516,504
1999 1,916,504
2000 1,516,504
2001 1,516,504
2002 2,356,504
13. OTHER CASH FLOW DISCLOSURES
On a cash basis, the Company paid $1,658,703, $1,700,973 and $1,934,326 in
interest expense for the years 1997, 1996 and 1995, respectively. The
Company paid $57,277, $17,634 and $25,821 in federal income tax for 1997,
1996 and 1995, respectively.
One of the Company's insurance subsidiaries ("UG") entered into a
coinsurance agreement with Park Avenue Life Insurance Company ("PALIC") at
September 30, 1996. At closing of the transaction, UG received a
coinsurance credit of $28,318,000 for policy liabilities covered under the
agreement. UG transferred assets equal to the credit received. This
transfer included policy loans of $2,855,000 associated with policies under
the agreement and a net cash transfer of $19,088,000 after deducting the
ceding commission due UG of $6,375,000. To provide the cash required to be
transferred under the agreement, the Company sold $18,737,000 of fixed
maturity investments.
14. NON-RECURRING WRITE DOWN OF VALUE OF AGENCY FORCE ACQUIRED
231
<PAGE>
During the year-ended December 31, 1995, the Company recognized a non-
recurring write down of $8,297,000 on its value of agency force acquired
The write down released $2,904,000 of the deferred tax liability and
$3,327,000 was attributed to minority interest in loss of consolidated
subsidiaries. In addition, equity loss of investees was negatively
impacted by $542,000. The effect of this write down resulted in an
increase in the net loss of $2,608,000. This write down is directly
related to the Company's change in distribution systems. Due to the broker
agency force not meeting management's expectations and lack of production,
the Company has changed its focus from a primarily broker agency
distribution system to a captive agent system. With the change in focus,
most of the broker agents were terminated and therefore, management re-
evaluated the value of the agency force carried on the balance sheet. For
purposes of the write-down, the broker agency force has no future expected
cash flows and therefore warranted a write-off of the value. The write
down is reported as a separate line item "non-recurring write down of value
of agency force acquired" and the release of the deferred tax liability is
reported in the credit for income taxes payable in the Statement of
Operations. In addition, the impact to minority interest in loss of
consolidated subsidiaries and equity loss of investees is in the Statement
of Operations.
15. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions that at times
may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
16. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. The
Statement's objective is to simplify the computation of earnings per share,
and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS. Basic
EPS is calculated by dividing income available to common stockholders
(i.e., net income or loss adjusted for preferred stock dividends) by the
weighted-average number of common shares outstanding. Thus, in the most
significant change in current practice, options, warrants, and convertible
securities are excluded from the basic EPS calculation. Further,
contingently issuable shares are included in basic EPS only if all the
necessary conditions for the issuance of such shares have been satisfied by
the end of the period.
Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Income available to common stockholders continues to be
adjusted for assumed conversion of all potentially dilutive securities
using the treasury stock method to calculate the dilutive effect of options
and warrants. However, unlike the calculation of fully diluted EPS under
previous opinions, a new treasury stock method is applied using the average
market price or the ending market price. Further, prior opinion
requirement to use the modified treasury stock method when the number of
options or warrants outstanding is greater than 20% of the outstanding
shares also has been eliminated. SFAS 128 also includes certain shares
that are contingently issuable; however, the test for inclusion under the
new rules is much more restrictive.
SFAS No. 128 requires companies reporting discontinued operations,
extraordinary items, or the cumulative effect of accounting changes are to
use income from operations as the control number or benchmark to determine
whether potential common shares are dilutive or antidilutive. Only
dilutive securities are to be included in the calculation of diluted EPS.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the Company reported a loss from continuing operations so
any potential issuance of common shares would have an antidilutive effect
on EPS. Consequently, the adoption of SFAS No. 128 did not have an impact
on the Company's financial statement.
232
<PAGE>
The FASB has issued SFAS No. 130 entitled Reporting Comprehensive Income
and SFAS No. 132 Employers' Disclosures about Pensions and Other
Postretirement Benefits. Both of the above statements are effective for
financial statements with fiscal years beginning after December 15, 1997.
SFAS No. 130 defines how to report and display comprehensive income and its
components in a full set of financial statements. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity
as owners.
SFAS No. 132 addresses disclosure requirements for post-retirement
benefits. The statement does not change post-retirement measurement or
recognition issues.
The Company will adopt both SFAS No. 130 and SFAS No. 132 for the 1998
financial statements. Management does not expect either adoption to have a
material impact on the Company's financial statements.
17. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
Upon completion of the transaction Mr. Correll will own 51% of UTI Under
the terms of the letter of intent Mr. Correll will buy 2,000,000 authorized
but unissued shares of UTI common stock for $15.00 per share and will also
buy 389,715 shares of UTI common stock, representing stock of UTI and UII,
that UTI purchased during the last eight months in private transactions at
the average price UTI paid for such stock, plus interest, or approximately
$10.00 per share. Mr. Correll also will purchase 66,667 shares of UTI
common stock and $2,560,000 of face amount of convertible bonds (which are
due and payable on any change in control of UTI) in private transactions,
primarily from officers of UTI. Upon completion of the transaction, Mr.
Correll would be the largest shareholder of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
18. PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the third quarter of 1998.
233
<PAGE>
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C>
1997
1st 2nd 3rd 4th
Premiums and policy fees,
net $ 7,926,386 $ 7,808,782 $ 6,639,394 $ 6,264,683
Net investment
income 3,859,875 3,839,519 3,691,584 3,491,699
Total revenues 11,781,878 11,687,887 10,216,109 9,664,744
Policy benefits
including dividends 7,718,015 6,861,699 6,467,739 6,007,718
Commissions and
amortization of
DAC and COI 1,670,854 1,174,116 1,727,317 1,571,438
Operating and
interest expenses 2,884,663 3,084,239 2,778,435 1,885,475
Operating income (loss)(491,654) 567,833 (757,382) 200,113
Net income (loss) (23,565) 27,351 (512,444) (414,719)
Net income (loss)
per share (235.65) 273.51 (5,124.44) (4,147.19)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1996
1st 2nd 3rd 4th
Premiums and policy fees,
net $ 7,637,503 $ 8,514,175 $ 7,348,199 $ 7,444,581
Net investment
income 3,974,407 3,930,487 4,002,258 3,994,955
Total revenues 12,513,692 12,187,077 11,331,283 10,444,059
Policy benefits
including dividends 6,528,760 7,083,803 8,378,710 8,334,759
Commissions and
amortization of
DAC and COI 2,567,921 2,298,549 1,734,048 3,314,436
Operating and
interest expenses 3,616,660 3,072,535 3,685,600 910,771
Operating income
(loss) (198,649) (267,810) (2,467,075) (3,869,480)
Net income (loss) 268,675 (93,640) (1,563,817) (271,915)
Net income (loss)
per share 2,686.75 (936.40) (15,638.17) (2,719.15)
</TABLE>
1995
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Premiums and policy fees,
net $ 8,703,332 $ 9,507,694 $ 7,868,803 $ 7,018,707
Net investment
income 3,857,562 3,849,212 3,757,605 3,918,933
Total revenues 13,385,477 12,566,391 11,514,869 11,130,583
Policy benefits
including dividends 8,097,830 9,113,933 5,978,795 6,665,206
Commissions and
amortization of
DAC and COI 2,451,030 2,860,032 3,044,057 1,459,141
Operating and
interest expenses 3,449,062 2,742,174 2,498,472 3,924,966
Operating income (loss)(612,445) (2,149,748) (6,455) (9,215,704)
Net income (loss) 95,608 (1,305,599) 126,751 (4,237,636)
Net income (loss)
per share 956.08 (13,055.99) 1,267.51 (42,376.60)
</TABLE>
234
<PAGE>
UNITED TRUST GROUP, INC.
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1997 Schedule I
Column A Column B Column C Column D
Amount at
Which Shown
in Balance
Cost Value Sheet
<TABLE>
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Goverment and
government agencies
and authorities $ 28,259,322 $ 28,622,970 $28,259,322
State, municipalities,
and political
subdivisions 22,778,816 23,449,601 22,778,816
Collateralized mortgage
obligations 11,093,926 11,207,647 11,093,926
Public utilities 47,984,322 49,141,537 47,984,322
All other corporate
bonds 70,853,947 72,360,813 70,853,947
Total fixed maturities 180,970,333 $ 184,782,568 180,970,333
Investments held for sale:
Fixed maturities:
United States Goverment and
government agencies
and authorities 1,448,202 $ 1,442,557 1,442,557
State, municipalities,
and political
subdivisions 35,000 35,485 35,485
Public utilities 80,169 80,496 80,496
All other corporate
bonds 108,927 110,092 110,092
1,672,298 $ 1,668,630 1,668,630
Equity securities:
Banks, trusts and
insurance companies 2,473,969 $ 2,167,368 2,167,368
All other corporate
securities 710,388 834,376 834,376
3,184,357 $ 3,001,744 3,001,744
Mortgage loans on real estate 9,469,444 9,469,444
Investment real estate 9,760,732 9,760,732
Real estate acquired in satisfaction
of debt 1,724,544 1,724,544
Policy loans 14,207,189 14,207,189
Short-term investments 1,798,878 1,798,878
Total investments $ 222,787,775 $ 222,601,494
</TABLE>
235
<PAGE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1997 and 1996 Schedule II
1997 1996
<TABLE>
<S> <C> <C>
ASSETS
Investment in affiliates $ 34,683,168 $ 35,548,414
Cash and cash equivalents 25,980 39,529
Notes receivable from affiliate 9,781,602 10,039,853
Accrued interest income 34,455 35,202
Total assets $ 44,525,205 $ 45,662,998
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 9,635,257 $ 10,009,853
Notes payable to affiliate 146,345 30,000
Income taxes payable 5,175 6,663
Accrued interest payable 34,455 35,202
Other liabilities 413,429 452,263
Total liabilities 10,234,661 10,533,981
Shareholders' equity:
Common stock 45,926,705 45,926,705
Unrealized depreciation of
investments held for sale of
affiliates (41,708) (126,612)
Accumulated deficit (11,594,453) (10,671,076)
Total shareholders' equity 34,290,544 35,129,017
Total liabilities and shareholders'
Equity $ 44,525,205 $ 45,662,998
</TABLE>
236
<PAGE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1997 Schedule II
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Revenues:
Interest income from
Affiliates $ 782,892 $ 792,046 $ 790,334
Other income 37,641 34,600 31,774
820,533 826,646 822,108
Expenses:
Interest expense 776,230 789,496 787,784
Interest expense to
Affiliates 6,662 2,550 2,550
Operating expenses 5,585 4,624 3,341
788,477 796,670 793,675
Operating income 32,056 29,976 28,433
Provision for income taxes (5,362) (4,664) (3,221)
Equity in loss of
Subsidiaries (950,071) (1,686,009)(5,346,088)
Net loss $ (923,377)$(1,660,697)(5,320,876)
</TABLE>
237
<PAGE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1997 Schedule II
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $(923,377)$(1,660,697)(5,320,876)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Equity in loss of subsidiaries 950,071 1,686,009 5,346,088
Change in accrued interest income 747 0 (167)
Change in accrued interest payable (747) 0 167
Change in income taxes payable (1,488) 3,442 3,221
Change in other liabilities (38,834) (139,256) (96,843)
Net cash used in operating activities (13,628) (110,502) (68,410)
Cash flows from investing activities:
Proceeds for fractional shares from reverse stock
split of subsidiary 79 0 0
Purchase of stock of affiliates 0 (95,000) (200)
Net cash provided by (used in) investing activities 79 (95,000) (200)
Cash flows from financing activities:
Receipt of principal on notes receivable
from affiliate 258,252 0 0
Payments of principal on notes
payable (258,252) 0 0
Capital contribution from affiliates 0 200,000 100,000
Net cash provided by financing activities 0 200,000 100,000
Net increase (decrease) in cash and
cash equivalents (13,549) (5,502) 31,390
Cash and cash equivalents at beginning
of year 39,529 45,031 13,641
Cash and cash equivalents at end of year $ 25,980 $ 39,529 $ 45,031
</TABLE>
238
<PAGE>UTG REINSURANCE 1997
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1997 and the year ended December 31, 1997 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<TABLE>
<S> <C> <C> <C> <C> <C>
Life
insurance
in force 3,691,867,000 1,022,458,000 1,079,885,000 3,749,294,000 28.80%
Premiums and
policy fees:
Life
insurance 33,133,414 $ 4,681,928 $ 0 $ 28,451,486 0.00%
Accident and
health
insurance 240,536 52,777 0 187,759 0.00%
$ 33,373,950 $ 4,734,705 $ 0 $ 28,639,245 0.00%
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
239
<PAGE>
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1996 and the year ended December 31, 1996 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<TABLE>
<S> <C> <C> <C> <C> <C>
Life
insurance
in
force 3,952,958,000 1,108,534,000 1,271,766,000 4,116,190,000 30.90%
Premiums
and policy fees:
Life
Insurance 35,633,232 $ 4,896,896 $ 0 $ 30,736,336 0.00%
Accident and
and health
insurance 258,377 50,255 0 208,122 0.00%
$ 35,891,609 $ 4,947,151 $ 0 $ 30,944,458 0.00%
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
<PAGE>
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1995 and the year ended December 31, 1995 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<TABLE>
<S> <C> <C> <C> <C> <C>
Life
insurance
in
force 4,207,695,000 1,087,774,000 1,039,517,000 4,159,438,000 25.00%
Premiums and policy fees:
Life
insurance38,233,190 $ 5,330,351 $ 0 $ 32,902,839 0.00%
Accident and health
insurance 248,448 52,751 0 195,697 0.00%
$ 38,481,638 $ 5,383,102 $ 0 $ 33,098,536 0.00%
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
241
<PAGE>
UNITED TRUST GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, 1996 and 1995 Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
<TABLE>
<S> <C> <C> <C> <C>
31-Dec-97
Allowance for
doubtful accounts -
mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
31-Dec-96
Allowance for
doubtful accounts -
mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
31-Dec-95
Allowance for
doubtful accounts -
mortgage loans $ 26,000 $ 0 $ 16,000 $ 10,000
</TABLE>
242
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTSUNITED INCOME, INC.
BALANCE SHEET
September 30, December 31,
1998 1997
ASSETS
<TABLE>
<S> <C> <C>
Cash and cash equivalents $ 740,511 $ 710,897
Mortgage loans 170,431 121,520
Notes receivable from affiliate 864,100 864,100
Accrued interest income 13,713 12,068
Property and equipment (net of accumulated
depreciation $94,170 and $93,648) 548 1,070
Investment in affiliates 11,458,930 11,060,682
Receivable from affiliates 33,789 23,192
Other assets (net of accumulated
amortization $166,572 and $138,810) 18,496 46,258
TOTAL ASSETS $ 13,300,518 $ 12,839,787
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 2,072 1,534
TOTAL LIABILITIES 904,372 903,834
Shareholders' equity:
Common stock - no par value,
stated value $.033 per share.
Authorized 2,310,001 shares -
1,391,919 and 1,391,919 shares
issued after deducting treasury shares of
177,590 and 177,590 45,934 45,934
Additional paid-in capital 15,242,365 15,242,365
Unrealized depreciation of investments
held for sale of affiliate (218,107) (19,603)
Accumulated deficit (2,674,046) (3,332,743)
TOTAL SHAREHOLDERS' EQUITY 12,396,146 11,935,953
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 13,300,518 $ 12,839,787
</TABLE>
See accompanying notes
242
UNITED INCOME, INC.
STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1998 1997 1998 1997
<TABLE>
<S> <C> <C> <C> <C>
Revenues:
Interest income $ 12,285 $ 10,806 $ 36,056 $ 16,145
Interest income from
affiliates 20,972 21,521 62,168 61,648
Service agreement income
from affiliates 227,868 213,518 662,807 795,209
Other income from
affiliates 15,279 20,971 53,195 70,132
276,404 266,816 814,226 943,134
Expenses:
Management fee to
affiliates 139,022 153,111 397,663 627,126
Operating expenses 10,444 9,912 70,787 69,912
Interest expense 21,430 21,429 64,289 63,725
170,896 184,452 532,739 760,763
Income before provision for income
taxes and equity income
of investees 105,508 82,364 281,487 182,371
Provision for income taxes 0 0 0 0
Equity in income (loss)
of investee 222,791 (219,216) 377,210 (178,710)
Net income (loss) $ 328,299 $ (136,852) $ 658,697 $ 3,661
Basic earnings per share
from continuing
operations and net
income (loss) $ 0.24 $ (0.10) $ 0.47 $ 0.00
Diluted earnings per share
from continuing
operations and net
income (loss) $ 0.24 $ (0.10) $ 0.51 $ 0.05
Basic weighted average
shares outstanding 1,391,919 1,391,919 1,391,919 1,392,022
Diluted weighted average
shares outstanding 1,428,242 1,391,919 1,428,242 1,428,345
</TABLE>
See accompanying notes
244
<PAGE>
UNITED INCOME, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED SEPTEMBER 30,1998
<TABLE>
<S> <C> <C>
COMMON STOCK
BALANCE, BEGINNING OF YEAR $ 45,934
ISSUED DURING YEAR 0
PURCHASE TREASURY STOCK 0
BALANCE, END OF PERIOD 45,934
ADDITIONAL PAID-IN CAPITAL
BALANCE, BEGINNING OF YEAR 15,242,365
ISSUED DURING YEAR 0
PURCHASE TREASURY STOCK 0
BALANCE, END OF PERIOD 15,242,365
RETAINED EARNINGS (ACCUMULATED DEFICIT)
BALANCE, BEGINNING OF YEAR (3,332,743)
NET INCOME 658,697 $ 658,697
BALANCE, END OF PERIOD (2,674,046)
ACCUMULATED OTHER COMPREHENSIVE INCOME
BALANCE, BEGINNING OF YEAR (19,603)
UNREALIZED DEPRECIATION ON SECURITIES (198,504)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 0
MINIMUM PENSION LIABILITY ADJUSTMENT 0
OTHER COMPREHENSIVE INCOME (198,504) (198,504)
COMPREHENSIVE INCOME $ 460,193
BALANCE, END OF PERIOD (218,107)
TOTAL SHAREHOLDER'S EQUITY,
END OF PERIOD $ 12,396,146
</TABLE>
See accompanying notes
245
<PAGE>
UNITED INCOME, INC.
STATEMENT OF CASH FLOWS
Sept 30, Sept 30,
1998 1997
<TABLE>
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 658,697 $ 3,661
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 28,284 28,895
Accretion of discount on mortgage loan (196) (200)
Equity in (income) loss of investees (377,210) 178,710
Changes in assets and liabilities:
Change in accrued interest income (1,645) (524)
Change in indebtedness of affiliates (10,597) 25,207
Change in other liabilities 538 (1,051)
NET CASH PROVIDED BY OPERATING ACTIVITIES 297,871 234,698
Cash flows from investing activities:
Purchase of investments in affiliates (30,909) (19,353)
Purchase of note receivable (188,633) 0
Issuance of mortgage loan (50,000) 0
Payments received on mortgage loans 1,285 1,188
NET CASH USED IN INVESTING ACTIVITIES (268,257) (18,165)
Cash flows from financing activities:
Payment for fractional shares from reverse
stock split 0 (2,112)
NET CASH USED IN FINANCING ACTIVITIES 0 (2,112)
Net increase in cash and cash equivalents 29,614 214,421
Cash and cash equivalents at beginning
of period 710,897 439,676
Cash and cash equivalents at end of period $ 740,511 $ 654,097
</TABLE>
246
<PAGE>
UNITED INCOME, INC.
Notes to Financial Statements at 9/30/98
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared by United Income,
Inc. ("UII") pursuant to the rules and regulations of the Securities and
Exchange Commission. Although UII and its affiliates believe the
disclosures are adequate to make the information presented not be
misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and the notes thereto presented
in UII's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1997.
The information furnished reflects, in the opinion of UII, all adjustments
(which include only normal and recurring accruals) necessary for a fair
presentation of the results of operations for the periods presented.
Operating results for interim periods are not necessarily indicative of
operating results to be expected for the year or of UII's future financial
condition.
At September 30, 1998, the affiliates of United Income, Inc., were as
depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1998
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
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2. STOCK OPTION PLANS
UII has a stock option plan under which certain directors, officers and
employees may be issued options to purchase up to 31,500 shares of common
stock at $13.07 per share. Options become exercisable at 25% annually
beginning one year after date of grant and expire generally in five years.
In November 1992, 10,437 option shares were granted. At September 30,
1998, options for 451 shares were exercisable and options for 20,576 shares
were available for grant. No options were exercised during 1998.
A summary of the status of UII's stock option plan for the periods ended
September 30, 1998 and December 31, 1997, and changes during the periods
ending on those dates is presented below.
September 30, 1998 December 31, 1997
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning
of period 451 $ 13.07 10,888 $ 13.07
Granted 0 0.00 0 0.00
Exercised 0 0.00 0 0.00
Forfeited 0 0 10,437 13.07
Outstanding at end of period 451 $ 13.07 451 $ 13.07
Options exercisable at
period end 451 $ 13.07 451 $ 13.07
The following information applies to options outstanding at September 30,1998:
Number outstanding 451
Exercise price $ 13.07
Remaining contractual life 2.25 years
On January 15, 1991, UII adopted an additional Non-Qualified Stock Option
Plan under which certain employees and sales personnel may be granted
options. The plan provides for the granting of up to 42,000 options at an
exercise price of $.47 per share. The options generally expire five years
from the date of grant. Options for 10,220 shares of common stock were
granted in 1991, options for 1,330 shares were granted in 1993 and options
for 301 shares were granted in 1995. A total of 11,620 option shares have
been exercised as of September 30, 1998. At September 30, 1998, 231
options have been granted and are exercisable. No options were exercised
during 1998 and 1997, respectively.
A summary of the status of UII's stock option plan for the periods ended
September 30, 1998 and December 31, 1997, and changes during the periods
ending on those dates is presented below.
September 30, 1998 December 31, 1997
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning
of period 231 $ 0.47 231 $ 0.47
Granted 0 0.00 0 0.00
Exercised 0 0.00 0 0.00
Forfeited 0 0.00 0 0.00
Outstanding at end of period 231 $ 0.47 231 $ 0.47
Options exercisable at
period end 231 $ 0.47 231 $ 0.47
Fair value of options granted
during the year $ 0.00 $ 0.00
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The following information applies to options outstanding at September 30,1998:
Number outstanding 231
Exercise price $ 0.47
Remaining contractual life 2.25 years
3. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which UII and its affiliates do business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Some of the lawsuits have resulted in
the award of substantial judgements against the insurer, including material
amounts of punitive damages. In some states, juries have substantial
discretion in awarding punitive damages in these circumstances.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed insurance
companies. Although UII and its affiliates cannot predict the amount of
any future assessments, most insurance guaranty fund laws currently provide
that an assessment may be excused or deferred if it would threaten an
insurer's financial strength. Those mandatory assessments may be partially
recovered through a reduction in future premium taxes in some states. UII
and its affiliates do not believe such assessments will be materially
different from amounts already provided for in the financial statements.
UII and its affiliates are named as defendants in a number of legal actions
arising primarily from claims made under insurance policies. Those actions
have been considered in establishing UII and its affiliates liabilities.
Management is of the opinion that the settlement of those actions will not
have a material adverse effect on UII and its affiliates financial position
or results of operations.
4. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations as presented on the income statement.
For the YTD period ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<TABLE>
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 658,697 1,391,919 $ 0.47
EFFECT OF DILUTIVE SECURITIES
Convertible debentures 64,289 36,092
Options 231
DILUTED EPS
Income available to common
shareholders and assumed
conversions 722,986 1,428,242 $ 0.51
</TABLE>
249
For the third quarter ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<TABLE>
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 328,299 1,391,919 $ 0.24
EFFECT OF DILUTIVE SECURITIES
Convertible debentures 21,430 36,092
Options 231
DILUTED EPS
Income available to common
shareholders and assumed
conversions 349,729 1,428,242 $ 0.24
</TABLE>
For the YTD period ended September 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<TABLE>
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 3,661 1,392,022 $ 0.00
EFFECT OF DILUTIVE SECURITIES
Convertible debentures 63,725 36,092
Options 231
DILUTED EPS
Income available to common
shareholders and assumed
conversions 67,386 1,428,345 $ 0.05
</TABLE>
For the third quarter ended September 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<TABLE>
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ (136,852) 1,391,919 $ (0.10)
EFFECT OF DILUTIVE SECURITIES
0 0
DILUTED EPS
Income available to common
shareholders and assumed
conversions (136,852) 1,391,919 $ (0.10)
</TABLE>
UII has stock options outstanding during the third quarter of 1998 and 1997
for 451 shares of common stock at $13.07 per share that were not included
in the computation of diluted EPS because the exercise price was greater
than the average market price of the common shares. Due to the limited
trading of the stock of UII, market price is assumed to be equal to book
value for purposes of this calculation.
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Due to the reported net loss for third quarter 1997, diluted EPS is the
same as basic EPS. Had UII reported a net gain, convertible debentures for
36,092 shares and options for 231 shares would have been included in the
diluted EPS calculation.
5. PROPOSED MERGER OF UNITED TRUST INC. AND UNITED INCOME INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
6. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds which are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter 1998. There can be no assurance that the transaction will
be completed. The pending change in control of UTI is not contingent upon
the merger of UTI and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
7. OTHER CASH FLOW DISCLOSURE
On a cash basis, UII paid $64,289 and $63,725 in interest expense through
the third quarter of 1998 and 1997, respectively. UII paid $0 and $0 of
federal income tax through the third quarter of 1998 and 1997,
respectively.
UII acquired for $188,633 a note receivable from an outside party which was
payable by UTG. Immediately upon acquisition of the note, it was
contributed to UTG as a capital contribution.
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8. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for UII's 50% or
less owned affiliate:
<TABLE>
<S> <C> <C>
September 30, December 31,
ASSETS 1998 1997
Total investments $ 211,685,442 $ 222,601,494
Cash and cash equivalents 28,107,672 15,763,639
Cost of insurance acquired 43,198,363 45,009,452
Other assets 63,284,969 64,576,450
TOTAL ASSETS $ 346,276,446 $ 347,951,035
LIABILITIES AND
SHAREHOLDERS' EQUITY
Policy liabilities $ 267,501,535 $ 268,237,887
Notes payable 18,172,839 19,081,602
Deferred taxes 11,060,688 12,157,685
Other liabilities 4,370,834 4,053,293
TOTAL LIABILITIES 301,105,896 303,530,467
Minority interests in 10,198,661 10,130,024
consolidated subsidiaries
Shareholders' equity
Common stock no par value 46,577,216 45,926,705
Authorized 10,000 shares - 100
issued
Unrealized depreciation of (464,056) (41,708)
investment in stocks
Accumulated deficit (11,141,271) (11,594,453)
TOTAL SHAREHOLDERS' EQUITY 34,971,889 34,290,544
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $ 346,276,446 $ 347,951,035
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Premium and policy fees,
net of reinsurance $ 6,243,869 $ 6,639,394 $ 20,586,429 $ 22,374,562
Net investment income 3,804,066 3,691,584 11,339,547 11,390,978
Other (415,552) (114,869) (775,915) (79,666)
9,632,383 10,216,109 31,150,061 33,685,874
Benefits, claims and
settlement expenses 6,217,272 6,467,739 19,331,772 21,047,453
Other expenses 3,672,468 4,505,752 12,175,402 13,319,624
9,889,740 10,973,491 31,507,174 34,367,077
Income (loss) before income tax and
minority interest (257,357) (757,382) (357,113) (681,203)
Income tax (provision) credit 845,835 131,893 1,044,373 113,671
Minority interest income
of consolidated
subsidiaries (141,938 ) 113,045 (234,076) 58,874
Net income (loss) $ 446,540 $ (512,444) $ 453,184 $ (508,658)
</TABLE>
9. ACCOUNTING AND LEGAL DEVELOPMENTS
THE FASB HAS ISSUED SFAS 130 ENTITLED REPORTING COMPREHENSIVE INCOME, WHICH
IS EFFECTIVE FOR FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNING AFTER
DECEMBER 15, 1997. SFAS 130 ESTABLISHES STANDARDS FOR REPORTING AND
PRESENTATION OF COMPREHENSIVE INCOME AND ITS COMPONENTS IN A FULL SET OF
FINANCIAL STATEMENTS. COMPREHENSIVE INCOME INCLUDES ALL CHANGES IN
SHAREHOLDERS' EQUITY, EXCEPT THOSE ARISING FROM TRANSACTIONS WITH
SHAREHOLDERS, AND INCLUDES NET INCOME AND NET UNREALIZED GAINS (LOSSES) ON
SECURITIES. SFAS 130 WAS ADOPTED AS OF JANUARY 1, 1998. ADOPTING THE NEW
STANDARD REQUIRED US TO MAKE ADDITIONAL DISCLOSURES IN THE CONSOLIDATED
FINANCIAL STATEMENTS, BUT DID NOT AFFECT UII'S FINANCIAL POSITION OR
RESULTS OF OPERATIONS.
ALL ITEMS OF OTHER COMPREHENSIVE INCOME REFLECT NO RELATED TAX EFFECT,
SINCE UII HAS AN ALLOWANCE AGAINST THE COLLECTION OF ANY FUTURE TAX
BENEFITS. IN ADDITION, THERE WAS NO SALE OR LIQUIDATION OF INVESTMENTS
REQUIRING A RECLASSIFICATION ADJUSTMENT FOR THE PERIOD PRESENTED.
THE FASB HAS ISSUED SFAS 131 ENTITLED, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, WHICH IS EFFECTIVE FOR FINANCIAL
STATEMENTS FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997. SFAS 131
REQUIRES THAT A PUBLIC BUSINESS ENTERPRISE REPORT FINANCIAL AND DESCRIPTIVE
INFORMATION ABOUT ITS REPORTABLE OPERATING SEGMENTS. OPERATING SEGMENTS
ARE COMPONENTS OF AN ENTERPRISE ABOUT WHICH SEPARATE FINANCIAL INFORMATION
IS AVAILABLE THAT IS EVALUATED REGULARLY IN DECIDING HOW TO ALLOCATE
RESOURCES AND IN ASSESSING PERFORMANCE. SFAS 131 WAS ADOPTED AS OF JANUARY
1, 1998. ADOPTING THE NEW STANDARD HAD NO AFFECT ON OUR FINANCIAL POSITION
OR RESULTS OF OPERATIONS, SINCE THE COMPANY HAS NO REPORTABLE OPERATING
SEGMENTS.
THE FASB HAS ISSUED SFAS 132 ENTITLED, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS, WHICH IS EFFECTIVE FOR
FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997.
SFAS 132 REVISES CURRENT DISCLOSURE REQUIREMENTS FOR EMPLOYER PROVIDED POST-
RETIREMENT BENEFITS. THE STATEMENT DOES NOT CHANGE RETIREMENT MEASUREMENT
OR RECOGNITION ISSUES. . SFAS 132 WAS ADOPTED AS OF JANUARY 1, 1998.
ADOPTING THE NEW STANDARD HAD NO AFFECT ON OUR FINANCIAL POSITION OR
RESULTS OF OPERATIONS, SINCE THE COMPANY HAS NO PENSION PLAN OR OTHER
OBLIGATION FOR POST-RETIREMENT BENEFITS.
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THE FASB HAS ISSUED SFAS 133 ENTITLED, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, WHICH IS EFFECTIVE FOR ALL FISCAL
QUARTERS OF FISCAL YEARS BEGINNING AFTER JUNE 15, 1999. SFAS 133 REQUIRES
THAT AN ENTITY RECOGNIZE ALL DERIVATIVES AS EITHER ASSETS OR LIABILITIES IN
THE STATEMENT OF FINANCIAL POSITION AND MEASURE THOSE INSTRUMENTS AT FAIR
VALUE. IF CERTAIN CONDITIONS ARE MET, A DERIVATIVE MAY BE SPECIFICALLY
DESIGNATED AS A SPECIFIC TYPE OF EXPOSURE HEDGE. THE ACCOUNTING FOR
CHANGES IN THE FAIR VALUE OF A DERIVATIVE DEPENDS ON THE INTENDED USE OF
THE DERIVATIVE AND THE RESULTING DESIGNATION. THE ADOPTION OF SFAS 133 IS
NOT EXPECTED TO HAVE A MATERIAL EFFECT ON OUR FINANCIAL POSITION OR RESULTS
OF OPERATIONS, SINCE THE COMPANY HAS NO DERIVATIVE OR HEDGING TYPE
INVESTMENTS.
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APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") dated March
31, 1998, by and between United Income, Inc., an Ohio corporation ("UII"),
and United Trust, Inc., an Illinois corporation ("UTI").
WITNESSETH:
UTI and UII have reached an agreement to combine their companies
through a merger (the "Merger") of UII into UTI. UTI and UII jointly own
100% of the outstanding capital stock of United Trust Group, Inc., an
Illinois corporation ("UTG"). Immediately after closing, UTG shall be
liquidated and UTI's name will be changed to United Trust Group, Inc. UTI
and UII now wish to enter into a definitive agreement setting forth the
terms and conditions of the Merger.
Accordingly, in consideration of the foregoing and of the covenants,
agreements, representations and warranties hereinafter contained, UTI and
UII hereby agree as follows:
1.REPRESENTATIONS AND WARRANTIES OF UTI. UTI hereby represents and
warrants to UII as follows:
1.1 Organization and Standing. UTI is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Illinois and has full corporate power to carry on its business as it is now
being conducted and to own or hold under lease the properties and assets it
now owns or holds under lease. Copies of the certificate of incorporation
and bylaws of UTI have been delivered to UII, and such copies are complete
and correct and in full force and effect on the date hereof.
1.2 Capitalization. UTI's entire authorized capital stock consists of
3,500,000 shares of Common Stock, no par value and 150,000 shares of
Preferred Stock, par value $100 per share. As of May 4, 1998, there were
1,655,200 shares of Common Stock outstanding and no shares of Preferred
Stock outstanding.
1.3 Financial Statements. UTI has delivered to UII copies of UTI's
audited consolidated financial statements for the fiscal years ended
December 31, 1996, 1997 and unaudited financial statements for the six
month periods ended June 30, 1997 and June 30, 1998. These financial
statements have been prepared in accordance with generally accepted
accounting principles consistently followed throughout the periods covered
by such statements (except as may be stated in the notes to such
statements), and present fairly the consolidated financial position and
consolidated results of operations of UTI and its subsidiaries at the dates
of and for the periods covered thereby. UTI also has delivered to UII
copies of UTI's Form 10-K's, Form 10-Q's, Form 8-K's and proxy statements
filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act") in respect of or
during the three years ended December 31, 1996 and thereafter through the
date hereof. All such reports were filed in a timely manner and complied
in all material respects with the applicable requirements of the Exchange
Act and the rules and regulations promulgated thereunder.
1.4 Absence of Certain Changes, Events or Conditions. Since June 30,
1998, there has not been any change in UTI's consolidated financial
position, results of operations, assets, liabilities, net worth or
business, other than as described in a schedule heretofore delivered to UII
referring to this Section 1.4 and changes in the ordinary course of
business which have not been materially adverse.
1.5 Litigation, etc. Except as described in a schedule heretofore
delivered to UII referring to this Section 1.5, there is no pending
litigation or other claim or matter against or relating to UTI, its
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<PAGE>
properties or business, or the transactions contemplated by this Agreement,
which, under Statement No. 5 of the Financial Accounting Standards Board,
would require disclosure in footnotes to, or accrual in, the consolidated
financial statements of UTI.
1.6 Information for Proxy Statement. The information and data provided
and to be provided by UTI for use in the Registration Statement and the
Proxy Statement referred to in Section 5, when such Registration Statement
becomes effective and at the time of mailing of the Prospectus and Proxy
Statement included therein to UTI and UII stockholders pursuant to Section
5, will not contain any untrue statement of a material fact and will not
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
1.7 No Conflict With Other Documents. Neither the execution and
delivery of this Agreement nor the carrying out of the transactions
contemplated hereby will result in any material violation, termination or
modification of, or conflict with, any terms of any material contract or
other instrument to which UTI is a party, or of any material judgment,
decree or order applicable to UTI.
1.8 Authority. The execution, delivery and performance of this
Agreement by UTI have been authorized by its Board of Directors, and this
Agreement is a valid, legally binding and enforceable obligation of UTI
subject to the discretion of a court of equity and subject to bankruptcy
insolvency and similar laws affecting the rights of creditors generally.
1.9 Validity of Common Stock to Be Issued. Subject to the approval by
the stockholders of UTI, the shares of UTI Common Stock to be issued by UTI
in connection with the Merger have been duly authorized by UTI's board of
directors for issue and will, when issued and delivered as provided in this
Agreement, be duly and validly issued, fully paid and non-assessable.
2. REPRESENTATIONS AND WARRANTIES OF UII. UII hereby represents and
warrants to UTI as follows:
2.1 Organization and Standing. UII is a corporation duly organized,
validly existing and in good standing under the laws of the State of Ohio,
and has full corporate power to carry on its business as it is now being
conducted and to own or hold under lease the properties and assets it now
owns or holds under lease. UII has delivered to UTI a true and complete
schedule referring to Section 2.1 and listing all of its (i) corporate
officers ("Officers"), (ii) members of the board of directors ("Directors")
and (iii) subsidiaries of which 20% or more of the common stock is directly
or indirectly owned by UII.
2.2 Capitalization. UII's entire authorized capital stock consists of
2,310,001 shares of Common Stock, no par value and 150,000 shares of
Preferred Stock, par value $100 per share. As of September 30, 1998, there
were 1,391,919 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding.
2.3 Financial Statements. UII has delivered to UTI copies of the
following: UII's audited consolidated financial statements for the fiscal
years ended December 31, 1995, 1996 and 1997 and unaudited financial
statements for the six month periods ended June 30, 1997 and June 30, 1998.
These financial statements have been prepared in accordance with generally
accepted accounting principles consistently followed throughout the periods
covered by such statements (except as may be stated in the explanatory
notes to such statements), and, at the dates of and for the periods covered
thereby, present fairly the consolidated financial position and results of
operations of UII and its subsidiaries. UII also has delivered to UTI
copies of UII's Form 10-K's, Form 10-Q's, Form 8-K's and proxy statements
filed with the Securities and Exchange Commission pursuant to the Exchange
Act in respect of or during the three years ended December 31, 1997 and
thereafter through the date hereof. All such reports were filed in a
timely manner and complied in all material respects with the applicable
requirements of the Exchange Act and the rules and regulations promulgated
thereunder.
2.4 No Undisclosed Liabilities. Except as and to the extent reflected
or reserved against in the consolidated balance sheets included within
UII's financial statements referred to in Section 2.3, at the date of such
statements UII had no material liabilities or obligations (whether accrued,
absolute or contingent), of the character which, under generally accepted
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accounting principles, should be shown, disclosed or indicated in a balance
sheet or explanatory notes or information supplementary thereto, including,
without limitation, any liabilities resulting from failure to comply with
any law or any federal, state or local tax liabilities due or to become due
whether (a) incurred in respect of or measured by income for any period
prior to the close of business on such dates, or (b) arising out of
transactions entered into, or any state of facts existing, prior thereto.
2.5 Absence of Certain Changes, Events or Conditions. Since December
31, 1997, there has not been any change in UII's financial position,
results of operations, assets, liabilities, net worth or business, other
than as described in a schedule heretofore delivered to UTI referring to
this Section 2.5 and changes in the ordinary course of business which have
not been materially adverse.
2.6 Litigation, etc. Except as described on a schedule heretofore
delivered to UTI and referring to this Section 2.6, there is no litigation,
proceeding or governmental investigation pending or threatened, and, so far
as is known to UII, there is no such litigation, proceeding or governmental
investigation which is probable of assertion in the reasonable opinion of
UII's officers, against or relating to UII, its properties or business, or
the transactions contemplated by this Agreement. UII is not subject to any
order of any court, regulatory commission, board or administrative body
entered in any proceeding to which they are a party or of which they have
knowledge.
2.7 Compliance. UII has all licensed, permits, approvals and other
authorizations, and have made all filings and registrations, necessary in
order to enable them to conduct their businesses in all material respects.
UII has heretofore delivered a schedule to UTI referring to this Section
2.7 which fairly and accurately summarizes or lists all licenses, permits,
approvals, authorizations and regulatory matters relating to UII.
UII has complied with all applicable laws, regulations and ordinances to
the extent material to their businesses. The schedule referred to in this
Section 2.7 fairly and accurately describes all instances, known to the
Officers or Directors of UII, in which UII is not currently in compliance
with any applicable law, regulation or ordinance.
2.8 Information for Proxy Statement. The information and data provided
and to be provided by UII for use in the Registration Statement and the
Proxy Statement referred to in Section 5, when such Registration Statement
becomes effective and at the time of mailing of the Prospectus and Proxy
Statement included therein to UTI and UII stockholders, will not contain
any untrue statement of a material fact and will not omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
2.9 No Conflict With Other Documents. Except as described in a schedule
heretofore delivered to UTI and referring to this Section 2.9, neither the
execution and delivery of this Agreement nor the carrying out of the
transactions contemplated hereby will result in any violation, termination
or modification of, or be in conflict with, any term of any contract or
other instrument to which UII is a party, or of any judgment, decree or
order applicable to UII, or result in the creation of any lien, charge or
encumbrance upon any of the properties or assets of UII.
2.10 Authority. The execution, delivery and performance of this
Agreement by UII have been authorized by its Board of Directors, and this
Agreement is a valid, legally binding and enforceable obligation of UII
subject to the discretion of a court of equity and subject to bankruptcy,
insolvency and similar laws affecting the rights of creditors generally.
2.11 Contracts. Except as shown on a schedule delivered to UTI and
referring to this Section 2.11, UII is not a party to or subject to: (a)
any employment contract with any officer, consultant, director or employee;
(b) any plan or contract or arrangement providing for bonuses, pensions,
options, deferred compensation, retirement payments, profit sharing, or the
like; (c) any contract or agreement with any labor union; (d) any lease of
real or personal property with a remaining term in excess of one year
(except for normal office equipment); (e) any instrument creating a lien or
evidencing or related to indebtedness for borrowed money; (f) any contract
containing covenants not to enter into or consummate the transactions
contemplated hereby or which will be terminated or modified by the carrying
out of such transactions; or (g) any other contract or agreement with a
value exceeding $25,000 not of the type covered by any of the other
specific items of this Section 2.11. Each of the instruments described in
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such schedule is valid and in full force and effect, and a true and
complete copy thereof has heretofore been delivered to UTI. UII is not in
default, or alleged to be in default, under any agreement, instrument or
obligation to which it is a party or by which it is bound, in any material
respect, nor, in the reasonable opinion of UII's Officers, is any such
agreement, instrument or obligation unduly burdensome. Except as shown on
such schedule, the consummation of the Merger and the transactions
contemplated by this Agreement will not cause a default under any such
agreement or provide any right of termination to any party thereto other
than UII. No party with whom UII has an agreement which is of any material
importance to UII is in default thereunder in any material respect. Except
as set forth in the schedule referred to in this Section 2.11, since
September 30, 1997 UII has not taken any action which would have violated
Section 4.1 had this Agreement been dated September 30, 1997.
2.12 Tax Matters. The provisions made for taxes on the December 31,
1997 and June 30, 1998 consolidated balance sheets referred to in Section
2.3 are sufficient for the payment of all unpaid taxes of the entities
included therein, whether or not disputed. The United States federal
income tax returns of UII have been audited by the Internal Revenue Service
(or are no longer subject to audit) for all years to and including December
31, 1994. Except as described on a schedule heretofore delivered to UTI
and referring to this Section 2.12, with respect to UII, there are no
proposed additional taxes, interest or penalties with respect to any year
examined or not yet examined, and except as set forth in said schedule none
of such entities has entered into any agreements extending the statute of
limitations with respect to any federal or state taxes. UII has provided
to UTI true and complete copies of the federal and state income tax returns
of UII for the three years ended December 31, 1997, together with true and
complete copies of all reports of any taxing authority relating to
examinations thereof which have been delivered to UII.
2.13 Title to Properties; Absence of Liens and Encumbrances, etc. UII
has good and marketable title to all their properties and assets, real and
personal (including those reflected in the consolidated balance sheets
contained in the financial statements referred to in Section 2.3, except as
sold or otherwise disposed of in the ordinary course of business from the
date thereof), in each case free and clear of all liens and encumbrances,
except those shown in such financial statements, the lien of current taxes
not yet in default or payable and such imperfections of title, easements
and encumbrances, if any, as are not substantial in character, amount or
extent, and do not materially detract from the value, or interfere with the
present or currently planned business use, of the properties subject
thereto or affected thereby, or impair business operations.
3. COVENANTS OF UTI. UTI covenants to UII that, except as otherwise
consented to in writing by UII after the date of this Agreement:
3.1 Authorized Stock Increase and Reservation. UTI will solicit and
will use its best efforts to cause its stockholders to increase the
authorized Common Stock of UTI from 3,500,000 shares to 7,000,000 shares.
If such increase is obtained, UTI will keep available a sufficient number
of shares of UTI Common Stock for issuance and delivery to the stockholders
of UII between the date hereof and the closing of the transactions
contemplated by this Agreement.
3.2 Consents. UTI will take all necessary corporate or other action,
and use its best efforts to obtain all consents and approvals, required for
consummation of the transactions contemplated by this Agreement.
3.3 Meeting of Stockholders. UTI will duly call and convene a meeting
of its stockholders to act upon the Merger, the increase in authorized
Common Stock of UTI and the other transactions contemplated by this
Agreement as soon as practicable, and the Board of Directors of UTI will
recommend a favorable vote thereon. UTI will solicit the proxies of its
stockholders to vote on the transactions contemplated by this Agreement.
3.4 Conditions to be Satisfied. UTI will use its best efforts to cause
all of the conditions described in Sections 7 and 8 of this Agreement to be
satisfied and to cause the officers and directors to UTI to cooperate to
that end.
4. COVENANTS OF UII. UII covenants to UTI that, except as otherwise
consented to in writing by UTI after the date of this Agreement:
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4.1 Conduct of Business. After the date of this Agreement, with respect
to UII (a) its business will be conducted only in the ordinary course; (b)
it will not enter into or amend any employment contract with any officer,
consultant, or employee; (c) there shall be no change in any of its
pension, retirement or similar benefits nor any increase in salaries of any
of its executive officers except for ordinary increases in accordance with
UII's established practice; (d) it shall not incur any liability for
borrowed money, encumber any of its assets or enter into any agreement
relating to the incurrence of additional debt (other than in connection
with purchases or leases of equipment which would not have been required to
be listed on the schedule provided under Section 2.11 or short term bank
credit, entered into in the ordinary course of operations); (e) it will use
its best efforts to preserve its business organization intact, to keep
available the service of its officers and employees and to preserve the
good will of its independent agents; (f) no change shall be made in its
charter documents or bylaws; (g) no change shall be made in the number of
shares or terms of its authorized, issued or outstanding capital stock and,
it shall not enter into any options, calls, contracts or commitments of any
character relating to any issued or unissued capital stock; and (h) no
dividend or other distribution or payment shall be declared or paid in
respect of the UII Common Stock or the UII Preferred Stock.
4.2 Information. UII will give to UTI and UTI's officers, accountants,
counsel and other representatives reasonable access, during normal business
hours throughout the period prior to the closing of the transactions
contemplated by this Agreement, to the properties, books, contracts,
commitments and records of UII. UII will furnish to UTI during such period
all such information concerning UII and its business and properties as UTI
may reasonably request.
4.3 Meeting of Stockholders. UII will duly call and convene a meeting
of its stockholders to act upon the transactions contemplated by this
Agreement as soon as practicable, and the Board of Directors of UII will
recommend a favorable vote thereon. UII will solicit the proxies of its
stockholders to vote on the transactions contemplated by this Agreement.
4.4 Consents. UII will take all necessary corporate or other action and
use its best efforts to obtain all consents and approvals required for
consummation of the transactions contemplated by this Agreement.
4.5 Conditions To Be Satisfied. UII will use its best efforts to cause
all of the conditions described in Articles 7 and 8 of this Agreement to be
satisfied and to cause the Officers and Directors of UII to cooperate to
that end.
5. S-4 REGISTRATION STATEMENT AND PROXY STATEMENT. As promptly as
practical, each of UTI and UII will file proxy materials under the Exchange
Act, and UTI will file a registration statement on Form S-4 under the
Securities Act of 1933, with the Securities and Exchange Commission, to
permit the solicitation of proxies under the Exchange Act and the offering
and delivery of shares of UTI Common Stock to the stockholders of UII in
connection with the Merger. Each of UTI and UII will exert its best
efforts to cause such registration statement to become effective as soon as
practicable, and UTI and UII agree to cooperate in such efforts. The
registration statement and the proxy statement in the form in which they
exist when the proxy statement is actually first mailed to the stockholders
of UTI and UII are herein referred to as the "Registration Statement" and
the "Proxy Statement". Upon the effectiveness of the Registration
Statement, each of UTI and UII will cause the Proxy Statement to be
delivered to its stockholders entitled to vote on the Merger at least 20
days prior to the date of the meeting of its stockholders that is called to
act upon the Merger in accordance with applicable law.
6. MERGER OF UII AND UTI. Subject to the terms and conditions of this
Agreement, UTI and UII agree to effect the following transactions at the
Closing (as defined in Section 6.10):
6.1 Conditions. UTI and UII will each deliver to the other reasonably
appropriate evidence of the satisfaction of the conditions, contained in
Sections 7 and 8, to their respective obligations hereunder.
6.2 Increase in Authorized UTI Common Stock. The certificate of
incorporation of UTI shall have been amended to increase the number of
authorized shares of UTI Common Stock from 3,500,000 to 7,000,000.
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6.3 Merger. At the time of Closing UII will be merged with and into UTI
(the "Merger") pursuant to the provisions and with the effect provided in
the Illinois Business Corporation Act and the Ohio General Corporation Law,
and in the Agreement of Merger, including without limitation the
liquidation of UTG into UTI immediately following the merger and the
assumption by UTI of all liabilities and obligations of UII. The Agreement
of Merger shall be filed with the Secretary of State of each Illinois and
Ohio on the date of Closing. UTI will be the surviving corporation in the
Merger and its corporate name will be changed to United Trust Group, Inc.
("UTG").
6.4 Conversion of Shares. The manner and basis of converting the UII
Common Stock into shares of UTG Common Stock are as follows. Each (one)
share of UII Common Stock issued and outstanding immediately prior to the
Merger (excluding shares held by UII as treasury stock, if any, which
shares shall be cancelled and extinguished), and all rights in respect
thereof, shall by virtue of the Merger, without any action by the holder
thereof, be converted into one share of UTG Common Stock (subject to
adjustment for any stock split, reverse stock split and stock dividend with
respect to UTI Common Stock from the date hereof to the Closing). From and
after the Closing, each certificate converted pursuant to this Section 6.3
which theretofore represented shares of UII Common Stock shall evidence
ownership of shares of UTG Common Stock on the basis herein above set
forth, and the conversion shall be complete and effective at the effective
time of the Merger.
6.5 Issuance of Certificates. As soon as practicable after the Closing
of the Merger, UTG will mail a letter of instruction and new stock
certificate of UTG Common Stock ("New Shares") to each UTI and UII
shareholder replacing their UTI Common Stock certificate and UII Common
Stock certificate ("Old Shares"). The Old Shares will be considered null
and void. Shareholders should not forward their certificates representing
the Old Shares before receiving their instructions.
6.6 Surrender of Certificates. As soon as practicable after the Closing
of the Merger, UTI will mail to each UII shareholder a form letter of
transmittal and instructions for surrendering certificates representing
their share of UII Common Stock and for receiving shares of UTG Common
Stock pursuant to the Merger.
6.7 Procedure. UTI shall have the right to make rules, not inconsistent
with the terms of this Agreement, governing any of the foregoing procedures
contemplated by this Section 6.
6.8 UII Transfer Books Closed and Stock Delisted. On the date of the
Closing, the stock transfer books of UII shall be deemed closed, and no
transfer of shares of UII shall be made thereafter. UII shall notify the
National Association of Securities Dealers, and the transfer agent and
registrar for the shares of UII capital stock, at least 10 calendar days
before the anticipated date of the Closing, that no transfer of shares will
be made after that date
6.9 Effective Date. The closing of the transactions (the "Effective
Date") contemplated by this Agreement shall take place at the executive
offices of UII beginning at 2:00 p.m. on the first business day following
the day upon which the UTI and UII stockholders meetings to approve the
Merger were held, or at such other time and place as may be agreed upon by
UTI and UII; provided, that if all of the conditions specified in this
Agreement have not been satisfied or waived as of such date, the Closing
shall be postponed until two business days following the satisfaction or
waiver of all of the conditions of this Agreement. In accordance with
Section 13, this Agreement may be terminated at the election of either
party if Closing does not occur on or before December 31, 1998.
7. CONDITIONS TO UTI'S OBLIGATIONS. Unless waived by UTI in writing
at its sole discretion, all obligations of UTI under this Agreement are
subject to the fulfillment, prior to or at the Closing, of each of the
following conditions:
7.1 Representations, Warranties and Covenants. The representations and
warranties of UII contained in Section 2 of this Agreement shall be true at
and as of the date of the Closing and, except as otherwise clearly
contemplated hereby, shall be deemed made again at and as of such date and
be true as so made again; UII shall have performed all obligations and
complied with all covenants required by this Agreement to be performed or
complied with by it prior to the Closing. UTI shall have received from UII
a certificate or certificates in such reasonable detail as UTI may
reasonably request, signed by the President or a Vice-President of UII and
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dated the date of Closing, to the effect stated in this Section 7.1 and
with respect to the fulfillment of the conditions set forth in Sections 7.2
through 7.7.
7.2 Approval of Stockholders. The transactions shall have been duly
approved by (i) a favorable vote of the holders of at least two-thirds of
the issued and outstanding shares of each of the UTI Common Stock entitled
to vote thereon, and (ii) a favorable vote of the holders of a majority of
the issued and outstanding UII Common Stock entitled to vote thereon.
7.3 Approvals of Governmental Authorities. All governmental approvals
necessary to consummate the transactions contemplated by this Agreement
shall have been received.
7.4 Accuracy of Prospectus and Proxy Statement. On and as of the dates
of the meetings of stockholders of UTI and UII at which action is to be
taken on the transactions contemplated hereby, the Proxy Statement and the
Registration Statement shall contain no statement which, at the time and in
light of the circumstances under which it is made, is false or misleading
with respect to any material fact, or which omits to state any material
fact necessary in order to make the statements made therein not misleading.
7.5 No Adverse Proceedings or Events. No suit, action or other
proceedings against UTI or UII or their officers and directors shall be
pending before any court or governmental agency in which it will be, or it
is, sought to restrain or prohibit or to obtain damages or other relief in
connection with this Agreement or the transactions contemplated hereby.
7.6 Consents and Actions; Contracts. All requisite consents of any
third parties and other actions which UII has covenanted to use its best
efforts to obtain and take under Section 4.4 hereof shall have been
obtained and completed.
7.7 Increase in Authorized UTI Common Stock. The certificate of
incorporation of UTI shall have been amended to increase the number of
authorized shares of UTI Common Stock from 3,500,000 to 7,000,000 and its
corporate name changed to United Trust Group, Inc.
8. CONDITIONS TO UII'S OBLIGATIONS. Unless waived by UII in writing
at its sole discretion, all obligations of UII under this Agreement are
subject to the fulfillment, prior to or at the Closing, of each of the
following conditions:
8.1 Representations, Warranties and Covenants. The representations and
warranties of UTI contained in Section 1 shall be true at and as of the
date of the Closing and, except as otherwise clearly contemplated hereby,
shall be deemed made again at and as of such date and be true as so made
again; UTI shall have performed all obligations and complied with all
covenants required by this Agreement to be performed or complied with by it
on or prior to the Closing; and UII shall have received from UTI a
certificate or certificates in such reasonable detail as UII may reasonably
request, signed by the President or a Vice President of UTI and dated the
date of Closing, to the effect stated in this Section 8.1 and with respect
to the fulfillment of the conditions set forth in Sections 8.2 through 8.7.
8.2 Approval of Stockholders. The transactions contemplated by this
Agreement shall have been duly approved by (i) a favorable vote of the
holders of at least two-thirds of the issued and outstanding shares of UTI
Common Stock entitled to vote thereon, and (ii) a favorable vote of the
holders of a majority of the issued and outstanding shares of UII Common
Stock entitled to vote thereon.
8.3 Approvals of Governmental Authorities. All governmental approvals
necessary to consummate the transactions contemplated by this Agreement
shall have been received.
8.4 Accuracy of Prospectus and Proxy Statement. On and as of the dates
of the meetings of stockholders of UTI and UII at which action is to be
taken on the transactions contemplated hereby, the Proxy Statement and the
Registration Statement shall contain no statement which, at the time and in
light of the circumstances under which it is made, is false or misleading
with respect to any material fact, or which omits to state any material
fact necessary in order to make the statements made therein not misleading.
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8.5 No Adverse Proceedings or Events. No suit, action or other
proceeding against UTI or UII or their officers and directors, or the
consummation of the transactions contemplated by this Agreement, shall have
been instituted and resulted in the entry of a court order (which has not
been subsequently dismissed, terminated or vacated) enjoining, either
temporarily or permanently, the consummation of the transactions
contemplated by this Agreement.
8.6 Consents and Actions. All requisite consents of any third parties
or other actions which UTI has covenanted to use its best efforts to obtain
and take under Section 3.2 shall have been obtained and completed.
8.7 Increase in Authorized UTI Common Stock. The certificate of
incorporation of UTI shall have been amended to increase the number of
authorized shares of UTI Common Stock from 3,500,000 to 7,000,000.
9. BROKERS AND ADVISORS. Each of UTI and UII represents and warrants
to the other that the transactions contemplated by this Agreement have been
negotiated directly between them and their respective counsel, without the
intervention of any person which might give rise to a valid claim against
any of them for a brokerage commission, finder's fee, counseling or
advisory fee, or like payment, and each agrees to indemnify the other
against any such liability.
10. UPDATING OF CERTAIN CONDITIONS. The requirement for the
continuing accuracy of the representations and warranties set forth in
Section 7.1 and 8.1 shall be subject to the following provisions. Each of
UTI and UII will promptly furnish to the other any information which,
either before or after the time of the mailing of the Proxy Statement and
Prospectus included in the Registration Statement, shall be necessary in
order to make the representations and warranties in Section 1.6 and 2.8
true as of the time of the meetings of the UTI and UII stockholders, the
Closing and any earlier date subsequent to the mailing of the Proxy
Statement. In the event that any such information would or might, in the
absence of any other action, cause the non-fulfillment of the conditions of
this Agreement due to a possible material adverse change or otherwise, a
determination shall be made by the Board of Directors of UTI in the case of
information pertaining to UII and by the Board of Directors of UII in the
case of information pertaining to UTI whether or not to continue the
transaction; and, if the transaction is continued, UTI and UII shall each
take such action as may be necessary to amend or supplement the Proxy
Statement and Registration Statement. If action is taken to continue the
transaction and so to amend or supplement the Proxy Statement or
Registration Statement, the supplemental or amended information included
therein shall be deemed to modify the requirements for the continuing
accuracy of any previous information, and shall be deemed part of the Proxy
Statement and Registration Statement.
11. EXPENSES. Each party to this Agreement shall pay all of its
expenses relating hereto, including fees and disbursements of its counsel,
accountants and financial advisors, whether or not the transactions
hereunder are consummated. Expenses of printing this Agreement, the Proxy
Statement and Registration Statement and any other documents used in the
transactions contemplated hereunder shall be divided equally between UTI
and UII. The fee for registration under the Securities Act of 1933 of the
shares of UTI Common Stock to be issued upon conversion of shares of UII
capital stock shall be paid by UTI.
12. NOTICES. All notices, requests, demands and other communications
under or in connection with this Agreement shall be in writing, and, shall
be addressed to each company's principal executive offices as shown on the
cover page of the most recent SEC report delivered by such company pursuant
to Section 1.3 or 2.3 of this Agreement, as the case may be.
All such notices, requests, demands or communication shall be mailed
postage prepaid, first class mail, or delivered personally, and shall be
sufficient and effective when delivered to or received at the address so
specified. Any party may change the address at which it is to receive
notice by like written notice to the other.
13. AMENDMENTS AND TERMINATION. UTI and UII by mutual consent of
their respective Boards of Directors or authorized committees or officers
may amend this Agreement in such manner as may be agreed upon only by a
written instrument executed by UTI and UII, whether before or after the
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meetings of the stockholders of UTI and UII, at which action upon the
transactions contemplated hereby is to be taken; provided, however, that
after the requisite approval of the stockholders has been obtained, neither
UTI nor UII shall consent to any amendment or modification which would
change the provisions with respect to the transactions contemplated by this
Agreement in any manner which would materially and adversely affect the
rights of UTI's or UII's stockholders. UTI and UII, by mutual consent of
their Boards of Directors, may terminate this Agreement at any time prior
to the Closing and, unless otherwise specifically provided in such consent,
any such termination shall be without liability on the part of UTI or UII
except as provided in Section 11.
UTI or UII may at its election terminate this Agreement and the Merger
in the event that any condition for it to close has not been met or waived
by it in its sole discretion, or if for any reason the Merger shall not
have become effective on or before December 31, 1998.
Any Such termination shall be without liability to UTI or UII except
as provided in Section 11 and except to the extent that such termination
was caused by the knowing or intentional material breach of covenants,
representations, or warranties contained in this Agreement.
14. ENTIRE AGREEMENT. This Agreement (including the exhibits hereto
and the lists, schedules and documents delivered pursuant hereto, which are
a part hereof) is intended by the parties to and does constitute the entire
agreement of the parties with respect to the transactions contemplated by
this Agreement. This Agreement supersedes any and all prior
understandings, written or oral, between the parties, and this Agreement
may not be amended, modified, waived, discharged or terminated orally, but
only by an instrument in writing signed by an authorized executive officer
of the party against which enforcement of the amendment, modification,
waiver, discharge or termination is sought.
15. GENERAL. The paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. This Agreement may be executed
simultaneously in counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and assigns, but nothing
herein, express or implied, is intended to or shall confer any rights,
remedies or benefits upon any person other than the parties hereto. This
Agreement may not be assigned by any party hereto. It is understood,
recognized, and agreed that the validity of this Agreement and the
enforceability of any provision hereof, whether before or after the
Closing, are subject to bankruptcy and insolvency laws affecting the rights
of creditors generally.
16. SURVIVAL. The respective representations, certifications and
warranties of the parties hereto, including those made in or resulting from
any certificates, instruments or other documents delivered pursuant to this
Agreement, shall expire with and be terminated and extinguished by the
Closing hereunder, and thereafter no party hereto shall be under any
liability whatsoever with respect to any such representation, certification
or warranty, it being intended that the sole remedy of any party for a
breach of any such representation, certification or warranty shall be to
elect not to proceed with the Closing hereunder if such breach has resulted
in a condition to such party's obligations hereunder not being satisfied.
The foregoing shall not be applicable to any knowing or intentional breach
of this Agreement or to any knowing or intentional misrepresentation,
certification or warranty, as to each of which, all legal remedies of the
party adversely affected may be enforced and shall survive the Closing
hereunder.
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IN WITNESS WHEREOF, each of the parties hereto has caused this
agreement to be duly executed by its undersigned officer thereunto duly
authorized on the date first above written.
ATTEST: UNITED TRUST, INC.
/s/ George E. Francis
George E. Francis By: /s/ Larry E. Ryherd
Secretary Larry E. Ryherd,
Chief Executive Officer
[CORPORATE SEAL]
ATTEST: UNITED INCOME, INC.
/s/ George E. Francis
George E. Francis By:/s/ James E. Melville
Secretary James E. Melville
President
[CORPORATE SEAL]
264
<PAGE> Exhibit A
To Agreement and Plan
Of Reorganization
AGREEMENT AND ARTICLES OF MERGER
Merging
UNITED INCOME, INC.
a corporation of the State of Ohio
With and Into
UNITED TRUST INC.
a corporation of the State of Illinois
Agreement and Articles of Merger, dated June 25, 1998, by and between
United Trust, Inc., an Illinois corporation ("UTI"), and United Income,
Inc., an Ohio corporation ("UII"), said corporations being together
hereinafter sometimes referred to as the "constituent Corporations".
Whereas, UTI is a corporation duly organized and existing under the
laws of the State of Illinois and has authorized capital stock of 3,500,000
shares of Common Stock, no par value, of which 1,912,239 shares are issued
and outstanding with 257,039 shares being held in the treasury and 150,000
shares of Preferred Stock, par value $100 per share of which no shares are
outstanding.
Whereas, UII is a corporation duly organized and existing under the
laws of the State of Ohio and has authorized capital stock of 2,310,001
shares of Common Stock, no par value, of which 1,569,509 shares are issued
and outstanding with 177,590 shares being held in the treasury and 150,000
shares of Preferred Stock, par value $100 per share of which no shares are
outstanding.
Whereas, the Board of Directors of each of the Constituent
Corporations has adopted resolutions declaring advisable and to the best
interests of the Constituent Corporations and their respective stockholders
that UII be merged with and into UTI, and that simultaneously UTI will
change its name to United Trust Group, Inc. (the "Surviving Corporation"),
under and pursuant to the Illinois Business Corporation Act and the Ohio
General Corporation Law, and on the terms and conditions herein contained
(the "Merger").
ARTICLE I
1.1 UTI and UII agree to effect the Merger of UII with and into UTI.
UTI and UII jointly own 100% of the outstanding capital stock of United
Trust Group, Inc., an Illinois corporation ("UTG"). Immediatley following
the merger, UTI will liquidate UTG. UTI will change its name to UTG and
shall be the Surviving Corporation and shall continue to be governed by the
laws of the State of Illinois. The name of the Surviving Corporation shall
be "United Trust Group, Inc". The terms and conditions of the Merger and
the manner of carrying the same into effect are as set forth in this
Agreement and Articles of Merger (hereinafter referred to as this
"Agreement").
1.2 The Certificate of Incorporation of UTI, as in effect immediately
prior to the Effective Date, until further amended, shall be and constitute
the Certificate of Incorporation of the Surviving Corporation, and an
amendment to said Certificate of Incorporation shall be effected as a
result of the Merger to reflect its name change to United Trust Group, Inc.
1.3 The Bylaws of UTI, as in effect immediately prior to the Effective
Date, until further amended, shall be and constitute the Bylaws of the
Surviving Corporation.
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1.4 The Board of Directors of UTI shall not be changed as a result of
the Merger.
1.5 The officers of UTI shall not be changed as a result of the
Merger.
ARTICLE II
2.1 The existence of UII shall cease on the Effective Date of the
Merger, and the existence of UTI shall continue unaffected and unimpaired
by the Merger. On the Effective Date of the Merger, in addition to the
general powers of corporations, UTI shall enjoy the rights, franchises and
privileges possessed by each of the Constituent Corporations, subject to
the restrictions, liabilities, duties and provisions of a corporation
organized under the Illinois Business Corporation Act; and all the rights,
privileges, franchises and interest of each of the Constituent Corporation,
and all the property, real, personal and mixed, and all the debts due on
whatever account to either of them, as well as all stock subscriptions,
securities and other things in action belonging to either of them, shall be
taken and deemed to be transferred to and vested in the Surviving
Corporation, without further act or deed; and all claims, demands, property
and every interest shall be the property of the Surviving Corporation as
they were of the Constituent Corporations, and the title to all real
estate, taken by deed or otherwise vested in any of the Constituent
Corporation, shall not be deemed to revert or deemed to be in any way
impaired by reason of the Merger, but shall be vested in the Surviving
Corporation; provided, however, that rights of creditors and all liens upon
any property of any of the Constituent Corporations shall not in any manner
be impaired, nor shall any liability or obligation due or to become due, or
any claim or demand for any cause existing against any such corporation be
released or impaired by such Merger; but the Surviving Corporation shall
be deemed to have assumed and shall be liable for liabilities and
obligations of either of the Constituent Corporations, in the same manner
as if the Surviving Corporations, in the same manner as if the Surviving
Corporation had itself incurred such liabilities or obligations.
2.2 The Surviving Corporation may be served with process in the State
of Ohio in any proceeding therein for enforcement of any obligation of UII
as well as for enforcement of any obligation UII or the Surviving
Corporation arising from the Merger, and the Surviving Corporation does
hereby irrevocably appoint the Secretary of State of Ohio as its agent to
accept service of process in any such suit or other proceeding. The address
to which a copy of such process shall be mailed to said agent is c/o United
Trust Group, Inc., 5250 South Sixth Street Road, Springfield, Illinois
62703, until UTG shall have hereafter designated in writing to the said
agent a different address for such purpose. Service of such process may be
made by personally delivering to and leaving with said agent duplicate
copies of such process, one of which copies the agent shall forthwith send
by registered mail to UTG at the above address.
2.3 The Surviving Corporation will promptly pay to dissenting
stockholders of UII the amount, if any, to which they are entitled under
the relevant provisions of the Ohio General Corporation Law.
2.4 Subject to the terms and conditions herein provided, this
Agreement shall be certified, executed and acknowledged to comply with
applicable filing and recording requirements of the Illinois Business
Corporation Act and the Ohio General Corporation Law on the closing date
referred to in Section 6.8 of that certain Agreement and Plan of
Reorganization, dated , between the Constituent
Corporations (the "Acquisition Agreement"), (the date of such
certification, execution and acknowledgment being herein referred to as the
"Closing Date"). On the Closing Date or as soon thereafter as practicable,
a certified Agreement and Articles of Merger incorporating this Agreement
shall be filed pursuant to Illinois Business Corporation Act and the Ohio
General Corporation Law with the Secretary of State of Illinois and Ohio,
respectively, and a certified copy thereof shall be recorded in the Office
of the Recorder of the appropriate county or counties in Illinois and Ohio,
respectively. This Agreement shall become effective in the State of
Illinois at the close of business on the day on which such filing is
completed, and shall become effective in the State of Ohio upon the
issuance by the Secretary of State of Ohio of a Certificate of Merger (the
latter of which dates is herein referred to as the "Effective Date").
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ARTICLE III
3.1 The manner of converting or exchanging the shares of UII into shares
of UTI shall be as hereinafter set forth in this Article III.
3.2 Each share of UTI Common Stock issued and outstanding immediately
prior to the Effective Date shall continue to be an issued and outstanding
share of UTI, fully paid and non-assessable.
3.3 Each share of UII Common Stock issued and outstanding immediately
prior to the Effective Date (excluding shares of UII Common Stock held by
UII as treasury stock, which shares shall be cancelled and extinguished at
the Effective Date) and all rights in respect thereof shall, upon the
Effective Date, by virtue of the Merger and without any action on the part
of the holder thereof, be exchanged for and converted into one share of UTI
Common Stock.
3.4 Each share of UTI Common Stock issued pursuant to this Article III
shall be fully paid and non-assessable. From and after the Effective Date,
each certificate which theretofore represented shares of UII Common Stock
shall evidence ownership of shares of the UTI Common Stock on the basis
hereinabove set forth, and the exchange and conversion shall be complete
and effective on the Effective Date without regard to the date or dates on
which outstanding UII Common Stock shall be cancelled.
3.5 On the Effective Date, UTI will deliver to the Exchange Agent
certificates representing the number of shares of UTI Common Stock that
will be required for delivery to the stockholders of UII pursuant to the
Merger, and will take such further action as may be necessary in order that
certificates for shares of the UTI Common Stock may be delivered to the
stockholders of UII. Dividends or other distributions payable after the
Effective Date to holder of record in respect of such shares of the UTI
Common Stock issued in exchange for UII Common Stock shall not be paid to
holders thereof until certificates evidencing the UII Common Stock are
surrendered for exchange as aforesaid.
ARTICLE IV
4.1 The obligations of UTI and UII to effect the Merger shall be subject
to all of the terms and conditions of the Acquisition Agreement.
4.2 This Agreement may be terminated or amended prior to the Effective
Date in the manner and upon the conditions set forth in the Acquisition
Agreement.
4.3 This Agreement may be executed in any number of counterparts, each
of which shall be deemed and original but all of which together shall
constitute but one instrument.
IN WITNESS WHEREOF, each of the Constituent Corporations has caused this
Agreement to be duly executed by its duly authorized officer, attested to
by its Secretary and its corporate seal, all as of the date first above
written.
UNITED TRUST, INC.
ATTEST:
George E. Francis Larry E. Ryherd
Secretary Chief Executive Officer
[CORPORATE SEAL]
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UNITED INCOME, INC.
ATTEST:
George E. Francis James E. Melville
Secretary President
[CORPORATE SEAL]
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THE UNDERSIGNED, Chief Executive Officer of United Trust Inc. who
executed on behalf of said corporation the foregoing Agreement and Articles
of Merger, of which this Certificate is made a part, hereby acknowledges,
in the name of and on behalf of said corporation, the foregoing Agreement
and Articles of Merger to be the corporate act of said corporation and
further certifies that, to the best of his knowledge, information and
belief, the matters and facts set forth therein with respect to the
approval thereof are true in all material respects, under the penalties of
perjury.
Larry E. Ryherd
Chief Executive Officer
THE UNDERSIGNED, President of United Income, Inc. who executed on
behalf of said corporation the foregoing Agreement and articles of Merger,
of which this Certificate is made a part, hereby acknowledges, in the name
of and on behalf of said corporation, the foregoing Agreement and articles
of Merger to be the corporate act of said corporation and further certifies
that, to the best of his knowledge, information and belief, the matters and
facts set forth therein with respect to the approval thereof are true in
all material respects, under the penalties of perjury.
James E. Melville
President
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UNITED INCOME, INC.
Secretary's Certificate
I, George E. Francis, Secretary of United Income, Inc., an Ohio
corporation ("UII"), do hereby certify, in accordance with the provisions
of the Ohio General Corporation Law, that the foregoing Agreement and
Articles of Merger, having been duly authorized and adopted by the Board of
Directors of UII and signed under its corporate seal by officers of UII
thereunto duly authorized, was duly approved and adopted by the
Stockholders of UII on the 27th day of October, 1998 at a Special Meeting
of the shareholders of UII, that at the time of said meeting UII had
outstanding 1,391,919 shares of its common stock, and no other shares of
capital stock; that at said meeting shares of UII common stock
were voted in favor of, and shares of UII common stock were
voted against, the plan of merger.
Witness my hand and the seal of UII this 27th day of October, 1998.
George E. Francis,
Secretary
[CORPORATE SEAL]
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UNITED TRUST, INC.
Secretary's Certificate
I, George E. Francis, Secretary of United Trust, Inc., an Illinois
corporation ("UTI"), do hereby certify, in accordance with the provisions
of the Illinois Business Corporation Act, that the foregoing Agreement and
Articles of Merger, having been duly authorized and adopted by the Board of
Directors of UTI and signed under its corporate seal by officers of UTI
thereunto duly authorized, was duly approved and adopted by the
Stockholders of UTI on the 27th day of October, 1998 at a Special Meeting
of the shareholders of UTI, that at the time of said meeting UTI had
outstanding 1,655,200 shares of its Common Stock, and no other shares of
capital stock; that at said meeting shares of UTI Common Stock
were voted in favor of, and shares of UTI Common Stock
were voted against, the plan of the Agreement of Merger.
Witness my hand and the seal of UTI this 27th day of October, 1998.
George E. Francis,
Secretary
[CORPORATE SEAL]
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CERTIFICATE OF EXECUTION
The foregoing Agreement of Merger, having been duly entered into and
signed by United Trust Inc., an Illinois corporation ("UTI") and United
Income, Inc., an Ohio corporation ("UII"), and having been duly adopted by
the stockholders of UTI and the stockholders of UII, all in accordance with
the provisions of the Illinois Business Corporation Act and the Ohio
General Corporation Law; the Chief Executive Officer of UTI and the Senior
Executive Vice President of UII do now hereby re-execute said Agreement of
Merger under the respective corporate seals of UTI and UII, attested by the
respective secretaries of UTI and UII, by authority of and as the act, deed
and agreement of UTI and UII, respectively, on this 27th day of October
1998.
UNITED TRUST, INC.
ATTEST:
George E. Francis Larry E. Ryherd
Secretary Chief Executive Officer
[CORPORATE SEAL]
UNITED INCOME, INC.
ATTEST:
George E. Francis James E. Melville
Secretary President
[CORPORATE SEAL]
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APPENDIX B
Sections 1701.84 and 1701.85
Ohio General Corporation Law
RIGHTS OF DISSENTING STOCKHOLDERS OF
UNITED INCOME, INC.
1701.84 Persons entitled to relief as dissenting shareholders.
The following are entitled to relief as dissenting shareholders under
section 1701.85 of the Revised Code;
(A) Shareholders of a domestic corporation that is being merged or
consolidated into a surviving or new entity, domestic or foreign, pursuant
to section 1701.78, 1701.781 [1701.78.1], 1701.79, 1701.791 [1701.79.1], or
1701.801 [1701.80.1] of the Revised Code;
(B) In the case of a merger into a domestic corporation, shareholders
of the surviving corporation who under section 1071.78 or 1701.781
[1701.78.1] of the Revised Code are entitled to vote on the adoption of an
agreement of merger, but only as to the shares so entitling them to vote;
(C) Shareholders, other than the parent corporation, of a domestic
subsidiary corporation that is being merged into the domestic or foreign
parent corporation pursuant to section 1701.80 of the Revised Code;
(D) In the case of a combination or a majority share acquisition,
shareholders of the acquiring corporation who under section 1701.83 of the
Revised Code are entitled to vote on such transaction, but only as to the
shares so entitling them to vote;
(E) Shareholders of a domestic subsidiary corporation into which one
or more domestic or foreign corporations are being merged pursuant to
section 1701.801 [1701.80.1] of the Revised Code.
(F) Dissenting shareholder's demand for fair cash value of shares.
1701.85 Dissenting shareholder's demand for fair cash value of shares.
(A)(1) A shareholder of a domestic corporation is entitled to relief
as a dissenting shareholder in respect to the proposals described in
sections 1701.74, 1701.76, and 1701.84 of the Revised Code, only in
compliance with this section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder
of the shares of the corporation as to which he seeks relief as of the date
fixed for the determination of shareholders entitled to notice of a meeting
of the shareholders at which the proposal is to be submitted, and such
shares shall not have been voted in favor of the proposal. Not later than
ten days after the date on which the vote on the proposal was taken at the
meeting of the shareholders, the dissenting shareholder shall deliver to
the corporation a written demand for payment to him of the fair cash value
of the shares as to which he seeks relief, which demand shall state his
address, the number and class of such shares, and the amount claimed by him
as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C)
of section 1701.84 of the Revised Code in the case of a merger pursuant to
section 1701.80 of the Revised Code and a dissenting shareholder entitled
to relief under division (E) of section 1701.84 of the Revised Code in the
case of a merger pursuant to section 1701.801 [1701.80.1] of the Revised
Code shall be a record holder of the shares of the corporation as to which
he seeks relief as of the date on which the agreement of merger was adopted
by the directors of that corporation. Within twenty days after he has been
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sent the notice provided in section 1701.80 or 1701.801 [1701.80.1] of the
Revised Code, the dissenting shareholder shall deliver to the corporation a
written demand for payment with the same information as that provided for
in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or
the new entity, whether the demand is served before, on, or after the
effective date of the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates
representing the shares as to which he seeks relief, the dissenting
shareholder, within fifteen days from the date of the sending of such
request, shall deliver to the corporation the certificates requested so
that the corporation may forthwith endorse on them a legend to the effect
that demand for the fair cash value of such shares has been made. The
corporation promptly shall return such endorsed certificates to the
dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the
option of the corporation, exercised by written notice sent to the
dissenting shareholder within twenty days after the lapse of the fifteen-
day period, unless a court for good cause shown otherwise directs. If
shares represented by a certificate on which such a legend has been
endorsed are transferred, each new certificate issued for them shall bear a
similar legend, together with the name of the original dissenting holder of
such shares. Upon receiving a demand for payment from a dissenting
shareholder who is the record holder of uncertificated securities, the
corporation shall make an appropriate notation of the demand for payment in
its shareholder records. If uncertificated shares for which payment has
been demanded are to be transferred, any new certificate issued for the
shares shall bear the legend required for certificated securities as
provided in this paragraph. A transferee of the shares so endorsed, or of
uncertificated securities where such notation has been made, acquires only
such rights in the corporation as the original dissenting holder of such
shares had immediately after the service of a demand for payment of the
fair cash value of the shares. A request under this paragraph by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to
an agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the
surviving or new entity, within three months after the service of the
demand by the dissenting shareholder, may file a complaint in the court of
common pleas of the county in which the principal office of the corporation
that issued the shares is located or was located when the proposal was
adopted by the shareholders of the corporation, or, if the proposal was not
required to be submitted to the shareholders, was approved by the
directors. Other dissenting shareholders, within that three-month period,
may join as plaintiffs or may be joined as defendants in any such
proceeding, and any two or more such proceedings may be consolidated. The
complaint shall contain a brief statement of the facts, including the vote
and the facts entitling the dissenting shareholder to the relief demanded.
No answer to such a complaint is required. Upon the filing of such a
complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of
the complaint and a notice of the filing and of the date for hearing be
given to the respondent or defendant in the manner in which summons is
required to be served or substituted service is required to be made in
other cases. On the day fixed for the hearing on the complaint or any
adjournment of it, the court shall determine from the complaint and from
such evidence as is submitted by either party whether the dissenting
shareholder is entitled to be paid the fair cash value of any shares and,
if so, the number and class of such shares. If the court finds that the
dissenting shareholder is so entitled, the court may appoint one or more
persons as appraisers to receive evidence and to recommend a decision on
the amount of the fair cash value. The appraisers have such power and
authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and
shall render judgment against the corporation for the payment of it, with
interest at such rate and from such date as the court considers equitable.
The costs of the proceeding, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as
the court considers equitable. The proceeding is a special proceeding and
final orders in it may be vacated, modified, or reversed on appeal pursuant
to the Rules of Appellate Procedure and, to the extent not in conflict with
those rules, Chapter 2505, of the Revised Code. If, during the pendency of
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any proceeding instituted under this section, a suit or proceeding is or
has been instituted to enjoin or otherwise to prevent the carrying out of
the action as to which the shareholder has dissented, the proceeding
instituted under this section shall be stayed until the final determination
of the other suit or proceeding. Unless any provision in division (D) of
this section is applicable, the fair cash value of the shares that is
agreed upon by the parties or fixed under this section shall be paid within
thirty days after the date of final determination of such value under this
division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a
holder of uncertificated securities entitled to such payment. In the case
of holders of shares represented by certificates, payment shall be made
only upon and simultaneously with the surrender to the corporation of the
certificates representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholder of
the corporation, fair cash value as to those shareholders shall be
determined as of the day prior to the day on which the vote by the
shareholders was taken and, in the case of a merger pursuant to section
1701.80 or 1701.801 [1701.80.1] of the Revised Code, fair cash value as to
shareholders of a constituent subsidiary corporation shall be determined as
of the day before the adoption of the agreement of merger by the directors
of the particular subsidiary corporation. The fair cash value of a share
for the purposes of this section is the amount that a willing seller who is
under no compulsion to sell would be willing to accept and that a willing
buyer who is under no compulsion to purchase would be willing to pay, but
in no event shall the fair cash value of a share exceed the amount
specified in the demand of the particular shareholder. In computing such
fair cash value, any appreciation or depreciation in market value resulting
from the proposal submitted to the directors or to the shareholders shall
be excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief,
and the right and obligation of the corporation to purchase such shares and
to pay the fair cash value of them terminates if any of the following
applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind
their adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent
of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder
nor the corporation has filed or joined in a complaint under division (B)
of this section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the
corporation shall be taken by the general partners of a surviving or new
partnership or the comparable representatives of any other surviving or new
entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it
or the purchase of the shares by the corporation, all other rights accruing
from such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid
in money upon shares of such class or any dividend, distribution, or
interest is paid in money upon any securities issued in extinguishment of
or in substitution for such shares, an amount equal to the dividend,
distribution, or interest which, except for the suspension, would have been
payable upon such shares or securities, shall be paid to the holder of
record as a credit upon the fair cash value of the shares. If the right to
receive fair cash value is terminated other than by the purchase of the
shares by the corporation, all rights of the holder shall be restored and
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all distributions which, except for the suspension, would have been made
shall be made to the holder of record of the shares at the time of
termination.
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<PAGE> APPENDIX C
Section 5/11.65 and 5/11.70
Illinois Business Corporation Act
RIGHTS OF DISSENTING STOCKHOLDERS OF
UNITED TRUST, INC.
5/11.65 RIGHT TO DISSENT. - (a) A shareholder of a corporation is
entitled to dissent from, and obtain payment for his or her shares in the
event of any of the following corporate actions:
(1) consummation of a plan of merger of consolidation or a plan of
share exchange to which the corporation is a party if (i) shareholder
authorization is required for the merger or consolidation or the share
exchange by Section 11.20 or the articles of incorporation or (ii) the
corporation is a subsidiary that is merged with its parent or another
subsidiary under Section 11.30;
(2) consummation of a sale, lease or exchange of all, or substantially
all, of the property and assets of the corporation other than in the usual
and regular course of business;
(3) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(i) alters or abolishes a preferential right of such shares;
(ii) alters or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of
such shares;
(iii) in the case of a corporation incorporated prior to January 1,
1982, limits or eliminates cumulative voting rights with respect to such
shares; or
(4) any other corporate action taken pursuant to a shareholder vote if
the articles of incorporation, by-laws, or a resolution of the board of
directors provide that shareholders are entitled to dissent and obtain
payment for their shares in accordance with the procedures set forth in
Section 11.70 or as may be otherwise provided in the articles, by-laws or
resolution.
(b) A shareholder entitled to dissent and obtain payment for his or
her shares under this Section may not challenge the corporate action
creating his or her entitlement unless the action is fraudulent with
respect to the shareholder or the corporation or constitutes a breach of a
fiduciary duty owed to the shareholder.
(c) A record owner of shares may assert dissenters' rights as to fewer
than all the shares recorded in such person's name only if such person
dissents with respect to all shares beneficially owned by any one person
and notifies the corporation in writing of the name and address of each
person on whose behalf the record owner asserts dissenters' rights. The
rights of a partial dissenter are determined as if the shares as to which
dissent is made and the other shares recorded in the names of different
shareholders. A beneficial owner of shares who is not the record owner may
assert dissenters' rights as to shares held on such person's behalf only if
the beneficial owner submits to the corporation the record owner's written
consent to the dissent before or at the same time the beneficial owner
asserts dissenters' rights.
5/11.70 PROCEDURE TO DISSENT. - (a) If the corporate action giving
rise to the right to dissent is to be approved at a meeting of
shareholders, the notice of meeting shall inform the shareholders of their
right to dissent and the procedure to dissent. If, prior to the meeting,
the corporation furnishes to the shareholders material information with
respect to the transaction that will objectively enable a shareholder to
vote on the transaction and to determine whether or not to exercise
dissenters' rights, a shareholder may assert dissenters' rights only if the
shareholder delivers to the corporation before the vote is taken a written
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demand for payment for his or her shares if the proposed action is
consummated, and the shareholder does not vote in favor of the proposed
action.
(b) If the corporate action giving rise to the right to dissent is not
to be approved at a meeting of shareholders, the notice to shareholders
describing the action taken under Section 11.30 or Section 7.10 shall
inform the shareholders of their right to dissent and the procedure to
dissent. If, prior to or concurrently with the notice, the corporation
furnishes to the shareholders material information with respect to the
transaction that will objectively enable a shareholder to determine whether
or not to exercise dissenters' rights, a shareholder may assert dissenter's
rights only if he or she delivers to the corporation within 30 days from
the date of mailing the notice a written demand for payment for his or her
shares.
(c) Within 10 days after the date on which the corporate action giving
rise to the right to dissent is effective or 30 days after the shareholder
delivers to the corporation the written demand for payment, whichever is
later, the corporation shall send each shareholder who has delivered a
written demand for payment a statement setting forth the opinion of the
corporation as to the estimated fair value of the shares, the corporation's
latest balance sheet as of the end of a fiscal year ending not earlier than
16 months before the delivery of the statement, together with the statement
of income for that year and the latest available interim financial
statements, and either a commitment to pay for the shares of the dissenting
shareholder at the estimated fair value thereof upon transmittal to the
corporation of the certificate or certificates, or other evidence of
ownership, with respect to the shares, or instructions to the dissenting
shareholder to sell his or her shares within 10 days after delivery of the
corporation's statement to the shareholder. The corporation may instruct
the shareholder to sell only if there is a public market for the shares at
which the shares may be readily sold. If the shareholder does not sell
within that 10 day period after being so instructed by the corporation, for
purposes of this Section the shareholder shall be deemed to have sold his
or her shares at the average closing price of the shares, if listed on a
national exchange, or the average of the bid and asked price with respect
to the shares quoted by a principal market maker, if not listed on a
national exchange, during that 10 day period.
(d) A shareholder who makes written demand for payment under this
Section retains all other rights of a shareholder until those rights are
cancelled or modified by the consummation of the proposed corporate action.
Upon consummation of that action, the corporation shall pay to each
dissenter who transmits to the corporation the certificate of other
evidence of ownership of the shares the amount the corporation estimates to
be the fair value of the shares, plus accrued interest, accompanied by a
written explanation of how the interest was calculated.
(e) If the shareholder does not agree with the opinion of the
corporation as to the estimated fair value of the shares or the amount of
interest due, the shareholder, within 30 days from the delivery of the
corporation's statement value, shall notify the corporation in writing of
the shareholder's estimated fair value and amount of interest due and
demand payment for the difference between the shareholder's estimate of
fair value and interest due and the amount of the payment by the
corporation or the proceeds of sale by the shareholder, whichever is
applicable because of the procedure for which the corporation opted
pursuant to subsection (c).
(f) If, within 60 days from delivery to the corporation of the
shareholder notification of estimate of fair value of the shares and
interest due, the corporation and the dissenting shareholder have not
agreed in writing upon the fair value of the shares and interest due, the
corporation shall either pay the difference in value demanded by the
shareholder, with interest or file a petition in the county in which either
the registered office or the principal office of the corporation is
located, requesting the court to determine the fair value of the shares and
interest due. The corporation shall make all dissenters, whether or not
residents of this State, whose demands remain unsettled parties to the
proceeding as 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. Failure
of the corporation to commence an action pursuant to this Section shall not
limit or affect the right of the dissenting shareholders to otherwise
commence an action as permitted by law.
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(g) The jurisdiction of the court in which the proceeding is commenced
under subsection (f) by a corporation is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the
power described in the order appointing them, or in any amendment to it.
(h) Each dissenter made a party to the proceeding is entitled to
judgment for the amount, if any, by which the court finds that fair value
of his or her shares, plus interest, exceeds the amount paid by the
corporation or the proceeds of sale by the shareholder, whichever amount is
applicable.
(i) The court, in a proceeding commenced under subsection (f), shall
determine all costs of the proceeding, including the reasonable
compensation and expenses of the appraisers, if any, appointed by the court
under subsection (g), but shall exclude the fees and expenses of counsel
and experts for the respective parties. If the fair value of the shares as
determined by the court materially exceeds the amount which the corporation
estimated to be the fair value of the shares or if no estimate was made in
accordance with subsection (c), then all or any part of the costs may be
assessed against the corporation. If the amount which any dissenter
estimated to be the fair value of the shares materially exceeds the fair
value of the shares as determined by the court, then all or any part of the
costs may be assessed against that dissenter. The court may also assess
the fees and expenses of counsel and experts for the respective parties, in
amounts the court finds equitable, as follows:
(1) Against the corporation and in favor of any or all dissenters if
the court finds that the corporation did not substantially comply with the
requirements or subsections (a), (b), (c), (d), or (f).
(2) Against either the corporation or a dissenter and 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 Section.
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 that counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who are benefited. Except as otherwise
provided in this Section, the practice, procedure, judgment and costs shall
be governed by the Code of Civil Procedure.
(j) As used in this Section:
(1) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the consummation 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.
(2) "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.
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<PAGE> APPENDIX D
PROPOSED AMENDMENT TO
PARAGRAPH 1 OF ARTICLE FOURTH OF
ARTICLES OF INCORPORATION OF
UNITED TRUST, INC.
ARTICLE FOURTH
Paragraph 1: The aggregate number of shares which the corporation is
authorized to issue is 7,150,000 divided into two classes. The designation
of each class, the number of shares of each class, and the par value, if
any, of the shares of each class, or a statement that the shares of any
class are without par value, are as follows:
Par value per share or
Series Number of statement that shares are
Class (if any) shares without par value
Common None 7,000,000 Without par value
Preferred To be fixed 150,000 $100
By the Board
Of Directors
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PART II
INFORMATION NOT REQUIRED IN
PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Illinois Business Corporation Act empowers the Registrant to
indemnify each officer and director of the Registrant against liabilities
and expenses incurred by reason of the fact that he or she is or was an
officer or director of the Registrant, or is or was serving as such at the
request of the Registrant with respect to another corporation, partnership,
joint venture, trust, or other enterprise. The Act also empowers the
Registrant to purchase and maintain insurance on behalf of any such officer
or director of the Registrant against liability asserted against or
incurred by him or her in any such capacity, whether or not the Registrant
would have power to indemnify such officer or direction against such
liability.
Article 1.1 of the Registrant's Bylaws provides, in effect, for the
indemnification by the Registrant of each director, officer, employee, or
agent of the Registrant to the full extent permitted by the Illinois
Business Corporation Act.
Item 21. Exhibits and Financial Statements Schedules
A list of exhibits and financial statement schedules included as
part of this Registration Statement is set forth in the list that
immediately precedes such exhibits and schedules and is hereby incorporated
herein by reference.
Item 22. Undertakings
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act, (ii) to
reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and (iii) to include any material information with respect to
the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement.
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
3. To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold in the termination
of the offering.
4. To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
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incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
5. To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
6.Prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
7. That every prospectus (i) that is filed pursuant to paragraph 6
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
8. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the UTI pursuant to the provisions described under
Item 20 above, or otherwise (other than insurance), UTI has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by UTI of expenses
incurred or paid by a director, officer or controlling person of UTI in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer of controlling person in connection with the Securities
being registered, UTI will, unless in the opinion of its counsel the matter
has been settled by question whether such indemnification by it, other than
indemnification pursuant to court order and not including any coverage
under, or agreement to pay premiums for, any policy of insurance, is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
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<PAGE> Appendix E
Consent of Independent Certified Public Accountant
We consent to the inclusion of our reports for the year ended December
31, 1997, dated March 26, 1998, accompanying the consolidated financial
statements and schedules of United Trust, Inc., the consolidated financial
statements of United Income, Inc. and the consolidated financial statements
and schedules of United Trust Group, Inc. appearing in the Form S-4/A
Registration Statement (File No 333-44269) of United Trust, Inc., dated
January 15, 1999, filed with the Securities and Exchange Commission
pursuant to the Securities Act of 1933.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
January 15, 1999
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Consent of Use of Federal Income Tax Opinion
We consent to the use of our opinion dated October 9, 1998 regarding
certain federal income tax consequences of the proposed merger of United
Income, Inc. with and into United Trust, Inc. and to the discussion
presented in the prospectus dated February 1, 1999 under the sub-heading
"Tax Consequences" as found starting on page 31.
KPMG LLP
Columbus, Ohio
January 15, 1999
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October 9, 1998
Mr. James E. Melville
President
United Trust, Inc.
5250 South Sixth Street
P.O. Box 5147
Springfield, Ohio 62705
Dear Mr. Melville:
You have requested the opinion of KPMG Peat Marwick LLP ("KPMG") regarding
certain Federal income tax consequences of the proposed merger ("the
Merger") of United Income, Inc. ("Income") with and into United Trust, Inc.
("Trust").
Our opinion is based solely upon information provided to us in the
"Agreement and Plan of Reorganization," as amended, (including Exhibit A)
("the Agreement"), and the "Statement of Facts and Representations" dated
October 7, 1998 (Representations) provided to us by the management of
Income and Trust as set forth in the sections of this letter entitled
"Facts" and "Representations."
You have advised us that the facts contained in the Agreement and the
Representations, and as set forth below in the section entitled "Facts,"
provide an accurate and complete description of the facts and circumstances
concerning the Merger. We have made no independent determination regarding
such facts and circumstances and, therefore, have relied solely upon the
facts presented and the Agreement and the Representations for purposes of
this letter. Any changes to the facts or to the Agreement or the
Representations could cause KPMG to change the opinions stated herein.
Facts:
Trust is an Illinois "C" corporation which is publicly owned. Trust is a
holding company and engages in no business or operations directly other
than holding the stock of other corporations. Currently, the authorized
capital stock of Trust consists solely of 3,500,000 shares of common stock,
no par value ("Trust Common Stock") and 150,000 shares of preferred stock,
$100 par value. In order to effect the Merger, Trust will increase the
number of authorized shares of Trust Common Stock to 8,000,000. Currently
1,569,509 of the authorized Trust Common Stock shares and none of the
preferred stock shares are issued and outstanding.
Income is an Ohio "C" corporation which is publicly owned. Income is a
holding company which engages in no business or operations directly other
than holding the stock of other corporations. Currently, the authorized
capital stock of Income consists solely of 2,310,001 shares of common
stock, no par value ("Income Common Stock") and 150,000 shares of preferred
stock, $100 par value. Currently, 1,912,239 shares of the authorized
Income Common Stock and none of the preferred stock are issued and
outstanding.
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United Trust Group ("UTG") is an Illinois "C" corporation and is a holding
company which engages in no business or operations directly other than
holding the stock of insurance and insurance-related companies. Currently
the authorized capital stock of UTG consists solely of 10,000 shares of
common stock, no par value ("UTG Common Stock"). Currently 100 shares of
the authorized UTG Common Stock are issued and outstanding. Currently
Trust owns 53% of the outstanding UTG Common Stock, and Income owns the
remaining 47% of UTG Common Stock.
Proposed transaction:
The managements of Trust and Income have both represented to KPMG that the
Merger will benefit the business operations of Trust and Income and their
respective stockholders by creating a larger, more viable life insurance
holding company group with lower administrative cost, a simplified
corporate structure, and more readily marketable securities.
To accomplish the business purposes described above, the following
transaction (the "Proposed Transaction") has been proposed:
In order to effect the Merger, Trust will increase the number of authorized
shares of Trust Common Stock to 8,000,000. Following a formal vote by the
Boards of Trust and Income in which the Agreement and the Merger is
approved, Income will merge pursuant to the Agreement with and into Trust
in accordance with the applicable provisions of the Illinois Business
Corporation Act and the Ohio General Corporation Law. In the Merger, and
by operation of state law, Trust will acquire all of the assets and assume
all of the liabilities of Income, the separate existence of Income will
cease, and Trust will be the surviving corporation in the Merger.
In the Merger, the shareholders of Income, other than Trust, will receive
solely one share of Trust Common Stock in exchange for each share of Income
Common Stock surrendered. Under applicable law, Income shareholders and
Trust shareholders have the right to dissent from approval of the Merger.
Any such dissenting shareholder will receive a cash payment equal to the
fair market value ("FMV") of their current stock holdings.
Representations:
For purposes of rendering this opinion, the managements of Trust and
Income, have provided the following representations to KPMG regarding the
proposed transaction:
(a) Trust has held a 30% interest in Income Common Stock for more than two
years. Trust purchased the remaining 10.6% interest within the past two
years. No part of this interest was acquired in anticipation or in
furtherance of the Merger.
(b) The Merger is being effected to benefit the business operations of
Trust and Income and their respective stockholders by creating a larger,
more viable life insurance holding company group with lower administrative
cost, a simplified corporate structure, and more readily marketable
securities.
(c) The fair market value of Trust Common Stock received by each Income
shareholder in the Merger will be approximately equal to the FMV of the
Income Common Stock surrendered by such shareholders in the exchange.
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(d) The FMV and adjusted basis of the assets of Income transferred to
Trust will equal or exceed the sum of the liabilities assumed by Trust plus
the amount of liabilities, if any, to which the transferred assets are
subject.
(e) Any liabilities of Income assumed by Trust and the liabilities to
which the transferred assets of Income are subject were incurred by Income
in the ordinary course of its business.
(f) Trust, Income, and Income shareholders will each pay their respective
expenses, if any, incurred in connection with the Merger.
(g) There is no intercorporate indebtedness existing between Income and
Trust that was issued, acquired, or will be settled at a discount.
(h) Neither Trust nor Income is an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.1
(i) Neither Trust nor Income is under the jurisdiction of a court in a
title 11 or similar case within the meaning of Section 368(a)(3)(A).
(j) None of the compensation received by shareholder-employees of Income,
if any, will be separate consideration for, or allocable to, any of their
shares of Income stock; none of the shares of Trust stock received by any
shareholder-employees will be separate consideration for, or allocable to,
any employment agreement; and the compensation paid to any shareholder-
employees will be for services actually rendered and will be commensurate
with amounts paid to third parties bargaining at arm's length for similar
services.
(k) There is no plan or intention on the part of any person or entity
holding Income Common Stock immediately prior to the Merger ("former Income
Common Stockholders"), to sell or exchange a number of shares of Trust
Common Stock received in the Merger in any transaction in which Trust, its
shareholders, or any corporation related to Trust is a direct or indirect
party, that would reduce the former Income Common Stockholders' aggregate
ownership of Trust Common Stock at any time following the Merger to a
number of shares having a value, as of the date of the Merger, of less than
fifty percent (50%) of the value of all of the formerly outstanding Income
Common Stock as of the same date. For purposes of this representation,
shares of Income Common Stock (or the portion thereof) exchanged for cash
or other property will be treated as outstanding Income Common Stock on the
date of the Merger. Moreover, shares of Income Common Stock and shares of
Trust Common Stock held by Income Common Stockholders and otherwise sold,
redeemed, or disposed of prior or subsequent to the Merger will be
considered in making this representation.
(l) Trust has no plan or intention to reacquire any of the Trust Common
Stock issued in the Merger and the management of Trust is not aware of any
plan or intention on the part of Trust, its shareholders, or any
corporation related to Trust to purchase or acquire a number of shares of
Trust stock received by Income shareholders in the Merger that would reduce
the former Income Stockholders' aggregate ownership of Trust Common Stock
at any time following the Merger to a number of shares having a value, as
of the date of the Merger, of less than fifty percent (50%) of the value of
all of the formerly outstanding Income Common Stock as of the same date.
For purposes of this representation, shares of Income Common Stock (or the
portion thereof) exchanged for cash or other property will be treated as
outstanding Income Common Stock on the date of the Merger. Moreover,
shares of Income Common Stock and shares of Trust Common Stock held by
former Income Common Stockholders and otherwise sold, redeemed, or disposed
of prior or subsequent to the Merger will be considered in making this
representation.
1. References to the "Code" are to the Internal Revenue Code of 1986, as
amended. Unless stated otherwise, all "section" references are to the Code.
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(m) Trust has no plan or intention to sell or otherwise dispose of any of
the assets of Income acquired in the transaction, except for dispositions
made in the ordinary course of business or transfers described in Section
368(a)(2)(C).
(n) Following the transaction, Trust will continue the historic business
of Income or use a significant portion of Income's historic business
assets in a business.
Opinions:
Based solely on the Facts and the Representations set forth above, and as
limited by the Scope of the Opinion, as discussed below, it is the opinion
of KPMG that:
1. Provided that the Merger qualifies as a statutory merger under the
applicable corporate laws of the states of Illinois and Ohio, then such
Merger should qualify as a reorganization within the meaning of Section
368(a)(1)(A). Trust and Income will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code.
2. No gain or loss should be recognized to Income on the transfer of all
its assets to Trust in exchange for Trust Common Stock, cash for dissenting
shareholders, if any, and the assumption by Trust of all Income's
liabilities. (Sections 361 and 357(a)).
3. The basis of Income assets in the hands of Trust should be the same
in each instance as the basis of those assets in the hands of Income
immediately prior to the Merger Section (362(b)).
4. The holding period of the Income assets in the hands of Trust should
include in each instance the period those assets were held by Income
(Section 1223(2)).
5. No gain or loss should be recognized by Trust on the receipt of
Income's assets in exchange for Trust Common Stock and the assumption of
the liabilities of Income (Section 1032(a)).
6. Trust should succeed to and take into account, as of the day of the
Merger the items of Income described in Section 381(c), subject to the
conditions and limitations specified in Sections 381, 382, 383 and 384, if
applicable, and the regulations thereunder (Section 381(a)). No opinion
has been requested, nor is any expressed, with respect to such conditions
and limitations.
7. No gain or loss should be recognized to the Income shareholders on the
exchange of their shares of Income Common Stock solely for Trust Common
Stock pursuant to the Merger. (Section 354(a)(1)).
8. The basis of the Trust Common Stock to be received by the Income
shareholders should be the same as the basis of the Income Common Stock
surrendered in exchange therefore in the Merger (Section 358(a)(1)).
9. The holding period of the Trust Common Stock received by the Income
shareholders should include the period during which they held the Income
Common Stock exchanged for Trust Common Stock in the Merger, provided the
Income Common Stock is held as a capital asset on the date of the exchange
(Section 1223(1)).
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10. Provided neither Income nor Trust is a "collapsible corporation" as
defined in Section 341(b), cash received by any dissenting shareholder of
Income who receives solely cash (in lieu of Trust Common Stock) in exchange
for his or her Income Common Stock, or any Trust shareholder who elects to
receive solely cash in exchange for his or her Trust Common Stock will be
treated as having been received by such shareholder as a distribution in
redemption of his or her stock, subject to the provisions and limitations
of Section 302. If, as a result of such distribution, a shareholder owns
no Trust Common Stock either directly or through the application of Section
318(a), the redemption will be a complete termination of interest within
the meaning of Section 302(b)(3), and such cash will be treated as a
distribution in exchange for his or her stock, as provided in Section
302(b).
Scope of the Opinion:
The opinions expressed above are rendered only with respect to the specific
facts and representations set forth herein. No opinions are provided with
respect to issues not specifically set forth in the "Opinions" section of
this letter. No inference should be drawn regarding any matter not
specifically opined upon. Further, our opinion has not been requested and
none is expressed with respect to any foreign, state or local tax
consequences to Income or its shareholders, or Trust and its shareholders,
including, but not limited to, income, franchise, sales, use, excise or
transfer taxes which may be significant.
KPMG does not express any opinion, and none was requested, as to any
possible conditions and limitations specified in IRC Secs. 381, 382, 383
and 384, if applicable, and the regulations thereunder (IRC Sec. 381(a) and
Reg. 1.381(a)-1) regarding any items described in IRC Sec. 381(c).
Our opinion with respect to the consummated transaction is based on the
assumption that the stock consideration received by the Income shareholders
will not decrease below 40 percent of the total consideration received by
them for their Income stock and no views are expressed with respect to the
consummated transition if that event occurs.
If any of the above-stated facts, circumstances, or assumptions are not
entirely complete or accurate, it is imperative that we be informed
immediately, as the inaccuracy or incompleteness could cause KPMG to change
its opinions. In rendering our opinion, we are relying upon the relevant
provisions of the Internal Revenue Code of 1986, as amended, the
regulations thereunder, and judicial and administrative interpretations
thereof, which are subject to change or modification by subsequent
legislative, regulatory, administrative, or judicial decisions. Any such
changes could also have an effect on the validity of our opinion.
The opinions contained herein are not binding upon the Internal Revenue
Service, any other tax authority or any court, and no assurance can be
given that a position contrary to that expressed herein will not be
asserted by a tax authority and ultimately sustained by a court.
On December 13,1994, the Internal Revenue Service (IRS) published Revenue
Procedure 94-76 stating that they were opening a study project to determine
if certain corporate combining transactions such as the Merger should be
subject to tax by reason of the repeal of the General Utilities doctrine.
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On January 29, 1996, the IRS published Notice 96-6 stating that the study
project referred to above would be closed with no guidance issued at the
time. The IRS reserves the right to issue such guidance in the future.
The opinions stated herein are specifically contingent upon the Merger
being consummated before any such guidance is issued by the Treasury or
IRS.
KPMG Peat Marwick LLP
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