SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NUMBER 2 to
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997Commission File Number 0-18540
UNITED INCOME, INC.
(Exact name of registrant as specified in its charter)
2500 CORPORATE EXCHANGE DRIVE
COLUMBUS, OH 43231
(Address of principal executive offices, including zip code)
OHIO 37-1224044
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (614) 899-6773
Amendment No. 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of its December 31, 1997 filing of
Form 10-K as set forth in the pages attached hereto:
Each amendment as shown on the index page is amended to
replace the existing item, statement or exhibit
reflected in the December 31, 1997 Form 10-K filing.
Changes to the original filing have been shaded for
easy identification.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this amendment to be signed on its behalf by the
undersigned , thereunto duly authorized.
UNITED INCOME, INC.
(Registrant)
By: /s/ James E. Melville
James E. Melville
President and Chief
Operating Officer
By: /s/ Theodore C. Miller
Senior Vice President and
Chief Financial Officer
Date: October 9, 1998
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UNITED INCOME, INC,
FORM 10-K/A
INDEX
CERTIFIED PUBLIC ACCOUNTANT'S CONSENT
KERBER, ECK, & BRAECKEL LLP 3
PART I
ITEM 1. BUSINESS
Products 4
Reinsurance 5
ITEM 3. LEGAL PROCEEDINGS 5
PART II
ITEM 7. MNAGEMENT'S DISCUSSION AND ANALYSIS OF
FNANCIAL CONDITION AND RESULTS OF OPERATIONS 5-17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Net loss per common share 18
Note 1B - Nature of operations 18
Note 2 - Disclosures about fair values of financial
instruments 18
Note 10 - Pending change in control of United Trust,
Inc. 19
EXHIBIT 99(d) AUDITED FINANCIAL STATEMENTS OF UNITED TRUST GROUP, INC.
Exhibit 99(d), Note 1G - Recognition of revenues and
related expenses 20
Exhibit 99(d), Note 1H - Deferred policy acquisition
costs 20
Exhibit 99(d), Note 1I - Cost of Insurance acquired 20
Exhibit 99(d), Note 1J - Cost in excess of net assets
purchased 20-21
Exhibit 99(d), Note 17 - Pending change in control of
United Trust, Inc. 21
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Consent of Independent Certified Public Accountant
We consent to the amendments on page 18-19 of this Form 10-K/A dated
October 9, 1998, and to the use of our opinion dated March 26, 1998, as
originally filed with the United Income, Inc. Form 10-K for 1997 after such
amendment. We also consent to the amendments in Exhibit 99(d) on pages 20-
21 of this Form 10-K/A and to the use of our opinion on United Trust Group,
Inc. dated March 26, 1998.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
October 9, 1998
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PART I, ITEM I, BUSINESS, PRODUCTS OF UII SHOULD BE AMENDED AS FOLLOWS:
Products
The Company's portfolio consists of two universal life insurance products.
Universal life insurance is a form of permanent life insurance that is
characterized by its flexible premiums, flexible face amounts, and
unbundled pricing factors. The primary universal life insurance product is
referred to as the "Century 2000". This product was introduced to the
marketing force in 1993 and has become the cornerstone of current
marketing. This product has a minimum face amount of $25,000 and currently
credits 6% interest with a guaranteed rate of 4.5% in the first 20 years
and 3% in years 21 and greater. The policy values are subject to a $4.50
monthly policy fee, an administrative load and a premium load of 6.5% in
all years. The premium and administrative loads are a general expense
charge which is added to a policy's net premium to cover the insurer's cost
of doing business. A premium load is assessed upon the receipt of a
premium payment. An administrative load is a monthly maintenance charge.
The administrative load and surrender charge are based on the issue age,
sex and rating class of the policy. A surrender charge is effective for
the first 14 policy years. In general, the surrender charge is very high
in the first couple of years and then declines to zero at the end of 14
years. Policy loans are available at 7% interest in advance. The policy's
accumulated fund will be credited the guaranteed interest rate in relation
to the amount of the policy loan.
The second universal life product referred to as the "UL90A", has a minimum
face amount of $25,000. The administrative load is based on the issue age,
sex and rating class of the policy. Policy fees vary from $1 per month in
the first year to $4 per month in the second and third years and $3 per
month each year thereafter. The UL90A currently credits 5.5% interest with
a 4.5% guaranteed interest rate. Partial withdrawals, subject to a
remaining minimum $500 cash surrender value and a $25 fee, are allowed once
a year after the first duration. Policy loans are available at 7% interest
in advance. The policy's accumulated fund will be credited the guaranteed
interest rate in relation to the amount of the policy loan. Surrender
charges are based on a percentage of target premium starting at 120% for
years 1-5 then grading downward to zero in year 15. This policy contains a
guaranteed interest credit bonus for the long-term policyholder. From
years 10 through 20, additional interest bonuses are earned with a total in
the twentieth year of 1.375%. The bonus is calculated from the policy
issue date and is contractually guaranteed.
The Company's actual experience for earned interest, persistency and
mortality vary from the assumptions applied to pricing and for determining
premiums. Accordingly, differences between the Company's actual experience
and those assumptions applied may impact the profitability of the Company.
The minimum interest spread between earned and credited rates is 1% on the
"Century 2000" universal life insurance product. The Company monitors
investment yields, and when necessary adjusts credited interest rates on
its insurance products to preserve targeted interest spreads. Credited
rates are reviewed and established by the Board of Directors of the
respective life insurance subsidiaries.
The premium rates are competitive with other insurers doing business in the
states in which the Company is marketing its products.
The Company markets other products, none of which is significant to
operations. The Company has a variety of policies in force different from
those which are currently being marketed. The previously defined Universal
life and interest sensitive whole life, which is a type of indeterminate
premium life insurance which provides that the policy's cash value may be
greater than that guaranteed if changing assumptions warrant an increase,
business account for approximately 46% of the insurance in force.
Approximately 29% of the insurance in force is participating business,
which represents policies under which the policyowner shares in the
insurance companies divisible surplus. The Company's average persistency
rate for its policies in force for 1997 and 1996 has been 89.4% and 87.9%,
respectively. The Company does not anticipate any material fluctuations in
these rates in the future that may result from competition.
Interest-sensitive life insurance products have characteristics similar to
annuities with respect to the crediting of a current rate of interest at or
above a guaranteed minimum rate and the use of surrender charges to
discourage premature withdrawal of cash values. Universal life insurance
policies also involve variable premium charges against the policyholder's
account balance for the cost of insurance and administrative expenses.
Interest-
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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.
PART I, ITEM I, BUSINESS, REINSURANCE PARAGRAPH 1 SHOULD BE AMENDED AS
FOLLOWS:
Reinsurance
As is customary in the insurance industry, the insurance affiliates cede
insurance to other insurance companies under reinsurance agreements.
Reinsurance agreements are intended to limit a life insurer's maximum loss
on a large or unusually hazardous risk or to obtain a greater
diversification of risk. The ceding insurance company remains primarily
liable with respect to ceded insurance should any reinsurer be unable to
meet the obligations assumed by it, however it is the practice of insurers
to reduce their exposure to loss to the extent that they have been
reinsured with other insurance companies. The Company sets a limit on the
amount of insurance retained on the life of any one person. The Company
will not retain more than $125,000, including accidental death benefits, on
any one life. At December 31, 1997, the Company had insurance in force of
$3.692 billion of which approximately $1.022 billion was ceded to
reinsurers.
PART I, ITEM 3, LEGAL PROCEEDINGS, SHOULD BE AMENDED AS FOLLOWS:
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.
PART II, ITEM 7 SHOULD BE AMENDED AS FOLLOWS:
UII MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
At December 31, 1997 and 1996, the balance sheet reflects the assets and
liabilities of UII and its 47% equity interest in UTG. The statements of
operations and statements of cash flows presented for 1997, 1996 and 1995
include the operating results of UII.
Results of Operations
1997compared to 1996
(a) Revenues
UII's primary source of revenues is derived from service fee income, which
is provided via a service agreement with USA. The agreement was originally
established upon the formation of USA, which was a 100% owned subsidiary of
UII. Changes in the affiliate structure have resulted in USA no longer
being a direct subsidiary of UII, though still a member of the same
affiliated group. The original service agreement has remained in place
without modification. The fees are based on a percentage of premium
revenue ofUSA. The percentages are applied to both first year and renewal
premiums at different rates. Under the current structure, FCC pays all
general operating expenses of the affiliated group. FCC then receives
management and service fees from the various affiliates, including UTI and
UII. Pursuant to the terms of the agreement, USA pays UII monthly fees
equal to 22% of the amount of collected first
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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.
(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. At this writing, negotiations are
progressing with a different unrelated party for the change in control
of UTI. Please refer to the Notes to the Consolidated Financial
Statements of UTG for additional information. The possible changes and
resulting uncertainties have hurt the insurance companies' ability to
recruit and maintain sales agents.
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New business production decreased significantly over the last two
years. New business production decreased 43% or $3,935,000 when
comparing 1997 to 1996. In recent years, the insurance industry as a
whole has experienced a decline in the total number of agents who sell
insurance products, therefore competition has intensified for top
producing sales agents. The relatively small size of our companies,
and the resulting limitations, have made it challenging to compete in
this area.
A positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained in relation to
the previous year. The average persistency rate for all policies in
force for 1997 and 1996 has been approximately 89.4% and 87.9%,
respectively.
Net investment income decreased 6% when comparing 1997 to 1996. The
decrease relates to the decrease in invested assets from a coinsurance
agreement. UTG's insurance subsidiary UG entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC"), an
unrelated party, as of September 30, 1996. During 1997, FILIC changed
its name to Park Avenue Life Insurance Company ("PALIC"). Under the
terms of the agreement, UG ceded to FILIC substantially all of its paid-
up life insurance policies. Paid-up life insurance generally refers to
non-premium paying life insurance policies. At closing of the
transaction, UG received a coinsurance credit of $28,318,000 for policy
liabilities covered under the agreement. UG transferred assets equal
to the credit received. This transfer included policy loans of
$2,855,000 associated with policies under the agreement and a net cash
transfer of $19,088,000, after deducting the ceding commission due UG
of $6,375,000. To provide the cash required to be transferred under
the agreement, UG sold $18,737,000 of fixed maturity investments.
The overall investment yields for 1997, 1996 and 1995, are 7.25%, 7.31%
and 7.14%, respectively. Since 1995 investment yield improved due to
the fixed maturity investments. Cash generated from the sales of
universal life insurance products, has been invested primarily in our
fixed maturity portfolio.
The investments are generally managed to match related insurance and
policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates
is 1% on the "Century 2000" universal life insurance product, which
currently is the primary sales product. UTG and its subsidiaries'
monitor investment yields, and when necessary adjusts credited interest
rates on its insurance products to preserve targeted interest spreads.
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
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of $3,307,000,
and $720,000 in 1996 and 1995, respectively. UTG and its subsidiaries'
incurred legal costs of $906,000 and $687,000 in 1996 and 1995,
respectively. All policies associated with this issue have been
settled as of December 31, 1996. Therefore, expense reductions for
1997 would follow.
Commissions and amortization of deferred policy acquisition costs
decreased 14% in 1997 compared to 1996. The decrease is due primarily
due to a reduction in commissions paid. Commissions decreased 19% in
1997 compared to 1996. The decrease in commissions was due to the
decline in new business production. There is a direct relationship
premium revenues and commission expense. First year premium production
decreased 43% and first year commissions decreased 33% when comparing
1997 to 1996. Amortization of deferred policy acquisition costs
decreased 6% in 1997 compared to 1996. Management would expect
commissions and amortization of deferred policy acquisition costs to
decrease in the future if premium revenues continue to decline.
Amortization of cost of insurance acquired decreased 56% in 1997
compared to 1996. Cost of insurance acquired is established when an
insurance company is acquired. The Company assigns a portion of its
cost to the right to receive future cash flows from insurance contracts
existing at the date of the acquisition. The cost of policies
purchased represents the actuarially determined present value of the
projected future cash flows from the acquired policies. Cost of
insurance acquired is comprised of individual life insurance products
including whole life, interest sensitive whole life and universal life
insurance products. Cost of insurance acquired is amortized with
interest in relation to expected future profits, including direct
charge-offs for any excess of the unamortized asset over the projected
future profits. The interest rates utilized in the amortization
calculation are 9% on approximately 24% of the balance and 15% on the
remaining balance. The interest rates vary due to risk analysis
performed at the time of acquisition on the business acquired. The
amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are
revised. UTG and its subsidiaries' did not have any charge-offs during
the periods covered by this report. The decrease in amortization
during the current period is a 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.
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Net loss of UTG
UTG had a net loss of $923,000 in 1997 compared to a net loss of
$1,661,000 in 1996. The improvement is directly related to the
decrease in life benefits and operating expenses primarily associated
with the 1996 settlement and other related costs of the non-standard
life insurance policies.
(d) Net loss
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.
Results of Operations
1996 compared to 1995
(a) Revenues
The Company's source of revenues is derived from service fee income which
is provided via a service agreement with USA. The service agreement
between UII and USA is to provide USA with certain administrative services.
The fees are based on a percentage of premium revenue of USA. The
percentages are applied to both first year and renewal premiums at
different rates.
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.
(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 a percentage of the fees paid
to UII by USA. The Company has incurred $1,241,000, $1,809,000, and
$1,210,000 in service fee expense in 1996, 1995, and 1994, respectively.
Interest expense of $84,000, $89,000 and $59,000 was incurred in 1996, 1995
and 1994, respectively. The interest expense is directly attributable to
the convertible debentures. The Debentures bear interest at a variable
rate equal to one percentage point above the prime rate published in the
Wall Street Journal from time to time.
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(c) Equity in loss of Investees
Equity in earnings of investees represents UII's 47% share of the net loss
of UTG. Included with this filing as Exhibit 99(d) are audited financial
statements of UTG. Following is a discussion of the results of operations
of UTG:
Revenues of UTG
Premium and policy fee revenues, net of reinsurance premium, decreased
7% when comparing 1996 to 1995. The decrease in premium income is
primarily attributed to a 15% decrease in new business production. The
decrease is due to two factors. The first factor is that UTG and its
subsidiaries' changed its focus from primarily a broker agency
distribution system to a captive agent system. The second factor is
that UTG and its subsidiaries' changed its product portfolio from
traditional life insurance to universal life insurance.
Business written by the broker agency force, in recent years, did not
meet UTG and its subsidiaries' expectations. With the change in focus
of distribution systems, most of the broker agents were terminated.
(The termination of the broker agency force caused a non-recurring
write down of the value of agency force asset in 1995, see discussion
of amortization of agency force for further details.). The change in
distribution systems effectively reduced the total number of agents
representing and producing business for UTG and its subsidiaries'
Broker agents sell insurance and related products for several
companies. Captive agents sell for only one company. The change from
a brokerage agency system to a captive agent system caused a decline in
new premium writings as the captive agents required training from the
home office and often had little or no previous insurance sales
experience. Additionally, the products sold were changed from
traditional whole life to universal life, resulting in veteran captive
agents having to learn the features of the new products. Broker agents
typically sell products for several companies and typically have more
experience in the industry or have experienced agents within the agency
to assist and train them. The captive agent approach, though slower
and requiring more home office training, is believed to be the best
long term approach for UTG and its subsidiaries' as agents will be
trained in the procedures and practices of the insurance subsidiaries
and will be more familiar through the training process. This will help
in recruiting quality individuals with the character and attitude
conducive with UTG and its subsidiaries' desires.
Universal life and interest sensitive products contribute only the risk
charge to premium income; however, traditional insurance products
contribute all monies received to premium income. UTG and its
subsidiaries' changed their product portfolio to remain competitive
based on consumer demand.
A positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained in relation to
the previous year. Average persistency rate for all policies in force
for 1996 and 1995 has been approximately 87.9% and 87.3%, respectively.
Net investment income increased 3% when comparing 1996 to 1995. The
overall investment yields for 1996 and 1995 are 7.31% and 7.14%,
respectively. The improvement in investment yield is primarily
attributed to fixed maturity investments. Cash generated from the
sales of universal life insurance products, has been invested primarily
in our fixed investment portfolio.
The investments are generally managed to match related insurance and
policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates
is 1% on the "Century 2000" universal life insurance product, which
currently is the primary sales product. UTG and its subsidiaries'
monitors investment yields, and when necessary adjusts credited
interest rates on its insurance products to preserve targeted interest
spreads. It is expected that monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on the insurance policies UTG and its subsidiaries'
currently has in force and will write in the future.
Realized investment losses were $466,000 and $114,000 in 1996 and 1995,
respectively. UTG and its subsidiaries' sold two foreclosed real
estate properties that resulted in approximately $357,000 in realized
losses in 1996. There were other gains and losses during the period
that comprised the remaining amount reported but were immaterial in
nature on an individual basis.
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Expenses of UTG
Life benefits, net of reinsurance benefits and claims, increased 2%
compared to 1995. The increase in life benefits is due primarily to
settlement expenses discussed in the following paragraph:
In 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be
not insurable by UTG and its subsidiaries' standards. These non-
standard policies had a face amount of $22,700,000 and represented 1/2
of 1% of the insurance in-force in 1994. Management's initial analysis
indicated that expected death claims on the business in-force was
adequate in relation to mortality assumptions inherent in the
calculation of statutory reserves. Nevertheless, management determined
it was in the best interest of UTG and its subsidiaries' to repurchase
as many of the non-standard policies as possible. Through December 31,
1996, UTG and its subsidiaries' spent approximately $7,099,000 for the
settlement of non-standard policies and for the legal defense of
related litigation. In relation to settlement of non-standard policies
UTG and its subsidiaries incurred life benefits of $3,307,000 and
$720,000 in 1996 and 1995, respectively. UTG and its subsidiaries'
incurred legal costs of $906,000 and $687,000 in 1996 and 1995,
respectively. All the policies associated with this issue have been
settled as of December 31, 1996. UTG and its insurance subsidiaries'
has approximately $3,742,000 of insurance in-force and $1,871,000 of
reserves from the issuance of paid-up life insurance policies for
settlement of matters related to the original non-standard policies.
Management believes the reserves are adequate in relation to expected
mortality on this block of in-force.
Commissions and amortization of deferred policy acquisition costs
decreased 14% in 1996 compared to 1995. The decrease is due to a
decrease in commissions expense. Commissions decreased 15% in 1996
compared to 1995. The decrease in commissions was due to the decline
in new business production. There is a direct relationship between
premium revenues and commission expenses. First year premium
production decreased 15% and first year commissions decreased 32% when
comparing 1996 to 1995. Amortization of deferred policy acquisition
costs decreased 12% in 1996 compared to 1995. Management expects
commissions and amortization of deferred policy acquisition costs to
decrease in the future if premium revenues continue to decline.
Amortization of cost of insurance acquired increased 26% in 1996
compared to 1995. Cost of insurance acquired is established when an
insurance company is acquired. The Company assigns a portion of its
cost to the right to receive future cash flows from insurance contracts
existing at the date of the acquisition. The cost of policies
purchased represents the actuarially determined present value of the
projected future cash flows from the acquired policies. Cost of
insurance acquired is comprised of individual life insurance products
including whole life, interest sensitive whole life and universal life
insurance products. Cost of insurance acquired is amortized with
interest in relation to expected future profits, including direct
charge-offs for any excess of the unamortized asset over the projected
future profits. The interest rates utilized in the amortization
calculation are 9% on approximately 24% of the balance and 15% on the
remaining balance. The interest rates vary due to risk analysis
performed at the time of acquisition on the business acquired. The
amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are
revised. UTG and its subsidiaries' did not have any charge-offs during
the periods covered by this report. The increase in amortization
during the current period is a 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.
UTG and its subsidiaries' reported a non-recurring write down of value
of agency force of $0 and $8,297,000 in 1996 and 1995, respectively.
The write down was directly related to the change in distribution
systems. UTG and its subsidiaries' changed its focus from primarily a
broker agency distribution system to a captive agent system. Business
produced by the broker agency force in recent years did not meet
expectations. With the change in focus of distribution systems, most
of the broker agents were terminated. The termination of most of the
agents involved in the broker agency force caused management to re-
evaluate and write-off the value of the agency force carried on the
balance sheet.
11
<PAGE>
Operating expenses increased 6% in 1996 compared to 1995. The primary
factor that caused the increase in operating expenses is directly
related to increased legal costs and reserves established for
litigation. The legal costs are due to the settlement of non-standard
insurance policies as was discussed in the review of life benefits.
UTG and its subsidiaries' incurred legal costs of $906,000 and $687,000
in 1996 and 1995, respectively in relation to the settlement of the non-
standard insurance policies.
Interest expense decreased 12% in 1996 compared to 1995. Since
December 31, 1995, notes payable decreased approximately $1,623,000
that has directly attributed to the decrease in interest expense during
1996. Interest expense was also reduced, as a result of the
refinancing of the senior debt under which the new interest rate is
more favorable. Please refer to Note 12 "Notes Payable" of the
Consolidated Notes to the Financial Statements of UTG for more
information on this matter.
Net loss of UTG
UTG and its subsidiaries' had a net loss of $1,661,000 in 1996 compared
to a net loss of $5,321,000 in 1995. The net loss in 1996 is
attributed to the increase in life benefits net of reinsurance and
operating expenses primarily associated with settlement and other
related costs of the non-standard life insurance policies.
(d) Net loss
The Company recorded a net loss of $319,000 for 1996 compared to a net loss
of $2,148,000 for the same period one year ago. The net loss is from the
equity share of UTG's operating results.
Financial Condition
The Company owns 47% equity interest in UTG which controls total assets of
approximately $348,000,000. Audited financial statements of UTG are
presented as Exhibit 99(d) of this filing.
Liquidity and Capital Resources
Since UII is a holding company, funds required to meet its debt service
requirements and other expenses are primarily provided by its affiliates.
UII's cash flow is dependent on revenues from a management agreement with
USA and its earnings received on invested assets and cash balances. At
December 31, 1997,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 1 of
the Notes to the Financial Statements. UG's dividend limitations are
described below without effect of the ownership structure. Please refer to
Note 1 of the Notes to the Financial Statements. UG's dividend limitations
are described below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,000.
At December 31, 1997, UG statutory capital and surplus amounted to
$10,997,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
12
<PAGE>
The Company currently has $711,000 in cash and cash equivalents. The
Company holds one mortgage loan. Operating activities of the Company
produced cash flows of $324,097, $255,675 and $326,905 in 1997, 1996 and
1995, respectively. The Company had uses of cash from investing activities
of $50,764, $180,402 and $192,801 in 1997, 1996 and 1995, respectively.
Cash flows from financing activities were ($2,112), $33 and $0 in 1997,
1996 and 1995, respectively.
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and
First of America Bank - Southeast Michigan, N.A., as trustee. The
Debentures are general unsecured obligations of UII, subordinate in right
of payment to any existing or future senior debt of UII. The Debentures
are exchangeable and transferable, and are convertible at any time prior to
March 31, 1999 into UII's Common Stock at a conversion price of $25 per
share, subject to adjustment in certain events. The Debentures bear
interest from March 31, 1994, payable quarterly, at a variable rate equal
to one percentage point above the prime rate published in the Wall Street
Journal from time to time. The prime rate was 8.25% during first quarter
1997, increasing to 8.5% April 1, 1997, and has remained unchanged. On or
after March 31, 1999, the Debentures will be redeemable at UII's option, in
whole or in part, at redemption prices declining from 103% of their
principal amount. No sinking fund will be established to redeem the
Debentures. The Debentures will mature on March 31, 2004. The Debentures
are not listed on any national securities exchange or the NASDAQ National
Market System.
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, the Company'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. The Company cannot predict the impact of
any future proposals, regulations or market conduct investigations. The
Company's insurance affiliates, USA, UG, APPL and ABE are domiciled in the
states of Ohio, Ohio, West Virginia and Illinois, respectively.
13
<PAGE>
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners ("NAIC"). The NAIC is an association whose membership
consists of the insurance commissioners or their designees of the various
states. The NAIC has no direct regulatory authority over insurance
companies, however its primary purpose is to provide a more consistent
method of regulation and reporting from state to state. This is
accomplished through the issuance of model regulations, which can be
adopted by individual states unmodified, modified to meet the state's own
needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled by
other corporations licensed to transact business within their respective
jurisdictions. The insurance affiliates are subject to such legislation
and registered as controlled insurers in those jurisdictions in which such
registration is required. Statutes vary from state to state but typically
require periodic disclosure, concerning the corporation, that controls the
registered insurers and all affiliates of such corporation. In addition,
prior notice to, or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 9 in the notes to the consolidated financial
statements), and payment of dividends (see note 2 in the notes to the
consolidated financial statements) in excess of specified amounts by the
insurance subsidiary, within the holding company system, are required.
Each year the NAIC calculates financial ratio results (commonly referred to
as IRIS ratios) for each company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement.
The results are then compared to pre-established normal ranges determined
by the NAIC. Results outside the range typically require explanation to
the domiciliary insurance department.
At year-end 1997, the insurance companies had one ratio outside the normal
range. The ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last three years. A primary cause for
the decrease in premium revenues is related to the potential change in
control of UTI over the last two years to two different parties. During
September of 1996, it was announced that control of UTI would pass to an
unrelated party, but the transaction did not materialize. At this writing,
negotiations are progressing with a different unrelated party for the
change in control of UTI. Please refer to the Notes to the Consolidated
Financial Statements for additional information. The possible changes and
resulting uncertainties have hurt the insurance companies' ability to
recruit and maintain sales agents. The industry has experienced a downward
trend in the total number of agents who sell insurance products, and
competition for the top sales producers has intensified. As this trend
appears to continue, the recruiting focus of the Company has been on
introducing quality individuals to the insurance industry through an
extensive internal training program. The Company feels this approach is
conducive to the mutual success of our new recruits and the Company as
these recruits market our products in a professional, company structured
manner.
The NAIC, in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC proposed changes
in the regulations governing insurance company investments and holding
company investments in subsidiaries and affiliates which were adopted by
the NAIC as model laws in 1996. The Company does not presently anticipate
any material adverse change in its business as a result of these changes.
Legislative and regulatory initiatives regarding changes in the regulation
of banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on the Company by altering the competitive
environment for its products. The outcome and timing of any such changes
cannot be anticipated at this time, but the Company will continue to
monitor developments in order to respond to any opportunities or increased
competition that may occur.
The NAIC adopted the Life Illustration Model Regulation. Many states have
adopted the regulation effective January 1, 1997. This regulation requires
products which contain non-guaranteed elements, such as universal life and
interest sensitive life, to comply with certain actuarially established
tests. These tests are intended to target future performance and
profitability of a product under various scenarios. The regulation does
not prevent a company from selling a product that does not meet the various
tests. The only implication is the way in which the product is marketed to
the consumer. A product that does not pass the tests uses guaranteed
assumptions rather than current assumptions in presenting future product
performance to the consumer. The Company conducts an ongoing thorough
review of its sales and marketing process and continues to emphasize its
compliance efforts.
14
<PAGE>
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
This project is not expected to be completed earlier than 1999. Specific
recommendations have been set forth in papers issued by the NAIC for
industry review. The Company is monitoring the process, but the potential
impact of any changes in insurance accounting standards is not yet known.
Accounting and Legal Developments
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. The
Statement's objective is to simplify the computation of earnings per share,
and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS. Basic
EPS is calculated by dividing income available to common stockholders
(i.e., net income or loss adjusted for preferred stock dividends) by the
weighted-average number of common shares outstanding. Thus, in the most
significant change in current practice, options, warrants, and convertible
securities are excluded from the basic EPS calculation. Further,
contingently issuable shares are included in basic EPS only if all the
necessary conditions for the issuance of such shares have been satisfied by
the end of the period.
Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Income available to common stockholders continues to be
adjusted for assumed conversion of all potentially dilutive securities
using the treasury stock method to calculate the dilutive effect of options
and warrants. However, unlike the calculation of fully diluted EPS under
previous opinions, a new treasury stock method is applied using the average
market price or the ending market price. Further, prior opinion
requirement to use the modified treasury stock method when the number of
options or warrants outstanding is greater than 20% of the outstanding
shares also has been eliminated. SFAS 128 also includes certain shares
that are contingently issuable; however, the test for inclusion under the
new rules is much more restrictive.
SFAS No. 128 requires companies reporting discontinued operations,
extraordinary items, or the cumulative effect of accounting changes are to
use income from operations as the control number or benchmark to determine
whether potential common shares are dilutive or antidilutive. Only
dilutive securities are to be included in the calculation of diluted EPS.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the Company reported a loss from continuing operations so
any potential issuance of common shares would have an antidilutive effect
on EPS. Consequently, the adoption of SFAS No. 128 did not have an impact
on the Company's financial statement.
The FASB has issued SFAS No. 130 entitled Reporting Comprehensive Income
and SFAS No. 132 Employers' Disclosures about Pensions and Other
Postretirement Benefits. Both of the above statements are effective for
financial statements with fiscal years beginning after December 15, 1997.
SFAS No. 130 defines how to report and display comprehensive income and its
components in a full set of financial statements. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity
as owners.
SFAS No. 132 addresses disclosure requirements for post-retirement
benefits. The statement does not change post-retirement measurement or
recognition issues.
The Company will adopt both SFAS No. 130 and SFAS No. 132 for the 1998
financial statements. Management does not expect either adoption to have a
material impact on the Company's financial statements.
15
<PAGE>
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.
Year 2000 Issue
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results. This could have a significant effect on the Company's
business/financial systems as well as products and services, if not
corrected.
The Company established a project to address year 2000 processing concerns
in September of 1996. In 1997 the Company completed the review of the
Company's internally and externally developed software, and made
corrections to all year 2000 non-compliant processing. The Company also
secured verification of current and future year 2000 compliance from all
major external software vendors. In December of 1997, a separate computer
operating environment was established with the system dates advanced to
December of 1999. A parallel model office was established with all dates
in the data advanced to December of 1999. Parallel model office processing
is being performed using dates from December of 1999 to January of 2001, to
insure all year 2000 processing errors have been corrected. Testing should
be completed by the end of the first quarter of 1998. After testing is
completed, periodic regression testing will be performed to monitor
continuing compliance. By addressing year 2000 compliance in a timely
manner, compliance will be achieved using existing staff and without
significant impact on the Company operationally or financially.
Proposed Merger
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the third quarter of 1998.
Subsequent Event
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
Upon completion of the transaction Mr. Correll will own 51% of UTI. Under
the terms of the letter of intent Mr. Correll will buy 2,000,000 authorized
but unissued shares of UTI common stock for $15.00 per share and will also
buy 389,715 shares of UTI common stock, representing stock of UTI and UII,
that UTI purchased during the last eight months in private transactions at
the average price UTI paid for such stock, plus interest, or approximately
$10.00 per share. Mr. Correll also will purchase 66,667 shares of UTI
common stock and $2,560,000 of face amount of convertible bonds (which are
due and payable on any change in control of UTI) in private transactions,
primarily from officers of UTI. Upon completion of the transaction, Mr.
Correll would be the largest shareholder of UTI.
16
<PAGE>
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
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.
17
<PAGE>
PART II, ITEM 8, FINANCIAL STATEMENTS, CONSOLIDATED STATEMENTS OF
OPERATIONS SHOULD BE AMENDED TO REPLACE NET LOSS PER COMMON SHARE
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Net loss per common $ (0.06) $ (0.23) $ (1.54)
share
</TABLE>
PART II, ITEM 8 NOTES TO FINANCIAL STATEMENTS, NOTE 1B, SHOULD BE AMENDED
AS FOLLOWS:
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
PART II, ITEM 8, NOTES TO FINANCIAL STATEMENTS, NOTE 2 SHOULD BE AMENDED AS
FOLLOWS:
2. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value:
(a) Mortgage loans
The fair values of mortgage loans are estimated using discounted cash flow
analyses and interest rates being offered for similar loans to borrowers
with similar credit ratings. As of December 31, 1997 the estimated fair
value and carrying amountt were $138,519 and $121,520, respectively. As of
December 31, 1996 the estimated fair value and carrying amount were each
$122,853.
(b) Notes receivable from affiliate
For notes receivable from affiliate, which is subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
(c) Convertible debentures
For the convertible debentures, which are subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
18
<PAGE>
PART II, ITEM 8, NOTES TO FINANCIAL STATEMENTS, NOTE 10 SHOULD BE AMENDED
AS FOLLOWS:
10. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a three year period of
time. Upon completion of the transaction Mr. Correll will own 51% of UTI.
Under the terms of the letter of intent, Mr. Correll will buy 2,000,000
authorized but unissued shares of UTI common stock for $15.00 per share and
will also buy 389,715 shares of UTI common stock, representing stock of UTI
and UII, that UTI purchased during the last eight months in private
transactions at the average price UTI paid for such stock, plus interest,
or approximately $10.00 per share. Mr. Correll also will purchase 66,667
shares of UTI common stock and $2,560,000 of face amount of convertible
bonds (which are due and payable on any change in control of UTI) in
private transactions, primarily from officers of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
19
<PAGE>
EXHIBIT 99(d) AUDITED FINANCIAL STATEMENTS OF UNITED TRUST GROUP, INC.,
NOTE 1G, SHOULD BE AMENDED AS FOLLOWS:
G. RECOGNITION OF REVENUES AND RELATED EXPENSES - Premiums for
traditional life insurance products, which include those products with
fixed and guaranteed premiums and benefits, consist principally of
whole life insurance policies, 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.
EXHIBIT 99(d) AUDITED FINANCIAL STATEMENTS OF UNITED TRUST GROUP, INC.,
NOTE 1H, FIRST PARAGRAGH SHOULD BE AMENDED AS FOLLOWS:
H. DEFERRED POLICY ACQUISITION COSTS -
Commissions and other costs (salaries of certain employees involved
in the underwriting and policy issue functions, and medical and
inspection fees) of acquiring life insurance products that vary with
and are primarily related to the production of new business have been
deferred. Traditional life insurance acquisition costs are being
amortized over the premium-paying period of the related policies
using assumptions consistent with those used in computing policy
benefit reserves.
EXHIBIT 99(d) AUDITED FINANCIAL STATEMENTS OF UNITED TRUST GROUP, INC.,
NOTE 1I, FIRST PARAGRAGH SHOULD BE AMENDED AS FOLLOWS:
I. COST OF INSURANCE ACQUIRED - When an insurance company is acquired,
the Company assigns a portion of its cost to the right to receive
future cash flows from insurance contracts existing at the date of
the acquisition. The cost of policies purchased represents the
actuarially determined present value of the projected future cash
flows from the acquired policies. The Company utilized a 9% discount
rate on approximately 24% of the business and a 15% discount rate on
approximately 76% of the business. Cost of Insurance Acquired is
amortized with interest in relation to expected future profits,
including direct charge-offs for any excess of the unamortized asset
over the projected future profits.. The interest rates utilized in
the amortization calculation are 9% on approximately 24% of the
balance and 15% on the remaining balance. The interest rates vary
due to differences in the blocks of business. The amortization is
adjusted retrospectively when estimates of current or future gross
profits to be realized from a group of products are revised.
EXHIBIT 99(d) AUDITED FINANCIAL STATEMENTS OF UNITED TRUST GROUP, INC.,
NOTE 1J SHOULD BE AMENDED AS FOLLOWS:
J.COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net
assets purchased is the excess of the amount paid to acquire a
company over the fair value of its net assets. Costs in excess of
net assets purchased are amortized on the straight-line basis over a
40-year period. Management continually reviews the value of goodwill
based on estimates of future earnings. As part of this review,
management determines whether goodwill is fully recoverable from
projected undiscounted net cash flows from earnings of the
subsidiaries over the remaining amortization period. If management
were to determine that changes in such projected cash flows no longer
supported the recoverability of goodwill
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over the remaining
amortization period, the carrying value of goodwill would be reduced
with a corresponding charge to expense (no such changes have
occurred). Accumulated amortization of cost in excess of net assets
purchased was $1,420,146 and $1,265,146 as of December 31, 1997 and
1996, respectively. A reverse stock split of FCC in May of 1997
created negative goodwill of $2,564,719. The credit to goodwill
resulted from the retirement of fractional shares. Please refer to
Note 11 to the Consolidated Financial Statements for additional
information concerning the reverse stock split.
EXHIBIT 99(d) AUDITED FINANCIAL STATEMENTS OF UNITED TRUST GROUP, INC.,
NOTE 17 SHOULD BE AMENDED AS FOLLOWS:
17. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
Upon completion of the transaction Mr. Correll will own 51% of UTI. Under
the terms of the letter of intent Mr. Correll will buy 2,000,000 authorized
but unissued shares of UTI common stock for $15.00 per share and will also
buy 389,715 shares of UTI common stock, representing stock of UTI and UII,
that UTI purchased during the last eight months in private transactions at
the average price UTI paid for such stock, plus interest, or approximately
$10.00 per share. Mr. Correll also will purchase 66,667 shares of UTI
common stock and $2,560,000 of face amount of convertible bonds (which are
due and payable on any change in control of UTI) in private transactions,
primarily from officers of UTI. Upon completion of the transaction, Mr.
Correll would be the largest shareholder of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
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