Amendment 6 as filed with the Securities and Exchange Commission on May 21, 1999
Registration No. 333-44269
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4/A6
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:
<PAGE>
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.
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- - ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Title of each Proposed maximum Proposed
Class of offering price maximum
Securities to be Amount to be per unit (2) aggregate Amount of
Registered registered (1) offering price Registration fee(2)
- - ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Common Stock, 826,153 12.74 10,525,189 3,157.56
No par value
- - ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
</TABLE>
(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 fair value
of UTI common stock at March 31, 1999 determined using the average price of
UTI shares issued on November 20, 1998 in a separate transaction with First
Southern Funding LLC, an outside third party.
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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<PAGE>
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.
- - --------------------------------------------------------------------------------
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 Cover Pages of
Prospectus; Table of
Contents; Available
Information
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information Proxy Statement Summary
4. Terms of the Transaction Information Regarding the
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
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<PAGE>
UII; Business Of UII;Market
Prices and Dividends; UII
Management's Discussion and
Analysis Of UII's Financial
Condition and Results 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 July 26, 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 July 26, 1999 at 9:00 a.m. at the corporate
headquarters, 5250 South Sixth Street Road, Springfield, Illinois 62703 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 June 14, 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: June 14, 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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<PAGE>
UNITED TRUST, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On July 26, 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 July 26 1999 at 9:00 a.m. at the Corporate
headquarters, 5250 South Sixth Street Road, Springfield, Illinois 62703 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 June 14, 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: June 14, 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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<PAGE>
Preliminary Prospectus/Proxy Statement dated June 14, 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 July 26, 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 $10,525,189.
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 July 26,
1999. The close of business on June 14, 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 March 31, 1999, the high bid for the UTI Common Stock traded on the
NASDAQ Small Cap exchange was $7.75 The UII Common Stock is not listed or
actively traded, therefore no quote is available.
The date of this Joint Proxy Statement/Prospectus is June 14, 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,
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<PAGE>
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 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, 1998.
2. Quarterly Report of UTI on Form 10-Q for the quarter ended March 31, 1999.
3. Annual Report of UII on Form 10-K for the year ended December 31, 1998.
4. Quarterly Report of UII on Form 10-Q for the quarter ended March 31, 1999.
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.
8
<PAGE>
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 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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<PAGE>
Preliminary Proxy Material dated June 14, 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 July 26, 1999
at 9:00 a.m. at the Corporate headquarters, 5250 South Sixth Street Road,
Springfield, Illinois 62703. 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
June 14, 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 June 14, 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 June 14, 1999.
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<PAGE>
Preliminary Proxy Material dated June 14, 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
July 26, 1999, at 9:00 a.m. at the Corporate headquarters, 5250 South Sixth
Steet Road, Springfield, Illinois 62703. 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 June 14, 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 June 14, 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 June 14, 1999.
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<PAGE>
TABLE OF CONTENTS
Page
PROXY STATEMENT SUMMARY 13
POTENTIAL CONFLICT OF INTERESTS 15
RISK FACTORS 17
INTRODUCTION 21
THE UTI HOLDING COMPANY SYSTEM 21
PRINCIPAL STOCKHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT 24
INFORMATION REGARDING THE PROPOSED MERGER 30
DISSENTERS' RIGHTS 36
SELECTED FINANCIAL DATA OF UII 40
UII MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 41
SELECTED FINANCIAL DATA OF UTI 62
UTI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 63
FEDERAL INCOME TAXES 87
CAPITALIZATION OF UTI AND UII 87
UTI AND UII PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
INFORMANTION - UNAUDITED 88
MARKET PRICES AND DIVIDENDS 95
BUSINESS OF UII 96
BUSINESS OF UTI 106
DIRECTORS AND EXECUTIVE OFFICERS OF UII 120
BENEFICIAL OWNERS AND MANAGEMENT OF UII 127
DIRECTORS AND EXECUTIVE OFFICERS OF UTI 129
BENEFICIAL OWNERS AND MANAGEMENT OF UTI 137
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 139
YEAR 2000 ISSUE 141
CHANGE IN CONTROL OF UNITED TRUST, INC. 141
DESCRIPTION OF UTI AND UII CAPITAL STOCK 142
PROPOSED INCREASE IN THE AUTHORIZED COMMON STOCK OF UTI 145
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS 146
OTHER MATTERS TO COME BEFORE THE MEETING 146
SIGNATURES 147
INDEX TO EXHIBITS 149
INDEX TO FINANCIAL STATEMENTS OF UTI AND UII 153
Appendix A Agreement and Plan of Reorganization 270
Appendix B Rights of Dissenting Stockholders of United Income, Inc. 288
Appendix C Rights of Dissenting Stockholders of United Trust, Inc. 291
Appendix D Proposed Amendment to Articles of Incorporation of UTI 294
Appendix E Consent to use of UTI and UII opinions issued by Kerber Eck
and Braeckel LLP 297
Appendix F Consent to use of Tax Opinion of KPMG Peat Marwick LLP 298
Appendix G Tax Opinion of KPMG Peat Marwick LLP 299
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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 July 26, 1999
Record Date June 14, 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 June 14, 1999 has been fixed
as the record date for the determination
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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 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
14
<PAGE>
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 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,at the time of the merger
proposal, 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
15
<PAGE>
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 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 one bank
that operates 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 carrying value of the UTI's cash and cash
equivalents on March 31, 1999 was approximately $808,000. UTI's interest income
on these balances for the period ended March 31, 1999 totaled $6,000.
Additionally, UTI holds $10,590,000 of notes receivable from its subsidiaries
and affiliates at March 31, 1999. UTI expects to earn approximately $865,000
annually from interest income on these notes.
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
$835,345, $989,295 and $1,567,891 under their agreement with UII for 1998, 1997
and 1996, respectively. UII paid $501,207, $593,577 and $940,734 under their
agreement with UTI for 1998, 1997 and 1996, 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.
17
<PAGE>
Change in Ownership Interest
If the Merger is approved, a shareholder of UTI will own a smaller
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).
18
<PAGE>
COMPARATIVE PER SHARE INFORMATION
<TABLE>
<S> <C> <C> <C> <C>
March 31, December 31, December 31, December 31,
1999 1998 1997 1996
UTI - Historical
Book value per share 10.22 10.18 9.39
Cash dividends declared per share 0.00 0.00 0.00 0.00
Basic income (loss) per share from
continuing operations 0.05 (0.39) (0.32) (0.50)
Diluted income (loss) per share from
continuing operations 0.07 (0.39) (0.32) (0.50)
UII - Historical
Book value per share 8.44 8.42 8.58
Cash dividends declared per share 0.00 0.00 0.00 0.00
Basic income (loss) per share from
continuing operations 0.03 (0.04) (0.06) (0.23)
Diluted income (loss) per share from
continuing operations 0.03 (0.04) (0.06) (0.23)
UTI - Pro-forma
Book value per share 10.86
Cash dividends declared per share 0.00 0.00
Basic income (loss) per share from 0.05 (0.33)
continuing operations
Diluted income (loss) per share from 0.06 (0.33)
continuing operations
</TABLE>
19
<PAGE>
SELECTED FINANCIAL INFORMATION
Proposed Merger of UTI and UII
(000's omitted except on per share data)
<TABLE>
Quarter Ended Year Ended
March 31, December 31,
--------------------------------- -----------------------------------------------
1999 1998 1998 1997 1996
--------------- -------------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
UTI - Historical
Revenues $ 9,835 $ 11,227 $ 40,885 $ 43,992 $ 46,976
Net Income (loss) $ 132 $ 114 $ (679) $ (559) $ (938)
Per common share:
Income (loss) $ 0.05 $ 0.07 $ (0.39) $ (0.32) $ (0.50)
Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0
Balance sheet data:
Assets $ 342,336 $ $ 343,824 $ 349,300 $ 355,474
Common stockholders equity:
Total $ 25,463 $ $ 25,361 $ 15,357 $ 18,014
Per Share $ 10.22 $ $ 10.18 $ 9.39 $ 9.63
UII - Historical
Revenues $ 276 $ 287 $ 1,035 $ 1,186 $ 1,791
Net Income (loss) $ 46 $ 105 $ (53) $ (79) $ (319)
Per common share:
Income (loss) $ 0.03 $ 0.08 $ (0.04) $ (0.06) $ (0.23)
Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0
Balance sheet data:
Assets $ 12,657 $ 12,646 $ 12,840 $ 12,881
Common Stockholders equity:
Total $ 11,747 $ 11,722 $ 11,936 $ 11,977
Per common share $ 8.44 $ 8.42 $ 8.58 $ 8.60
UTI and UII - Pro Forma:
Revenues $ 9,630 $ 40,251
Net Income (loss) $ 167 $ (830)
Per common share:
Income (loss) $ 0.05 $ (0.33)
Cash dividends $ 0 $ 0
Balance sheet data:
Assets $ 337,084
Common stockholders equity:
Total $ 35,949
Per Share $ 10.86
</TABLE>
20
<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.
21
<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 March 31, 1999, the parent, significant subsidiaries and affiliates of United
Trust Inc. were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF MARCH 31, 1999
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
22
<PAGE>
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.
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 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 a bank that operates
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.
23
<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%
24
<PAGE>
<TABLE>
<S> <C>
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 *
Larry E. Ryherd 0 *
Robert W. Teater 0 *
All directors and executive officers 544 *
as a group (ten in number)
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%
</TABLE>
(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.
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(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.
* 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.
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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.
<TABLE>
<S> <C> <C> <C>
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 *
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%
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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%
</TABLE>
(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.
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* 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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<PAGE>
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 ownership of UTG, excepting the $11,000,000 capital received
in the stock sale to First Southern Funding LLC in November 1998. 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. UII shareholders other than UTI's ownership of
UII own 27.9%of UTG prior to the merger. These same shareholders will own 24.9%
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<PAGE>
of UTG and will share in the $11,000,000 of UTI capital received from First
Southern. Both UTI and UII shareholders will own approximately the same amount
of value of the assets owned before and 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.
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,
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<PAGE>
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.
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 July 26, 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.
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<PAGE>
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, 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 July 26, 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
33
<PAGE>
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.
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 $10,525,189. Value was determined using $12.74 per share, the average price
of UTI shares issued on November 20, 1998 in a separate transaction with First
Southern Funding LLC, an outside third party.
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
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<PAGE>
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 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
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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
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
36
<PAGE>
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.
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
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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.
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
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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>
1998 1997 1996 1995 1994
------------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net Operating Revenues $ 1,035 $ 1,186 $ 1,791 $ 2,234 $ 1,667
Operating Costs and Expenses $ 667 $ 909 $ 1,414 $ 1,976 $ 1,627
Income taxes $ 0 $ 0 $ 0 $ 0 $ 0
Equity in loss of investees $ (421) $ (357) $ (696) $ (2,406) $ (384)
Net loss $ (53) $ (79) $ (319) $ (2,148) $ (344)
Net loss per common share $ (0.04) $ (0.06) $ (0.23) $ (1.54) $ (0.25)
Cash Dividend Declared $ 0 $ 0 $ 0 $ 0 $ 0
per common share
Total Assets $ 12,646 $ 12,840 $ 12,881 $ 13,386 $ 15,414
Long Term Obligations $ 902 $ 902 $ 902 $ 902 $ 902
</TABLE>
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UII MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED December 31, 1998
At December 31, 1998 and 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 for 1998, 1997 and 1996
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 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
1998 compared to 1997
(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. 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 $835,345, $989,295 and $1,567,891 in
1998, 1997 and 1996, respectively, based on statutory collected premiums in USA
of $8,443,463, $10,300,332 and $13,298,597 in 1998, 1997 and 1996, respectively.
First year premium revenues of USA decreased 39% in 1998 from 1997. 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
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have hurt USA's ability to recruit and maintain sales agents. In November 1998,
the change in control transaction was completed with First Southern Funding LLC.
The Company holds $1,364,100 of notes receivable from affiliates. The notes
receivable from affiliates consists of four 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. In December 1998, FCC
borrowed an additional $500,000 from UII to further reduce outside debt. The
note bears interest at the rate of 7.5%, with interest payments due quarterly
and principal due upon maturity of the note on March 31, 2004. At current
interest levels, the notes will generate approximately $122,000 in interest
earnings annually.
(b) Expenses
The Company 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. The Company has incurred
$501,207, $743,577 and $1,240,735 in service fee expense in 1998, 1997, and
1996, respectively.
Interest expense of $85,155, $85,155 and $84,027 was incurred in 1998, 1997 and
1996, 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.
(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 8% when comparing 1998 to 1997. 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 at a rate consistent with prior
experience.
Another cause for the decrease in premium revenues is related to the
uncertainties regarding the pending 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. In February 1998, an
announcement was made regarding negotiations with a different unrelated
party, First Southern Funding LLC, for the change in control of UTI. In
November 1998, the change in control with this second party was
completed. Please refer to the Notes to the Financial Statements for
additional information. The possible changes and resulting uncertainties
have hurt the insurance companies' ability to recruit and maintain sales
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agents. Although the transaction has resulted in some short term
negative impacts, management believes the long term potential to be
gained from the increased capitalization and alliance with a banking
group will result in a stronger and more competitive position in the
future.
New business production decreased significantly over the last two years.
New business production decreased 39% or approximately $2,063,000 when
comparing 1998 to 1997. 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. The Company is currently in a position where it must increase its
new business writings or look at measures to reduce costs associated
with new business production to a level more in line with the current
level of production. In late 1998, A.M. Best Company, a leading
insurance industry rating agency, increased two levels its rating
assigned to UG, the Company's largest insurance subsidiary, from a C++
to a B. This rating change should aid in the agents selling ability
although to what extent is currently unknown.
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 1998 and 1997 has been approximately 89.9% and
89.4%, respectively.
At the March 1998 Board of Directors meeting, the UG and USA Boards
approved a permanent premium reduction on certain of its participating
products in force commonly referred to as the initial contract and the
presidents plan. The premium reduction was generally 20% with 35% used
on initial contract plans of UG with original issue ages less than 56
years old. The dividends were also reduced, the net effect to the
policyholder was a slightly lower net premium. This change becomes
effective with the 1999 policy anniversary and is expected to result in
a $2,000,000 decline in premiums and a comparable reduction in dividends
to policyholders in 1999 as compared to 1998. This action was taken by
the Boards to ensure these policyholders will be protected in future
periods from potential dividend reductions at least to the extent of the
permanent premium reduction amount. By reducing the required premium
payment, it makes replacement activity by other insurance companies more
difficult as ongoing premium payments are compared from the current
policy to a potential replacement policy.
Net investment income increased 1% when comparing 1998 to 1997. The
increase in investment income is the result of a combination of factors.
The Company changed banks during 1997, which provided an improvement in
yield on cash balances. In late 1998, the Company again transferred most
of its cash balances to another bank, First Southern National Bank, an
affiliate of First Southern Funding, LLC. This transfer resulted in an
increase in earning rates on cash balances of approximately one quarter
of one percent (.25%) over those previously received. During 1998, the
Company directed a greater percentage of its investing activity to
mortgage loans. These new loans provide an investment yield
approximately 3% higher or $110,000 more than can be obtained from
quality fixed maturities currently available. During September and
October of 1998, the national prime rate declined three quarters of one
percent (.75%). This decline reduced yields on investments available in
the marketplace in which the Company invests, primarily fixed
maturities. The decline had a more immediate impact on the earnings
rates of the Company's cash and cash equivalents balances.
The overall investment yields for 1998, 1997 and 1996, are 6.69%, 6.71%
and 6.87%, respectively. Cash generated from the sales of universal life
insurance products, has been invested primarily in our fixed maturity
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
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<PAGE>
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, the Board lowered crediting rates one half percent on
all products crediting 5.5% or more. This adjustment was in response to
continued declines in interest rates in the market place. The change
affected approximately $60,000,000 of policy reserves and will result in
interest crediting reductions of $300,000 per year. Policy interest
crediting rate changes become effective on an individual policy basis on
the next policy anniversary. Therefore, it will take a full year from
the time the change is determined for the full impact of such change to
be realized.
Realized investment losses were $1,119,000 and $279,000 in 1998 and
1997, respectively. Approximately $440,000 of realized losses in 1998 is
due to the sale of real estate. During 1998 the Company re-evaluated its
real estate holdings, especially those properties acquired through
acquisitions of other companies and mortgage loan foreclosures, and
determined it would be in the long term interest of the Company to
dispose of certain of these parcels. Parcels targeted for sale were
generally non-income or low income producing and located in parts of the
country where management has little other reason to travel to. The
disposal of these properties will free up management time to focus on
the properties that have a more viable long-term benefit to the Company.
The Company reduced its non-income producing investments $1,610,000
during 1998, as a result of these actions. The Company incurred losses
of $339,000 on the foreclosure of three mortgage loans during the second
quarter of 1998. The foreclosed properties were sold before the end of
1998. As a result of these foreclosures, management reassessed its
remaining mortgage loan portfolio and determined an allowance of $70,000
was appropriate to cover potential future losses in the portfolio. 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 beween Fortis, Inc. and John Alden all outstanding common
shares of John Alden were acquired. The Company had other gains and
losses during the period that comprised the remaining amount reported
but were immaterial on an individual basis.
Expenses of UTG
Life benefits, net of reinsurance benefits and claims, decreased 5% in
1998 as compared to 1997. The most significant influence on the decrease
in life benefits was from a decline of $1,036,000 in death benefit
claims. There was no specific incident or event in 1998 or 1997 that
caused this to occur. At the September 1998 Board of Directors meeting,
the Board lowered crediting rates one half percent on all products
crediting 5.5% or more. This adjustment was in response to continued
declines in interest rates in the market place. The change affected
approximately $60,000,000 of policy reserves and will result in interest
crediting reductions of $300,000 per year. This change had little effect
on the 1998 results, but will influence future periods. Policy interest
crediting rate changes become effective on an individual policy basis on
the next policy anniversary. Therefore, it will take a full year from
the time the change is determined for the full impact of such change to
be realized.
Commissions and amortization of deferred policy acquisition costs
increased 78% in 1998 compared to 1997. At year-end 1998, the Company
recorded an impairment write off of deferred policy acquisition costs of
$2,983,000. The impairment was the result of the actuarial analysis of
the recoverability of the asset based on current trends and known events
compared to assumptions used in the establishment of the original asset.
The recent decline in interest rates in the marketplace combined with
lower than expected new policy writings leaving the Company with greater
per policy costs as a result of fixed costs being spread over fewer
policies caused the impairment. Exclusive of the impairment write down,
commissions and amortization of deferred policy acquisition costs were
comparable to 1997 results. The write down will result in lower
amortizations in future periods, as there is now a smaller asset to
amortize.
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Amortization of cost of insurance acquired decreased 8% in 1998 compared
to 1997. 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
25% 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. 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 1998 and 1997 has been approximately 89.9%
and 89.4%, respectively. Persistency has shown a steady improvement over
the past several years.
Operating expenses increased 17% in 1998 compared to 1997. Included in
operating expenses in 1998 is $2,367,474 from the release of discounts
associated with the Company's notes payable. The Company's subordinated
debt was issued at rates considered favorable to the Company at time of
issue, therefore the notes were discounted to reflect an effective
interest rate of 15%. With the payment of part of this debt in November
1998, the unamortized discount was written off. Management's plan to
repay the remaining debt in a much shorter period of time from required
repayment resulted in the determination to write off the entire
remaining note discount. See information contained below in interest
expense analysis for further details regarding debt retirement.
Excluding the note discount write off, operating expenses decreased 9%
attributable primarily to reduced salary and employee benefit costs in
1998, as a result of natural attrition.
Interest expense decreased 2% in 1998 compared to 1997. In November
1998, the Company's ultimate parent, UTI, received approximately
$11,000,000 from the issuance of common stock to First Southern Funding
and its affiliates. These funds were used to retire outside debt. On
November 23, 1998, the Company paid a $6,300,000 principle payment on
its senior debt, and paid a $2,608,099 principal payment on its 10 year
subordinated debt through intercompany borrowings from UTI. On December
16, 1998 the Company paid an additional $500,000 principal payment on
its 10 year subordinated debt through an intercompany borrowing from
UII. In total these transactions retired $9,408,099 of outside debt and
replaced it with intercompany debt, which provides the Company with
increased flexibility when it comes to repayment options. With the new
capital and expectations of future growth, management has formulated a
plan to repay the remaining outside debt within the next two years. At
December 31, 1998, FCC had $17,369,993 in notes payable, of which
$5,561,894 is debt owed to outside parties. The Company believes this
can be accomplished in the next two years through dividends from the
subsidiaries, namely dividends to FCC from UG and from expected
operating cashflows.
The provision for income taxes reflected a significant change from the
same period 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. In 1998,
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the insurance company subsidiaries incurred taxable income for federal
income tax purposes which was offset through utilization of federal tax
loss carryforwards. Since these carryforwards had an allowance
established against them for deferred tax purposes, no corresponding
expense was incurred in the financial statements. Additionally, the
Company incurred deferred tax credits of $1,872,666 from the deferred
policy acquisition costs impairment and the notes payable discounts
write offs.
Net loss of UTG
UTG had a net loss of $1,273,000 in 1998 compared to a net loss of
$923,000 in 1997. During 1998, the deferred policy acquisition costs
impairment resulted in a net loss of $1,551,000 and the notes discount
write offs resulted in a net loss of $1,231,000. Exclusive of these two
events, the Company would have reported net income of $1,509,000. Lower
death benefit claims and reduced operating expenses from 1997 results
provided improvements to the 1998 results.
(d) Net loss
The Company recorded a net loss of $53,000 for 1998 compared to $79,000 for
the same period one year ago. The net loss is from the equity share of
UTG's operating results.
1997 compared 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 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. 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.
The Company 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.
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(b) Expenses
The Company 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. The Company 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.
(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. In February 1998, an announcement was made
regarding negotiations with a different unrelated party, First Southern
Funding LLC, for the change in control of UTI. In November 1998, the
change in control of UTI with this second party was completed. 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
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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 6.71%, 6.87%
and 6.07%, 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.
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 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
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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 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.
Operating expenses decreased 21% 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 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.
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(d) Net loss
The Company 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.
FINANCIAL CONDITION
The Company owns 47% equity interest in UTG which controls total assets of
approximately $342,000,000. 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,
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 the Company as a
corporation in good standing with the various regulatory bodies which govern
corporations in the jurisdictions where the Company 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 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. 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 2 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, 1998, UG
had a statutory gain from operations of $3,226,364. At December 31, 1998, UG
statutory capital and surplus amounted to $15,280,577. 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 currently has $368,692 in cash and cash equivalents. The Company
holds two mortgage loans. Operating activities of the Company produced cash
flows of $425,607, $324,097 and $255,675 in 1998, 1997 and 1996, respectively.
The Company had uses of cash from investing activities of $767,812, $50,764 and
$180,402 in 1998, 1997 and 1996, respectively. Cash flows from financing
activities were $0, $(2,112) and $33 in 1998, 1997 and 1996, respectively.
In early 1994, UII received $902,300 from the sale of Debentures. The Debentures
were issued pursuant to an indenture between the Company and National City Bank
(formerly 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 8.5% during the first three quarters of 1998, decreasing to 8.25%
October 1, 1998, and decreasing to 7.75% January 1, 1999. 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
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March 31, 2004. The Debentures are not listed on any national securities
exchange or the NASDAQ National Market System.
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 affiliates. 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 that the overall sources of liquidity available to the
Company will be more than sufficient to satisfy its financial obligations.
REGULATORY ENVIRONMENT
The Company'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. 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, 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 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
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agreements (see Note 6 in the Notes to the Financial Statements), and payment of
dividends (see note 2 in the Notes to the 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 1998, 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. In February 1998, an announcement was made
regarding negotiations with a different unrelated party, First Southern Funding
LLC, for the change in control of UTI. In November 1998, the change in control
with this second party was completed. Please refer to the Notes to the Financial
Statements for additional information. The possible changes and resulting
uncertainties have hurt the insurance companies' ability to recruit and maintain
sales agents.
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 Clinton Administration has recently proposed tax changes that would affect
the insurance industry. One proposal is to require recapture of untaxed profits
on policyholder surplus accounts. Between 1959 and 1983, stock life insurance
companies deferred tax on a portion of their profits. These untaxed profits were
added to a policyholders surplus account ("PSA"). In 1984, Congress precluded
life insurance companies from continuing to defer taxes on any future profits.
The Clinton Administration argues that there is no continuing justification for
permitting stock life insurance companies to defer tax on profits that were
earned between 1959 and 1983. Accordingly, the stock life companies would be
required to include in their gross income over ten years their PSA balances. The
second proposal modifies rules for capitalizing policy acquisition costs on the
grounds that life insurance companies generally only capitalize a fraction of
their actual policy acquisition costs. This modification would increase the
current capitalization percentages. Either of these changes would be onerous to
the Company and to the insurance industry as a whole. The outcome and timing of
these proposals cannot be anticipated at this time.
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 and its affiliates
conduct an ongoing thorough review of its sales and marketing process and
continues to emphasize its compliance efforts.
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A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
Project results were recently approved by the NAIC with an implementation date
of January 1, 2001. Individual states in which UII and its affiliates do
business must implement these new rules for them to become effective. Specific
recommendations have been set forth in papers issued by the NAIC. The NAIC
continues to modify and amend these papers. UII is monitoring the process, and
is not aware of any new requirements that would result in a material financial
impact on UII's financial position or results of operations. UII will continue
to monitor this issue as changes and new proposals are made.
ACCOUNTING AND LEGAL DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 128 entitled Earnings per share, which is
effective for financial statements for fiscal years beginning after December 15,
1997. SFAS 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.
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 128 did not have an impact on UII's financial
statement.
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 UII to make additional disclosures in
the 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 UII's financial position or results of operations,
since UII 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
UII's financial position or results of operations, since UII 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
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<PAGE>
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 UII's financial
position or results of operations, since UII has no derivative or hedging type
investments.
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.
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 and its affiliates established a project to address year 2000 processing
concerns in September of 1996. In 1997 UII completed the review of UII's
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 was completed by the end of the first quarter of 1998. Periodic
regression testing is being performed to monitor continuing compliance. By
addressing year 2000 compliance in a timely manner, compliance has been achieved
using existing staff and without significant impact on the Company operationally
or financially.
CHANGE IN CONTROL OF UNITED TRUST, INC.
On November 20, 1998, First Southern Funding, LLC., 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
54
<PAGE>
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
acquired on the market, FSF and affiliates currently own 1,073,577 shares of UTI
common stock (43.1%) becoming the largest shareholder of UTI. Through the shares
acquired and options owned, FSF can ultimately own over 51% of UTI. 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 a bank that operates
out of 14 locations in central Kentucky.
This transaction provides UTI and its affiliates with increased opportunities.
The additional capitalization has enabled UTI to significantly reduce its
outside debt and has enhanced its ability to make future acquisitions through
increased borrowing power and financial strength. Many synergies exist between
UTI and its affiliates and First Southern Funding and its affiliates. The
potential for cross selling of services to each customer base is currently being
explored. Legislation is currently pending that would eliminate many of the
barriers currently existing between banks and insurance companies. Such
alliances are already being formed within the two industries. Management
believes this transaction positions the Company for continued growth and
competitiveness into the future as the financial industry changes.
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.
UII owns 47% of United Trust Group, Inc., an insurance holding company, and UTI
owns 53% of United Trust Group, Inc. Neither UTI nor UII had any other
significant holdings or business dealings at the time the merger was recommended
by the respective Boards of Directors. 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. Additionally, the merger will further
simplify the group's holding company system making it easier to understand for
outside parties including current investors, potential investors and lenders.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the second quarter of 1999.
55
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF UII FOR THE PERIOD ENDED MARCH 31, 1999
At March 31, 1999 and December 31, 1998, 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 or any of its officers, directors or employees is qualified by
the fact that actual results of UII may differ materially from any such
statement due to the following important factors, among other risks and
uncertainties inherent in UII'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
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
(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. 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.
UII holds $1,364,100 of notes receivable from affiliates. The notes receivable
from affiliates consists of four 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. In December 1998, FCC
borrowed an additional $500,000 from UII to further reduce outside debt. The
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<PAGE>
note bears interest at the rate of 7.5%, with interest payments due quarterly
and principal due upon maturity of the note on March 31, 2004. At current
interest levels, the notes will generate approximately $122,000 in interest
earnings 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.
Interest expense of $19,738 and $21,430 was incurred in first quarter 1999 and
1998, 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. At March 31, 1999, the conversion privilege expired with no
conversions exercised.
(c) Equity in income of investees
Equity in income of investees represents UII's 47% share of the net loss of UTG.
Please refer to Note 6 of the Notes to the Financial Statements for summarized
financial information of UTG. Following is a discussion of the results of
operations of UTG and its consolidated subsidiaries ("UTG"):
Revenues of UTG
Premiums and policy fee revenues, net of reinsurance premiums and
policy fees, decreased 17% when comparing 1999 to 1998. 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.
During 1998, the Boards of UG and USA approved a permanent premium
reduction on certain of its participating products in force commonly
referred to as the initial contract and the presidents plan. The
premium reduction was generally 20% with 35% used on initial contract
plans of UG with original issue ages less than 56 years old. The
dividends were also reduced, and the net effect to the policyholder was
a slightly lower net premium. This change became effective with the
1999 policy anniversary. This action was taken by the Boards to ensure
these policyholders will be protected in future periods from potential
dividend reductions at least to the extent of the permanent premium
reduction amount. By reducing the required premium payment, it makes
replacement activity by other insurance companies more difficult as
ongoing premium payments are compared from the current policy to a
potential replacement policy. This premium reduction accounted for
approximately 12% of the total premium revenue decline. A corresponding
decline is reflected in the policy benefits line item dividends to
policyholders.
Net investment income decreased 2% when comparing 1999 to 1998. During
September and October of 1998, the national prime rate declined three
quarters of one percent (.75%). This decline reduced yields on
investments available in the marketplace in which UTG invests,
primarily fixed maturities. Approximately 10.5% of the total fixed
maturity portfolio will mature during 1999, with another 47.2% maturing
in the next two to five years. If interest rates remain at current
levels, investment income will continue to decline as these maturities
are reinvested at current market rates.
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<PAGE>
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 UTG currently has in force and will write in
the future. At the March 1999 Board of Directors meeting, the Board
lowered crediting rates one half percent on all products that could be
lowered. This adjustment was in response to continued declines in
interest rates in the marketplace. The change will result in interest
crediting reductions of approximately $600,000 per year. Policy
interest crediting rate changes become effective on an individual
policy basis on the next policy anniversary. Therefore, it will take a
full year from the time the change is determined for the full impact of
such change to be realized.
Expenses of UTG
Benefits claims and settlement expenses, decreased 10% in 1999 as
compared to 1998. The decrease in premium revenues from normal policy
terminations resulted in lower benefit reserve increases in the current
period. Dividends to policyholders decreased $659,000 from first
quarter 1998. The decrease is primarily the result of the permanent
premium reduction voted by the Boards of UG and USA on certain
participating policies. The dividend reduction is offset by a decline
in premium revenues. See above discussion in revenues of UTG for
additional information relative to this event. Policyholder benefits
increased due to an increase in death benefit claims of $518,000 from
the prior period. There is no single event that caused mortality to
increase. Policy claims vary from year to year and therefore,
fluctuations in mortality are to be expected and are not considered
unusual by management. At the March 1999 Board of Directors meeting,
the Board lowered crediting rates one half percent on all products that
could be lowered. This adjustment was in response to continued declines
in interest rates in the marketplace. The change will result in
interest crediting reductions of approximately $600,000 per year.
Policy interest crediting rate changes become effective on an
individual policy basis on the next policy anniversary. Therefore, it
will take a full year from the time the change is determined for the
full impact of such change to be realized.
Other expenses decreased 14% in 1999 compared to 1998. The decrease in
operating expenses is due to the decrease in salaries from normal
attrition. In most instances, the workload was absorbed into the
remaining workforce. First year sales production has shown a declining
trend in the last three years. UTG has tried a variety of solutions to
bolster new sales production including additional training, home office
assistance in providing leads on prospective clients and a review of
current product offerings. First year production in the first quarter
of 1999 resulted in cash received from new sales of only 54% of that
received in first quarter 1998, or $560,000 less. With continued
declining new business, costs associated with supporting new business,
primarily salary costs, as a percentage of new business received
continued to grow. In March of 1999, UTG determined it could no longer
continue to support these fixed costs in light of the new business
trend and no indication it would reverse any time soon. It was
determined these fixed costs should be reduced to be commensurate with
the level of new sales production activity currently being experienced.
As such, in March seven employees of UTG (approximately 8% of the total
staff), were terminated due to lack of business activity. An accrual of
$68,000 was established in first quarter 1999 for unpaid severances
provided the terminated employees. This action will result in future
expense savings of approximately $275,000 per year.
Net loss of UTG
UTG had a net loss of ($18,818) in 1999 compared to net income of
$31,311 in 1998. The decline is primarily related to increased death
claims partially offset by reduced policy reserve increases.
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(d) Net income
The Company recorded net income of $45,576 for the first quarter of 1999
compared to $105,177 for the same period one-year ago. The decline in net income
is the result of a combination of increased management fees to affiliates and a
decrease in income from earnings of UTG.
FINANCIAL CONDITION
UII owns 47% equity interest in UTG, which controls total assets of
approximately $342,000,000.
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 March 31, 1999,
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, 1998, UG
had a statutory gain from operations of $3,266,000. At December 31, 1998, UG's
statutory capital and surplus amounted to $15,281,000. 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 $426,994 in cash and cash equivalents. UII holds two mortgage
loans. Operating activities of UII produced cash flows of $57,848 and $29,635 in
the first quarter of 1999 and 1998, respectively. UII had uses of cash from
investing activities of $5,705 in the first quarter of 1998 compared to cash
provided by investing activities of $454 in 1999.
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 (now National City Bank Illinois/Michigan).
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. 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. At March 31,
1999, the conversion privilege expired, with no conversion privileges exercised.
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
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<PAGE>
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.
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 is being performed to monitor continuing compliance. By
addressing year 2000 compliance in a timely manner, compliance has been 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. At the time the decision to merge was made,
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 will
occur as soon as practical following regulatory approval.
ACCOUNTING AND LEGAL DEVELOPMENTS
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
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of SFAS 133 is not expected to have a material effect on our financial position
or results of operations, since UII has no derivative or hedging type
investments.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk relates, broadly, to changes in the value of financial instruments
that arise from adverse movements in interest rates, equity prices and foreign
exchange rates. UII is exposed principally to changes in interest rates which
affect its variable rate debt outstanding. UII's exposure to equity prices and
foreign currency exchange rates is immaterial.
Interest rate risk
UII has $902,300 of outstanding notes payable which have a variable rate of
interest tied to the current prime interest rate. Changes in the prime interest
rate affect the operating results of UII through the amount of interest expense
it must pay on this debt. UII has substantially mitigated these effects through
$850,000 of holdings of notes receivable from affiliates which also bear
interest rates tied to the current prime interest rate. Thus, as interest
expense increases or decreases from changes in the prime interest rate, interest
income also changes in a similar manner.
Tabular presentation
The following table provides information about UII's long term debt that is
sensitive to changes in interest rates. The table presents principal cash flows
and related weighted average interest rates by; expected maturity dates. UII has
no derivative financial instruments or interest rate swap contracts.
March 31, 1999
Expected maturity date
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 Thereafter Total Fair value
Long term debt
Fixed rate 0 0 0 0 0 0 0 0
Avg. int. rate 0 0 0 0 0 0 0
Variable rate 0 0 0 0 0 902,300 902,300 902,300
Avg. int. rate 0 0 0 0 0 8.75% 8.75%
</TABLE>
61
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SELECTED FINANCIAL DATA OF UTI
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
<TABLE>
1998 1997 1996 1995 1994
------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Premium income
net of reinsurance $ 26,396 $ 28,639 $ 30,944 $ 33,099 $ 35,145
Total revenues $ 40,885 $ 43,992 $ 46,976 $ 49,869 $ 49,207
Net loss* $ (679) $ (559) $ (938) $ (3,001) $ (1,624)
Net loss per share $ (0.39) $ (0.32) $ (0.50) $ (1.61) $ (0.90)
Total assets $ 343,824 $ 349,300 $ 355,474 $ 356,305 $ 360,258
Total long-term debt $ 9,529 $ 21,460 $ 19,574 $ 21,447 $ 22,053
Dividends paid per share NONE NONE NONE NONE NONE
* Includes equity earnings of investees.
</TABLE>
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UTI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 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 December 31,
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
- - ---------------------
1998 Compared to 1997
- - ---------------------
(a) Revenues
Premiums and policy fee revenues, net of reinsurance premiums and policy fees,
decreased 8% when comparing 1998 to 1997. 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 at a rate consistent with prior
experience.
Another cause for the decrease in premium revenues is related to the
uncertainties regarding the pending 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. In February 1998, an announcement was made regarding
negotiations with a different unrelated party, First Southern Funding LLC, for
the change in control of UTI. In November 1998, the change in control with this
second party was completed. 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. Although the transaction has resulted in some short
term negative impacts, management believes the long term potential to be gained
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from the increased capitalization and alliance with a banking group will result
in a stronger and more competitive position in the future.
New business production decreased significantly over the last two years. New
business production decreased 39% or approximately $2,063,000 when comparing
1998 to 1997. 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. The Company is currently in a position where it must
increase its new business writings or look at measures to reduce costs
associated with new business production to a level more in line with the current
level of production. In late 1998, A.M. Best Company, a leading insurance
industry rating agency, increased its rating assigned to UG, the Company's
largest insurance subsidiary, from a C++ to a B. This rating change should aid
in the agents selling ability although to what extent is currently unknown.
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 1998 and 1997 has been approximately 89.9% and 89.4%, respectively.
At the March 1998 Board of Directors meeting, the UG and USA Boards approved a
permanent premium reduction on certain of its participating products in force
commonly referred to as the initial contract and the presidents plan. The
premium reduction was generally 20% with 35% used on initial contract plans of
UG with original issue ages less than 56 years old. The dividends were also
reduced, and the net effect to the policyholder was a slightly lower net
premium. This change becomes effective with the 1999 policy anniversary and is
expected to result in a $2,000,000 decline in premiums and a comparable
reduction in dividends to policyholders in 1999 as compared to 1998. This action
was taken by the Boards to ensure these policyholders will be protected in
future periods from potential dividend reductions at least to the extent of the
permanent premium reduction amount. By reducing the required premium payment, it
makes replacement activity by other insurance companies more difficult as
ongoing premium payments are compared from the current policy to a potential
replacement policy.
Net investment income increased 1% when comparing 1998 to 1997. The increase in
investment income is the result of a combination of factors. The Company changed
banks during 1997, which provided an improvement in yield on cash balances. In
late 1998, the Company again transferred most of its cash balances to another
bank, First Southern National Bank, an affiliate of First Southern Funding, LLC.
This transfer resulted in an increase in earning rates on cash balances of
approximately one quarter of one percent (.25%) over those previously received.
During 1998, the Company directed a greater percentage of its investing activity
to mortgage loans. These new loans provide an investment yield approximately 3%
higher or $110,000 more than can be obtained from quality fixed maturities
currently available. During September and October of 1998, the national prime
rate declined three quarters of one percent (.75%). This decline reduced yields
on investments available in the marketplace in which the Company invests,
primarily fixed maturities. The decline had a more immediate impact on the
earnings rates of the Company's cash and cash equivalents balances.
The overall investment yields for 1998, 1997 and 1996, are 6.69%, 6.71% and
6.87%, respectively. Cash generated from the sales of universal life insurance
products, has been invested primarily in our fixed maturity 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. At the September 1998 Board of Directors meeting, the Board lowered
crediting rates one half percent on all products crediting 5.5% or more. This
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adjustment was in response to continued declines in interest rates in the market
place. The change affected approximately $60,000,000 of policy reserves and will
result in interest crediting reductions of $300,000 per year. Policy interest
crediting rate changes become effective on an individual policy basis on the
next policy anniversary. Therefore, it will take a full year from the time the
change is determined for the full impact of such change to be realized.
Realized investment losses were $1,119,000 and $279,000 in 1998 and 1997,
respectively. Approximately $440,000 of realized losses in 1998 is due to the
sale of real estate. During 1998 the Company re-evaluated its real estate
holdings, especially those properties acquired through acquisitions of other
companies and mortgage loan foreclosures, and determined it would be in the long
term interest of the Company to dispose of certain of these parcels. Parcels
targeted for sale were generally non-income or low income producing and located
in parts of the country where management has little other reason to travel to.
The disposal of these properties will free up management time to focus on the
properties that have a more viable long-term benefit to the Company. The Company
reduced its non-income producing investments $1,610,000 during 1998, as a result
of these actions. The Company incurred losses of $339,000 on the foreclosure of
three mortgage loans during the second quarter of 1998. The foreclosed
properties were sold before the end of 1998. As a result of these foreclosures,
management reassessed its remaining mortgage loan portfolio and determined an
allowance of $70,000 was appropriate to cover potential future losses in the
portfolio. 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 beween Fortis, Inc. and John Alden all outstanding common shares of
John Alden were acquired. The Company had other gains and losses during the
period that comprised the remaining amount reported but were immaterial on an
individual basis.
(b) Expenses
Life benefits, net of reinsurance benefits and claims, decreased 5% in 1998 as
compared to 1997. The most significant influence on the decrease in life
benefits was from a decline of $1,036,000 in death benefit claims. There was no
specific incident or event in 1998 or 1997 that caused this to occur. At the
September 1998 Board of Directors meeting, the Board lowered crediting rates one
half percent on all products crediting 5.5% or more. This adjustment was in
response to continued declines in interest rates in the market place. The change
affected approximately $60,000,000 of policy reserves and will result in
interest crediting reductions of $300,000 per year. This change had little
effect on the 1998 results, but will influence future periods. Policy interest
crediting rate changes become effective on an individual policy basis on the
next policy anniversary. Therefore, it will take a full year from the time the
change is determined for the full impact of such change to be realized.
Commissions and amortization of deferred policy acquisition costs increased 78%
in 1998 compared to 1997. At year-end 1998, the Company recorded an impairment
write off of deferred policy acquisition costs of $2,983,000. The impairment was
the result of the actuarial analysis of the recoverability of the asset based on
current trends and known events compared to assumptions used in the
establishment of the original asset. The recent decline in interest rates in the
marketplace combined with lower than expected new policy writings leaving the
Company with greater per policy costs as a result of fixed costs being spread
over fewer policies caused the impairment. Exclusive of the impairment write
down, commissions and amortization of deferred policy acquisition costs were
comparable to 1997 results. The write down will result in lower amortizations in
future periods, as there is now a smaller asset to amortize.
Amortization of cost of insurance acquired decreased 7% in 1998 compared to
1997. 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 25% of the
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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.
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 1998 and 1997 has been approximately 89.9% and 89.4%,
respectively. Persistency has shown a steady improvement over the past several
years.
Operating expenses increased 16% in 1998 compared to 1997. Included in operating
expenses in 1998 is $2,534,317 from the release of discounts associated with the
Company's notes payable. The Company's subordinated debt was issued at rates
considered favorable to the Company at time of issue, therefore the notes were
discounted to reflect an effective interest rate of 15%. With the payment of
part of this debt in November 1998, the unamortized discount was written off.
Management's plan to repay the remaining debt in a much shorter period of time
from required repayment resulted in the determination to write off the entire
remaining note discount. See information contained below in interest expense
analysis for further details regarding debt retirement. Excluding the note
discount write off, operating expenses decreased 12% attributable primarily to
reduced salary and employee benefit costs in 1998, as a result of natural
attrition.
Interest expense increased 21% in 1998 compared to 1997. Included in interest
expense in 1998, is the write off of unamortized note discounts of $341,852 from
the early retirement of debt in November 1998. At December 31, 1998, there were
no unamortized note discounts remaining on the balance sheet. In November 1998,
UTI received approximately $11,000,000 from the issuance of common stock to
First Southern Funding and its affiliates. These funds were used to retire
outside debt. Additionally, with the new capital and expectations of future
growth, management has formulated a plan to repay the remaining outside debt
within the next two years. At December 31, 1998, UTI had $9,529,138 in notes
payable. On March 1, 1999, First Southern acquired the $2,560,000 of UTI
convertible debt outstanding from the seven officers and employees who
previously held the notes. Pursuant to the terms of an agreement with First
Southern, this debt will be converted to equity by July 31, 2000. UII, an equity
investee of UTI, holds notes receivable from UTI and its subsidiaries of
$1,364,100. Upon the merger of UTI and UII, these notes would be eliminated in
consolidation. UII has $902,300 of outside debt which would be assumed by UTI in
a merger. This means there would be $6,507,338 of outside debt remaining to be
repaid. The Company believes this can be accomplished in the next two years
through dividends from the subsidiaries, namely dividends to FCC from UG and
from expected operating cashflows.
The provision for income taxes reflected a significant change from the same
period 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. In 1998, the
insurance company subsidiaries incurred taxable income for federal income tax
purposes which was offset through utilization of federal tax loss carryforwards.
Since these carryforwards had an allowance established against them for deferred
tax purposes, no corresponding expense was incurred in the financial statements.
Additionally, the Company incurred deferred tax credits of $2,050,709 from the
deferred policy acquisition costs impairment and the notes payable discounts
write offs.
(c) Net loss
The Company had a net loss of $679,000 in 1998 compared to a net loss of
$559,000 in 1997. During 1998, the deferred policy acquisition costs impairment
resulted in a net loss of $1,117,000 and the notes discount write offs resulted
in a net loss of $1,077,000. Exclusive of these two events, the Company would
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have reported net income of $1,515,000. Lower death benefit claims and reduced
operating expenses from 1997 results provided improvements to the 1998 results.
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 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 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. In February
1998, an announcement was made regarding negotiations with a different unrelated
party, First Southern Funding LLC, for the change in control of UTI. In November
1998, the change in control with this second party was completed. 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 6.71%, 6.87% and
6.08%, 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 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"
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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 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 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 report. The
decrease in amortization during the current period is a fluctuation due to the
expected future profits. Amortization of cost of insurance acquired is
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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 National City 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.
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 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, 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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The following table summarizes the Company's fixed maturities distribution at
December 31, 1998 and 1997 by ratings category as issued by Standard and Poor's,
a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
----------------------
1998 1997
---------- ----------
Investment Grade
AAA 38% 31%
AA 18% 14%
A 36% 46%
BBB 7% 9%
Below investment grade 1% 0%
---------- ----------
100% 100%
========== ==========
Mortgage loans increased 16% in 1998 as compared to 1997. During 1998, the
Company issued approximately $3,667,000 in new loans. In recent history, the
Company did not actively seek new mortgage loans. With the decline in interest
rates in the market place and an affiliation with a banking group, First
Southern, the Company determined the mortgage loan market was a strong
alternative to the much lower yielding fixed maturities available in the
marketplace. All mortgage loans held by the Company are first position loans.
The Company has $248,000 in mortgage loans, net of a $30,000 reserve allowance,
which are in default and in the process of foreclosure, this represents
approximately 2% of the total portfolio.
Investment real estate and real estate acquired in satisfaction of debt
decreased 8% in 1998 compared to 1997. During 1998 the Company re-evaluated its
real estate holdings, especially those properties acquired through acquisitions
of other companies and mortgage loan foreclosures, and determined it would be in
the long term interest of the Company to dispose of certain of these parcels.
Parcels targeted for sale were generally non-income or low income producing and
located in parts of the country where management has little other reason to
travel to. The disposal of these properties will free up management time to
focus on the properties that have a more viable long-term benefit to the
Company. Investment real estate holdings represent approximately 3% of the total
assets of the Company. Total investment real estate is separated into three
categories: Commercial 43%, Residential Development 42% and Foreclosed
Properties 15%.
Policy loans decreased 1% in 1998 compared to 1997. 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 40% in 1998 compared to 1997.
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 $892,000 in policy acquisition costs deferred, $397,000
in interest accretion and $2,582,000 in amortization in 1998. At year end 1998,
the Company recorded an impairment write off of deferred policy acquisition
costs of $2,983,000. The impairment was the result of the actuarial analysis of
the recoverability of the asset based on current trends and known events
compared to assumptions used in the establishment of the original asset. The
recent decline in interest rates in the marketplace combined with lower than
expected new policy writings leaving the Company with greater per policy costs
as a result of fixed costs being spread over fewer policies caused the
impairment.
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Cost of insurance acquired decreased 5% in 1998 compared to 1997. At December
31, 1998, cost of insurance acquired was $39,308,000 and amortization totaled
$2,215,000 for the year. 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 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 decreased 5% in 1998 compared to 1997. Policy liabilities and
accruals, which represents most of total liabilities remained relatively
unchanged from the prior year. The significant changes in total liabilities were
from deferred income taxes and notes payable.
Income taxes payable and deferred income taxes payable decreased 33% in 1998
compared to 1997. 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. The Company
released deferred taxes of $2,050,709 from the deferred policy acquisition costs
impairment and the notes payable discounts write offs. Federal income taxes are
discussed in more detail in Note 3 of the Consolidated Notes to the Financial
Statements.
Notes payable decreased 56% in 1998 compared to 1997. In November 1998, UTI
received approximately $11,000,000 from the issuance of common stock to First
Southern Funding and its affiliates. These funds were used to retire outside
debt. Additionally, with the new capital and expectations of future growth,
management has formulated a plan to repay the remaining outside debt within the
next two years. At December 31, 1998, UTI had $9,529,138 in notes payable. On
March 1, 1999, First Southern acquired the $2,560,000 of UTI convertible debt
outstanding from the seven officers and employees who previously held the notes.
Pursuant to the terms of an agreement with First Southern, this debt will be
converted to equity by July 31, 2000. UII, an equity investee of UTI, holds
notes receivable from UTI and its subsidiaries of $1,364,100. Upon the merger of
UTI and UII, these notes would be eliminated in consolidation. UII has $902,300
of outside debt which would be assumed by UTI in a merger. This means there
would be $6,507,338 of debt remaining to be repaid. The Company believes this
can be accomplished in the next two years through dividends from the
subsidiaries, namely dividends to FCC from UG and from expected operating
cashflows. The Company's long-term debt is discussed in more detail in Note 11
of the Notes to the Financial Statements.
(c) Shareholders' Equity
Total shareholders' equity increased 65% in 1998 compared to 1997. The increase
is attributable to the Company's issuance of common stock to First Southern
Funding LLC.
On November 20, 1998, First Southern Funding, LLC., 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
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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
acquired on the market, FSF and affiliates currently own 1,073,577 shares of UTI
common stock (43.1%) becoming the largest shareholder of UTI. Through the shares
acquired and options owned, FSF can ultimately own over 51% of UTI. 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 a bank that operates
out of 14 locations in central Kentucky.
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 December 31, 1998 and 1997, respectively.
Fixed maturities as a percentage of total invested assets were 82% as of
December 31, 1998 and 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 operating activities was $2,166,000, $23,000 and $3,140,000 in
1998, 1997 and 1996, respectively. Reporting regulations require cash inflows
and outflows from universal life insurance products to be shown as financing
activities when reporting on cash flows. The net cash provided by operating
activities plus policyholder contract deposits less policyholder contract
withdrawals equaled $5,244,000 in 1998, $3,412,000 in 1997 and $9,952,000 in
1996. Management utilizes this measurement of cash flows as an indicator of the
performance of the Company's insurance operations.
Cash provided by (used in) investing activities was $5,556,000, ($2,989,000) and
$15,808,000, for 1998, 1997 and 1996, respectively. The most significant aspect
of cash provided by (used in) investing activities are the fixed maturity
transactions. Fixed maturities account for 84%, 70% and 81% of the total cost of
investments acquired in 1998, 1997 and 1996, respectively. The net cash provided
by investing activities in 1996, is due to the fixed maturities sold in
conjunction with the coinsurance agreement with PALIC. 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 $2,551,000, $1,746,000
and ($14,150,000) for 1998, 1997 and 1996, respectively. The change between 1997
and 1996 is due to a coinsurance agreement with PALIC 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 14% in 1998 compared to 1997, and
decreased 20% in 1997 when compared to 1996. Policyholder contract withdrawals
has decreased 15% in 1998 compared to 1997, and decreased 6% in 1997 compared to
1996. The change in policyholder contract withdrawals is not attributable to any
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one significant event. Factors that influence policyholder contract withdrawals
are fluctuation of interest rates, competition and other economic factors.
At December 31, 1998, the Company had a total of $9,529,000 in long-term debt
outstanding. The debt structure is described in the following paragraphs.
In November 1998, UTI received approximately $11,000,000 from the issuance of
common stock to First Southern Funding and its affiliates. These funds were used
to retire outside debt. Additionally, with the new capital and expectations of
future growth, management has formulated a plan to repay the remaining outside
debt within the next two years. At December 31, 1998, UTI had $9,529,138 in
notes payable. On March 1, 1999, First Southern acquired the $2,560,000 of UTI
convertible debt outstanding from the seven officers and employees who
previously held the notes. Pursuant to the terms of an agreement with First
Southern, this debt will be converted to equity by July 31, 2000. UII, an equity
investee of UTI, holds notes receivable from UTI and its subsidiaries of
$1,364,100. Upon the merger of UTI and UII, these notes would be eliminated in
consolidation. UII has $902,300 of outside debt which would be assumed by UTI in
a merger. This means there would be $6,507,338 of debt remaining to be repaid.
The Company believes this can be accomplished in the next two years through
dividends from the subsidiaries, namely dividends to FCC from UG and from
expected operating cashflows.
The senior debt is through National City Bank (formerly First of America Bank)
and is subject to a credit agreement. As of December 31, 1998 the outstanding
principal balance of the senior debt is $100,000. 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 National City Bank from time to time as its "base lending rate".
The base rate at December 31, 1998 was 7.75% and has remained unchanged 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 23, 1998, the Company prepaid all but $100,000 of
principal. The remaining principal balance will be payable on the maturity date
and is being maintained to keep the Company's credit relationship with National
City Bank in place.
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, 1998 the outstanding
principal balance of the 10-year notes is $2,267,000 and the 20-year notes is
$3,252,000. 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.
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, 1998, the outstanding principal balance of the convertible notes is
$2,560,000. The notes bear interest at a rate of 1% over prime, currently at
7.75%, 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, 1998, the notes were convertible into 204,800 shares of UTI common stock
with no conversion privileges having been exercised. On March 1, 1999, First
Southern acquired the $2,560,000 of UTI convertible debt outstanding from the
seven officers and employees who previously held the notes. Pursuant to the
terms of an agreement with First Southern, this debt will be converted to equity
by July 31, 2000.
As of December 31, 1998 the Company has a total $26,378,000 of cash and cash
equivalents, short-term investments and investments held for sale in comparison
to $9,529,000 of notes payable. UTI and FCC service this debt through existing
cash balances and management fees received from the insurance subsidiaries. FCC
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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.
UTI is a holding company that has no day to day operations of its own. Funds
required to meet its expenses, generally costs associated with maintaining the
company in good standing with states in which it does business, 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, 1998,
substantially all of the consolidated shareholders equity represents net assets
of its subsidiaries and receivables from its subsidiaries. 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 subsequent intermediate company within the holding company structure paid a
dividend equal to the amount it received, UTI would receive 57% 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, 1998, UG
had a statutory gain from operations of $3,266,000. At December 31, 1998, UG's
statutory capital and surplus amounted to $15,281,000. 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.
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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, 1998, each of the insurance subsidiaries has a Ratio that is in
excess of 4, which is 400% 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.
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
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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 1998, 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. In February 1998, an announcement was made
regarding negotiations with a different unrelated party, First Southern Funding
LLC, for the change in control of UTI. In November 1998, the change in control
with this second party was completed. 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 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 Clinton Administration has recently proposed tax changes that would affect
the insurance industry. One proposal is to require recapture of untaxed profits
on policyholder surplus accounts. Between 1959 and 1983, stock life insurance
companies deferred tax on a portion of their profits. These untaxed profits were
added to a policyholders surplus account ("PSA"). In 1984, Congress precluded
life insurance companies from continuing to defer taxes on any future profits.
The Clinton Administration argues that there is no continuing justification for
permitting stock life insurance companies to defer tax on profits that were
earned between 1959 and 1983. Accordingly, the stock life companies would be
required to include in their gross income over ten years their PSA balances. The
second proposal modifies rules for capitalizing policy acquisition costs on the
grounds that life insurance companies generally only capitalize a fraction of
their actual policy acquisition costs. This modification would increase the
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current capitalization percentages. Either of these changes would be onerous to
the Company and to the insurance industry as a whole. The outcome and timing of
these proposals cannot be anticipated at this time
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.
Project results were recently approved by the NAIC with an implementation date
of January 1, 2001. Individual states in which the Company does business must
implement these new rules for them to become effective. Specific recommendations
have been set forth in papers issued by the NAIC. The NAIC continues to modify
and amend these papers. The Company is monitoring the process, and is not aware
of any new requirements that would result in a material financial impact on the
Company's financial position or results of operations. The Company will continue
to monitor this issue as changes and new proposals are made.
ACCOUNTING AND LEGAL DEVELOPMENTS
- - ---------------------------------
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 128 entitled Earnings per share, which is
effective for financial statements for fiscal years beginning after December 15,
1997. SFAS 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.
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 128 did not have an impact on the Company's
financial statement.
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 the Company 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
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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 the Company's 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
the Company's 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 the Company's financial
position or results of operations, since the Company has no derivative or
hedging type investments.
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 was completed by the end of the first quarter of 1998. Periodic
regression testing is being performed to monitor continuing compliance. By
addressing year 2000 compliance in a timely manner, compliance has been achieved
using existing staff and without significant impact on the Company operationally
or financially.
CHANGE IN CONTROL OF UNITED TRUST, INC.
- - ----------------------------------------
On November 20, 1998, First Southern Funding, LLC., 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
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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
acquired on the market, FSF and affiliates currently own 1,073,577 shares of UTI
common stock (43.1%) becoming the largest shareholder of UTI. Through the shares
acquired and options owned, FSF can ultimately own over 51% of UTI. 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 a bank that operates
out of 14 locations in central Kentucky.
This transaction provides the Company with increased opportunities. The
additional capitalization has enabled UTI to significantly reduce its outside
debt and has enhanced its ability to make future acquisitions through increased
borrowing power and financial strength. Many synergies exist between the Company
and First Southern Funding and its affiliates. The potential for cross selling
of services to each customer base is currently being explored. Legislation is
currently pending that would eliminate many of the barriers currently existing
between banks and insurance companies. Such alliances are already being formed
within the two industries. Management believes this transaction positions the
Company for continued growth and competitiveness into the future as the
financial industry changes.
PROPOSED MERGER
- - ---------------
On March 25, 1997, the Board of Directors of the Company and UII voted to
recommend to the shareholders a merger of the two companies. Under the Plan of
Merger, the Company would be the surviving entity issuing one share of its stock
for each share held by UII shareholders.
The Company owns 53% of United Trust Group, Inc., an insurance holding company,
and UII owns 47% of United Trust Group, Inc. Neither the Company nor UII had any
other significant holdings or business dealings at the time the merger was
recommended by the respective Boards of Directors. 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. Additionally, the merger
will further simplify the group's holding company system making it easier to
understand for outside parties including current investors, potential investors
and lenders.
A vote of the shareholders of the Company and UII regarding the proposed merger
is anticipated to occur sometime during the second quarter of 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR UTI FOR THE PERIOD ENDED MARCH 31, 1999
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 that 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 March 31, 1999.
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
- - ---------------------
First quarter 1999 compared to first quarter 1998
- - -------------------------------------------------
(a) Revenues
Premiums and policy fee revenues, net of reinsurance premiums and policy fees,
decreased 17% when comparing 1999 to 1998. 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.
During 1998, the Boards of UG and USA approved a permanent premium reduction on
certain of its participating products in force commonly referred to as the
initial contract and the presidents plan. The premium reduction was generally
20% with 35% used on initial contract plans of UG with original issue ages less
than 56 years old. The dividends were also reduced, and the net effect to the
policyholder was a slightly lower net premium. This change became effective with
the 1999 policy anniversary. This action was taken by the Boards to ensure these
policyholders will be protected in future periods from potential dividend
reductions at least to the extent of the permanent premium reduction amount. By
reducing the required premium payment, it makes replacement activity by other
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<PAGE>
insurance companies more difficult as ongoing premium payments are compared from
the current policy to a potential replacement policy. This premium reduction
accounted for approximately 12% of the total premium revenue decline. A
corresponding decline is reflected in the policy benefits line item dividends to
policyholders.
Net investment income decreased 2% when comparing 1999 to 1998. During September
and October of 1998, the national prime rate declined three quarters of one
percent (.75%). This decline reduced yields on investments available in the
marketplace in which the Company invests, primarily fixed maturities.
Approximately 10.5% of the total fixed maturity portfolio will mature during
1999, with another 47.2% maturing in the next two to five years. If interest
rates remain at current levels, investment income will continue to decline as
these maturities are reinvested at current market rates.
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 March 1999 Board of Directors meeting, the Board lowered
crediting rates one half percent on all products that could be lowered. This
adjustment was in response to continued declines in interest rates in the
marketplace. The change will result in interest crediting reductions of
approximately $600,000 per year. Policy interest crediting rate changes become
effective on an individual policy basis on the next policy anniversary.
Therefore, it will take a full year from the time the change is determined for
the full impact of such change to be realized.
(b) Expenses
Life benefits, net of reinsurance benefits and claims, are comparable in 1999 to
1998. Although the end results are similar, two events for offsetting amounts
were incurred in 1999, which differ from 1998 experience. The decrease in
premium revenues from normal policy terminations resulted in lower benefit
reserve increases in the current period. Policyholder benefits increased due to
an increase in death benefit claims of $518,000 from the prior period. There is
no single event that caused mortality to increase. Policy claims vary from year
to year and therefore, fluctuations in mortality are to be expected and are not
considered unusual by management. At the March 1999 Board of Directors meeting,
the Board lowered crediting rates one half percent on all products that could be
lowered. This adjustment was in response to continued declines in interest rates
in the marketplace. The change will result in interest crediting reductions of
approximately $600,000 per year. Policy interest crediting rate changes become
effective on an individual policy basis on the next policy anniversary.
Therefore, it will take a full year from the time the change is determined for
the full impact of such change to be realized.
Operating expenses decreased 7% in 1999 compared to 1998. The decrease in
operating expenses is due to the decrease in salaries from normal attrition. In
most instances, the workload was absorbed into the remaining workforce. First
year sales production has shown a declining trend in the last three years. The
Company has tried a variety of solutions to bolster new sales production
including additional training, home office assistance in providing leads on
prospective clients and a review of current product offerings. First year
production in the first quarter of 1999 resulted in cash received from new sales
of only 54% of that received in first quarter 1998, or $560,000 less. With
continued declining new business, costs associated with supporting new business,
primarily salary costs, as a percentage of new business received continued to
grow. In March of 1999, the Company determined it could no longer continue to
support these fixed costs in light of the new business trend and no indication
it would reverse any time soon. It was determined these fixed costs should be
reduced to be commensurate with the level of new sales production activity
currently being experienced. As such, in March seven employees of the Company
(approximately 8% of the total staff), were terminated due to lack of business
activity. An accrual of $68,000 was established in first quarter 1999 for unpaid
severances provided the terminated employees. This action will result in future
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expense savings of approximately $275,000 per year. Interest expense decreased
59% in 1999 compared to 1998. In November 1998, UTI received approximately
$11,000,000 from the issuance of common stock to First Southern Funding and its
affiliates. These funds were used to retire outside debt. Additionally, with the
new capital and expectations of future growth, management has formulated a plan
to repay the remaining outside debt within the next two years. At March 31,
1999, UTI had $9,529,138 in notes payable. On March 1, 1999, First Southern
acquired the $2,560,000 of UTI convertible debt outstanding from the seven
officers and employees who previously held the notes. Pursuant to the terms of
an agreement with First Southern, this debt will be converted to equity by July
31, 2000. UII, an equity investee of UTI, holds notes receivable from UTI and
its subsidiaries of $1,364,100. Upon the merger of UTI and UII, these notes
would be eliminated in consolidation. UII has $902,300 of outside debt that
would be assumed by UTI in a merger. This means there would be $6,507,338 of
outside debt remaining to be repaid. The Company believes this can be
accomplished in the next two years through dividends from the subsidiaries,
namely dividends to FCC from UG and from expected operating cashflows. In April
1999, FCC retired $2,030,000 of outside debt. This was accomplished through an
ordinary dividend from its subsidiary, UG of $2,000,000 and from operating cash
available.
(c) Net income
The Company had a net income of $132,461 in 1999 compared to $114,441 in 1998.
Lower interest expense costs from the retirement of outside debt and lower
policy reserve increases, partially offset by increased death claim experience
contributed to the improvement in earnings.
Financial Condition
- - -------------------
The financial condition of the Company has changed very little since December
31,1998. Total shareholder's equity increased approximately $102,000 as of March
31, 1999 compared to December 31, 1998.
Investments represent approximately 64% and 61% of total assets at March 31,
1999 and December 31, 1998, 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 March 31, 1999, 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. To
provide additional flexibility and liquidity, the Company has categorized all
fixed maturity investments acquired in the first quarter of 1999 as available
for sale. Securities originally classified as available for sale have since
matured, thus reducing the amount of securities carried in this category. It was
determined it would be in the Company's best financial interest to classify
these new purchases as available for sale to provide additional liquidity. All
of the fixed maturity acquisitions in the first quarter of 1999 were U.S.
government, government agency or Federal National Mortgage Association ("FNMA")
securities.
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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 6% and 8% as of March 31, 1999, and December 31, 1998,
respectively. Fixed maturities as a percentage of total invested assets were 81%
and 82% as of March 31, 1999 and December 31, 1998, respectively.
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. To provide
additional flexibility and liquidity, the Company has categorized all fixed
maturity investments acquired in the first quarter of 1999 as available for
sale. Securities originally classified as available for sale have since matured,
thus reducing the amount of securities carried in this category. It was
determined it would be in the Company's best financial interest to classify
these new purchases as available for sale to provide additional liquidity. All
of the fixed maturity acquisitions in the first quarter of 1999 were U.S.
government, government agency or Federal National Mortgage Association ("FNMA")
securities. By increasing the amount of investments carried in the available for
sale category, the Company can invest a larger percentage of its cash and cash
equivalents holdings in long term investments.
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 $(791,576) and $309,381 in
1999 and 1998, respectively. The net cash provided by (used in) operating
activities plus net policyholder contract deposits after the payment of
policyholder withdrawals equaled $(6,689) in 1999 and $1,891,265 in 1998.
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 $(4,466,286) and $7,007,600,
for 1999 and 1998, respectively. The most significant aspect of cash provided by
(used in) investing activities are the fixed maturity transactions. Fixed
maturities account for 69% and 90% of the total cost of investments acquired in
1999 and 1998, respectively. The Company has not directed its investable funds
to so-called "junk bonds" or derivative investments.
Net cash provided by financing activities was $784,887 and $1,555,357 for 1999
and 1998, respectively. Policyholder contract deposits decreased 8% in 1999
compared to 1998. Policyholder contract withdrawals has increased 15% in 1999
compared to 1998. During first quarter of 1999, the Company had a large annuity
contract surrender of approximately $400,000. Exclusive of this single policy
surrender, policyholder withdrawals were comparable to the previous year.
At March 31, 1999, the Company had a total of $9,529,000 in long-term debt
outstanding. The debt structure is described in the following paragraphs.
In November 1998, UTI received approximately $11,000,000 from the issuance of
common stock to First Southern Funding and its affiliates. These funds were used
to retire outside debt. Additionally, with the new capital and expectations of
future growth, management has formulated a plan to repay the remaining outside
debt within the next two years. At March 31, 1999, UTI had $9,529,138 in notes
payable. On March 1, 1999, First Southern acquired the $2,560,000 of UTI
convertible debt outstanding from the seven officers and employees who
previously held the notes. Pursuant to the terms of an agreement with First
Southern, this debt will be converted to equity by July 31, 2000. UII, an equity
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<PAGE>
investee of UTI, holds notes receivable from UTI and its subsidiaries of
$1,364,100. Upon the merger of UTI and UII, these notes would be eliminated in
consolidation. UII has $902,300 of outside debt that would be assumed by UTI in
a merger. This means there would be $6,507,338 of debt remaining to be repaid.
The Company believes this can be accomplished in the next two years through
dividends from the subsidiaries, namely dividends to FCC from UG and from
expected operating cashflows.
The senior debt is through National City Bank (formerly First of America Bank)
and is subject to a credit agreement. As of March 31, 1999 the outstanding
principal balance of the senior debt is $100,000. 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 National City Bank from time to time as its "base lending rate".
The base rate at March 31, 1999 was 7.75% and has remained unchanged through the
date of this filing. Interest is paid quarterly. The remaining principal balance
will be payable on the maturity date, May 8, 2005, and is being maintained to
keep the Company's credit relationship with National City Bank in place.
The subordinated debt was incurred June 16, 1992 as a part of an acquisition and
consists of 10 and 20 year notes. As of March 31, 1999 the outstanding principal
balance of the 10-year notes is $2,267,000 and the 20-year notes is $3,252,000.
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.
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, 1998, the outstanding principal balance of the convertible notes is
$2,560,000. The notes bear interest at a rate of 1% over prime, currently at
7.75%, 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 March 31,
1999, the notes were convertible into 204,800 shares of UTI common stock with no
conversion privileges having been exercised. On March 1, 1999, First Southern
acquired the $2,560,000 of UTI convertible debt outstanding from the seven
officers and employees who previously held the notes. Pursuant to the terms of
an agreement with First Southern, this debt will be converted to equity by July
31, 2000.
As of March 31, 1999 the Company has a total of $35,587,032 of cash and cash
equivalents, short-term investments and investments held for sale in comparison
to $9,529,138 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 March 31, 1999, 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.
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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, 1998, UG
had a statutory gain from operations of $3,266,000. At December 31, 1998, UG's
statutory capital and surplus amounted to $15,281,000. 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 is being performed to monitor continuing compliance. By
addressing year 2000 compliance in a timely manner, compliance has been 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. At the time the decision to merge was made,
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.
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A vote of the shareholders of UTI and UII regarding the proposed merger will
occur as soon as practical following regulatory approval.
Accounting and Legal Developments
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- - -----------------------------------------------------------
Market risk relates, broadly, to changes in the value of financial instruments
that arise from adverse movements in interest rates, equity prices and foreign
exchange rates. The Company is exposed principally to changes in interest rates
which affect the market prices of its fixed maturities available for sale and
its variable rate debt outstanding. The Company's exposure to equity prices and
foreign currency exchange rates is immaterial.
Interest rate risk
The Company could experience economic losses if it were required to liquidate
fixed income securities available for sale during periods of rising and/or
volatile interest rates. The Company attempts to mitigate its exposure to
adverse interest rate movements through a staggering of the maturities of its
fixed maturity investments and through maintaining cash and other short term
investments to assure sufficient liquidity to meet its obligations and to
address reinvestment risk considerations.
Tabular presentation
The following table provides information about the Company's long term debt that
is sensitive to changes in interest rates. The table presents principal cash
flows and related weighted average interest rates by; expected maturity dates.
The Company has no derivative financial instruments or interest rate swap
contracts.
March 31, 1999
Expected maturity date
<TABLE>
1999 2000 2001 2002 2003 Thereafter Total Fair value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long term debt
Fixed rate 226,714 226,714 226,714 1,586,925 0 3,752,071 6,019,138 5,921,363
Avg. int. rate 7.50% 7.50% 7.50% 7.50% 0 8.40% 8.06%
Variable rate 150,000 0 0 0 0 3,360,000 3,510,000 3,510,000
Avg. int. rate 8.75% 0 0 0 0 8.74% 8.74%
</TABLE>
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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 $986,000 for UTI, $329,000 for FCC, and $387,000
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 December 31, 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
$10,525,189. The pro forma combined capitalization is based on the exchange
ratio of one share of UTI Common Stock for each share of UII Common Stock
assumes that no stockholder dissents and exercises his rights of appraisal. The
table should be read in conjunction with the financial statements and pro forma
financial statements and related notes of UTI and UII. (* inapplicable).
<TABLE>
Outstanding at
March 31, 1999
---------------- Pro Forma
UTI UII Combined
--- --- --------
<S> <C> <C> <C>
Short-term debt 0 0 0
Long-term debt, less current portion 9,529,000 902,000 9,067,000
Shareholders' equity:
Common Stock:
UTI, no par value (.02 stated value) 50,000 * 66,000
UII, no par value ($.033 stated value) * 46,000 *
Paid-in Additional Capital 27,403,000 15,242,000 37,873,000
Accumulated other comprehensive income (308,000) (201,000) (308,000)
Accumulated Deficit (1,682,000) (3,340,000) (1,682,000)
Total Shareholders' Equity 25,463,000 11,747,000 35,949,000
Total Capitalization $25,463,000 $11,747,000 $35,949,000
</TABLE>
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UTI AND UII
PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL INFORMATION - UNAUDITED
The March 31, 1999 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.
88
<PAGE>
UNITED TRUST, INC.
UNITED INCOME, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
as of March 31, 1999
(Unaudited)
<TABLE>
UTI UII Merger
ASSETS March 31 March 31 Adjustments Pro Forma
<S> <C> <C> <C> <C>
Investments:
Fixed maturities at amortized cost $ 166,679,573 $ 0 (8) 998,575 $167,678,148
Investments held for sale:
Fixed maturities,at market 11,360,356 0 11,360,356
Equity securities, at market 2,274,398 0 2,274,398
Mortgage loans on real estate at amortized cost 11,262,436 169,663 11,432,099
Investment real estate, at cost, net of
accumulated depreciation 9,054,432 0 9,054,432
Real estate acquired in satisfaction of debt 1,550,000 0 1,550,000
Policy loans 14,080,618 0 14,080,618
Other long-term investments 906,278 1,364,100 (7) (1,364,100) 906,278
Short term investments 2,321,188 0 2,321,188
219,489,279 1,533,763 (365,525) 220,657,517
Cash and cash equivalents 21,905,488 426,994 22,332,482
Investment in affiliates 5,559,934 10,681,758(1)(2)(5)(16,241,692) 0
Accrued investment income 3,760,491 14,634 3,775,125
Reinsurance receivables:
Future policy benefits 36,762,282 0 36,762,282
Policy claims and other benefits 3,719,988 0 3,719,988
Cost of insurance acquired 38,812,032 0 (8) 1,666,808 40,478,840
Deferred policy acquisition costs 5,952,885 0 (8) (1,666,808) 4,286,077
Costs in excess of net assets purchased,
net of accumulated amortization 2,619,710 0 (8) (1,302,262) 1,317,448
Property and equipment,
net of accumulated depreciation 3,133,997 339 3,134,336
Receivable from affiliate, net 106 0 (6) (106) 0
Other assets 619,960 0 619,960
=========== =========== =========== ===========
Total assets $ 342,336,152 $ 12,657,488 $ (17,909,585) $ 337,084,055
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 247,528,307 $ 0 $ $ 247,528,307
Policy claims and benefits payable 2,303,835 0 2,303,835
Other policyholder funds 2,036,924 0 2,036,924
Dividend and endowment accumulations 15,002,280 0 15,002,280
Income taxes payable:
Current 204,710 0 204,710
Deferred 9,258,170 0 (8) 349,501 9,607,671
Notes payable 9,529,138 902,300 (7) (1,364,100) 9,067,338
Indebtedness to (from) affiliates, net 0 106 (6) (106) 0
Other liabilities 5,607,438 7,928 5,615,366
Total liabilities 291,470,802 910,334 (1,014,705) 291,366,431
Minority interests in consolidated subsidiaries 25,402,171 0 (3) (15,633,780) 9,768,391
Shareholders' equity:
Common stock - no par value, stated value $.02 per share. 49,809 45,934 (4)(5)(8) (29,521) 66,222
Additional paid-in capital 27,403,172 15,242,365 (4)(5)(8)(4,772,724) 37,872,813
Accumulated other comprehensive income (307,445) (201,021)(4) 201,021 (307,445)
Accumulated deficit (1,682,357) (3,340,124)(4) 3,340,124 (1,682,357)
Total shareholders' equity 25,463,179 11,747,154 (1,261,100) 35,949,233
=========== =========== =========== ===========
Total liabilities and shareholders' equity $ 342,336,152 $ 12,657,488 $ (17,909,585) $ 337,084,055
=========== =========== =========== ===========
89
</TABLE>
<PAGE>
UNITED TRUST, INC.
UNITED INCOME, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended March 31, 1999
<TABLE>
(Unaudited)
UTI UII Merger
<S> <C> <C> <C> <C>
March 31 March 31 Adjustments Pro Forma
Revenues:
Premiums and policy fees $ 7,047,130 $ 0 $ $ 7,047,130
Reinsurance premiums and policy fees (1,039,619) 0 (1,039,619)
Net investment income 3,640,387 36,395 (3)(7) (90,723) 3,586,059
Realized investment gains and (losses), net 16,343 0 16,343
Other income 170,870 239,854 (1),(2) (390,616) 20,108
9,835,111 276,249 (481,339) 9,630,021
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 6,157,767 0 6,157,767
Reinsurance benefits and claims (745,245) 0 (745,245)
Annuity 345,578 0 345,578
Dividends to policyholders 356,979 0 356,979
Commissions and amortization of deferred policy
acquisition costs 870,360 0 (7) (114,146) 756,214
Amortization of cost of insurance acquired 495,928 0 (7) 114,146 610,074
Operating expenses 2,080,905 215,009 (1)(2)(7) (434,025) 1,861,889
Interest expense 197,877 19,738 (3) (28,312) 189,303
9,760,149 234,747 (462,337) 9,532,559
Loss before income taxes, minority interest
and equity in loss of investees 74,962 41,502 (19,002) 97,462
Income tax credit 60,003 0 (7) 21,844 81,847
Minority interest in loss (income)
of consolidated subsidiaries (21,029) 0 (6) 8,844 (12,185)
Equity in earnings of investees 18,525 4,074 (4),(5) (22,599) 0
============= ============= ============= =============
Net income $ 132,461 $ 45,576 $ (10,913) $ 167,124
============= ============= ============= =============
Basic earnings per share from continuing
operations and net income $ 0.05 $ 0.03 $ 0.05
============= ============= =============
Diluted earnings per share from continuing
operations and net income $ 0.07 $ 0.03 $ 0.06
============= ============= =============
Basic weighted average shares outstanding 2,490,438 1,391,919 3,311,083
============= ============= =============
Diluted weighted average shares outstanding 2,696,800 1,392,150 3,517,676
============= ============= =============
</TABLE>
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<PAGE>
UNITED TRUST, INC.
UNITED INCOME, INC .
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
<TABLE>
UTI UII Adjustments Pro Forma
<S> <C> <C> <C> <C>
Revenues:
Premiums and policy fees $ 30,938,609 $ 0 $ $ 30,938,609
Reinsurance premiums and policy fees (4,542,532) 0 (4,542,532)
Net investment income 15,042,287 133,025 (3)(7) (332,961) 14,842,351
Realized investment gains and (losses), net (1,119,156) 0 (1,119,156)
Other income 566,192 901,898 (1),(2) (1,336,552) 131,538
40,885,400 1,034,923 (1,669,513) 40,250,810
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 23,078,145 0 23,078,145
Reinsurance benefits and claims (2,499,394) 0 (2,499,394)
Annuity 1,462,385 0 1,462,385
Dividends to policyholders 3,431,238 0 3,431,238
Commissions and amortization of deferred
policy acquisition costs 6,450,529 0 (7) (611,848) 5,838,681
Amortization of cost of insurance acquired 2,214,928 0 (7) 611,848 2,826,776
Operating expenses 10,665,976 581,603 (1)(2)(7) (1,379,961) 9,867,618
Interest expense 2,198,773 85,155 (3) (83,317) 2,200,611
47,002,580 666,758 (1,463,278) 46,206,060
Loss before income taxes, minority interest
and equity in loss of investees (6,117,180) 368,165 (206,235) (5,955,250)
Credit for income taxes 4,624,032 0 (7) 87,375 4,711,407
Minority interest in loss
of consolidated subsidiaries 835,181 0 (6) (421,122) 414,059
Equity in loss of investees (21,525) (421,122)(4),(5) 442,647 0
-------------- -------------- --------------- --------------
Net loss $ (679,492) $ (52,957) $ (97,335) $ (829,784)
============== ============== =============== ==============
Basic loss per share from continuing
operations and net loss $ (0.39) $ (0.04) $ (0.33)
============== ============== ==============
Diluted loss per share from continuing
operations and net loss $ (0.39) $ (0.04) $ (0.33)
============== ============== ==============
Basic weighted average shares outstanding 1,726,843 1,391,919 2,547,488
============== ============== ==============
Diluted weighted average shares outstanding 1,726,843 1,391,919 2,547,488
============== ============== ==============
</TABLE>
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<PAGE>
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 $10,642,623
2. Eliminate UTI investment in UII of $5,559,934
3. Eliminate minority interest liability for UII ownership of UTG of
$15,633,780
4. Eliminate UII equity accounts:
Common stock $ 45,934
Additional paid in capital $ 15,242,365
Accumulated other comprehensive income $ (201,021)
Accumulated deficit $ (3,340,124)
5. Record as treasury shares 5,508 shares of UTI stock owned by UII
Common stock $ 110
Additional paid in capital $ 39,025
6. Reclassify due to/due from affiliate of 106
7. Eliminate UII notes receivable from affiliates of $1,364,100
8. To record the issuance of 826,153 shares of UTI common stock to
the shareholders of UII at a cost of $10,525,189 and the
adjustment in basis of balance sheet items from historic
consolidated basis. Value was determined using the average price
of UTI shares issued on November 20, 1998 in a separate
transaction with First Southern Funding LLC, an outside third
party. ($12.74 per share).
Common stock $ 16,523
Additional paid in capital $ 10,508,666
Non-UTI shareholders of UII own approximately 28% of UTG. The purchase price of
$10,525,189 was allocated to 28% of each balance sheet item of UTG adjusted to
its estimated fair value and allocated to 100% of each balance sheet item of
UII, excepting its ownership of UTG, adjusted to its estimated fair value.
The purchase price of $10,525,189 is comprised of the following components:
Investments $ 62,625,236
Cash and cash equivalents 6,334,297
Accrued investment income 1,061,516
Reinsurance receivables 11,335,036
Cost of insurance acquired 13,468,711
Costs in excess of net assets purchased 1,692,491
Property and equipment 874,904
Other assets 431,897
-------------
Total assets 97,824,088
Policy liabilities and accruals (74,723,977)
Income taxes payable-current and deferred (2,394,659)
Notes payable (5,818,955)
Other liabilities (1,626,159)
Minority interests (2,735,149)
-------------
Net purchase price (10,525,189)
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<PAGE>
UTI/UII Pro-forma Merger
Income Statement Elimination Entries
03/31/99
B. The pro forma statement of operations for the period ended March 31, 1999
reflects the following adjustments:
1. Eliminate management fee UII receives from USA of $225,385
2. Eliminate management fee UII pays to UTI Consolidated affiliates of
$165,231
3. Eliminate intercompany interest paid to UII by UTI Consolidated affiliates
of $28,312
4. Eliminate UTI equity in income of UII of $18,525
5. Eliminate UII equity in income of UTG of $4,074
6. Eliminate minority interest in loss of UTG established for UII ownership of
$8,844
7. Record amortization effects from basis adjustment differences.
Net investment income (62,411)
Amort of deferred policy acquisition costs (114,146)
Amort of cost of insurance acquired 114,146
Operating expenses (43,409)
Income taxes (21,844)
Purchase adjustments include an adjustment to market of fixed
maturities of $998,575, which is amortized over the remaining life of
the assets. This adjustment further includes effects on deferred income
taxes.
Operating expenses is comprised of the amortization of the
negative goodwill established in the purchase adjustments and is being
amortized over a 30 year period, which is consistent with the remaining
life of the goodwill already existing on the balance sheet.
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<PAGE>
UTI/UII Pro-forma Merger
Income Statement Elimination Entries
12/31/98
C. The pro forma statement of operations for the year ended December 31, 1998
reflects the following adjustments:
1. Eliminate management fee UII receives from USA of $835,345
2. Eliminate management fee UII pays to UTI Consolidated affiliates of
$501,207
3. Eliminate intercompany interest paid to UII by UTI Consolidated affiliates
of $83,317
4. Eliminate UTI equity in loss of UII of $21,525
5. Eliminate UII equity in loss of UTG of $421,122
6. Eliminate minority interest in loss of UTG established for UII ownership of
$421,122
7. Record amortization effects from basis adjustment differences.
Net investment income (249,644)
Amort of deferred policy acquisition costs (611,848)
Amort of cost of insurance acquired 611,848
Operating expenses (43,409)
Income taxes (87,375)
Purchase adjustments include an adjustment to market of fixed
maturities of $998,575, which is amortized over the remaining life of
the assets. This adjustment further includes effects on deferred income
taxes.
Operating expenses is comprised of the amortization of the
negative goodwill established in the purchase adjustments and is being
amortized over a 30 year period, which is consistent with the remaining
life of the goodwill already existing on the balance sheet.
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<PAGE>
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
1998
First quarter 8.000 10.000
Second quarter 8.625 10.375
Third quarter 6.500 8.875
Fourth quarter 6.500 8.125
BID
PERIOD LOW HIGH
1997
First quarter 3.750 5.625
Second quarter 4.625 5.250
Third quarter 9.250 9.500
Fourth quarter 8.000 8.000
Current Market Makers are:
Knight Securities L.P. J.J.B. Hilliard, W.L. Lyons
800-222-4910 800-627-3557
Fox-Pitt, Kelton, Inc.
800-367-5528
The Company has no current plans to pay dividends on its common stock and
intends to retain all earnings for investment in and growth of the Company's
business. The payment of future dividends, if any, will be determined by the
Board of Directors in light of existing conditions, including the Company's
earnings, financial condition, business conditions and other factors deemed
relevant by the Board of Directors. See Note 2 in the accompanying consolidated
financial statements for information regarding dividend restrictions.
Number of Common Shareholders as of March 11, 1999 is 5,166.
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<PAGE>
BUSINESS OF UII
FORWARD-LOOKING INFORMATION
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 those projected in forward-looking statements. Additional information
concerning factors that could cause actual results to differ from those in the
forward-looking statements is contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
OVERVIEW
United Income, Inc. (the "Registrant") was incorporated in 1987 under the laws
of the State of Ohio to serve as an insurance holding company. The Registrant
and its affiliates (the "Company") have only one significant industry segment -
insurance. The Company's dominant business is individual life insurance which
includes the servicing of existing insurance business in force, the solicitation
of new individual life insurance, and the acquisition of other companies in the
insurance business.
At December 31, 1998, the affiliates of the Registrant were as depicted on the
following organizational chart:
ORGANIZATIONAL CHART
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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<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 the insurance 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.
HISTORY
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 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. Additionally, the merger will further
simplify the group's holding company system making it easier to understand for
outside parties, including current investors, potential investors and lenders. A
vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the second quarter of 1999.
On November 20, 1998, First Southern Funding, LLC., 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.
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 above transactions, and together with shares of UTI acquired in
the market, FSF and affiliates own 1,073,577 shares of UTI common stock (43.1%)
becoming the largest shareholder of UTI. Through the shares acquired and options
owned, FSF can ultimately own over 51% of UTI. 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 a bank that operates out of 14 locations
in central Kentucky.
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<PAGE>
This transaction provides the Company with increased opportunities. The
additional capitalization has enabled UTI to significantly reduce its outside
debt and has enhanced its ability to make future acquisitions through increased
borrowing power and financial strength. Many synergies exist between the Company
and First Southern Funding and its affiliates. The potential for cross selling
of services to each customer base is currently being explored. Legislation is
currently pending that would eliminate many of the barriers currently existing
between banks and insurance companies. Such alliances are already being formed
within the two industries. Management believes this transaction positions the
Company for continued growth and competitiveness into the future as the
financial industry changes.
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 5.5% 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 early 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% 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 credited 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 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. Interest sensitive products including universal life
and excess interest whole life ("fixed premium UL") account for 50% of the
insurance in force. Approximately 34% of the insurance in force is participating
business, which represents policies under which the policyowner shares in the
insurance companies statutory divisible surplus. The Company's average
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<PAGE>
persistency rate for its policies in force for 1998 and 1997 has been 89.9% and
89.4%, 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. No
individual sales agent accounted for over 10% of the Company's premium volume in
1998. The Company's sales agents do not have the power to bind the Company.
Marketing is based on a referral network of community leaders and shareholders
of UII and UTI. Recruiting of sales agents is also based on the same referral
network. New sales are marketed by UG and USA through their agency forces using
prepared presentation materials and personal computer illustrations when
appropriate. Current marketing efforts are primarily focused on the Midwest
region.
USA is licensed in Illinois, Indiana and Ohio. During 1998, Ohio accounted for
96% of USA's direct premiums collected.
ABE is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and Missouri.
During 1998, Illinois and Indiana accounted for 45% and 33%, 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 1998, West Virginia accounted for 96% 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 1998, Illinois
accounted for 32%, and Ohio accounted for 12% of direct premiums collected. No
other state accounted for more than 7% of direct premiums collected in 1998.
In 1998, $35,899,905 of total direct premium was collected by USA, ABE, APPL and
UG. Ohio accounted for 32%, Illinois accounted for 21%, and West Virginia
accounted for 10% of total direct premiums collected.
New business production has decreased 43% from 1996 to 1997 and 39% from 1997 to
1998. 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. On
November 20, 1998, UTI closed on a transaction with First Southern Funding, LLC
in which First Southern became the largest shareholder of UTI. These events, and
the uncertainty surrounding each event, have hurt the insurance companies'
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<PAGE>
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.
The Company is currently in a position where it must increase its new business
writings or look at measures to reduce costs associated with new business
production to a level more in line with the current level of production. In late
1998, A.M. Best Company, a leading insurance industry rating agency, increased
two levels its rating assigned to UG, the Company's largest insurance
subsidiary, from a C++ to a B. This rating change should aid in the agents
selling ability although to what extent is currently unknown.
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 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
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of related policy account balances. Interest crediting rates for universal life
and interest sensitive products range from 4.5% to 5.5% in 1998 and 5.0% to 6.0%
in 1997 and 1996.
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, 1998, the Company had insurance in
force of $3.536 billion of which approximately $924 million 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 of UTG as of December 31, 1998.
INVESTMENTS
At December 31, 1998, substantially all of the assets of UII represent
investments in or receivables from affiliates. UII does own two mortgage loans
as of December 31, 1998. The mortgage loans are 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. 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.
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. 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 6 in the Notes to the Financial Statements), and payment of
dividends (see Note 2 in 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 1998, 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. In February 1998, an announcement was made
regarding negotiations with a different unrelated party, First Southern Funding
LLC, for the change in control of UTI. In November 1998, the change in control
with this second party was completed. Please refer to the Notes to the 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.
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, 1998, each of the insurance subsidiaries has a Ratio that is in
excess of 4, which is 400% of the authorized control level; accordingly, the
insurance subsidiaries 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. 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
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this time, but the Company will continue to monitor developments in order to
respond to any opportunities or increased competition that may occur.
The Clinton Administration has recently proposed tax changes that would affect
the insurance industry. One proposal is to require recapture of untaxed profits
on policyholder surplus accounts. Between 1959 and 1983, stock life insurance
companies deferred tax on a portion of their profits. These untaxed profits were
added to a policyholders surplus account ("PSA"). In 1984, Congress precluded
life insurance companies from continuing to defer taxes on any future profits.
The Clinton Administration argues that there is no continuing justification for
permitting stock life insurance companies to defer tax on profits that were
earned between 1959 and 1983. Accordingly, the stock life companies would be
required to include in their gross income over ten years their PSA balances. The
second proposal modifies rules for capitalizing policy acquisition costs on the
grounds that life insurance companies generally only capitalize a fraction of
their actual policy acquisition costs. This modification would increase the
current capitalization percentages. Either of these changes would be onerous to
the Company and to the insurance industry as a whole. The outcome and timing of
these proposals cannot be anticipated at this time.
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.
Project results were recently approved by the NAIC with an implementation date
of January 1, 2001. Individual states in which the Company does business must
implement these new rules for them to become effective. Specific recommendations
have been set forth in papers issued by the NAIC. The NAIC continues to modify
and amend these papers. The Company is monitoring the process, and is not aware
of any new requirements that would result in a material financial impact on the
Company's financial position or results of operations. The Company will continue
to monitor this issue as changes and new proposals are made.
EMPLOYEES
UII has no employees of its own. There are approximately 90 persons who are
employed by 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 UII's pro
rata share of building taxes, operating expenses and management expenses. Under
the current lease agreement, UII will pay a minimum of $18,000 through the
remaining term of the lease. The lease contains no renewal or purchase option
clause. The leased space cannot be sublet without written approval of lessor.
Rent expense for 1998, 1997 and 1996 was approximately $36,000, $65,000 and
$61,000, respectively.
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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 UII's liabilities. Management is of the opinion
that the settlement of those actions will not have a material adverse effect on
UII's financial position or results of operations.
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BUSINESS OF UTI
FORWARD-LOOKING INFORMATION
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 those projected in forward-looking statements. Additional information
concerning factors that could cause actual results to differ from those in the
forward-looking statements is contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
OVERVIEW
United Trust, Inc. (the "Registrant") was incorporated in 1984, under the laws
of the State of Illinois to serve as an insurance holding company. The
Registrant and its subsidiaries (the "Company") have only one significant
industry segment - insurance. The Company's dominant business is individual life
insurance which includes the servicing of existing insurance business in force,
the solicitation of new individual life insurance, and the acquisition of other
companies in the insurance business.
At December 31, 1998, significant majority-owned subsidiaries and affiliates of
the Registrant were as depicted on the following organizational chart:
ORGANIZATIONAL CHART
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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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 the insurance 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.
HISTORY
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, including dissolution of
intermediate holding companies and mergers of several life insurance companies.
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 had 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. Additionally, the merger will further
simplify the group's holding company system making it easier to understand for
outside parties, including current investors, potential investors and lenders. A
vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the second quarter of 1999.
On November 20, 1998, First Southern Funding, LLC., 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.
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
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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 above transactions, and together with shares of UTI acquired in
the market, FSF and affiliates own 1,073,577 shares of UTI common stock (43.1%)
becoming the largest shareholder of UTI. Through the shares acquired and options
owned, FSF can ultimately own over 51% of UTI. 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 a bank that operates out of 14 locations
in central Kentucky.
This transaction provides the Company with increased opportunities. The
additional capitalization has enabled UTI to significantly reduce its outside
debt and has enhanced its ability to make future acquisitions through increased
borrowing power and financial strength. Many synergies exist between the Company
and First Southern Funding and its affiliates. The potential for cross selling
of services to each customer base is currently being explored. Legislation is
currently pending that would eliminate many of the barriers currently existing
between banks and insurance companies. Such alliances are already being formed
within the two industries. Management believes this transaction positions the
Company for continued growth and competitiveness into the future as the
financial industry changes.
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 5.5% 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 early 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% 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 credited 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 subsidiaries.
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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. Interest sensitive products including universal life
and excess interest whole life ("fixed premium UL") account for 50% of the
insurance in force. Approximately 34% of the insurance in force is participating
business, which represents policies under which the policyowner shares in the
insurance companies statutory divisible surplus. The Company's average
persistency rate for its policies in force for 1998 and 1997 has been 89.9% and
89.4%, 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. No
individual sales agent accounted for over 10% of the Company's premium volume in
1998. The Company's sales agents do not have the power to bind the Company.
Marketing is based on a referral network of community leaders and shareholders
of UII and UTI. Recruiting of sales agents is also based on the same referral
network. New sales are marketed by UG and USA through their agency forces using
prepared presentation materials and personal computer illustrations when
appropriate. Current marketing efforts are primarily focused on the Midwest
region.
USA is licensed in Illinois, Indiana and Ohio. During 1998, Ohio accounted for
96% of USA's direct premiums collected.
ABE is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and Missouri.
During 1998, Illinois and Indiana accounted for 45% and 33%, 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 1998, West Virginia accounted for 96% 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 1998, Illinois
accounted for 32%, and Ohio accounted for 12% of direct premiums collected. No
other state accounted for more than 7% of direct premiums collected in 1998.
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In 1998 $35,899,905 of total direct premium was collected by USA, ABE, APPL and
UG. Ohio accounted for 32%, Illinois accounted for 21%, and West Virginia
accounted for 10% of total direct premiums collected.
New business production has decreased 43% from 1996 to 1997 and 39% from 1997 to
1998. 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. On
November 20, 1998, UTI closed on a transaction with First Southern Funding, LLC
in which First Southern became the largest shareholder of UTI. These events, and
the uncertainty surrounding each 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.
The Company is currently in a position where it must increase its new business
writings or look at measures to reduce costs associated with new business
production to a level more in line with the current level of production. In late
1998, A.M. Best Company, a leading insurance industry rating agency, increased
its rating assigned to UG, the Company's largest insurance subsidiary, from a
C++ to a B. This rating change should aid in the agents selling ability although
to what extent is currently unknown.
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 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
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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 4.5% to 5.5% in 1998 and 5.0% to 6.0%
in 1997 and 1996.
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, 1998, the Company had insurance in
force of $3.536 billion of which approximately $924 million 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, 1998.
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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 1998,
1997 and 1996 was as follows:
Shown in thousands
--------------------------------------------------------
1998 1997 1996
Premiums Premiums Premiums
Earned Earned Earned
---------------- ---------------- ----------------
Direct $ 30,919 $ 33,374 $ 35,891
Assumed 20 0 0
Ceded (4,543) (4,735) (4,947)
---------------- ---------------- ----------------
Net premiums $ 26,396 $ 28,639 $ 30,944
================ ================ ================
INVESTMENTS
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.
<TABLE>
December 31,
----------------------------------------------------------
1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
Fixed maturities and fixed maturities
held for sale $ 11,981,660 $ 12,677,348 $ 13,326,312
Equity securities 92,196 87,211 88,661
Mortgage loans 859,543 802,123 1,047,461
Real estate 842,724 745,502 794,844
Policy loans 984,761 976,064 1,121,538
Other long-term investments 62,477 64,232 89,321
Short-term investments 29,907 70,624 17,664
Cash 1,235,888 632,254 605,549
--------------- ---------------- ----------------
Total consolidated investment income 16,089,156 16,055,358 17,091,350
Investment expenses (1,046,869) (1,198,061) (1,222,903)
---------------- --------------- ----------------
Consolidated net investment income $ 15,042,287 $ 14,857,297 $ 15,868,447
=============== ================ ================
</TABLE>
At December 31, 1998, the Company had a total of $4,187,000 of investments,
comprised of $3,152,000 in real estate, $968,000 in equity securities and
$66,000 in other invested assets, which did not produce income during 1998.
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The following table summarizes the Company's fixed maturities distribution at
December 31, 1998 and 1997 by ratings category as issued by Standard and Poor's,
a leading ratings analyst.
<PAGE>
Fixed Maturities
Rating % of Portfolio
----------------------
1998 1997
---------- ----------
Investment Grade
AAA 38% 31%
AA 18% 14%
A 36% 46%
BBB 7% 9%
Below investment grade 1% 0%
---------- ----------
100% 100%
========== ==========
The following table summarizes the Company's fixed maturities and fixed
maturities held for sale by major classification.
<TABLE>
Carrying Value
-------------------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
U.S. government and government agencies $ 39,685,041 $ 29,701,879
States, municipalities and political subdivisions 23,919,754 22,814,301
Collateralized mortgage obligations 9,406,895 11,093,926
Public utilities 41,724,208 48,064,818
Corporate 62,515,762 70,964,039
-------------------- --------------------
$ 175,746,254 $ 182,638,963
==================== ====================
</TABLE>
The following table shows the composition and average maturity of the Company's
investment portfolio at December 31, 1998.
Carrying Average Average
Investments Value Maturity Yield
Fixed maturities and fixed
maturities held for sale $175,746,254 4 years 6.69%
Equity securities 2,087,416 not applicable 3.62%
Mortgage loans 10,941,614 10 years 8.42%
Real estate 10,529,183 not applicable 7.66%
Policy loans 14,134,041 not applicable 6.95%
Other long-term investments 906,278 5 years 7.16%
Short-term investments 1,062,796 190 days 5.57%
Cash and cash equivalents 26,378,463 on demand 5.82%
------------
Total Investments and cash $241,786,045 6.69%
===========
At December 31, 1998, fixed maturities and fixed maturities held for sale have a
combined market value of $181,390,785. 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.
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The Company holds $1,062,796 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 $18,431,309 mature in one year and
$82,995,251 mature in two to five years.
The Company holds $10,941,614 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.
The Company has no mortgage loans which are in default and in the process of
foreclosure. The Company has one loan of $42,116 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.
A 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 makes sure 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-payments 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 Loans Amount % of Total
- - --------------------- ---------------- -------------
FHA/VA $ 424,229 4%
Commercial 4,572,395 42%
Residential 5,944,990 54%
The following table shows a geographic distribution of the mortgage loan
portfolio and investment real estate and real estate acquired in satisfaction of
debt.
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Mortgage Real
Loans Estate
------------ ----------
Illinois 22% 62%
Kansas 7% 0%
Louisiana 24% 15%
Mississippi 0% 20%
Missouri 2% 1%
New Mexico 2% 0%
North Carolina 6% 0%
Oklahoma 4% 0%
Virginia 3% 0%
West Virginia 28% 2%
Other 2% 0%
------------ ----------
Total 100% 100%
============ ==========
The following table summarizes delinquent mortgage loan holdings.
<TABLE>
<S> <C> <C> <C>
Delinquent
90 days or More 1998 1997 1996
- - ----------------------------------- ------------- ------------- -------------
Non-accrual status $ 0 $ 0 $ 0
Other 278,000 203,000 282,000
Reserve on delinquent
loans (30,000) (10,000) (10,000)
------------- ------------- -------------
Total Delinquent $ 248,000 $ 193,000 $ 272,000
============= ============= =============
Interest income past due
(Delinquent loans) $ 9,000 $ 5,000 $ 9,000
============= ============= =============
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 Properties, for description of real estate holdings.
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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.
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.
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 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
116
<PAGE>
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 1998, 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. In February 1998, an announcement was made
regarding negotiations with a different unrelated party, First Southern Funding
LLC, for the change in control of UTI. In November 1998, the change in control
with this second party was completed. 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.
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, 1998, each of the insurance subsidiaries has a Ratio that is in
excess of 4, which is 400% of the authorized control level; accordingly, the
insurance subsidiaries 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. The Company does not presently anticipate any material
adverse change in its business as a result of these changes.
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<PAGE>
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 Clinton Administration has recently proposed tax changes that would affect
the insurance industry. One proposal is to require recapture of untaxed profits
on policyholder surplus accounts. Between 1959 and 1983, stock life insurance
companies deferred tax on a portion of their profits. These untaxed profits were
added to a policyholders surplus account ("PSA"). In 1984, Congress precluded
life insurance companies from continuing to defer taxes on any future profits.
The Clinton Administration argues that there is no continuing justification for
permitting stock life insurance companies to defer tax on profits that were
earned between 1959 and 1983. Accordingly, the stock life companies would be
required to include in their gross income over ten years their PSA balances. The
second proposal modifies rules for capitalizing policy acquisition costs on the
grounds that life insurance companies generally only capitalize a fraction of
their actual policy acquisition costs. This modification would increase the
current capitalization percentages. Either of these changes would be onerous to
the Company and to the insurance industry as a whole. The outcome and timing of
these proposals cannot be anticipated at this time
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.
Project results were recently approved by the NAIC with an implementation date
of January 1, 2001. Individual states in which the Company does business must
implement these new rules for them to become effective. Specific recommendations
have been set forth in papers issued by the NAIC. The NAIC continues to modify
and amend these papers. The Company is monitoring the process, and is not aware
of any new requirements that would result in a material financial impact on the
Company's financial position or results of operations. The Company will continue
to monitor this issue as changes and new proposals are made.
EMPLOYEES
There are approximately 90 persons who are employed by the Company and its
affiliates.
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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.
Property owned Amount % of Total
Home Office $ 2,667,325 20%
Investment real estate
Commercial $ 4,571,312 35%
Residential development $ 4,407,871 33%
Foreclosed real estate $ 1,550,000 12%
----------- ---
$10,529,183 80%
-----------
Grand total $13,196,508 100%
=========== ====
Total investment real estate holdings represent approximately 3% of the total
assets of the Company net of accumulated depreciation of $685,526 and $539,366
at year-end 1998 and 1997 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 $2,522,898. 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 $144,427. The facilities occupied by the Company
are adequate relative to the Company's present operations.
Commercial 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 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 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.
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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.
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
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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., 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.
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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
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.
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(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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Number of Shares Number of Securities Underlying Value of Unexercised In the
Acquired on Value Unexercised Options/SARs Money Options/SARs at
Exercise (#) Realized ($) at FY-End(#) FY-End ($)
Name Exercisable Unexercisable Exercisable Unexercisable
Larry E. Ryherd - - 13,800 - - -
James E. Melville - - 30,000 - - -
George E. Francis - - 4,600 - - -
</TABLE>
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.
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.
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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 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.
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.
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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):
1993 1994 1995 1996 1997 1998
UII 100 92 92 40 32 34
NASDAQ 100 98 138 170 209 293
NASDAQ Insurance 100 94 134 153 223 199
(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
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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.
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.
<TABLE>
<S> <C> <C> <C>
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%
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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 *
Larry E. Ryherd 0 *
Robert W. Teater 0 *
All directors and executive officers 544 *
as a group (ten in number)
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%
</TABLE>
(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.
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(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.
* 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.
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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 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.
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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; 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.
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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
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.
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Number of Shares Number of Securities Underlying Value of Unexercised In the
Acquired on Value Unexercised Options/SARs Money Options/SARs at
Exercise (#) Realized ($) at FY-End(#) FY-End ($)
Name Exercisable Unexercisable Exercisable Unexercisable
Larry E. Ryherd - - 13,800 - - -
James E. Melville - - 30,000 - - -
George E. Francis - - 4,600 - - -
</TABLE>
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.
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
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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 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.
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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.
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
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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):
1993 1994 1995 1996 1997 1998
UTI 100 40 30 50 64 65
NASDAQ 100 98 138 170 209 293
NASDAQ Insurance 100 94 134 153 223 199
(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.
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,
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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 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.
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<TABLE>
<S> <C> <C> <C>
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 *
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%
</TABLE>
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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
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
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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.
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 $8,793,905, $9,893,321
and $9,927,000 under these arrangements in 1998, 1997 and 1996, respectively. UG
paid $8,018,141, $8,660,481 and $9,626,559 to FCC in 1998, 1997 and 1996,
respectively.
USA paid $835,345, $989,295 and $1,567,891 under their agreement with UII for
1998, 1997 and 1996, respectively. UII paid $501,207, $593,577 and $940,734
under their agreement with UTI for 1998, 1997 and 1996, respectively.
Additionally, UII paid FCC $0, $150,000 and $300,000 in 1998, 1997 and 1996,
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 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.
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, 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. On March 1, 1999, the individuals
holding the convertible notes sold their interests in said notes to First
Southern Bancorp, Inc. in private transactions.
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
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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 owned
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 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.
UTI and UII 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 is being performed to monitor continuing compliance. By
addressing year 2000 compliance in a timely manner, compliance has been achieved
using existing staff and without significant impact on the Company operationally
or financially.
CHANGE IN CONTROL OF UNITED TRUST, INC.
- - ----------------------------------------
On November 20, 1998, First Southern Funding, LLC., 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.
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<PAGE>
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
acquired on the market, FSF and affiliates currently own 1,073,577 shares of UTI
common stock (43.1%) becoming the largest shareholder of UTI. Through the shares
acquired and options owned, FSF can ultimately own over 51% of UTI. 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 a bank that operates
out of 14 locations in central Kentucky.
This transaction provides the Company with increased opportunities. The
additional capitalization has enabled UTI to significantly reduce its outside
debt and has enhanced its ability to make future acquisitions through increased
borrowing power and financial strength. Many synergies exist between the Company
and First Southern Funding and its affiliates. The potential for cross selling
of services to each customer base is currently being explored. Legislation is
currently pending that would eliminate many of the barriers currently existing
between banks and insurance companies. Such alliances are already being formed
within the two industries. Management believes this transaction positions the
Company for continued growth and competitiveness into the future as the
financial industry as a whole experiences change.
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.
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<PAGE>
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 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.
143
<PAGE>
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.
144
<PAGE>
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.
145
<PAGE>
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, 1998 and
for fiscal year ended December 31, 1997. 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.
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.
146
<PAGE>
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. 5 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/ Randall L. Attkisson
Randall L. Attkisson, Director
/s/ William F. Cellini
William F. Cellini, Director
/s/ Robert E. Cook
Robert E. Cook, Director
/s/ Jesse T. Correll
Jesse T. Correll, 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/ Millard V. Oakley
Millard V. Oakley, Director
147
<PAGE>
/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)
148
<PAGE>
UTI INDEX TO EXHIBITS
Exhibit
Number
2(a) Agreement and Plan of Reorganization. (Appendix A).
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.
3(e) Proposed Amendment to Articles of Incorporation of UTI.
(Appendix D).
4(a) Rights of Dissenting Stockholders of United Trust, Inc.
(Appendix C).
8(a) Tax Opinion of KPMG Peat Marwick LLP dated October 9, 1998.
(Appendix G)
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) (3) Employment Agreement dated as of July 31, 1997 between Larry
E. Ryherd and First Commonwealth Corporation
10(l) (3) Employment Agreement dated as of July 31, 1997 between James
E. Melville and First Commonwealth Corporation
149
<PAGE>
10(m) (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, Brad M. Wilson, Theodore C. Miller,
Michael K. Borden and Patricia G. Fowler.
10(n) (1) Agreement dated June 16, 1992 between John K. Cantrell and
First Commonwealth Corporation.
10(o) (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(p) (1) Stock Purchase Agreement dated February 20, 1992 between
United Trust Group, Inc. and Sellers.
10(q) (1) Amendment No. One dated April 20, 1992 to the Stock Purchase
Agreement between the Sellers and United Trust Group, Inc.
10(r) (1) Security Agreement dated June 16, 1992 between United Trust
Group, Inc. and the Sellers.
10(s) (1) Stock Purchase Agreement dated June 16, 1992 between United
Trust Group, Inc. and First Commonwealth Corporation
24(a) Consent to use of opinions issued by Kerber Eck and Braeckel
LLP (Appendix E).
24(b) Consent to use of tax opinion of KPMG Peat Marwick LLP
(Appendix F).
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
150
<PAGE>
UII INDEX TO EXHIBITS
Exhibit
Number
3(i) (1) Articles of Incorporation for the Company dated November 2,
1987.
3(i) (1) Amended Articles of Incorporation for the Company dated
January 27, 1988.
3(ii) (1) Code of Regulations for the Company.
4(a) Rights of Dissenting Stockholders of United Income, Inc.
(Appendix B).
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.
24(a) Consent to use of opinions issued by Kerber Eck and Braeckel
LLP (Appendix E).
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.
151
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99(d) Audited financial statements of United Trust Group, Inc.
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.
152
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
United Trust, Inc.
Annual Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997.............................155
Consolidated Statements of Operations Three Years
Ended December 31, 1998..............................................................156
Consolidated Statements of Shareholders' Equity Three Years
Ended December 31, 1998..............................................................157
Consolidated Statements of Cash Flows Three Years Ended
December 31, 1998....................................................................158
Notes to Financial Statements............................................................159
Quarterly Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998...................195
Consolidated Statements of Operations Three Months
Ended March 31, 1999 and 1998........................................................196
Consolidated Statements of Shareholders' Equity Period
Ended March 31, 1999.................................................................197
Consolidated Statements of Cash Flows Months Ended
March 31, 1999 and1998...............................................................198
Notes to Financial Statements............................................................199
United Income, Inc.
Annual Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997.............................207
Consolidated Statements of Operations Three Years Ended
December 31, 1998....................................................................208
Consolidated Statements of Shareholders' Equity Three Years
Ended December 31, 1998..............................................................209
Consolidated Statements of Cash Flows Three Years Ended
December 31, 1998....................................................................210
Notes to Financial Statements............................................................211
Exhibit Containing Audited Consolidated Financial Statements and
Notes of United Trust Group, Inc.....................................................222
Quarterly Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998...................260
Consolidated Statements of Operations Three Months
Ended March 31, 1999 and 1998........................................................261
Consolidated Statements of Shareholders' Equity Period
Ended March 31, 1999.................................................................262
Consolidated Statements of Cash Flows Months Ended
March 31, 1999 and1998...............................................................263
Notes to Financial Statements............................................................264
</TABLE>
153
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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, 1998
and 1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Trust, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1998, and Schedules
II, IV and V as of December 31, 1998 and 1997, 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, 1999
154
<PAGE>
UNITED TRUST, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
ASSETS
<TABLE>
1998 1997
--------------- ---------------
<S> <C> <C>
Investments:
Fixed maturities at amortized cost (market $179,885,379 and $184,782,568) $ 174,240,848 $ 180,970,333
Investments held for sale:
Fixed maturities, at market (cost $1,494,636 and $1,672,298) 1,505,406 1,668,630
Equity securities, at market (cost $2,725,061 and $3,184,357) 2,087,416 3,001,744
Mortgage loans on real estate at amortized cost 10,941,614 9,469,444
Investment real estate, at cost, net of accumulated depreciation 8,979,183 9,760,732
Real estate acquired in satisfaction of debt 1,550,000 1,724,544
Policy loans 14,134,041 14,207,189
Other long-term investments 906,278 840,066
Short-term investments 1,062,796 1,798,878
--------------- ---------------
215,407,582 223,441,560
Cash and cash equivalents 26,378,463 16,105,933
Investment in affiliates 5,549,515 5,636,674
Accrued investment income 3,563,383 3,686,562
Reinsurance receivables:
Future policy benefits 36,965,938 37,814,106
Policy claims and other benefits 3,563,963 3,529,078
Cost of insurance acquired 39,307,960 41,522,888
Deferred policy acquisition costs 6,324,548 10,600,720
Cost in excess of net assets purchased,
net of accumulated amortization 2,642,210 2,777,089
Property and equipment, net of accumulated depreciation 3,179,203 3,412,956
Other assets 941,656 772,258
--------------- ---------------
Total assets $ 343,824,421 $ 349,299,824
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 248,391,753 $ 248,805,695
Policy claims and benefits payable 2,183,434 2,080,907
Other policyholder funds 2,150,632 2,445,469
Dividend and endowment accumulations 15,329,048 14,905,816
Income taxes payable:
Current 115,785 15,730
Deferred 9,438,758 14,174,260
Notes payable 9,529,138 21,460,223
Indebtedness to affiliates, net 22,244 18,475
Other liabilities 5,890,059 3,790,051
--------------- ---------------
Total liabilities 293,050,851 307,696,626
--------------- ---------------
Minority interests in consolidated subsidiaries 25,412,259 26,246,580
--------------- ---------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share.
Authorized 3,500,000 shares - 2,490,438 and 1,634,779 shares
issued after deducting treasury shares of 28,000 and 277,460 49,809 32,696
Additional paid-in capital 27,403,172 16,488,375
Accumulated deficit (1,814,818) (1,135,326)
Accumulated other comprehensive income (276,852) (29,127)
--------------- ---------------
Total shareholders' equity 25,361,311 15,356,618
--------------- ---------------
Total liabilities and shareholders' equity $ 343,824,421 $ 349,299,824
=============== ===============
See accompanying notes.
</TABLE>
155
<PAGE>
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1998
<TABLE>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Premiums and policy fees $ 30,938,609 $ 33,373,950 $ 35,891,609
Reinsurance premiums and policy fees (4,542,532) (4,734,705) (4,947,151)
Net investment income 15,042,287 14,857,297 15,868,447
Realized investment gains and (losses), net (1,119,156) (279,096) (987,930)
Other income 566,192 774,884 1,151,395
---------------- ---------------- ----------------
40,885,400 43,992,330 46,976,370
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 23,078,145 23,644,252 26,568,062
Reinsurance benefits and claims (2,499,394) (2,078,982) (2,283,827)
Annuity 1,462,385 1,560,828 1,892,489
Dividends to policyholders 3,431,238 3,929,073 4,149,308
Commissions and amortization of deferred
policy acquisition costs 6,450,529 3,616,365 4,224,885
Amortization of cost of insurance acquired 2,214,928 2,394,392 5,524,815
Operating expenses 10,665,976 9,222,913 11,994,464
Interest expense 2,198,773 1,816,491 1,731,309
---------------- ---------------- ----------------
47,002,580 44,105,332 53,801,505
---------------- ---------------- ----------------
Loss before income taxes, minority
interest and equity in loss of investees (6,117,180) (113,002) (6,825,135)
Income tax credit (expense) 4,624,032 (986,229) 4,703,741
Minority interest in loss
of consolidated subsidiaries 835,181 563,699 1,278,883
Equity in loss of investees (21,525) (23,716) (95,392)
---------------- ---------------- ----------------
Net loss $ (679,492) $ (559,248)$ (937,903)
================ ================ ================
Basic loss per share from continuing
operations and net loss $ (0.39) $ (0.32)$ (0.50)
================ ================ ================
Diluted loss per share from continuing
operations and net loss $ (0.39) $ (0.32)$ (0.50)
================ ================ ================
Basic weighted average shares outstanding 1,726,843 1,772,870 1,869,511
================ ================ ================
Diluted weighted average shares outstanding 1,726,843 1,772,870 1,869,511
================ ================ ================
</TABLE>
See accompanying notes.
156
<PAGE>
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1998
<TABLE>
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock
Balance, beginning
of year $ 32,696 $ 37,402 $ 37,352
Issued during year 17,264 0 50
Stock retired from
purchase
of fractional
shares of reverse
stock split 0 (7) 0
Treasury stock
acquired (151) (4,699) 0
-------------- ------------- -------------
Balance, end of year $ 49,809 $ 32,696 $ 37,402
============== ============= =============
Additional paid-in
capital
Balance, beginning
of year $ 16,488,375 $ 18,638,591 $ 18,624,578
Issued during year 10,982,731 0 14,013
Stock retired from
purchase
of fractional
shares of reverse
stock split 0 (2,374) 0
Treasury stock
acquired (67,934) (2,147,842) 0
-------------- ------------- -------------
Balance, end of year $ 27,403,172 $ 16,488,375 $ 18,638,591
============== ============= =============
Accumulated deficit
Balance, beginning
of year $ (1,135,326) $ (576,078) $ 361,825
Net loss (679,492) $ (679,492) (559,248) $ (559,248) (937,903) $ (937,903)
-------------- ------------- -------------
Balance, end of year $ (1,814,818) $ (1,135,326) $ (576,078)
============== ============= =============
Accumulated other
comprehensive income
Balance, beginning
of year (29,127) (86,058) (1,499)
Other comprehensive
income
Unrealized holding
gain
(loss) on securities (247,725) (247,725) 56,931 56,931 (84,559) (84,559)
-------------- ------------- ------------- ------------- ------------- --------------
Comprehensive income $ (927,217) $ (502,317) $ (1,022,462)
============= ============= ==============
Balance, end of year (276,852) (29,127) (86,058)
-------------- ------------- -------------
Total shareholders'
equity,
end of year $ 25,361,311 $ 15,356,618 $ 18,013,857
============== ============= =============
</TABLE>
See accompanying notes.
157
<PAGE>
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1998
<TABLE>
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents Cash flows from operating
activities:
Net loss $ (679,492) $ (559,248)$ (937,903)
Adjustments to reconcile net loss to net cash provided by
operating activities net of changes in assets and liabilities resulting
from the sales and purchases of subsidiaries:
Amortization/accretion of fixed maturities 657,863 670,185 899,445
Realized investment losses, net 1,119,156 279,096 987,930
Policy acquisition costs deferred (892,000) (586,000) (1,276,000)
Amortization of deferred policy acquisition costs 5,168,172 1,310,636 1,387,372
Amortization of cost of insurance acquired 2,214,928 2,394,392 5,524,815
Amortization of costs in excess of net assets purchased 90,000 155,000 185,279
Depreciation 494,364 469,854 390,357
Minority interest (835,181) (563,699) (1,278,883)
Equity in (earnings) loss of investees 21,525 23,716 95,392
Change in accrued investment income 123,179 (224,763) 210,043
Change in reinsurance receivables 813,283 1,257,953 83,871
Change in policy liabilities and accruals 75,087 (547,081) 3,326,651
Charges for mortality and administration
of universal life and annuity products (10,771,795) (10,588,874) (10,239,476)
Interest credited to account balances 7,014,683 7,212,406 7,075,921
Change in income taxes payable (4,635,447) 925,896 (4,714,258)
Change in indebtedness (to) from affiliates, net 3,769 (13,362) 119,706
Change in other assets and liabilities, net 2,184,079 (1,593,358) 1,299,773
------------ ------------- -------------
Net cash provided by operating activities 2,166,173 22,749 3,140,035
------------ ------------- -------------
Cash flows from investing activities: Proceeds from investments sold and
matured:
Fixed maturities held for sale 164,520 290,660 1,219,036
Fixed maturities sold 0 0 18,736,612
Fixed maturities matured 54,642,223 21,488,265 20,721,482
Equity securities 450,000 76,302 8,990
Mortgage loans 1,785,859 1,794,518 3,364,427
Real estate 1,716,124 1,136,995 3,219,851
Policy loans 3,661,834 4,785,222 3,937,471
Short term 1,593,749 410,000 825,000
------------ ------------- -------------
Total proceeds from investments sold and matured 64,014,309 29,981,962 52,032,869
Cost of investments acquired:
Fixed maturities (48,745,594) (23,220,172) (29,365,111)
Equity securities (79,053) (1,248,738) 0
Mortgage loans (3,667,061) (245,234) (503,113)
Real estate (1,346,299) (1,444,980) (813,331)
Policy loans (3,588,686) (4,554,291) (4,329,124)
Other long-term investments (66,212) 0 0
Short term (851,198) (1,726,035) (830,983)
------------ ------------- -------------
Total cost of investments acquired (58,344,103) (32,439,450) (35,841,662)
Purchase of property and equipment (114,449) (531,528) (383,411)
------------ ------------- -------------
Net cash provided by (used in) investing activities 5,555,757 (2,989,016) 15,807,796
------------ ------------- -------------
Cash flows from financing activities:
Policyholder contract deposits 15,480,745 17,905,246 22,245,369
Policyholder contract withdrawals (12,402,530) (14,515,576) (15,433,644)
Net cash transferred from coinsurance ceded 0 0 (19,088,371)
Net cash transferred from coinsurance assumed 420,790 0 0
Proceeds from notes payable 500,000 2,560,000 9,050,000
Payments of principal on notes payable (12,420,373) (1,874,597) (10,923,475)
Payment for fractional shares from reverse stock split 0 (2,381) 0
Payment for fractional shares from reverse stock split of subsidiary 0 (534,251) 0
Purchase of stock of affiliates (1,500) (865,877) 0
Purchase of treasury stock (26,527) (926,599) 0
Proceeds from issuance of common stock 10,999,995 0 500
------------ ------------- -------------
Net cash provided by (used in ) financing activities 2,550,600 1,745,965 (14,149,621)
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents 10,272,530 (1,220,302) 4,798,210
Cash and cash equivalents at beginning of year 16,105,933 17,326,235 12,528,025
------------ ------------- -------------
Cash and cash equivalents at end of year $ 26,378,463 $ 16,105,933 $ 17,326,235
============ ============= =============
</TABLE>
See accompanying notes.
158
<PAGE>
UNITED TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1998, the parent, significant
majority-owned subsidiaries and affiliates of United Trust, Inc.,
were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
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").
159
<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 Company's dominant business is individual life insurance
which includes the servicing of existing insurance business in force,
the solicitation of new individual life insurance and the acquisition
of other companies in the insurance business.
C. BUSINESS SEGMENTS - The Company has only one significant business
segment - insurance.
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. 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.
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 $685,526 and $539,366 as of December 31, 1998 and 1997,
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.
Other long-term investments -- at cost.
Realized gains and losses on sales of investments are recognized in
net income on the specific identification basis.
G. 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.
H. 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
160
<PAGE>
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 are
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.
I. 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 4.5% to 5.5% in 1998 and 4.5% to 6.0%
in 1997 and 1996.
J. 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.
K. 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 25% of the business and 15% discount rate on
approximately 75% 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 25% 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.
161
<PAGE>
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
---------------- ---------------- ----------------
Cost of insurance acquired,
beginning of year $ 41,522,888 $ 43,917,280 $ 55,816,934
Interest accretion 5,624,883 5,962,644 6,312,931
Amortization (7,839,811) (8,357,036) (11,837,746)
---------------- ---------------- ----------------
Net amortization (2,214,928) (2,394,392) (5,524,815)
Balance attributable to
coinsurance agreement 0 0 (6,374,839)
---------------- ---------------- ----------------
Cost of insurance acquired,
end of year $ 39,307,960 $ 41,522,888 $ 43,917,280
================ ================ ================
</TABLE>
Estimated net amortization expense of cost of insurance acquired for
the next five years is as follows:
Interest Net
Accretion Amortization Amortization
--------- ------------ ------------
1999 5,319,000 6,887,000 1,568,000
2000 5,107,000 6,421,000 1,314,000
2001 4,934,000 6,423,000 1,489,000
2002 4,737,000 6,203,000 1,466,000
2003 4,542,000 6,187,000 1,645,000
L. 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.
162
<PAGE>
The following table summarizes deferred policy acquisition costs and
related data for the years shown.
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
---------------- ---------------- ----------------
Deferred, beginning of year $ 10,600,720 $ 11,325,356 $ 11,436,728
Acquisition costs deferred:
Commissions 690,000 998,000 1,441,000
Other expenses 202,000 274,000 431,000
---------------- ---------------- ----------------
Total 892,000 1,272,000 1,872,000
Interest accretion 397,000 425,000 408,000
Amortization charged to income (2,582,172) (2,421,636) (2,391,372)
---------------- ---------------- ----------------
Net amortization (2,185,172) (1,996,636) (1,983,372)
Amortization due to impairment (2,983,000) 0 0
---------------- ---------------- ----------------
Change for the year (4,276,172) (724,636) (111,372)
---------------- ---------------- ----------------
Deferred, end of year $ 6,324,548 $ 10,600,720 $ 11,325,356
================ ================ ================
</TABLE>
The following table reflects the components of the income statement
for the line item Commissions and amortization of deferred policy
acquisition costs:
<TABLE>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net amortization of deferred
policy acquisition costs $ 5,168,172 $ 1,996,636 $ 1,983,372
Commissions 1,282,357 1,619,729 2,241,513
---------- ---------- ----------
Total $ 6,450,529 $ 3,616,365 $ 4,224,885
========== ========== ==========
</TABLE>
Estimated net amortization expense of deferred policy acquisition
costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1999 $ 157,000 $ 1,367,000 $ 1,210,000
2000 140,000 1,202,000 1,062,000
2001 124,000 1,053,000 929,000
2002 110,000 920,000 810,000
2003 98,000 803,000 705,000
M. 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).
163
<PAGE>
Accumulated amortization of cost in excess of net assets purchased was
$1,510,146 and $1,420,146 as of December 31, 1998 and 1997, respectively.
N. PROPERTY AND EQUIPMENT - Company-occupied property, data processing
equipment and furniture and office equipment are stated at cost less
accumulated depreciation of $1,939,501 and $1,990,314 at December 31,
1998 and 1997, 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 $348,204
and $372,861 for the years ended December 31, 1998 and 1997,
respectively.
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. 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 the same as basic
earnings per share 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 1998, 1997 and 1996,
respectively, and stock options exercisable of 1,562, 1,562, and 4,062
shares in 1998, 1997, and 1996, respectively. UTI had stock options
outstanding during each of the periods presented for 1,555,000,
105,000 and 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 for 1998,
1997 and 1996, respectively.
Q. 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, 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 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.
R. PARTICIPATING INSURANCE - Participating business represents 34% and
39% of the ordinary life insurance in force at December 31, 1998 and
1997, respectively. Premium income from participating business
represents 39%, 50%, and 52% of total premiums for the years ended
December 31, 1998, 1997 and 1996, 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.
S. RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform with the 1998 presentation. Such reclassifications had no
effect on previously reported net loss, total assets, or
shareholders' equity.
164
<PAGE>
T. 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.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1998, 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, 1998, UG
had a statutory gain from operations of $3,226,364. At December 31, 1998, UG's
statutory capital and surplus amounted to $15,280,577. 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 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.
Shareholders' Untaxed
Company Surplus Balance
- - ---------------------- ----------------- --------------
ABE $ 5,180,494 $ 1,149,693
APPL 6,137,321 1,525,367
UG 30,998,215 4,363,821
USA 0 0
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.
165
<PAGE>
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:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
---------------- ----------------- ----------------
Current tax expense $ 111,470 $ 5,400 $ (148,148)
Deferred tax expense (credit) (4,735,502) 980,829 (4,555,593)
---------------- ----------------- ----------------
$ (4,624,032) $ 986,229 $ (4,703,741)
================ ================= ================
</TABLE>
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
UTI UG FCC
------------- ------------- ---------------
2004 369,265 0 0
2005 292,656 0 0
2006 212,852 0 0
2007 110,758 0 136,058
2008 0 0 4,595
2009 0 0 168,800
2010 0 0 19,112
2012 0 386,669 0
------------- ------------- ---------------
TOTAL $ 985,531 $ 386,669 $ 328,565
============= ============= ===============
The Company has established a deferred tax asset of $595,268 for its operating
loss carryforwards and has established an allowance of $250,332.
The following table shows the reconciliation of net income to taxable income of
UTI:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
--------------- --------------- ----------------
Net income (loss) $ (679,492) $ (559,248) $ (937,903)
Federal income tax provision (credit) (121,495) 414,230 (59,780)
Loss of subsidiaries 421,738 356,422 714,916
Loss of investees 21,525 23,716 95,392
Write off of investment in affiliate 0 0 315,000
Write off of note receivable 0 (4,368) 211,419
Write off of note discounts 586,462 48,427 25,528
Depreciation 0 0 1,046
=============== =============== ================
Taxable income $ 228,738 $ 279,179 $ 365,618
=============== =============== ================
</TABLE>
UTI has a net operating loss carryforward of $985,531 at December 31, 1998. UTI
has averaged approximately $290,000 in taxable income over the past three years
and must average taxable income of approximately $200,000 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:
166
<PAGE>
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
--------------- --------------- ----------------
Tax computed at statutory rate $ (2,141,013) $ (39,551) $ (2,388,797)
Changes in taxes due to:
Cost in excess of net assets purchased 31,500 54,250 64,848
Current year loss for which no benefit realized 0 1,039,742 0
Benefit of prior losses (2,587,353) (324,705) (2,393,395)
Other 72,834 256,493 13,603
--------------- --------------- ----------------
Income tax expense (credit) $ (4,624,032) $ 986,229 $ (4,703,741)
=============== =============== ================
</TABLE>
The following table summarizes the major components that comprise the deferred
tax liability as reflected in the balance sheets:
1998 1997
---------------- ---------------
Investments $ (182,000) $ (228,027)
Cost of insurance acquired 14,935,793 15,753,308
Other assets (72,468) (72,468)
Deferred policy acquisition costs 2,213,592 3,710,252
Agent balances (22,257) (23,954)
Property and equipment (149) (19,818)
Discount of notes 0 1,097,352
Management/consulting fees (376,852) (573,182)
Future policy benefits (6,144,399) (4,421,038)
Gain on sale of subsidiary 2,312,483 2,312,483
Net operating loss carryforward (344,936) (424,679)
Other liabilities (797,832) (756,482)
Federal tax DAC (2,082,217) (2,179,487)
---------------- ---------------
Deferred tax liability $ 9,438,758 $ 14,174,260
================ ===============
167
<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:
<TABLE>
December 31,
----------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
--------------- ---------------- ----------------
Fixed maturities and fixed maturities
held for sale $ 11,981,660 $ 12,677,348 $ 13,326,312
Equity securities 92,196 87,211 88,661
Mortgage loans 859,543 802,123 1,047,461
Real estate 842,724 745,502 794,844
Policy loans 984,761 976,064 1,121,538
Other long-term investments 62,477 64,232 89,321
Short-term investments 29,907 70,624 17,664
Cash 1,235,888 632,254 605,549
--------------- ---------------- ----------------
Total consolidated investment income 16,089,156 16,055,358 17,091,350
Investment expenses (1,046,869) (1,198,061) (1,222,903)
---------------- --------------- ----------------
Consolidated net investment income $ 15,042,287 $ 14,857,297 $ 15,868,447
=============== ================ ================
</TABLE>
At December 31, 1998, the Company had a total of $4,187,000 of investments,
comprised of $3,152,000 in real estate, $968,000 in equity securities and
$66,000 in other invested assets, which did not produce income during 1998.
The following table summarizes the Company's fixed maturity holdings and
investments held for sale by major classifications:
<TABLE>
Carrying Value
----------------------------------------
1998 1997
<S> <C> <C>
--------------- ---------------
Investments held for sale:
Fixed maturities $ 1,505,406 $ 1,668,630
Equity securities 2,087,416 3,001,744
Fixed maturities:
U.S. Government, government agencies and authorities 36,809,239 28,259,322
State, municipalities and political subdivisions 23,835,306 22,778,816
Collateralized mortgage obligations 9,406,895 11,093,926
Public utilities 41,724,208 47,984,322
All other corporate bonds 62,465,200 70,853,947
--------------- ---------------
$ 177,833,670 $ 185,640,707
=============== ===============
</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.
168
<PAGE>
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:
Below Investment
Grade Investments 1998 1997 1996
- - ------------------------------ -------------- ------------ ------------
State, Municipalities and
political Subdivisions $ 0 $ 0 $ 10,042
Public Utilities 970,311 80,497 117,609
Corporate 47,281 656,784 813,717
------------- ------------ -------------
Total $ 1,017,592 $ 737,281 $ 941,368
============= ============ =============
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<PAGE>
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in securities
including investments held for sale are as follows:
<TABLE>
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1998 Cost Gains Losses Value
- - --------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $ 1,434,636 $ 3,265 $ 0 $ 1,437,901
States, municipalities and
political subdivisions 35,000 7,224 0 42,224
Collateralized mortgage
obligations 0 0 0 0
Public utilities 0 0 0 0
All other corporate bonds 25,000 281 0 25,281
-------------- -------------- -------------- --------------
1,494,636 10,770 0 1,505,406
Equity securities 2,725,061 42,520 (680,165) 2,087,416
-------------- -------------- -------------- --------------
Total $ 4,219,697 $ 53,290 $ (680,165) $ 3,592,822
============== ============== ============== ==============
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $ 36,809,239 $ 378,136 $ (53,868) $ 37,133,507
States, municipalities and
political subdivisions 23,835,306 1,042,876 0 24,878,182
Collateralized mortgage
obligations 9,406,895 182,805 (64,769) 9,524,931
Public utilities 41,724,208 1,810,290 (8,585) 43,525,913
All other corporate bonds 62,465,200 2,358,259 (613) 64,822,846
-------------- -------------- -------------- --------------
Total $ 174,240,848 $ 5,772,366 $ (127,835) $ 179,885,379
============== ============== ============== ==============
</TABLE>
170
<PAGE>
<TABLE>
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
- - --------------------------------- -------------- -------------- -------------- --------------
<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>
The amortized cost of debt securities at December 31, 1998, 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.
<TABLE>
Estimated
Fixed Maturities Held for Sale Amortized Market
December 31, 1998 Cost Value
- - --------------------------------------------- -------------- --------------
<S> <C> <C>
Due in one year or less $ 1,434,636 $ 1,437,901
Due after one year through five years 35,000 42,224
Due after five years through ten years 25,000 25,281
Due after ten years 0 0
Collateralized mortgage obligations 0 0
-------------- --------------
Total $ 1,494,636 $ 1,505,406
============== ==============
</TABLE>
171
<PAGE>
<TABLE>
Estimated
Fixed Maturities Held to Maturity Amortized Market
December 31, 1998 Cost Value
- - --------------------------------------------- -------------- --------------
<S> <C> <C>
Due in one year or less $ 16,996,673 $ 17,079,985
Due after one year through five years 82,960,251 85,927,556
Due after five years through ten years 58,630,433 60,814,932
Due after ten years 6,246,596 6,537,975
Collateralized mortgage obligations 9,406,895 9,524,931
-------------- --------------
Total $ 174,240,848 $ 179,885,379
============== ==============
</TABLE>
An analysis of sales, maturities and principal repayments of the Company's
fixed maturities portfolio for the years ended December 31, 1998, 1997 and
1996 is as follows:
<TABLE>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December 31, 1998 Cost Gains Losses Sale
- - ------------------------------------- --------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Scheduled principal repayments, calls and tenders:
Held for sale $ 164,161 $ 359 $ 0 $ 164,520
Held to maturity 54,824,249 126,285 (308,311) 54,642,223
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
--------------- ------------- --------------- ---------------
Total $ 54,988,410 $ 126,644 $ (308,311) $ 54,806,743
=============== ============= =============== ===============
</TABLE>
<TABLE>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December 31, 1997 Cost Gains Losses Sale
- - ------------------------------------- --------------- ------------- --------------- ---------------
<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>
172
<PAGE>
<TABLE>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December 31, 1996 Cost Gains Losses Sale
- - ------------------------------------- --------------- ------------- --------------- ---------------
<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>
C. INVESTMENTS ON DEPOSIT - At December 31, 1998, investments carried at
approximately $15,854,000 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, 1998 and 1997, 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.
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<PAGE>
(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.
(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 mortgage loans and certificates of
deposit with various banks that are protected under FDIC.
(g) Other long-term investments
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.
(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.
174
<PAGE>
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>
1998 1997
--------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Fixed maturities $ 174,240,848 $ 179,885,379 $ 180,970,333 $ 184,782,568
Fixed maturities
held for sale 1,505,406 1,505,406 1,668,630 1,668,630
Equity securities 2,087,416 2,087,416 3,001,744 3,001,744
Mortgage loans on
real estate 10,941,614 10,979,378 9,469,444 9,837,530
Investment in real
estate 8,979,183 8,979,183 9,760,732 9,760,732
Real estate
acquired in
satisfaction of debt 1,550,000 1,550,000 1,724,544 1,724,544
Policy loans 14,134,041 14,134,041 14,207,189 14,207,189
Other long-term 906,278 879,037 840,066 784,831
investments
Short-term
investments 1,062,796 1,062,796 1,798,878 1,798,878
Liabilities
Notes payable 9,529,138 9,431,363 21,460,223 20,925,184
</TABLE>
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 is expected to
become effective January 1, 2001, 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 $15,280,577 and $10,997,365 at December
31, 1998 and 1997, respectively. The Company's four life insurance subsidiaries
reported combined statutory operating income before taxes (exclusive of
intercompany dividends) of $5,485,000, $2,067,000 and $2,134,000 for 1998, 1997
and 1996, 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
175
<PAGE>
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 $924 million, $1.022 billion and $1.109
billion in face amount of life insurance risks with other insurers for 1998,
1997 and 1996, respectively. Reinsurance receivables for future policy benefits
were $36,965,938 and $37,814,106 at December 31, 1998 and 1997, 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 accounts for
approximately 65% of the reinsurance receivables as of December 31, 1998.
The Company does not have any short-duration reinsurance contracts. The effect
of the Company's long-duration reinsurance contracts on premiums earned in 1998,
1997 and 1996 was as follows:
Shown in thousands
--------------------------------------------------------
1998 1997 1996
Premiums Premiums Premiums
Earned Earned Earned
---------------- ---------------- ----------------
Direct $ 30,919 $ 33,374 $ 35,891
Assumed 20 0 0
Ceded (4,543) (4,735) (4,947)
---------------- ---------------- ----------------
Net premiums $ 26,396 $ 28,639 $ 30,944
================ ================ ================
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.
176
<PAGE>
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.
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 $8,793,905, $9,893,321
and $9,927,000 under these arrangements in 1998, 1997 and 1996, respectively. UG
paid $8,018,141, $8,660,481 and $9,626,559 to FCC in 1998, 1997 and 1996,
respectively.
USA paid $835,345, $989,295 and $1,567,891 under their agreement with UII for
1998, 1997 and 1996, respectively. UII paid $501,207, $593,577 and $940,734
under their agreement with UTI for 1998, 1997 and 1996, respectively.
Additionally, UII paid FCC $0, $150,000 and $300,000 in 1998, 1997 and 1996,
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 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.
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<PAGE>
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, 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. On March 1, 1999, the individuals
holding the convertible notes sold their interests in said notes to First
Southern Bancorp, Inc. in private transactions.
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 owned
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 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.
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, 1998 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, 1998, and changes during the years ending on those dates is
presented below:
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<TABLE>
1998 1997 1996
------------------------ ------------------------ --------------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,562 $ 0.20 1,562 $ 0.20 4,062 $ 0.20
Granted 0 0.00 0 0.00 0 0.00
Exercised 0 0.00 0 0.00 (2,500) 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 1,562 $ 0.20
========== ========== ==========
Options exercisable at year end 1,562 $ 0.20 1,562 $ 0.20 1,562 $ 0.20
Fair value of options granted
during the year $ 0.00 $ 0.00 $ 5.43
</TABLE>
The following information applies to options outstanding at December 31,
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 December 31, 1997 no options
were exercised. At December 31, 1998 and 1997, the Company held a liability of
$1,494,520 and $1,376,384, respectively, relating to this plan. At December 31,
1998, UTI common stock had a market price of $8.125 per share.
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The following information applies to deferred compensation plan stock options
outstanding at December 31, 1998:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 2 years
C. CHANGE IN CONTROL OF 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 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
acquired on the market, FSF and affiliates currently own 1,073,577 shares of UTI
common stock (43.1%) becoming the largest shareholder of UTI. Through the shares
acquired and options owned, FSF can ultimately own over 51% of UTI. 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 a bank that operates
out of 14 locations in central Kentucky.
D. 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 December 31, 1998,
the notes were convertible into 204,800 shares of UTI common stock with no
conversion privileges having been exercised. At December 31, 1998, UTI common
stock had a market price of $8.125 per share. On March 1, 1999, the individuals
holding the convertible notes sold their interests in said notes to First
Southern Bancorp, Inc. in private transactions. Pursuant to the terms of the
stock purchase agreement with First Southern and UTI, the convertible notes must
be converted to stock by July 31, 2000.
E. 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
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<PAGE>
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. NOTES PAYABLE
At December 31, 1998 and 1997, the Company has $9,529,138 and $21,460,223 in
long-term debt outstanding, respectively. The debt is comprised of the following
components:
1998 1997
------------- -------------
Senior debt $ 100,000 $ 6,900,000
Subordinated 10 yr. notes 2,267,067 5,746,774
Subordinated 20 yr. notes 3,252,071 3,902,582
Convertible notes 2,560,000 2,560,000
Other notes payable 1,350,000 2,350,867
------------- -------------
$ 9,529,138 $ 21,460,223
============= =============
A. SENIOR DEBT
The senior debt is through National City Bank (formerly 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 National City Bank from time to time as its "base lending rate."
The base rate at December 31, 1998 was 7.75%. 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, 1998, the Company prepaid
$500,000 of the May 1999 principal payment, and on November 23, 1998, the
Company paid a $6,300,000 principal payment. The remaining principal balance of
$100,000 will be payable on or before the debt maturity date of May 8, 2005, and
is being maintained to keep the Company's credit relationship with National City
Bank in place.
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 $840,00 note provides for a lump sum principal
payment due June 16, 2002. In addition to regularly scheduled semi-annual
principal payments, the Company made principal reduction payments totaling
$2,608,099 on November 23, 1998, and $500,000 on December 16, 1998, on its 10
year subordinated debt. The original 20-year notes bear interest at the rate of
8 1/2% per annum on $2,747,109 and 8.75% per annum on $504,962 payable
semi-annually with a lump sum principal payment due June 16, 2012.
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<PAGE>
C. CONVERTIBLE NOTES
On July 31, 1997, UTI issued convertible notes for cash in the amount of
$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.
D. OTHER NOTES PAYABLE
UII holds three promissory notes receivable totaling $1,350,000 due from FCC.
Two of the notes, totaling $850,000, bear 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. The third note in the amount of $500,000 bears interest at the rate
of 7.5%, with interest payments due quarterly, and principal due upon the
maturity date of March 31, 2004.
E. GENERAL DISCUSSION
In November 1998, UTI received approximately $11,000,000 from the issuance of
common stock to First Southern Funding and its affiliates. These funds were used
to retire outside debt. At December 31, 1998, there were no unamortized note
discounts remaining on the balance sheet and total notes payable of $9,529,138
represented a 56% decrease in notes payable from the previous year end. In
addition, subsequent to the balance sheet date, on March 1, 1999, First Southern
acquired the $2,560,000 of UTI convertible debt outstanding from the seven
officers and employees who previously held the notes. Pursuant to the terms of
an agreement with First Southern, this debt will be converted to equity by July
31, 2000.
Scheduled principal reductions on the Company's debt for the next five years is
as follows:
Year Amount
1999 $ 376,714
2000 226,714
2001 226,714
2002 1,586,925
2003 0
12. OTHER CASH FLOW DISCLOSURES
On a cash basis, the Company paid $1,851,386, $1,800,110 and $1,700,973 in
interest expense for the years 1998, 1997 and 1996, respectively. The Company
paid $15,805, $57,277 and $17,634 in federal income tax for 1998, 1997 and 1996,
respectively.
As partial proceeds for the acquisition of common stock of UTI during 1998, UTI
issued a promissory note of $53,053 due seven years from issue.
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.
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
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<PAGE>
$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.
13. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions which 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.
14. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 128 entitled Earnings per share, which is
effective for financial statements for fiscal years beginning after December 15,
1997. SFAS 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.
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 128 did not have an impact on the Company's
financial statement.
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 the Company 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 the Company's 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
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<PAGE>
the Company's 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 the Company's financial
position or results of operations, since the Company has no derivative or
hedging type investments.
15. 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. At the time the decision to merge was made,
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 second quarter of 1999.
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<PAGE>
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
1998
-------------------- --------------------- --------------------- --------------------
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Premiums and policy fees, net $ 7,231,481 $ 7,111,079 $ 6,243,869 $ 5,809,648
Net investment income 3,727,002 3,786,410 3,791,774 3,737,101
Total revenues 11,226,760 10,557,065 9,767,526 9,334,049
Policy benefits including
dividends 6,827,040 6,287,460 6,217,272 6,140,602
Commissions and
amortization of DAC 1,043,677 776,558 824,516 3,805,778
Operating expenses 2,237,840 2,237,899 1,953,061 4,237,176
Operating income (loss) 19,707 163,392 (204,429) (6,095,850)
Net income (loss) 114,441 228,704 458,002 (1,480,639)
Basic earnings (loss) per share 0.07 0.14 0.28 (0.88)
Diluted earnings (loss) per share
0.08 0.15 0.27 (0.88)
</TABLE>
<TABLE>
1997
-------------------- --------------------- --------------------- --------------------
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Premiums and policy fees, 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 (loss) per share 0.03 0.05 (0.28) (0.12)
Diluted earnings (loss) per share
0.03 0.05 (0.28) (0.12)
</TABLE>
<TABLE>
1996
-------------------- --------------------- --------------------- --------------------
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Premiums and policy fees, 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 (loss) per share 0.16 0.00 (0.48) (0.18)
Diluted earnings (loss) per share
0.16 0.00 (0.48) (0.18)
</TABLE>
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UNITED TRUST, INC.
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1998
<TABLE>
Schedule I
Column A Column B Column C Column D
------------------------------------------------ --------------- ---------------- ----------------
Amount at
Which Shown
in Balance
Cost Value Sheet
--------------- ---------------- ----------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Goverment and
government agencies and authorities $ 36,809,239 $ 37,133,507 $ 36,809,239
State, municipalities, and political
subdivisions 23,835,306 24,878,182 23,835,306
Collateralized mortgage obligations 9,406,895 9,524,931 9,406,895
Public utilities 41,724,208 43,525,913 41,724,208
All other corporate bonds 62,465,200 64,822,846 62,465,200
--------------- ---------------- ----------------
Total fixed maturities 174,240,848 $ 179,885,379 174,240,848
================
Investments held for sale:
Fixed maturities:
United States Goverment and
government agencies and authorities 1,434,636 $ 1,437,901 1,437,901
State, municipalities, and political
subdivisions 35,000 42,224 42,224
Public utilities 0 0 0
All other corporate bonds 25,000 25,281 25,281
--------------- ---------------- ----------------
1,494,636 $ 1,505,406 1,505,406
================
Equity securities:
Banks, trusts and insurance companies 1,935,619 $ 1,607,798 1,607,798
All other corporate securities 789,442 479,618 479,618
--------------- ---------------- ----------------
2,725,061 $ 2,087,416 2,087,416
================
Mortgage loans on real estate 10,941,614 10,941,614
Investment real estate 8,979,183 8,979,183
Real estate acquired in satisfaction of debt 1,550,000 1,550,000
Policy loans 14,134,041 14,134,041
Other long-term investments 906,278 906,278
Short-term investments 1,062,796 1,062,796
--------------- ----------------
Total investments $ 216,034,457 $ 215,407,582
=============== ================
</TABLE>
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UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1998 and 1997 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.
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UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1998 and 1997
Schedule II
<TABLE>
1998 1997
---------------- ---------------
<S> <C> <C>
ASSETS
Investment in affiliates $ 19,495,824 $ 19,974,098
Cash and cash equivalents 510,886 342,294
Notes receivable from affiliate 10,590,344 1,682,245
Receivable from affiliates, net 30,069 31,502
Accrued interest income 19,446 21,334
Other assets 12,368 225,986
---------------- ---------------
Total assets $ 30,658,937 $ 22,277,459
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 2,560,000 $ 4,060,866
Notes payable to affiliate 840,000 840,000
Deferred income taxes 1,895,080 2,016,575
Other liabilities 2,546 3,400
---------------- ---------------
Total liabilities 5,297,626 6,920,841
---------------- ---------------
Shareholders' equity:
Common stock 49,809 32,696
Additional paid-in capital 27,403,172 16,488,375
Accumulated other comprehensive
income of affiliates (276,852) (29,127)
Accumulated deficit (1,814,818) (1,135,326)
---------------- ---------------
Total shareholders' equity 25,361,311 15,356,618
---------------- ---------------
Total liabilities and shareholders' equity $ 30,658,937 $ 22,277,459
================ ===============
</TABLE>
188
<PAGE>
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1998
<TABLE>
Schedule II
1998 1997 1996
---------------- ---------------- ----------------
Revenues:
<S> <C> <C> <C>
Management fees from affiliates $ 501,207 $ 593,577 $ 940,734
Other income from affiliates 47,048 73,515 115,235
Interest income from affiliates 236,058 53,492 21,264
Interest income 25,283 37,620 29,340
Realized investment losses 0 0 (207,051)
Loss from write down of investee 0 0 (315,000)
---------------- ---------------- ----------------
809,596 758,204 584,522
Expenses:
Management fee to affiliate 0 200,000 575,000
Interest expense 787,432 194,543 0
Interest expense to affiliates 63,000 63,000 63,000
Operating expenses 316,888 65,541 133,897
---------------- ---------------- ----------------
1,167,320 523,084 771,897
---------------- ---------------- ----------------
Operating income (loss) (357,724) 235,120 (187,375)
Income tax credit (expense) 121,495 (414,230) 59,780
Equity in loss of investees (21,525) (23,716) (95,392)
Equity in loss of subsidiaries (421,738) (356,422) (714,916)
---------------- ---------------- ----------------
Net loss $ (679,492) $ (559,248)$ (937,903)
================ ================ ================
Basic loss per share from continuing
operations and net loss $ (0.39) $ (0.32)$ (0.50)
================ ================ ================
Diluted loss per share from continuing
operations and net loss $ (0.39) $ (0.32)$ (0.50)
================ ================ ================
Basic weighted average shares outstanding 1,726,843 1,772,870 1,869,511
================ ================ ================
Diluted weighted average shares outstanding 1,726,843 1,772,870 1,869,511
================ ================ ================
</TABLE>
189
<PAGE>
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1998
Schedule II
<TABLE>
1998 1997 1996
---------------- --------------- ----------------
Increase (decrease) in cash and cash equivalents Cash flows from operating
activities:
<S> <C> <C> <C>
Net loss $ (679,492) $ (559,248) $ (937,903)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Equity in loss of subsidiaries 421,738 356,422 714,916
Equity in loss of investees 21,525 23,716 95,392
Compensation expense through stock option plan 0 0 13,563
Change in accrued interest income 1,888 (19,283) 14,222
Depreciation 7,683 12,439 18,366
Amortization of notes payable discount 586,462 48,427 25,528
Realized investment losses 0 0 207,051
Loss from writedown of investee 0 0 315,000
Change in deferred income taxes (121,495) 414,230 (60,524)
Change in indebtedness (to) from affiliates, net 1,433 (1,255) (104,766)
Change in other assets and liabilities 4,147 (4,398) (26,256)
---------------- --------------- ----------------
Net cash provided by operating activities 243,889 271,050 274,589
---------------- --------------- ----------------
Cash flows from investing activities:
Purchase of stock of affiliates 0 (865,877) 0
Issuance of notes receivable to affiliates (9,120,813) (1,116,345) (250,000)
Capital contribution to affiliate 0 0 (106,000)
---------------- --------------- ----------------
Net cash used in investing activities (9,120,813) (1,982,222) (356,000)
---------------- --------------- ----------------
Cash flows from financing activities:
Purchase of treasury stock (26,527) (926,599) 0
Proceeds from issuance of notes payable 0 2,560,000 0
Payments on notes payable (1,927,952) 0 0
Payment for fractional shares from reverse stock split 0 (2,381) 0
Proceeds from issuance of common stock 10,999,995 0 500
---------------- --------------- ----------------
Net cash provided by financing activities 9,045,516 1,631,020 500
---------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents 168,592 (80,152) (80,911)
Cash and cash equivalents at beginning of year 342,294 422,446 503,357
---------------- --------------- ----------------
Cash and cash equivalents at end of year $ 510,886 $ 342,294 $ 422,446
================ =============== ================
</TABLE>
190
<PAGE>
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1998 and the year ended December 31, 1998
Schedule IV
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------
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
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Life insurance
in force $ 3,424,677,000 $ 924,404,000 $ 1,036,005,000 $ 3,536,278,000 29.3%
=============== =============== =============== ===============
Premiums and policy fees:
Life insurance $ 30,685,493 $ 4,492,304 $ 20,091 $ 26,213,280 0.1%
Accident and health
insurance 233,025 50,228 0 182,797 0.0%
--------------- --------------- --------------- ---------------
$ 30,918,518 $ 4,542,532 $ 20,091 $ 26,396,077 0.1%
=============== =============== =============== ===============
</TABLE>
191
<PAGE>
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1997 and the year ended December 31, 1997
<TABLE>
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
- - ------------------------------------------------------------------------------------------------------------------
<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 28.8%
================ =============== =============== ================
Premiums and policy fees:
Life insurance $ 33,133,414 $ 4,681,928 $ 0 $ 28,451,486 0.0%
Accident and health
insurance 240,536 52,777 0 187,759 0.0%
---------------- --------------- --------------- ----------------
$ 33,373,950 $ 4,734,705 $ 0 $ 28,639,245 0.0%
================ =============== =============== ================
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life
192
<PAGE>
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1996 and the year ended December 31, 1996
<TABLE>
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
------------------------------------------------------------------------------------------------------------------
<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 30.9%
================ =============== =============== ================
Premiums and policy fees:
Life insurance $ 35,633,232 $ 4,896,896 $ 0 $ 30,736,336 0.0%
Accident and health
insurance 258,377 50,255 0 208,122 0.0%
---------------- --------------- --------------- ----------------
$ 35,891,609 $ 4,947,151 $ 0 $ 30,944,458 0.0%
================ =============== =============== ================
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
193
<PAGE>
UNITED TRUST, INC.
VALUATION AND QUALIFYING ACCOUNTS For the years ended December
31, 1998, 1997 and 1996
<TABLE>
Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 70,000 $ 10,000 $ 70,000
December 31, 1997
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
December 31, 1996
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
</TABLE>
194
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
March 31, December 31,
ASSETS 1999 1998
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $ 170,245,912 and $179,885,379) $ 166,679,573 $ 174,240,848
Investments held for sale:
Fixed maturities, at market
(cost $11,428,916 and $1,494,636) 11,360,356 1,505,406
Equity securities, at market
(cost $ 2,886,315 and $2,725,061) 2,274,398 2,087,416
Mortgage loans on real estate at amortized cost 11,262,436 10,941,614
Investment real estate, at cost,
net of accumulated depreciation 9,054,432 8,979,183
Real estate acquired in satisfaction of debt 1,550,000 1,550,000
Policy loans 14,080,618 14,134,041
Other long-term investments 906,278 906,278
Short-term investments 2,321,188 1,062,796
----------- -----------
219,489,279 215,407,582
Cash and cash equivalents 21,905,488 26,378,463
Investment in affiliates 5,559,934 5,549,515
Indebtedness from affiliates, net 106 0
Accrued investment income 3,760,491 3,563,383
Reinsurance receivables:
Future policy benefits 36,762,282 36,965,938
Policy claims and other benefits 3,719,988 3,563,963
Cost of insurance acquired 38,812,032 39,307,960
Deferred policy acquisition costs 5,952,885 6,324,548
Costs in excess of net assets purchased,
net of accumulated amortization 2,619,710 2,642,210
Property and equipment,
net of accumulated depreciation 3,133,997 3,179,203
Other assets 619,960 941,656
--------------- ---------------
Total assets $ 342,336,152 $ 343,824,421
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 247,528,307 $ 248,391,753
Policy claims and benefits payable 2,303,835 2,183,434
Other policyholder funds 2,036,924 2,150,632
Dividend and endowment accumulations 15,002,280 15,329,048
Income taxes payable:
Current 204,710 115,785
Deferred 9,258,170 9,438,758
Notes payable 9,529,138 9,529,138
Indebtedness to affiliates, net 0 22,244
Other liabilities 5,607,438 5,890,059
-------------- --------------
Total liabilities 291,470,802 293,050,851
-------------- --------------
Minority interests in consolidated subsidiaries 25,402,171 25,412,259
-------------- --------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 3,500,000 shares - 2,490,438 and 2,490,438 shares
issued after deducting treasury shares of 28,000 and 28,000 49,809 49,809
Additional paid-in capital 27,403,172 27,403,172
Accumulated deficit (1,682,357) (1,814,818)
Accumulated other comprehensive income (307,445) (276,852)
Total shareholders' equity 25,463,179 25,361,311
=============== ===============
Total liabilities and shareholders' equity $ 342,336,152 $ 343,824,421
=============== ===============
</TABLE>
See accompanying notes.
195
<PAGE>
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
Three Months Ended
March 31, March 31,
1999 1998
Revenues:
<S> <C> <C>
Premiums and policy fees $ 7,047,130 $ 8,468,346
Reinsurance premiums and policy fees (1,039,619) (1,236,865)
Net investment income 3,640,387 3,727,002
Realized investment gains and (losses), net 16,343 92,248
Other income 170,870 176,029
------------------ ----------------
9,835,111 11,226,760
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 6,157,767 6,023,110
Reinsurance benefits and claims (745,245) (589,874)
Annuity 345,578 377,860
Dividends to policyholders 356,979 1,015,944
Commissions and amortization of deferred
policy acquisition costs 870,360 1,043,677
Amortization of cost of insurance acquired 495,928 610,883
Operating expenses 2,080,905 2,237,840
Interest expense 197,877 487,613
------------------ ----------------
9,760,149 11,207,053
Income before income taxes, minority interest
and equity in earnings of investees 74,962 19,707
Income tax credit 60,003 85,031
Minority interest in income of
consolidated subsidiaries (21,029) (33,048)
Equity in earnings of investees 18,525 42,751
------------------ ----------------
Net income $ 132,461 $ 114,441
================== ================
Basic earnings per share from continuing
operations and net income $ 0.05 $ 0.07
================== ================
Diluted earnings per share from continuing
operations and net income $ 0.07 $ 0.08
================== ================
Basic weighted average shares outstanding 2,490,438 1,628,547
================== ===============
Diluted weighted average shares outstanding 2,696,800 1,834,909
================== ================
</TABLE>
See accompanying notes
196
<PAGE>
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the Period ended March 31,1999
<TABLE>
Common stock
<S> <C>
Balance, beginning of year $ 49,809
Issued during year 0
Purchase treasury stock 0
----------
Balance, end of period 49,809
----------
Additional paid-in capital
Balance, beginning of year 27,403,172
Issued during year 0
Purchase treasury stock 0
----------
Balance, end of period 27,403,172
----------
Retained earnings (accumulated deficit)
Balance, beginning of year (1,814,818)
Net income 132,461 $ 132,461
-------- --------
Balance, end of period (1,682,357)
--------
Accumulated other comprehensive income
Balance, beginning of year (276,852)
Unrealized depreciation on securities (30,593)
Foreign currency translation adjustments 0
Minimum pension liability adjustment 0
--------
Other comprehensive income (30,593) (30,593)
-------- --------
Comprehensive income $ 101,868
Balance, end of period (307,445) ========
--------
Total shareholder's equity, end of period $ 25,463,179
===========
</TABLE>
See accompanying notes
197
<PAGE>
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
Three Months Ended
March 31, March 31,
1999 1998
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
<S> <C> <C>
Net income $ 132,461 $ 114,441
Adjustments to reconcile net income 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 131,525 146,403
Realized investment (gains) losses, net (16,343) (92,248)
Policy acquisition costs deferred (165,000) (285,000)
Amortization of deferred policy acquisition costs 536,663 602,293
Amortization of cost of insurance acquired 495,928 610,883
Amortization of costs in excess of net
assets purchased 22,500 22,500
Depreciation 132,336 118,631
Minority interest 21,029 33,048
Equity in earnings of investees (18,525) (42,751)
Change in accrued investment income (197,108) (351,417)
Change in reinsurance receivables 47,631 164,935
Change in policy liabilities and accruals (981,293) 31,192
Charges for mortality and administration of
universal life and annuity products (2,704,943) (2,715,992)
Interest credited to account balances 1,717,828 1,781,211
Change in income taxes payable (91,663) (100,485)
Change in indebtedness (to) from affiliates, net (22,350) 67,001
Change in other assets and liabilities, net 167,748 204,736
------- -------
Net cash provided by (used in) operating activities (791,576) 309,381
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 630,000 0
Fixed maturities sold 0 0
Fixed maturities matured 7,444,589 15,433,649
Equity securities 0 0
Mortgage loans 1,623,458 154,574
Real estate 75,616 745,741
Policy loans 849,532 909,847
Short-term 241,800 1,180,000
------- ---------
Total proceeds from investments sold and matured 10,864,995 18,423,811
Cost of investments acquired:
Fixed maturities held for sale (10,572,284) 0
Fixed maturities 0 (10,210,000)
Equity securities (161,256) 0
Mortgage loans (1,944,280) 0
Real estate (308,615) (138,171)
Policy loans (796,109) (945,087)
Other long-term investments 0 (66,212)
Short-term (1,500,192) 0
---------- ----------
Total cost of investments acquired (15,282,736) (11,359,470)
Purchase of property and equipment (48,545) (56,741)
---------- ----------
Net cash provided by (used in) investing activities (4,466,286) 7,007,600
Cash flows from financing activities:
Policyholder contract deposits 4,160,118 4,505,638
Policyholder contract withdrawals (3,375,231) (2,923,754)
Purchase of treasury stock 0 (26,527)
------- ---------
Net cash provided by financing activities 784,887 1,555,357
------- ---------
Net increase (decrease) in cash and cash equivalents (4,472,975) 8,872,338
Cash and cash equivalents at beginning of period 26,378,463 16,105,933
============= ==============
Cash and cash equivalents at end of period $ 21,905,488 $ 24,978,271
============= ==============
</TABLE>
See accompanying notes
198
<PAGE>
UNITED TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements 3/31/99
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, 1998.
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 March 31, 1999, the parent, significant subsidiaries and affiliates of United
Trust Inc. were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF MARCH 31, 1999
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").
199
<PAGE>
2. INVESTMENTS
As of March 31, 1999, fixed maturities and fixed maturities held for sale
represented 81% 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 value. 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 March 31, 1999, 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 March 31, 1999 and December 31, 1998, the Company has $9,529,138 and
$9,529,138 in long-term debt outstanding, respectively. The debt is comprised of
the following components:
1999 1998
------------- -------------
Senior debt $ 100,000 $ 100,000
Subordinated 10 yr. notes 2,267,067 2,267,067
Subordinated 20 yr. notes 3,252,071 3,252,071
Convertible notes 2,560,000 2,560,000
Other notes payable 1,350,000 1,350,000
------------- -------------
$ 9,529,138 $ 9,529,138
============= =============
A. Senior debt
The senior debt is through National City Bank (formerly 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 National City Bank from time to time as its "base lending rate."
The base rate at March 31, 1999 was 7.75%. Interest is paid quarterly. The
remaining principal balance of $100,000 will be payable on or before the debt
maturity date of May 8, 2005, and is being maintained to keep the Company's
credit relationship with National City Bank in place.
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
200
<PAGE>
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 original 20-year notes bear interest at the rate
of 8 1/2% per annum on $2,747,109 and 8.75% per annum on $504,962 payable
semi-annually with a lump sum principal payment due June 16, 2012. On April 16,
1999, the Company prepaid $2,030,000 of its outside debt consisting of the
remaining 10 year notes excepting the $840,000 note, all of the twenty year
notes with 8.75% interest rates and $98,771 of the 8.5% 20 year notes.
C. Convertible notes
On July 31, 1997, UTI issued convertible notes for cash in the amount of
$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. On March 1, 1999, First Southern Bancorp, Inc., an affiliate
of First Southern Funding, LLC, acquired all the outstanding UTI convertible
notes from the original holders. Pursuant to an agreement, First Southern
Bancorp, Inc. will convert the notes to common stock by July 31, 2000.
D. Other notes payable
UII holds three promissory notes receivable totaling $1,350,000 due from FCC.
Two of the notes, totaling $850,000, bear 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. The third note in the amount of $500,000 bears interest at the rate
of 7.5%, with interest payments due quarterly and principal due upon the
maturity date of March 31, 2004.
Scheduled principal reductions on the Company's debt for the next five years is
as follows:
Year Amount
1999 $ 376,714
2000 226,714
2001 226,714
2002 1,586,925
2003 0
4. 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 March 31, 1999 options for 42,438 shares were granted and exercised.
Options for 1,562 shares remain available for grant.
201
<PAGE>
A summary of the status of UTI's stock option plan through March 31, 1999 and
December 31, 1998 is presented below.
<TABLE>
1999 1998
---- ----
Exercise Exercise
Shares Price Shares Price
<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 March 31, 1999:
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 March 31, 1999 no options
were exercised. At March 31, 1999 and December 31, 1998, the Company held a
liability of $1,525,483 and $1,494,520, respectively, relating to this plan. At
March 31, 1999, UTI common stock had a market price of $7.75 per share.
The following information applies to deferred compensation plan stock options
outstanding at March 31, 1999:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 1.75 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 March 31, 1999, the
notes were convertible into 204,800 shares of UTI common stock with no
conversion privileges having been exercised. At March 31, 1999, UTI common stock
had a market price of $7.75 per share. On March 1, 1999, First Southern Bancorp,
Inc., an affiliate of First Southern Funding, LLC, acquired all the outstanding
202
<PAGE>
UTI convertible notes from the original holders. Pursuant to an agreement, First
Southern Bancorp, Inc. will convert the notes to common stock by July 31, 2000.
D. Stock options
At the time of the closing on the UTI stock sale to First Southern Funding, LLC
("FSF") and its affiliates on November 20, 1998, and as part of the transaction,
UTI 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. As
of March 31, 1999, no options were exercised. At March 31, 1999, UTI common
stock had a market value of $7.75 per share.
The following information applies to options outstanding at March 31, 1999:
Number outstanding 1,450,000
Exercise price $ 15.00
Remaining contractual life 2.25 years
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.
<TABLE>
For the period ended March 31, 1999
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
Basic EPS
<S> <C> <C> <C>
Income available to common shareholders $ 132,461 2,490,438 $ 0.05
=================
Effect of Dilutive Securities
Convertible notes 55,845 204,800
Options 1,562
--------------- ------------------
Diluted EPS
Income available to common shareholders and $
assumed conversions 188,306 2,696,800 $ 0.07
=============== ================== =================
</TABLE>
<TABLE>
For the period ended March 31, 1998
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
Basic EPS
<S> <C> <C> <C>
Income available to common shareholders $ 114,441 1,628,547 $ 0.07
=================
Effect of Dilutive Securities
Convertible notes 38,979 204,800
Options 1,562
--------------- ------------------
Diluted EPS
Income available to common shareholders and $
assumed conversions 153,420 1,834,909 $ 0.08
=============== ================== =================
</TABLE>
203
<PAGE>
UTI has stock options outstanding during the first quarter of 1999 and 1998 for
105,000 shares of common stock at $17.50 per share and options for 1,450,000 and
0 shares of common stock respectively at $15.00 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.
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 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 $85,559 and $285,784 in interest expense
during the first quarter of 1999 and 1998, respectively. The Company paid
$29,308 and $0 in federal income tax during the first quarter of 1999 and 1998,
respectively.
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. At the time the decision to merge was made,
neither UTI nor UII had 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 will
occur as soon as practical following regulatory approval.
204
<PAGE>
9. ACCOUNTING AND LEGAL DEVELOPMENTS
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.
205
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
United Income, Inc.
We have audited the accompanying balance sheets of United Income, Inc.
(an Ohio corporation) as of December 31, 1998 and 1997, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of United Income, Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1999
206
<PAGE>
UNITED INCOME, INC.
BALANCE SHEETS
As of December 31, 1998 and 1997
<TABLE>
ASSETS
1998 1997
---------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 368,692 $ 710,897
Mortgage loans 170,052 121,520
Notes receivable from affiliate 1,364,100 864,100
Accrued interest income 13,629 12,068
Property and equipment (net of accumulated
depreciation of $50,038 and $93,648) 444 1,070
Investment in affiliates 10,697,626 11,060,682
Receivable from affiliate 22,244 23,192
Other assets (net of accumulated amortization
of $175,826 and $138,810) 9,242 46,258
---------------- ---------------
Total assets $ 12,646,029 $ 12,839,787
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 22,209 1,534
---------------- ---------------
Total liabilities 924,509 903,834
---------------- ---------------
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
Accumulated deficit (3,385,700) (3,332,743)
Accumulated other comprehensive income (181,079) (19,603)
---------------- ---------------
Total shareholders' equity 11,721,520 11,935,953
---------------- ---------------
Total liabilities and shareholders' equity $ 12,646,029 $ 12,839,787
================ ===============
</TABLE>
See accompanying notes
207
<PAGE>
UNITED INCOME, INC.
STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1998
<TABLE>
1998 1997 1996
-------------- -------------- -------------
Revenues:
<S> <C> <C> <C>
Interest income $ 49,708 $ 27,127 $ 13,099
Interest income from affiliates 83,317 82,579 79,433
Service agreement income from affiliates 835,345 989,295 1,567,891
Other income from affiliates 66,553 87,073 127,922
Realized investment gains 0 0 2,599
Other income 0 48 3
-------------- -------------- -------------
1,034,923 1,186,122 1,790,947
Expenses:
Management fee to affiliate 501,207 743,577 1,240,735
Operating expenses 80,396 80,173 89,529
Interest expense 85,155 85,155 84,027
-------------- -------------- -------------
666,758 908,905 1,414,291
-------------- -------------- -------------
Gain before income taxes and equity
in loss of investees 368,165 277,217 376,656
Provision for income taxes 0 0 0
Equity in loss of investees (421,122) (356,533) (695,739)
-------------- -------------- -------------
Net loss $ (52,957)$ (79,316) $ (319,083)
============== ============== =============
Basic loss per share from continuing
operations and net loss $ (0.04)$ (0.06) $ (0.23)
============== ============== =============
Diluted loss per share from continuing
operations and net loss $ (0.04)$ (0.06) $ (0.23)
============== ============== =============
Basic weighted average shares outstanding 1,391,919 1,391,996 1,392,084
============== ============== =============
Diluted weighted average shares outstanding 1,391,919 1,391,996 1,392,084
============== ============== =============
</TABLE>
See accompanying notes
208
<PAGE>
UNITED INCOME, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1998
<TABLE>
1998 1997 1996
-------------------------------- ------------------------------- ---------------------------
Common stock
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of year $ 45,934 $ 45,940 $ 45,938
Exercise of
stock
options 0 0 2
Stock retired
from
purchase of
fractional
shares of reverse
stock split 0 (6) 0
---------------- --------------- -----------
Balance, end of year $ 45,934 $ 45,934 $ 45,940
================ =============== ===========
Additional paid-in capital
Balance, beginning
of year $ 15,242,365 $ 15,244,471 $ 15,243,773
Exercise of stock
options 0 0 698
Stock retired from
purchase of fractional
shares of reverse
stock split 0 (2,106) 0
---------------- --------------- -----------
Balance, end of year $ 15,242,365 $ 15,242,365 $ 15,244,471
================ =============== ===========
Accumulated deficit
Balance, beginning
of year $ (3,332,743) $ (3,253,427) $ (2,934,344)
Net loss (52,957) $ (52,957) (79,316) $ (79,316) (319,083) $ (319,083)
---------------- --------------- -----------
Balance, end of year $ (3,385,700) $ (3,332,743) $ (3,253,427)
================ =============== ===========
Accumulated other
comprehensive income
Balance, beginning
of year (19,603) (59,508) (236)
Other comprehensive
income
Unrealized holding gain
(loss) on securities (161,476) (161,476) 39,905 39,905 (59,272) (59,272)
---------------- --------------- --------------- --------------- ----------- -----------
Comprehensive income $ (214,433) $ (39,411) $ (378,355)
=============== =============== ===========
Balance, end of year (181,079) (19,603) (59,508)
---------------- --------------- -----------
Total shareholders'
equity, end of year $ 11,721,520 $ 11,935,953 $ 11,977,476
================ =============== ===========
</TABLE>
See accompanying notes
209
<PAGE>
UNITED INCOME, INC.
STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1998
<TABLE>
1998 1997 1996
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents Cash flows from operating
activities:
<S> <C> <C> <C>
Net loss $ (52,957) $ (79,316) $ (319,083)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 37,643 38,524 45,331
Gain on payoff of mortgage loan 0 0 (2,599)
Accretion of discount on mortgage loans (262) (266) (481)
Compensation expense through stock option plan 0 0 667
Equity in loss of investees 421,122 356,533 695,739
Changes in assets and liabilities:
Change in accrued interest income (1,561) (284) (4,744)
Change in receivable from affiliates 948 8,645 (119,706)
Change in other liabilities 20,674 261 (39,449)
--------------- --------------- ---------------
Net cash provided by operating activities 425,607 324,097 255,675
--------------- --------------- ---------------
Cash flows from investing activities:
Change in notes receivable from affiliate (688,633) 0 (150,000)
Purchase of investments in affiliates (30,909) (52,363) 0
Capital contribution to investee 0 0 (94,000)
Payments of principal on mortgage loans 1,730 1,599 62,434
Issuance of mortgage loan (50,000) 0 0
Proceeds from sale of property and equipment 0 0 1,164
--------------- --------------- ---------------
Net cash used in investing activities (767,812) (50,764) (180,402)
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from sale of common stock 0 0 33
Payment for fractional shares from reverse stock split 0 (2,112) 0
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 0 (2,112) 33
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (342,205) 271,221 75,306
Cash and cash equivalents at beginning of year 710,897 439,676 364,370
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 368,692 $ 710,897 $ 439,676
</TABLE>
See accompanying notes
210
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1998, the affiliates of United Income, Inc.
were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
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").
211
<PAGE>
The summary of the Company's significant accounting policies, consistently
applied in the preparation of the accompanying financial statements, are
summarized as 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 - Mortgage loans are shown on the following basis - 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. 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.
E. PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost.
Depreciation is provided using a straight-line method. Accumulated
depreciation was $50,038 in 1998 and $93,648 in 1997. Depreciation expense
for the years ended December 1998, 1997, and 1996 was $627, $1,508 and
$8,315 respectively.
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 1998, 1997 and 1996, respectively, and
stock options exercisable of 231, 231, and 231 shares in 1998, 1997, and
1996, respectively. UII had stock options outstanding for shares of common
stock in 1998, 1997, and 1996 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. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the current year presentation. Such reclassifications had no
effect on previously reported net loss, total assets, or shareholders'
equity.
H. 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.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1998, substantially all of 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.
212
<PAGE>
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, 1998, UG
had a statutory gain from operations of $3,226,364. At December 31, 1998, UG's
statutory capital and surplus amounted to $15,280,577. 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
The Company has net operating loss carryforwards for federal income tax purposes
expiring as follows:
UII
-----------------
2007 $ 206,309
-----------------
TOTAL $ 206,309
=================
The Company has established a deferred tax asset of $72,208 for its operating
loss carryforwards and has established an allowance of $72,208 against this
asset. The Company has no other deferred tax components which would be reflected
in the balance sheets.
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:
<TABLE>
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Income tax at statutory rate of
35% of income before income taxes $ 128,858 $ 97,026 $ 131,830
Utilization of net operating loss
carryforward (128,858) (97,026) (133,866)
Depreciation 0 0 2,036
-------------- ------------- --------------
Provision for income taxes $ 0 $ 0 $ 0
============== ============= ==============
</TABLE>
4. 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, 1998, the estimated fair value and
carrying amounts were $248,216 and $170,052, respectively. As of December 31,
1997, the estimated fair value and carrying amount were $138,519 and $121,520,
respectively.
(b) Notes receivable from affiliate
For notes receivable from affiliates, which is subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
(c) Convertible debentures
213
<PAGE>
For the convertible debentures, which are subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
6. 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.
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 $8,793,905, $9,893,321
and $9,927,000 under these arrangements in 1998, 1997 and 1996, respectively. UG
paid $8,018,141, $8,660,481 and $9,626,559 to FCC in 1998, 1997 and 1996,
respectively.
USA paid $835,345, $989,295 and $1,567,891 under their agreement with UII for
1998, 1997 and 1996, respectively. UII paid $501,207, $593,577 and $940,734
under their agreement with UTI for 1998, 1997 and 1996, respectively.
Additionally, UII paid FCC $0, $150,000 and $300,000 in 1998, 1997 and 1996,
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 UTI 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. On March 1, 1999, the individuals
holding the convertible notes sold their interests in said notes to First
Southern Bancorp, Inc. in private transactions.
214
<PAGE>
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 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 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 UTI and its affiliates. 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 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 UTI to make the stock more attractive to the investment
community. Following the transaction, Mr. Ryherd and his family owned
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 July 31,1997, UTI entered into employment agreements with eight individuals,
all officers or employees of UTI. 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
UTI a stable management environment and positioning for future growth.
7. 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, 1998, 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 1998.
A summary of the status of the Company's stock option plan for the three years
ended December 31, 1998, and changes during the years ending on those dates is
presented below.
<TABLE>
1998 1997 1996
---- ---- ----
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 451 $ 13.07 10,888 $ 13.07 10,888 $ 13.07
Granted 0 0.00 0 0.00 0 0.00
Exercised 0 0.00 0 0.00 0 0.00
Forfeited 0 0.00 10,437 13.07 0 0.00
Outstanding at end of year 451 $ 13.07 451 $ 13.07 10,888 $ 13.07
========== ========= =======
Options exercisable at year end 451 $ 13.07 451 $ 13.07 10,888 $ 13.07
</TABLE>
The following information applies to options outstanding at December 31,
1998:
Number outstanding 451
Exercise price $ 13.07
Remaining contractual life 2 years
215
<PAGE>
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, 1998. At December 31, 1998, 231 options have been granted and are
exercisable. No options were exercised during 1998.
A summary of the status of the Company's stock option plan for the three
years ended December 31, 1998, and changes during the years ending on those
dates is presented below.
<TABLE>
1998 1997 1996
---- ---- ----
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 231 $ 0.47 231 $ 0.47 301 $ 0.47
Granted 0 0.00 0 0.00 0 0.00
Exercised 0 0.00 0 0.00 (70) 0.47
Forfeited 0 0.00 0 0.00 0 0.00
Outstanding at end of year 231 $ 0.47 231 $ 0.47 231 $ 0.47
========== ========= =========
Options exercisable at year end 231 $ 0.47 231 $ 0.47 231 $ 0.47
Fair value of options granted
during the year $ 0.00 $ 0.00 $ 0.00
</TABLE>
The following information applies to options outstanding at December 31,
1998:
Number outstanding 231
Exercise price $ 0.47
Remaining contractual life 2 years
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 National City Bank
(formerly 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.
9. 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.
216
<PAGE>
10. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for the Company's 50% or
less owned affiliate:
<TABLE>
December 31, December 31,
ASSETS 1998 1997
------------------ ------------------
<S> <C> <C>
Total investments $ 216,247,582 $ 224,281,560
Cash and cash equivalents 25,867,577 15,763,639
Cost of insurance acquired 42,673,693 45,009,452
Other assets 57,499,087 62,896,384
------------------ ------------------
Total assets $ 342,287,939 $ 347,951,035
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 268,054,867 $ 268,237,887
Notes payable 17,559,482 19,081,602
Deferred taxes 7,543,678 12,157,685
Other liabilities 6,055,611 4,053,293
------------------ ------------------
Total liabilities 299,213,638 303,530,467
------------------ ------------------
Minority interests in consolidated subsidiaries 9,749,693 10,130,024
------------------ ------------------
Shareholders' equity
Common stock no par value 46,577,216 45,926,705
Authorized 10,000 shares - 100 issued
Accumulated other comprehensive income (385,275) (41,708)
Accumulated deficit (12,867,333) (11,594,453)
------------------ ------------------
Total shareholders' equity 33,324,608 34,290,544
------------------ ------------------
Total liabilities and shareholders' equity $ 342,287,939 $ 347,951,035
================== ==================
1998 1997 1996
---------------- ---------------- ----------------
Premiums and policy fees, net of reinsurance $ 26,396,077 $ 28,639,245 $ 30,944,458
Net investment income 15,080,005 14,882,677 15,902,107
Other (1,101,219) (171,304) (370,454)
---------------- ---------------- ----------------
40,374,863 43,350,618 46,476,111
Benefits, claims and settlement expenses 25,472,374 27,055,171 30,326,032
Other expenses 20,914,833 16,776,537 22,953,093
---------------- ---------------- ----------------
46,387,207 43,831,708 53,279,125
---------------- ---------------- ----------------
Loss before income tax and
minority interest (6,012,344) (481,090) (6,803,014)
Income tax credit (provision) 4,502,537 (571,999) 4,643,961
Minority interest in loss of
consolidated subsidiaries 236,927 129,712 498,356
---------------- ---------------- ----------------
Net loss $ (1,272,880) $ (923,377) $ (1,660,697)
================ ================ ================
</TABLE>
217
<PAGE>
11. OTHER CASH FLOW DISCLOSURES
On a cash basis, UII paid $64,289, $85,155 and $84,027 in interest expense for
the years 1998, 1997 and 1996, respectively. UII paid $0, $0 and $0 in federal
income tax for 1998, 1997 and 1996, respectively.
12. 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.
13. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 128 entitled Earnings per share, which is
effective for financial statements for fiscal years beginning after December 15,
1997. SFAS 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.
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 128 did not have an impact on the Company's
financial statement.
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 the Company to make additional
disclosures in the 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 the Company's 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
218
<PAGE>
the Company's 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 the Company's financial
position or results of operations, since the Company has no derivative or
hedging type investments.
14. CHANGE IN CONTROL OF UNITED TRUST, INC.
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
acquired on the market, FSF and affiliates currently own 1,073,577 shares of UTI
common stock (43.1%) becoming the largest shareholder of UTI. Through the shares
acquired and options owned, FSF can ultimately own over 51% of UTI. 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 a bank that operates
out of 14 locations in central Kentucky.
15. 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. At the time the decision to merge was made,
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.
219
<PAGE>
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the second quarter of 1999.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
1998
-------------------- --------------------- -------------------- ---------------------
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest income $ 11,551 $ 12,220 $ 12,285 $ 13,652
Interest income/affil. 20,488 20,708 20,972 21,149
Service agreement income 237,358 197,581 227,868 172,538
Total revenues 287,351 250,471 276,404 220,697
Management fee/affil 142,415 116,226 139,022 103,544
Operating expenses 50,140 10,203 10,444 9,609
Interest expense 21,430 21,429 21,430 20,866
Operating income (loss) 73,366 102,613 105,508 86,678
Net income (loss) 105,177 225,221 328,299 (711,654)
Basic earnings (loss) per share 0.08 0.16 0.24 (0.52)
Diluted earnings (loss) per share 0.09 0.17 0.24 (0.52)
</TABLE>
<TABLE>
1997
-------------------- --------------------- -------------------- ---------------------
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
<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/affil 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 (loss) per share 0.04 0.06 (0.10) (0.06)
Diluted earnings (loss) per share 0.05 0.07 (0.10) (0.06)
</TABLE>
220
<PAGE>
<TABLE>
1996
-------------------- --------------------- -------------------- ---------------------
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
<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/affil 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 (loss) per share 0.01 0.00 (0.03) 0.00
Diluted earnings (loss) per share 0.01 0.00 (0.03) 0.00
</TABLE>
221
<PAGE>
EXHIBIT 99(d)
AUDITED FINANCIAL STATEMENTS OF
UNITED TRUST GROUP, INC.
222
<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,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Trust Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1998, and Schedules
II, IV and V as of December 31, 1998 and 1997, 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, 1999
223
<PAGE>
UNITED TRUST GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
<TABLE>
ASSETS
1998 1997
--------------- ---------------
Investments:
<S> <C> <C>
Fixed maturities at amortized cost 174,240,848 180,970,333
(market $179,885,379 and $184,782,568)
Investments held for sale:
Fixed maturities, at market (cost $1,494,636 and $1,672,298) 1,505,406 1,668,630
Equity securities, at market (cost $2,725,061 and $3,184,357) 2,087,416 3,001,744
Mortgage loans on real estate at amortized cost 10,941,614 9,469,444
Investment real estate, at cost, net of accumulated depreciation 8,979,183 9,760,732
Real estate acquired in satisfaction of debt 1,550,000 1,724,544
Policy loans 14,134,041 14,207,189
Other long-term investments 1,746,278 1,680,066
Short-term investments 1,062,796 1,798,878
--------------- ---------------
216,247,582 224,281,560
Cash and cash equivalents 25,867,577 15,763,639
Investment in affiliates 350,000 350,000
Accrued investment income 3,543,937 3,665,228
Reinsurance receivables:
Future policy benefits 36,965,938 37,814,106
Policy claims and other benefits 3,563,963 3,529,078
Cost of insurance acquired 42,673,693 45,009,452
Deferred policy acquisition costs 6,324,548 10,600,720
Cost in excess of net assets purchased,
net of accumulated amortization 2,642,210 2,777,089
Property and equipment, net of accumulated depreciation 3,166,835 3,392,905
Other assets 941,656 767,258
--------------- ---------------
Total assets 342,287,939 347,951,035
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and
accruals:
Future policy benefits 248,391,753 248,805,695
Policy claims and benefits payable 2,183,434 2,080,907
Other policyholder funds 2,150,632 2,445,469
Dividend and endowment accumulations 15,329,048 14,905,816
Income taxes payable:
Current 115,785 15,730
Deferred 7,543,678 12,157,685
Notes payable 17,559,482 19,081,602
Indebtedness to affiliates, net 52,313 49,977
Other liabilities 5,887,513 3,987,586
--------------- ---------------
Total liabilities 299,213,638 303,530,467
--------------- ---------------
Minority interests in consolidated subsidiaries 9,749,693 10,130,024
--------------- ---------------
Shareholders' equity:
Common stock - no par value
Authorized 10,000 shares - 100 shares issued 46,577,216 45,926,705
Accumulated deficit (12,867,333) (11,594,453)
Accumulated other comprehensive income (385,275) (41,708)
--------------- ---------------
Total shareholders' equity 33,324,608 34,290,544
--------------- ---------------
Total liabilities and shareholders' equity 342,287,939 347,951,035
=============== ===============
</TABLE>
See accompanying notes
224
<PAGE>
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1998
<TABLE>
1998 1997 1996
---------------- --------------- ----------------
Revenues:
<S> <C> <C> <C>
Premiums and policy fees $ 30,938,609 $ 33,373,950 $ 35,891,609
Reinsurance premiums and policy fees (4,542,532) (4,734,705) (4,947,151)
Net investment income 15,080,005 14,882,677 15,902,107
Realized investment gains and (losses), net (1,119,156) (279,096) (465,879)
Other income 17,937 107,792 95,425
---------------- --------------- ----------------
40,374,863 43,350,618 46,476,111
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 23,078,145 23,644,252 26,568,062
Reinsurance benefits and claims (2,499,394) (2,078,982) (2,283,827)
Annuity 1,462,385 1,560,828 1,892,489
Dividends to policyholders 3,431,238 3,929,073 4,149,308
Commissions and amortization of deferred
policy acquisition costs 6,450,529 3,616,365 4,224,885
Amortization of cost of insurance acquired 2,335,759 2,527,360 5,690,069
Operating expenses 10,481,145 8,957,372 11,285,566
Interest expense 1,647,400 1,675,440 1,752,573
---------------- --------------- ----------------
46,387,207 43,831,708 53,279,125
---------------- --------------- ----------------
Loss before income taxes, minority interest
and equity in loss of investees (6,012,344) (481,090) (6,803,014)
Income tax credit (expense) 4,502,537 (571,999) 4,643,961
Minority interest in loss
of consolidated subsidiaries 236,927 129,712 498,356
---------------- --------------- ----------------
Net loss $ (1,272,880) $ (923,377) $ (1,660,697)
================ =============== ================
Basic loss per share from continuing
operations and net loss $ (12,728.80) $ (9,233.77) $ (16,606.97)
================ =============== ================
Diluted loss per share from continuing
operations and net loss $ (12,728.80) $ (9,233.77) $ (16,606.97)
================ =============== ================
Basic weighted average shares outstanding 100 100 100
================ =============== ================
Diluted weighted average shares outstanding 100 100 100
================ =============== ================
</TABLE>
See accompanying notes
225
<PAGE>
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1998
<TABLE>
1998 1997 1996
-------------------------------- -------------------------------- ----------------------------
Common stock
<S> <C> <C> <C> <C> <C> <C>
Balance,
beginning of
year $ 45,926,705 $ 45,926,705 $ 45,726,705
Capital
contribution 650,511 0 200,000
-------------- -------------- --------------
Balance, end
of year $ 46,577,216 $ 45,926,705 $ 45,926,705
============== ============== ==============
Accumulated
deficit
Balance,
beginning
of year $ (11,594,453) $ (10,671,076) $ (9,010,379)
Net income
(loss) (1,272,880) $ (1,272,880) (923,377) $ (923,377) (1,660,697) $(1,660,697)
-------------- -------------- --------------
Balance,
end of year $ (12,867,333) $ (11,594,453) $ (10,671,076)
============== ============== ==============
Accumulated other
comprehensive
income
Balance,
beginning
of year (41,708) (126,612) (501)
Other
comprehensive
income
Unrealized holding
gain (loss)
on securities (343,567) (343,567) 84,904 84,904 (126,111) (126,111)
-------------- -------------- -------------- -------------- -------------- -----------
Comprehensive income $ (1,616,447) $ (838,473) $(1,786,808)
============== ============== ===========
Balance, end of year (385,275) (41,708) (126,612)
-------------- -------------- --------------
Total shareholders'
equity, end of year $ 33,324,608 $ 34,290,544 $ 35,129,017
============== ============== ==============
</TABLE>
See accompanying notes
226
<PAGE>
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1998
<TABLE>
1998 1997 1996
--------------- -------------- ---------------
Increase (decrease) in cash and cash equivalents Cash flows from operating
activities:
<S> <C> <C> <C>
Net loss (1,272,880)$ (923,377)$ (1,660,697)
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 657,863 670,185 899,445
Realized investment (gains) losses, net 1,119,156 279,096 465,879
Policy acquisition costs deferred (892,000) (586,000) (1,276,000)
Amortization of deferred policy acquisition costs 5,168,172 1,310,636 1,387,372
Amortization of cost of insurance acquired 2,335,759 2,527,360 5,690,069
Amortization of costs in excess of net assets purchased 90,000 155,000 185,279
Depreciation 486,681 457,415 371,991
Minority interest (236,927) (129,712) (498,356)
Change in accrued investment income 121,291 (205,480) 195,821
Change in reinsurance receivables 813,283 1,257,953 83,871
Change in policy liabilities and accruals 75,087 (547,081) 3,326,651
Charges for mortality and administration of
universal life and annuity products (10,771,795) (10,588,874) (10,239,476)
Interest credited to account balances 7,014,683 7,212,406 7,075,921
Change in income taxes payable (4,513,952) 511,666 (4,653,734)
Change in indebtedness (to) from affiliates, net 2,336 (12,107) 224,472
Change in other assets and liabilities, net 1,725,527 (1,634,387) 1,392,938
--------------- -------------- ---------------
Net cash provided by (used in) operating activities 1,922,284 (245,301) 2,971,446
--------------- -------------- ---------------
Cash flows from investing activities: Proceeds from investments sold and
matured:
Fixed maturities held for sale 164,520 290,660 1,219,036
Fixed maturities sold 0 0 18,736,612
Fixed maturities matured 54,642,223 21,488,265 20,721,482
Equity securities 450,000 76,302 8,990
Mortgage loans 1,785,859 1,794,518 3,364,427
Real estate 1,716,124 1,136,995 3,219,851
Policy loans 3,661,834 4,785,222 3,937,471
Short term 1,593,749 410,000 825,000
--------------- -------------- ---------------
Total proceeds from investments sold and matured 64,014,309 29,981,962 52,032,869
Cost of investments acquired:
Fixed maturities (48,745,594) (23,220,172) (29,365,111)
Equity securities (79,053) (1,248,738) 0
Mortgage loans (3,667,061) (245,234) (503,113)
Real estate (1,346,299) (1,444,980) (813,331)
Policy loans (3,588,686) (4,554,291) (4,329,124)
Other long-term investments (66,212) 0 0
Short term (851,198) (1,726,035) (830,983)
--------------- -------------- ---------------
Total cost of investments acquired (58,344,103) (32,439,450) (35,841,662)
Purchase of property and equipment (114,449) (531,528) (383,411)
--------------- -------------- ---------------
Net cash provided by (used in) investing activities 5,555,757 (2,989,016) 15,807,796
--------------- -------------- ---------------
Cash flows from financing activities:
Policyholder contract deposits 15,480,745 17,902,246 22,245,369
Policyholder contract withdrawals (12,402,530) (14,515,576) (15,433,644)
Net cash transferred from coinsurance ceded 0 0 (19,088,371)
Net cash transferred from coinsurance assumed 420,790 0 0
Proceeds from notes payable 9,408,099 1,000,000 9,300,000
Payments on principal of notes payable (10,279,707) (1,758,252) (10,923,475)
Purchase of stock of affiliates (1,500) 0 0
Payment for fractional shares from reverse stock split of subsidiary 0 (534,251) 0
--------------- -------------- ---------------
Net cash provided by (used in) financing activities 2,625,897 2,094,167 (13,900,121)
--------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents 10,103,938 (1,140,150) 4,879,121
Cash and cash equivalents at beginning of year 15,763,639 16,903,789 12,024,668
--------------- -------------- ---------------
Cash and cash equivalents at end of year 25,867,577 $ 15,763,639 $ 16,903,789
=============== ============== ===============
</TABLE>
227
<PAGE>
UNITED TRUST, GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1998, the parent, significant
majority-owned subsidiaries and affiliates of United Trust Group,
Inc., were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
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").
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 Company's dominant business is
individual life insurance which includes the servicing of existing
insurance business in force, the solicitation of new individual life
insurance and the acquisition of other companies in the insurance
business.
C. BUSINESS SEGMENTS - The Company has only one significant business
segment - insurance.
228
<PAGE>
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. 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.
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 $685,526 and $539,366 as of December 31, 1998 and 1997,
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. 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.
H. 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.
I. 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
229
<PAGE>
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 4.5% to 5.5% in 1998 and 4.5% to 6.0%
in 1997 and 1996.
J. 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.
K. 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 31% of the business and 15% discount rate on
approximately 69% 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 31% 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.
<TABLE>
1998 1997 1996
---------------- ---------------- ----------------
Cost of insurance acquired,
<S> <C> <C> <C>
beginning of year $ 45,009,452 $ 47,536,812 $ 59,601,720
Interest accretion 5,938,673 6,288,402 6,649,203
Amortization (8,274,432) (8,815,762) (12,339,272)
---------------- ---------------- ----------------
Net amortization (2,335,759) (2,527,360) (5,690,069)
Balance attributable to
coinsurance agreement 0 0 (6,374,839)
---------------- ---------------- ----------------
Cost of insurance acquired,
end of year $ 42,673,693 $ 45,009,452 $ 47,536,812
================ ================ ================
</TABLE>
230
<PAGE>
Estimated net amortization expense of cost of insurance acquired for the next
five years is as follows:
Interest Net
Accretion Amortization Amortization
1999 5,622,000 7,304,000 1,682,000
2000 5,400,000 6,840,000 1,440,000
2001 5,216,000 6,825,000 1,609,000
2002 5,008,000 6,569,000 1,561,000
2003 4,804,000 6,521,000 1,717,000
L. DEFERRED POLICY ACQUISITION COSTS - Commissions and other costs 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.
<TABLE>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Deferred, beginning of year $ 10,600,720 $ 11,325,356 $ 11,436,728
Acquisition costs deferred:
Commissions 690,000 998,000 1,441,000
Other expenses 202,000 274,000 431,000
---------------- ---------------- ----------------
Total 892,000 1,272,000 1,872,000
Interest accretion 397,000 425,000 408,000
Amortization charged to income (2,582,172) (2,421,636) (2,391,372)
---------------- ---------------- ----------------
Net amortization (2,185,172) (1,996,636) (1,983,372)
Amortization due to impairment (2,983,000) 0 0
---------------- ---------------- ----------------
Change for the year (4,276,172) (724,636) (111,372)
---------------- ---------------- ----------------
Deferred, end of year $ 6,324,548 $ 10,600,720 $ 11,325,356
================ ================ ================
</TABLE>
231
<PAGE>
The following table reflects the components of the income statement for the line
item Commissions and amortization of deferred policy acquisition costs:
<TABLE>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net amortization of deferred
policy acquisition costs $ 5,168,172 $ 1,996,636 $ 1,983,372
Commissions 1,282,357 1,619,729 2,241,513
---------- ---------- ----------
Total $ 6,450,529 $ 3,616,365 $ 4,224,885
========== ========== ==========
</TABLE>
Estimated net amortization expense of deferred policy acquisition costs for the
next five years is as follows:
Interest Net
Accretion Amortization Amortization
1999 $ 157,000 $ 1,367,000 $ 1,210,000
2000 140,000 1,202,000 1,062,000
2001 124,000 1,053,000 929,000
2002 110,000 920,000 810,000
2003 98,000 803,000 705,000
M. 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 or by shortening the amortization period
(no such changes have occurred). Accumulated amortization of cost in excess
of net assets purchased was $1,510,146 and $1,420,146 as of December 31,
1998 and 1997, respectively.
N. PROPERTY AND EQUIPMENT - Company-occupied property, data processing
equipment and furniture and office equipment are stated at cost less
accumulated depreciation of $1,715,626 and $1,375,105 at December 31, 1998
and 1997, 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 $340,521 and $360,422 for the years
ended December 31, 1998 and 1997, respectively.
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. 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 128. The computation of diluted earnings
per share is the same as basic earnings per share since the Company has no
dilutive instruments outstanding.
Q. RECOGNITION OF REVENUES AND RELATED EXPENSES - Premiums for traditional
life insurance products, which include those products with fixed and
232
<PAGE>
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.
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
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.
R. PARTICIPATING INSURANCE - Participating business represents 34% and 39% of
the ordinary life insurance in force at December 31, 1998 and 1997,
respectively. Premium income from participating business represents 39%,
50%, and 52% of total premiums for the years ended December 31, 1998, 1997
and 1996, 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.
S. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the 1998 presentation. Such reclassifications had no effect on
previously reported net loss, total assets, or shareholders' equity.
T. 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.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1998, 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, 1998, UG
had a statutory gain from operations of $3,226,364. At December 31, 1998, UG's
statutory capital and surplus amounted to $15,280,577. 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 only to life insurance
233
<PAGE>
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.
Shareholders' Untaxed
Company Surplus Balance
- - ---------------------- ----------------- --------------
ABE $ 5,180,494 $ 1,149,693
APPL 6,137,321 1,525,367
UG 30,998,215 4,363,821
USA 0 0
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:
<TABLE>
1998 1997 1996
---------------- ----------------- ----------------
<S> <C> <C> <C>
Current tax expense $ 111,470 $ 5,400 $ (148,148)
Deferred tax expense (credit) (4,614,007) 566,599 (4,495,813)
---------------- ----------------- ----------------
$ (4,502,537) $ 571,999 $ (4,643,961)
================ ================= ================
</TABLE>
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
UG FCC
------------- ---------------
2007 $ 0 $ 136,058
2008 0 4,595
2009 0 168,800
2010 0 19,112
2012 386,669 0
------------- ---------------
TOTAL $ 386,669 $ 328,565
============= ===============
The Company has established a deferred tax asset of $250,332 for its operating
loss carryforwards and has established an allowance of $250,332.
234
<PAGE>
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:
<TABLE>
1998 1997 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Tax computed at statutory rate $ (2,104,320) $ (168,382) $ (2,381,055)
Changes in taxes due to:
Cost in excess of net assets purchased 31,500 54,250 64,848
Current year loss for which no benefit realized 0 1,039,742 0
Benefit of prior losses (2,587,353) (324,705) (2,393,395)
Other 157,636 (28,906) 65,641
--------------- --------------- ----------------
Income tax expense (credit) $ (4,502,537) $ 571,999 $ (4,643,961)
=============== =============== ================
</TABLE>
The following table summarizes the major components that comprise the deferred
tax liability as reflected in the balance sheets:
1998 1997
---------------- ---------------
Investments $ (182,000) $ (228,027)
Cost of insurance acquired 14,935,793 15,753,308
Deferred policy acquisition costs 2,213,592 3,710,252
Agent balances (22,257) (23,954)
Property and equipment (149) (19,818)
Discount of notes 0 896,113
Management/consulting fees (376,852) (573,182)
Future policy benefits (6,144,399) (4,421,038)
Other liabilities (797,833) (756,482)
Federal tax DAC (2,082,217) (2,179,487)
---------------- ---------------
Deferred tax liability $ 7,543,678 $ 12,157,685
================ ===============
235
<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:
<TABLE>
December 31,
------------------------------------------------------
1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
Fixed maturities and fixed maturities
held for sale $ 11,981,660 $ 12,677,348 $ 13,326,312
Equity securities 92,196 87,211 88,661
Mortgage loans 859,543 802,123 1,047,461
Real estate 842,724 745,502 794,844
Policy loans 984,761 976,064 1,121,538
Other long-term investments 125,478 126,532 126,005
Short-term investments 29,907 70,624 17,664
Cash 1,210,605 595,334 602,525
--------------- ---------------- ----------------
Total consolidated investment income 16,126,874 16,080,738 17,125,010
Investment expenses (1,046,869) (1,198,061) (1,222,903)
---------------- --------------- ----------------
Consolidated net investment income $ 15,080,005 $ 14,882,677 $ 15,902,107
=============== ================ ================
</TABLE>
At December 31, 1998, the Company had a total of $4,187,000 of investments,
comprised of $3,152,000 in real estate, $968,000 in equity securities and
$66,000 in other invested assets, which did not produce income during 1998.
The following table summarizes the Company's fixed maturities distribution at
December 31, 1998 and 1997 by ratings category as issued by Standard and Poor's,
a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
----------------------
1998 1997
---------- ----------
Investment Grade
AAA 38% 31%
AA 18% 14%
A 36% 46%
BBB 7% 9%
Below investment grade 1% 0%
---------- ----------
100% 100%
========== ==========
236
<PAGE>
The following table summarizes the Company's fixed maturity holdings and
investments held for sale by major classifications:
<TABLE>
Carrying Value
----------------------------------------
1998 1997
--------------- ---------------
Investments held for sale:
<S> <C> <C>
Fixed maturities $ 1,505,406 $ 1,668,630
Equity securities 2,087,416 3,001,744
Fixed maturities:
U.S. Government, government agencies and authorities 36,809,239 28,259,322
State, municipalities and political subdivisions 23,835,306 22,778,816
Collateralized mortgage obligations 9,406,895 11,093,926
Public utilities 41,724,208 47,984,322
All other corporate bonds 62,465,200 70,853,947
--------------- ---------------
$ 177,833,670 $ 185,640,707
=============== ===============
</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:
Below Investment
Grade Investments 1998 1997 1996
- - ------------------------------ -------------- ------------ ------------
State, Municipalities and
political Subdivisions $ 0 $ 0 $ 10,042
Public Utilities 970,311 80,497 117,609
Corporate 47,281 656,784 813,717
------------- ------------ -------------
Total $ 1,017,592 $ 737,281 $ 941,368
============= ============ =============
237
<PAGE>
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in securities
including investments held for sale are as follows:
<TABLE>
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1998 Cost Gains Losses Value
- - --------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $ 1,434,636 $ 3,265 $ 0 $ 1,437,901
States, municipalities and
political subdivisions 35,000 7,224 0 42,224
Collateralized mortgage
obligations 0 0 0 0
Public utilities 0 0 0 0
All other corporate bonds 25,000 281 0 25,281
-------------- -------------- -------------- --------------
1,494,636 10,770 0 1,505,406
Equity securities 2,725,061 42,520 (680,165) 2,087,416
-------------- -------------- -------------- --------------
Total $ 4,219,697 $ 53,290 $ (680,165) $ 3,592,822
============== ============== ============== ==============
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $ 36,809,239 $ 378,136 $ (53,868) $ 37,133,507
States, municipalities and
political subdivisions 23,835,306 1,042,876 0 24,878,182
Collateralized mortgage
obligations 9,406,895 182,805 (64,769) 9,524,931
Public utilities 41,724,208 1,810,290 (8,585) 43,525,913
All other corporate bonds 62,465,200 2,358,259 (613) 64,822,846
-------------- -------------- -------------- --------------
Total $ 174,240,848 $ 5,772,366 $ (127,835) $ 179,885,379
============== ============== ============== ==============
</TABLE>
238
<PAGE>
<TABLE>
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
- - --------------------------------- -------------- -------------- -------------- --------------
<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>
The amortized cost of debt securities at December 31, 1998, 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.
Estimated
Fixed Maturities Held for Sale Amortized Market
December 31, 1998 Cost Value
- - ---------------------------------------- -------------- --------------
Due in one year or less $ 1,434,636 $ 1,437,901
Due after one year through five years 35,000 42,224
Due after five years through ten years 25,000 25,281
Due after ten years 0 0
Collateralized mortgage obligations 0 0
============== ==============
Total $ 1,494,636 $ 1,505,406
============== ==============
239
<PAGE>
Estimated
Fixed Maturities Held to Maturity Amortized Market
December 31, 1998 Cost Value
- - ---------------------------------------- -------------- --------------
Due in one year or less $ 16,996,673 $ 17,079,985
Due after one year through five years 82,960,251 85,927,556
Due after five years through ten years 58,630,433 60,814,932
Due after ten years 6,246,596 6,537,975
Collateralized mortgage obligations 9,406,895 9,524,931
============== ==============
Total $ 174,240,848 $ 179,885,379
============== ==============
An analysis of sales, maturities and principal repayments of the Company's fixed
maturities portfolio for the years ended December 31, 1998, 1997 and 1996 is as
follows:
<TABLE>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December 31, 1998 Cost Gains Losses Sale
- - ------------------------------------- --------------- ------------- --------------- ---------------
Scheduled principal repayments, calls and tenders:
<S> <C> <C> <C> <C>
Held for sale $ 164,161 $ 359 $ 0 $ 164,520
Held to maturity 54,824,249 126,285 (308,311) 54,642,223
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
--------------- ------------- --------------- ---------------
Total $ 59,988,410 $ 126,644 $ (308,311) $ 54,806,743
=============== ============= =============== ===============
</TABLE>
<TABLE>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December 31, 1997 Cost Gains Losses Sale
- - ------------------------------------- --------------- ------------- --------------- ---------------
Scheduled principal repayments, calls and tenders:
<S> <C> <C> <C> <C>
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>
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<TABLE>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December 31, 1996 Cost Gains Losses Sale
- - ------------------------------------- --------------- ------------- --------------- ---------------
Scheduled principal repayments, calls and tenders:
<S> <C> <C> <C> <C>
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>
C. INVESTMENTS ON DEPOSIT - At December 31, 1998, investments carried at
approximately $15,854,000 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, 1998 and 1997, 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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(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 mortgage loans and certificates of
deposit with various banks that are protected under FDIC.
(g) Other long-term investments
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.
(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>
1998 1997
--------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Fixed maturities $ 174,240,848 $ 179,885,379 $ 180,970,333 $ 184,782,568
Fixed maturities
held for sale 1,505,406 1,505,406 1,668,630 1,668,630
Equity securities 2,087,416 2,087,416 3,001,744 3,001,744
Mortgage loans on
real estate 10,941,614 10,979,378 9,469,444 9,837,530
Investment in real
estate 8,979,183 8,979,183 9,760,732 9,760,732
Real estate
acquired in
satisfaction of debt 1,550,000 1,550,000 1,724,544 1,724,544
Policy loans 14,134,041 14,134,041 14,207,189 14,207,189
Other long term
invested assets 906,278 879,037 1,680,066 1,569,603
Short-term
investments 1,036,251 1,036,251 1,798,878 1,798,878
Liabilities
Notes payable 17,559,482 17,203,574 19,081,602 18,539,301
</TABLE>
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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 is expected to
become effective January 1, 2001, 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 $15,280,577 and $10,997,365 at December
31, 1998 and 1997, respectively. The Company's four life insurance subsidiaries
reported combined statutory operating income before taxes (exclusive of
intercompany dividends) of $5,485,000, $2,067,000 and $2,134,000 for 1998, 1997
and 1996, 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 $924 million, $1.022 billion and $1.109
billion in face amount of life insurance risks with other insurers for 1998,
1997 and 1996, respectively. Reinsurance receivables for future policy benefits
were $36,965,938 and $37,814,106 at December 31, 1998 and 1997, 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
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Life Insurance Company ("PALIC"). The agreement with PALIC accounts for
approximately 65% of the reinsurance receivables as of December 31, 1998.
The Company does not have any short-duration reinsurance contracts. The effect
of the Company's long-duration reinsurance contracts on premiums earned in 1998,
1997 and 1996 was as follows:
Shown in thousands
--------------------------------------------------------
1998 1997 1996
Premiums Premiums Premiums
Earned Earned Earned
---------------- ---------------- ----------------
Direct $ 30,919 $ 33,374 $ 35,891
Assumed 20 0 0
Ceded (4,543) (4,735) (4,947)
---------------- ---------------- ----------------
Net premiums $ 26,396 $ 28,639 $ 30,944
================ ================ ================
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
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fees from USA as stated above. The service fees received from UII are recorded
in UTI's financial statements as other income.
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 $8,793,905, $9,893,321
and $9,927,000 under these arrangements in 1998, 1997 and 1996, respectively. UG
paid $8,018,141, $8,660,481 and $9,626,559 to FCC in 1998, 1997 and 1996,
respectively.
USA paid $835,345, $989,295 and $1,567,891 under their agreement with UII for
1998, 1997 and 1996, respectively. UII paid $501,207, $593,577 and $940,734
under their agreement with UTI for 1998, 1997 and 1996, respectively.
Additionally, UII paid FCC $0, $150,000 and $300,000 in 1998, 1997 and 1996,
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. On March 1, 1999, the individuals
holding the convertible notes sold their interests in said notes to First
Southern Bancorp, Inc. in private transactions.
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 owned
approximately 31% of the outstanding common stock of United Trust Inc. The
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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 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.
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, 1998 no options
were exercised. At December 31, 1998 and 1997, the Company held a liability of
$1,494,520 and $1,376,384, respectively, relating to this plan. At December 31,
1998, UTI common stock had a market price of $8.125 per share.
The following information applies to deferred compensation plan stock options
outstanding at December 31, 1998:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 2 years
11. NOTES PAYABLE
At December 31, 1998 and 1997, the Company has $17,559,482 and $19,081,602 in
long-term debt outstanding, respectively. The debt is comprised of the following
components:
1998 1997
--------------- ----------------
Senior debt $ 100,000 $ 6,900,000
Subordinated 10 yr. notes 2,267,067 5,746,774
Subordinated 20 yr. notes 3,384,316 4,034,828
Other notes payable 11,808,099 2,400,000
--------------- ----------------
$ 17,559,482 $ 19,081,602
=============== ================
A. SENIOR DEBT
The senior debt is through National City Bank (formerly 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 National City Bank from time to time as its "base lending rate."
The base rate at December 31, 1998 was 7.75%. 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, 1998, the Company prepaid
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<PAGE>
$500,000 of the May 1999 principal payment, and on November 23, 1998, the
Company paid a $6,300,000 principal payment. The November 23, 1998 principal
payment was facilitated through a borrowing from United Trust, Inc., which is an
affiliate, and ultimate parent to the Company. The remaining principal balance
of $100,000 will be payable on or before the debt maturity date of May 8, 2005,
and is being maintained to keep the Company's credit relationship with National
City Bank in place.
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 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. In addition to regularly scheduled
semi-annual principal payments, the Company made principal reduction payments
totaling $2,608,099 on November 23, 1998, and $500,000 on December 16, 1998, on
its 10 year subordinated debt. The additional principal payments were
facilitated through borrowings from affiliated party and ultimate parent, United
Trust, Inc. The original 20-year notes bear interest at the rate of 8 1/2% per
annum on $2,879,354 and 8.75% per annum on $504,962 payable semi-annually with a
lump sum principal payment due June 16, 2012. In May of 1998, $650,511 of the 20
year debt was retired through a capital contribution by UTG's parent companies.
The capital contribution was facilitated through the aforementioned parent
companies acquisition of the debt.
C. AFFILIATED 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.
In November 1998 FCC borrowed $2,608,099 from UTI to facilitate the prepayment
of principal on its 10 year subordinated 10-year debt. The note bears interest
at the rate of 7.50%, with interest payments due quarterly and principal due
upon maturity of the note on December 31, 2005. In addition, FCC borrowed
$6,300,000 from UTI to facilitate the prepayment of principal on the senior
debt. This note bears interest at the rate of 9/16% over the prime rate of
interest as published in the Wall Street Journal, with interest payments due
quarterly and principal due upon maturity of the note on December 31, 2006.
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Scheduled principal reductions on the Company's debt for the next five years is
as follows:
Year Amount
1999 $ 626,714
2000 226,714
2001 226,714
2002 1,586,925
2003 0
12. OTHER CASH FLOW DISCLOSURES
On a cash basis, the Company paid $1,686,657, $1,658,703 and $1,700,973 in
interest expense for the years 1998, 1997 and 1996, respectively. The Company
paid $15,805, $57,277 and $17,634 in federal income tax for 1998, 1997 and 1996,
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.
13. 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.
14. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 128 entitled Earnings per share, which is
effective for financial statements for fiscal years beginning after December 15,
1997. SFAS 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.
This statement was adopted for the 1997 Financial Statements. For all periods
presented the computation of diluted earnings per share is the same as basic
earnings per share since the Company had no dilutive instruments outstanding.
Adopting the new standard required the Company to change its financial
presentation and disclosure, but did not affect the Company's financial position
or results of operations.
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 the Company to make additional
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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 the Company's 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
the Company's 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 the Company's financial
position or results of operations, since the Company has no derivative or
hedging type investments.
15. CHANGE IN CONTROL OF UNITED TRUST, INC.
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.
249
<PAGE>
Following the transactions described above, and together with shares of UTI
acquired on the market, FSF and affiliates currently own 1,073,577 shares of UTI
common stock (43.1%) becoming the largest shareholder of UTI. Through the shares
acquired and options owned, FSF can ultimately own over 51% of UTI. 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 a bank that operates
out of 14 locations in central Kentucky.
16. 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. At the time the decision to merge was made,
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 second quarter of 1999.
250
<PAGE>
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
1998
-------------------- --------------------- --------------------- --------------------
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Premiums and policy fees, net $ 7,231,481 $ 7,111,079 $ 6,243,869 $ 5,809,648
Net investment income 3,738,105 3,797,376 3,804,066 3,740,458
Total revenues 11,080,718 10,436,960 9,632,383 9,224,802
Policy benefits including
dividends 6,827,040 6,287,460 6,217,272 6,140,602
Commissions and
amortization of DAC and COI 1,686,864 1,418,423 1,350,553 4,330,448
Operating and interest 2,620,664 2,776,983 2,321,915 4,408,983
expenses
Operating income (loss) (53,850) (45,906) (257,357) (5,655,231)
Net income (loss) 31,311 (24,667) 446,540 (1,726,064)
Basic and diluted earnings (loss) 313.11 (246.67) 4,465.40 (17,260.64)
per share
</TABLE>
<TABLE>
1997
-------------------- --------------------- --------------------- --------------------
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
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 2,884,663 3,084,239 2,778,435 1,885,475
expenses
Operating income (loss) (491,654) 567,833 (757,382) 200,113
Net income (loss) (23,565) 27,351 (512,444) (414,719)
Basic and diluted earnings (loss) (235.65) 273.51 (5,124.44) (4,147.19)
per share
</TABLE>
<TABLE>
1996
-------------------- --------------------- --------------------- --------------------
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
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 3,616,660 3,072,535 3,685,600 910,771
expenses
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)
Basic and diluted earnings (loss) 2,686.75 (936.40) (15,638.17) (2,719.15)
per share
</TABLE>
251
<PAGE>
UNITED TRUST GROUP, INC.
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1998
<TABLE>
Schedule I
Column A Column B Column C Column D
- - -------------------------------------------------------------------------- ---------------- ----------------
Amount at
Which Shown
in Balance
Cost Value Sheet
--------------- ---------------- ----------------
Fixed maturities:
Bonds:
<S> <C> <C> <C>
United States Goverment and
government agencies and authorities $ 36,809,239 $ 37,133,507 $ 36,809,239
State, municipalities, and political
subdivisions 23,835,306 24,878,182 23,835,306
Collateralized mortgage obligations 9,406,895 9,524,931 9,406,895
Public utilities 41,724,208 43,525,913 41,724,208
All other corporate bonds 62,465,200 64,822,846 62,465,200
--------------- ---------------- ----------------
Total fixed maturities 174,240,848 $ 179,885,379 174,240,848
================
Investments held for sale:
Fixed maturities:
United States Goverment and
government agencies and authorities 1,434,636 $ 1,437,901 1,437,901
State, municipalities, and political
subdivisions 35,000 42,224 42,224
Public utilities 0 0 0
All other corporate bonds 25,000 25,281 25,281
--------------- ---------------- ----------------
1,494,636 $ 1,505,406 1,505,406
================
Equity securities:
Banks, trusts and insurance companies 1,935,619 $ 1,607,798 1,607,798
All other corporate securities 789,442 479,618 479,618
--------------- ---------------- ----------------
2,725,061 $ 2,087,416 2,087,416
================
Mortgage loans on real estate 10,941,614 10,941,614
Investment real estate 8,979,183 8,979,183
Real estate acquired in satisfaction of debt 1,550,000 1,550,000
Policy loans 14,134,041 14,134,041
Other long-term investments 1,746,278 1,746,278
Short-term investments 1,062,796 1,062,796
--------------- ----------------
Total investments $ 216,874,457 $ 216,247,582
=============== ================
</TABLE>
252
<PAGE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1998 and 1997
Schedule II
<TABLE>
1998 1997
--------------- ----------------
ASSETS
<S> <C> <C>
Investment in affiliates $ 33,012,770 $ 34,683,168
Cash and cash equivalents 52,127 25,980
Notes receivable from affiliate 6,301,894 9,781,602
Accrued interest income 22,856 34,455
--------------- ----------------
Total assets $ 39,389,647 $ 44,525,205
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 5,505,038 $ 9,635,257
Notes payable to affiliate 146,345 146,345
Income taxes payable 12,467 5,175
Accrued interest payable 21,074 34,455
Other liabilities 380,115 413,429
--------------- ----------------
Total liabilities 6,065,039 10,234,661
--------------- ----------------
Shareholders' equity:
Common stock 46,577,216 45,926,705
Accumulated deficit (12,867,333) (11,594,453)
Accumulated other comprehensive income (385,275) (41,708)
--------------- ----------------
Total shareholders' equity 33,324,608 34,290,544
--------------- ----------------
Total liabilities and shareholders' equity $ 39,389,647 $ 44,525,205
=============== ================
</TABLE>
253
<PAGE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1998
<TABLE>
Schedule II
1998 1997 1996
---------------- ---------------- ----------------
Revenues:
<S> <C> <C> <C>
Interest income from affiliates $ 743,080 782,892 $ 792,046
Other income 37,435 37,641 34,600
---------------- ---------------- ----------------
780,515 820,533 826,646
Expenses:
Interest expense 696,543 776,230 789,496
Interest expense to affiliates 12,439 6,662 2,550
Operating expenses 5,115 5,585 4,624
---------------- ---------------- ----------------
714,097 788,477 796,670
---------------- ---------------- ----------------
Operating income 66,418 32,056 29,976
Income tax credit (expense) (12,467) (5,362) (4,664)
Equity in loss of subsidiaries (1,326,831) (950,071) (1,686,009)
---------------- ---------------- ----------------
Net loss $ (1,272,880) (923,377)$ (1,660,697)
================ ================ ================
Basic loss per share from continuing
operations and net loss $ (12,728.80) (9,233.77)$ (16,606.97)
================ ================ ================
Diluted loss per share from continuing
operations and net loss $ (12,728.80) (9,233.77)$ (16,606.97)
================ ================ ================
Basic weighted average shares outstanding 100 100 100
================ ================ ================
Diluted weighted average shares outstanding 100 100 100
================ ================ ================
</TABLE>
254
<PAGE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1998
<TABLE>
Schedule II
1998 1997 1996
---------------- --------------- ----------------
Increase (decrease) in cash and cash equivalents Cash flows from operating
activities:
<S> <C> <C> <C>
Net loss $ (1,272,880)$ (923,377)$ (1,660,697)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Equity in loss of subsidiaries 1,326,831 950,071 1,686,009
Change in accrued interest income 11,599 747 0
Change in accrued interest payable (13,381) (747) 0
Change in income taxes payable 7,292 (1,488) 3,442
Change in other liabilities (33,314) (38,834) (139,256)
---------------- --------------- ----------------
Net cash provided by (used in) operating activities 26,147 (13,628) (110,502)
---------------- --------------- ----------------
Cash flows from investing activities:
Proceeds for fractional shares from reverse stock
split of subsidiary 0 79 0
Purchase of stock of affiliates 0 0 (95,000)
---------------- --------------- ----------------
Net cash provided by (used in) investing activities 0 79 (95,000)
---------------- --------------- ----------------
Cash flows from financing activities:
Receipt of principal on notes receivable from affiliate 3,479,707 258,252 0
Payments of principal on notes payable (3,479,707) (258,252) 0
Capital contribution from affiliates 0 0 200,000
---------------- --------------- ----------------
Net cash provided by financing activities 0 0 200,000
---------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents 26,147 (13,549) (5,502)
Cash and cash equivalents at beginning of year 25,980 39,529 45,031
---------------- --------------- ----------------
Cash and cash equivalents at end of year $ 52,127 $ 25,980 $ 39,529
================ =============== ================
</TABLE>
255
<PAGE>
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1998 and the year ended December 31, 1998
Schedule IV
<TABLE>
- - -----------------------------------------------------------------------------------------------------------------
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
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Life insurance
in force $ 3,424,677,000 $ 924,404,000 $ 1,036,005,000 $ 3,536,278,000 29.3%
=============== =============== ============== ==============
Premiums and policy fees:
Life insurance $ 30,685,493 $ 4,492,304 $ 20,091 $ 26,213,280 0.1%
Accident and health
insurance 233,025 50,228 0 182,797 0.0%
--------------- --------------- -------------- --------------
$ 30,918,518 $ 4,542,532 $ 20,091 $ 26,396,077 0.1%
=============== =============== ============== ==============
</TABLE>
256
<PAGE>
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1997 and the year ended December 31, 1997
Schedule IV
<TABLE>
- - ----------------------------------------------------------------------------------------------------------------
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
- - ----------------------------------------------------------------------------------------------------------------
<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 28.8%
================== ================== ================== ==================
Premiums and policy fees:
Life insurance $ 33,133,414 4,681,928 $ 0 28,451,486 0.0%
Accident and health
insurance 240,536 52,777 0 187,759 0.0%
------------------ ------------------ ------------------ ------------------
$ 33,373,950 4,734,705 $ 0 28,639,245 0.0%
================== ================== ================== ==================
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life
257
<PAGE>
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1996 and the year ended December 31, 1996
Schedule IV
<TABLE>
- - ---------------------------------------------------------------------------------------------------------------
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
- - ---------------------------------------------------------------------------------------------------------------
<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 30.9%
================== ================== ================= ==================
Premiums and policy fees:
Life insurance $ 35,633,232 4,896,896 $ 0 $ 30,736,336 0.0%
Accident and health
insurance 258,377 50,255 0 208,122 0.0%
------------------ ------------------ ----------------- ------------------
$ 35,891,609 4,947,151 $ 0 $ 30,944,458 0.0%
================== ================== ================= ==================
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
258
<PAGE>
UNITED TRUST GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31,
1998, 1997 and 1996
<TABLE>
Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
- - -----------------------------------------------------------------------------------------------------------------------
December 31, 1998
<S> <C> <C> <C> <C>
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 70,000 $ 10,000 $ 70,000
December 31, 1997
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
December 31, 1996
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
</TABLE>
259
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED INCOME, INC.
Balance Sheet
<TABLE>
March 31, December 31,
1999 1998
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 426,994 $ 368,692
Mortgage loans 169,663 170,052
Notes receivable from affiliate 1,364,100 1,364,100
Accrued interest income 14,634 13,629
Property and equipment (net of accumulated
depreciation $50,143 and $50,038) 339 444
Investment in affiliates 10,681,758 10,697,626
Receivable from affiliate, net 0 22,244
Other assets (net of accumulated
amortization $185,068 and $175,826) 0 9,242
----------------- -----------------
Total assets $ 12,657,488 $ 12,646,029
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Notes payable $ 902,300 $ 902,300
Payable to affiliates, net 106 0
Other liabilities 7,928 22,209
----------------- -----------------
Total liabilities 910,334 924,509
----------------- -----------------
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
Accumulated deficit (3,340,124) (3,385,700)
Unrealized depreciation of investments
held for sale of affiliate (201,021) (181,079)
---------------- -----------------
Total shareholders' equity 11,747,154 11,721,520
================ =================
Total liabilities and shareholders' equity $ 12,657,488 $ 12,646,029
================ =================
</TABLE>
260
<PAGE>
UNITED INCOME, INC.
<TABLE>
Statement of Operations
- - -------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
1999 1998
----------------- -----------------
Revenues:
<S> <C> <C>
Interest income $ 8,083 $ 11,551
Interest income from affiliates 28,312 20,488
Service agreement income from affiliates 225,385 237,358
Other income from affiliates 14,251 17,954
Other income 218 0
----------------- -----------------
276,249 287,351
Expenses:
Management fee to affiliate 165,231 142,415
Operating expenses 49,778 50,140
Interest expense 19,738 21,430
----------------- -----------------
234,747 213,985
Income before provision for income
taxes and equity income of investees 41,502 73,366
Provision for income taxes 0 0
Equity in income of investees 4,074 31,811
----------------- -----------------
Net income $ 45,576 $ 105,177
================= =================
Basic earnings per share from continuing operations
and net income $ 0.03 $ 0.08
================= =================
Diluted earnings per share from continuing operations
and net income $ 0.03 $ 0.09
================= =================
Basic weighted average shares outstanding 1,391,919 1,391,919
================= =================
Diluted weighted average shares outstanding 1,392,150 1,428,242
================= =================
</TABLE>
See accompanying notes
261
<PAGE>
UNITED INCOME, INC.
Statement of Changes in Shareholders' Equity
For the Period ended March 31,1999
<TABLE>
Common stock
<S> <C> <C>
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
----------------
Accumulated deficit
Balance, beginning of year (3,385,700)
Net income 45,576 $ 45,576
---------------- ----------------
Balance, end of period (3,340,124)
Accumulated other comprehensive income
Balance, beginning of year (181,079)
Unrealized depreciation on securities (19,942)
Foreign currency translation adjustments 0
Minimum pension liability adjustment 0
----------------
Other comprehensive income (19,942) (19,942)
---------------- ----------------
Comprehensive income $ 25,634
Balance, end of period (201,021) ================
----------------
Total shareholder's equity, end of period $ 11,747,154
================
</TABLE>
See accompanying notes
262
<PAGE>
UNITED INCOME, INC.
<TABLE>
Statement of Cash Flows
Three Months Ended
March 31, March 31,
1999 1998
---- ----
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
<S> <C> <C>
Net income $ 45,576 $ 105,177
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,346 9,516
Accretion of discount on mortgage loan (65) (65)
Equity in income of investees (4,074) (31,811)
Changes in assets and liabilities:
Change in accrued interest income (1,005) 72
Change in indebtedness of affiliates 22,350 (62,284)
Change in other liabilities (14,280) 9,030
---------------- ----------------
Net cash provided by operating activities 57,848 29,635
Cash flows from investing activities:
Purchase of investments in affiliates 0 (6,125)
Payments received on mortgage loans 454 420
---------------- ----------------
Net cash provided by (used in) investing activities 454 (5,705)
Net increase in cash and cash equivalents 58,302 23,930
Cash and cash equivalents at beginning of period 368,692 710,897
---------------- ----------------
Cash and cash equivalents at end of period $ 426,994 $ 734,827
================ ===============
</TABLE>
See accompanying notes
263
<PAGE>
UNITED INCOME, INC.
Notes to Financial Statements 3/31/99
2. Basis of Presentation
The accompanying consolidated financial statements have been prepared by United
Income Inc. pursuant to the rules and regulations of the Securities and Exchange
Commission. Although UII 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 UII's Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the year ended December
31, 1998.
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 March 31, 1999, the affiliates of United Income Inc. were as depicted on the
following organizational chart.
ORGANIZATIONAL CHART
AS OF MARCH 31, 1999
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").
264
<PAGE>
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 March 31, 1999, options for 451 shares
were exercisable and options for 20,576 shares were available for grant. No
options were exercised during 1999.
A summary of the status of UII's stock option plan for the periods ended March
31, 1999 and December 31, 1998, and changes during the periods ending on those
dates is presented below.
<TABLE>
March 30, 1999 December 31, 1998
-------------- -----------------
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of period 451 $ 13.07 451 $ 13.07
Granted 0 0.00 0 0.00
Exercised 0 0.00 0 0.00 Forfeited
Forfeited 0 0 0 13.07
------------ -----------
Outstanding at end of period 451 $ 13.07 451 $ 13.07
========== =========
Options exercisable at period end 451 $ 13.07 451 $ 13.07
</TABLE>
The following information applies to options outstanding at March 31, 1999:
Number outstanding 451
Exercise price $ 13.07
Remaining contractual life 2 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
March 31, 1999. At March 31, 1999, 231 options have been granted and are
exercisable. No options were exercised during 1999 and 1998, respectively.
A summary of the status of the Company's stock option plan for the periods
ended March 31, 1999 and December 31, 1998, and changes during the periods
ending on those dates is presented below.
<TABLE>
March 31, 1999 December 31, 1998
-------------- -----------------
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
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
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
</TABLE>
265
<PAGE>
The following information applies to options outstanding at March 31, 1999:
Number outstanding 231
Exercise price $ 0.47
Remaining contractual life 2 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 does 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's liabilities. Management is of the opinion
that the settlement of those actions will not have a material adverse effect on
UII's 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.
<TABLE>
For the period ended March 31, 1999
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
Basic EPS
<S> <C> <C> <C>
Income available to common shareholders $ 45,576 1,391,919 $ 0.03
=================
Effect of Dilutive Securities
Options 231
--------------- ------------------
Diluted EPS
Income available to common shareholders and $
assumed conversions 45,576 1,392,150 $ 0.03
=============== ================== =================
</TABLE>
266
<PAGE>
<TABLE>
For the period ended March 31, 1998
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
Basic EPS
<S> <C> <C> <C>
Income available to common shareholders $ 105,177 1,391,919 $ 0.08
=================
Effect of Dilutive Securities
Convertible debentures 21,430 36,092
Options 231
--------------- ------------------
Diluted EPS
Income available to common shareholders and $
assumed conversions 126,607 1,428,242 $ 0.09
=============== ================== =================
</TABLE>
UII has stock options outstanding during the first quarter of 1999 and 1998 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. On March 31, 1999, the conversion privilege of the convertible
debentures expired. As such, as of the expiration date of the conversion
privilege, thses securities are no longer considered a dilutive instrument for
the calculation of diluted EPS.
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. At the time the decision to merge was made,
neither UTI nor UII had 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 will
occur as soon as practical following regulatory approval.
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6. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for UII's 50% or less
owned affiliate:
<TABLE>
March 31, December 31,
ASSETS 1999 1998
------------------ ------------------
<S> <C> <C>
Total investments $ 219,489,279 $ 216,247,582
Cash and cash equivalents 21,097,511 25,867,577
Cost of insurance acquired 42,149,654 42,673,693
Other assets 57,809,668 57,499,087
------------------ ------------------
Total assets $ 340,546,112 $ 342,287,939
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 266,871,346 $ 268,054,867
Notes payable 17,559,482 17,559,482
Deferred taxes 7,304,137 7,543,678
Other liabilities 5,779,395 6,055,611
------------------ ------------------
Total liabilities 297,514,360 299,213,638
------------------ ------------------
Minority interests in consolidated subsidiaries 9,768,391 9,749,693
------------------ ------------------
Shareholders' equity
Common stock no par value 46,577,216 46,577,216
Authorized 10,000 shares - 100 issued
Accumulated other comprehensive income (427,704) (385,275)
Accumulated deficit (12,886,151) (12,867,333)
------------------ ------------------
Total shareholders' equity 33,263,361 33,324,608
------------------ ------------------
Total liabilities and shareholders' equity $ 340,546,112 $ 342,287,939
================== ==================
</TABLE>
<TABLE>
March 31, March 31,
1999 1998
------------------ -------------------
<S> <C> <C>
Premium and policy fees, net of reinsurance $ 6,007,511 $ 7,231,481
Net investment income 3,649,708 3,738,105
Other 45,020 111,132
------------------ -------------------
9,702,239 11,080,718
Benefits, claims and settlement expenses 6,115,079 6,827,040
Other expenses 3,708,749 4,307,528
------------------ -------------------
9,823,828 11,134,568
Loss before income tax and
minority interest (121,589) (53,850)
Income tax credit 132,644 103,493
Minority interest in (income) loss
of consolidated subsidiaries (29,873) (18,332)
------------------ -------------------
Net income (loss) $ (18,818) $ 31,311
================== ===================
</TABLE>
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7. ACCOUNTING AND LEGAL DEVELOPMENTS
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 UII 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 properties or business,
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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
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contingent), of the character which, under generally accepted 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
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instruments described in 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
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Vice-President of UII and 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
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executed by UTI and UII, whether before or after the 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]
279
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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]
283
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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 26th
day of July, 1999 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 26th day of July, 1999.
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 26th
day of July, 1999 at a Special Meeting of the shareholders of UTI, that at the
time of said meeting UTI had outstanding 2,490,438 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 26th day of July, 1999.
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 26th day of July 1999.
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]
287
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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 sent the notice provided in
section 1701.80 or 1701.801 [1701.80.1] of the Revised Code, the dissenting
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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
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Revised Code. If, during the pendency of 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 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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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
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the vote is taken a written 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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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,
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within one business day of receipt of such request, and to send the
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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Appendix E
Consent of Independent Certified Public Accountant
--------------------------------------------------
We consent to the inclusion of our reports for the year ended December
31, 1998, dated March 26, 1999, 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 May 21, 1999, filed
with the Securities and Exchange Commission pursuant to the Securities Act of
1933.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
May 21, 1999
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Appendix F
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 May 21, 1999 under the sub-heading "Tax Consequences" as found
starting on page 34.
KPMG LLP
Columbus, Ohio
May 21, 1999
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APPENDIX G
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.
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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:
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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:
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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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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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