SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ].
At March 13, 1998, the Registrant had outstanding 1,391,919 shares of
Common Stock, stated value $.033 per share.
DOCUMENTS INCORPORATED BY REFERENCE: None
Page 1 of 89
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PART I
ITEM 1. BUSINESS
United Income, Inc. (the "Registrant") was incorporated in 1987 under the
laws of the State of Ohio to serve as an insurance holding company. At
December 31, 1997, the affiliates of the Registrant were as depicted on the
following organizational chart:
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
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The Registrant and its affiliates (the "Company") operate principally in
the individual life insurance business. The primary business of the
Company has been the servicing of existing insurance business in force, the
solicitation of new insurance business, and the acquisition of other
companies in similar lines of business.
United Income, Inc. ("UII"), was incorporated on November 2, 1987, as an
Ohio corporation. Between March 1988 and August 1990, UII raised a total
of approximately $15,000,000 in an intrastate public offering in Ohio.
During 1990, UII formed a life insurance subsidiary and began selling life
insurance products.
On February 20, 1992, UII and its affiliate, UTI, formed a joint venture,
United Trust Group, Inc., ("UTG"). On June 16, 1992, UII contributed $7.6
million in cash and 100% of the common stock of its wholly owned life
insurance subsidiary. UTI contributed $2.7 million in cash, an $840,000
promissory note and 100% of the common stock of its wholly owned life
insurance subsidiary. After the contributions of cash, subsidiaries, and
the note, UII owns 47% and UTI owns 53% of UTG.
On June 16, 1992, UTG acquired 67% of the outstanding common stock of the
now dissolved Commonwealth Industries Corporation, ("CIC") for a purchase
price of $15,567,000. Following the acquisition, UTG controlled eleven
life insurance subsidiaries. The Company has taken several steps to
streamline and simplify the corporate structure following the acquisitions.
On December 28, 1992, Universal Guaranty Life Insurance Company ("UG") was
the surviving company of a merger with Roosevelt National Life Insurance
Company ("RNLIC"), United Trust Assurance Company ("UTAC"), Cimarron Life
Insurance Company ("CIM") and Home Security Life Insurance Company
("HSLIC"). On June 30, 1993, Alliance Life Insurance Company ("ALLI"), a
subsidiary of UG, was merged into UG.
On July 31, 1994, Investors Trust Assurance Company ("ITAC") was merged
into Abraham Lincoln Insurance Company ("ABE").
On August 15, 1995, the shareholders of CIC, ITI, and UGIC voted to
voluntarily liquidate each of the companies and distribute the assets to
the shareholders (consisting solely of common stock of their respective
subsidiary). As a result, the shareholders of the liquidated companies
became shareholders of FCC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders. Neither UTI nor UII have
any other significant holdings or business dealings. The Board of
Directors of each company thus concluded a merger of the two companies
would be in the best interests of the shareholders. The merger will result
in certain cost savings, primarily related to costs associated with
maintaining a corporation in good standing in the states in which it
transacts business. A vote of the shareholders of UTI and UII regarding
the proposed merger is anticipated to occur sometime during the third
quarter of 1998.
The holding companies within the group, UTI, UII, UTG and FCC, are all life
insurance holding companies. These companies became members of the same
affiliated group through a history of acquisitions in which life insurance
companies were involved. The focus of the holding companies is the
acquisition of other companies in similar lines of business and management
of the insurance subsidiaries. The companies have no activities outside
the life insurance focus.
The insurance companies of the group, UG, USA, APPL and ABE, all operate in
the individual life insurance business. The primary focus of these
companies has been the servicing of existing insurance business in force
and the solicitation of new insurance business.
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
Under the terms of the letter of intent, Mr. Correll will buy 2,000,000
authorized but unissued shares of UTI common stock for $15.00 per share and
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.
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UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
PRODUCTS
The Company's portfolio consists of two universal life insurance products.
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 administrative load and
surrender charge are based on the issue age, sex and rating class of the
policy. A surrender charge is effective for the first 14 policy years. In
general, the surrender charge is very high in the first couple of years and
then declines to zero at the end of 14 years. Policy loans are available
at 7% interest in advance. The policy's accumulated fund will be credited
the guaranteed interest rate in relation to the amount of the policy loan.
The second universal life product referred to as the "UL90A", has a minimum
face amount of $25,000. The administrative load is based on the issue age,
sex and rating class of the policy. Policy fees vary from $1 per month in
the first year to $4 per month in the second and third years and $3 per
month each year thereafter. The UL90A currently credits 5.5% interest with
a 4.5% guaranteed interest rate. Partial withdrawals, subject to a
remaining minimum $500 cash surrender value and a $25 fee, are allowed once
a year after the first duration. Policy loans are available at 7% interest
in advance. The policy's accumulated fund will be credited the guaranteed
interest rate in relation to the amount of the policy loan. Surrender
charges are based on a percentage of target premium starting at 120% for
years 1-5 then grading downward to zero in year 15. This policy contains a
guaranteed interest credit bonus for the long term policyholder. From
years 10 through 20, additional interest bonuses are earned with a total in
the twentieth year of 1.375%. The bonus is calculated from the policy
issue date and is contractually guaranteed.
The Company's actual experience for earned interest, persistency and
mortality vary from the assumptions applied to pricing and for determining
premiums. Accordingly, differences between the Company's actual experience
and those assumptions applied may impact the profitability of the Company.
The minimum interest spread between earned and credited rates is 1% on the
"Century 2000" universal life insurance product. The Company monitors
investment yields, and when necessary adjusts credited interest rates on
its insurance products to preserve targeted interest spreads. Credited
rates are reviewed and established by the Board of Directors of the
respective life insurance affiliates.
The premium rates are competitive with other insurers doing business in the
states in which the Company is marketing its products.
The Company markets other products, none of which is significant to
operations. The Company has a variety of policies in force different from
those which are currently being marketed. Universal life and interest
sensitive whole life business account for approximately 46% of the
insurance in force. Approximately 29% of the insurance in force is
participating business. 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.
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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 1997. The Company's sales agents do not
have the power to bind the Company.
Marketing is based on referral network of community leaders and
shareholders of UII and UTI. Recruiting of sales agents is also based on
the same referral network. The industry has experienced a downward trend
in the total number of agents who sell insurance products, and competition
for the top sales producers has intensified. As this trend appears to
continue, the recruiting focus of the Company has been on introducing
quality individuals to the insurance industry through an extensive internal
training program. The Company feels this approach is conducive to the
mutual success of our new recruits and the Company as these recruits market
our products in a professional, company structured manner.
New sales are marketed by UG and USA through their agency forces using
contemporary sales approaches with personal computer illustrations.
Current marketing efforts are primarily focused on the Midwest region.
USA is licensed in Illinois, Indiana and Ohio. During 1997, Ohio accounted
for 99% of USA's direct premiums collected.
ABE is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1997, Illinois and Indiana accounted for 46% and 32%,
respectively of ABE's direct premiums collected.
APPL is licensed in Alabama, Arizona, Arkansas, Colorado, Georgia,
Illinois, Indiana, Kansas, Kentucky, Louisiana, Missouri, Montana,
Nebraska, Ohio, Oklahoma, Pennsylvania, Tennessee, Utah, Virginia, West
Virginia and Wyoming. During 1997, West Virginia accounted for 95% of
APPL's direct premiums collected.
UG is licensed in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma,
Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin.
During 1997, Illinois accounted for 33%, and Ohio accounted for 14% of
direct premiums collected. No other state accounted for more than 7% of
direct premiums collected in 1997.
In 1997 $38,471,452 of total direct premium was written by USA, ABE, APPL
and UG. Ohio accounted for 35% , Illinois accounted for 21%, and West
Virginia accounted for 10% of total direct premiums collected.
New business production has decreased 15% from 1995 to 1996 and 43% from
1996 to 1997. Several factors have had a significant impact on new
business production. Over the last two years there has been the
possibility of a change in control of UTI. In September of 1996, an
agreement was reached effecting a change in control of UTI to an unrelated
party. The transaction did not materialize. At this writing negotiations
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are progressing with a different unrelated party for change in control of
UTI. Please refer to the Notes to the Consolidated Financial Statements
for additional information. The possible changes in control, and the
uncertainty surrounding each potential event, have hurt the insurance
Companies' ability to attract and maintain sales agents. In addition,
increased competition for consumer dollars from other financial
institutions, product Illustration guideline changes by State Insurance
Departments, and a decrease in the total number of insurance sales agents
in the industry, have all had an impact, given the relatively small size of
the Company.
Management recognizes the aforementioned challenges and is responding. The
potential change in control of the Company is progressing, bringing the
possibility for future growth, efforts are being made to introduce
additional products, and the recruitment of quality individuals for
intensive sales training, are directed at reversing current marketing
trends.
UNDERWRITING
The underwriting procedures of the insurance affiliates are established by
management. Insurance policies are issued by the Company based upon
underwriting practices established for each market in which the Company
operates. Most policies are individually underwritten. Applications for
insurance are reviewed to determine additional information required to make
an underwriting decision, which depends on the amount of insurance applied
for and the applicant's age and medical history. Additional information
may include inspection reports, medical examinations, statements from
doctors who have treated the applicant in the past and, where indicated,
special medical tests. After reviewing the information collected, the
Company either issues the policy as applied for or with an extra premium
charge because of unfavorable factors or rejects the application.
Substandard risks may be referred to reinsurers for full or partial
reinsurance of the substandard risk.
The insurance affiliates require blood samples to be drawn with individual
insurance applications for coverage over $45,000 (age 46 and above) or
$95,000 (age 16-45). Blood samples are tested for a wide range of chemical
values and are screened for antibodies to the HIV virus. Applications also
contain questions permitted by law regarding the HIV virus which must be
answered by the proposed insureds.
RESERVES
The applicable insurance laws under which the insurance affiliates operate
require that each insurance company report policy reserves as liabilities
to meet future obligations on the policies in force. These reserves are
the amounts which, with the additional premiums to be received and interest
thereon compounded annually at certain assumed rates, are calculated in
accordance with applicable law to be sufficient to meet the various policy
and contract obligations as they mature. These laws specify that the
reserves shall not be less than reserves calculated using certain mortality
tables and interest rates.
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 affiliates'
experience adjusted to reflect anticipated trends and to include provisions
for possible unfavorable deviations. The Company makes these assumptions
at the time the contract is issued or, in the case of contracts acquired by
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purchase, at the purchase date. Benefit reserves for traditional life
insurance policies include certain deferred profits on limited-payment
policies that are being recognized in income over the policy term. Policy
benefit claims are charged to expense in the period that the claims are
incurred. Current mortality rate assumptions are based on 1975-80 select
and ultimate tables. Withdrawal rate assumptions are based upon Linton B
or Linton C, which are industry standard actuarial tables for forecasting
assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life
insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges.
Policy benefits and claims that are charged to expense include benefit
claims in excess of related policy account balances. Interest crediting
rates for universal life and interest sensitive products range from 5.0% to
6.0% in each of the years 1997, 1996 and 1995.
REINSURANCE
As is customary in the insurance industry, the 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 contingently
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 financial statement liabilities to the extent that they
have been reinsured with other insurance companies. The Company sets a
limit on the amount of insurance retained on the life of any one person.
The Company will not retain more than $125,000, including accidental death
benefits, on any one life. At December 31, 1997, the Company had insurance
in force of $3.692 billion of which approximately $1.022 billion was ceded
to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The
Company believes the assuming companies are able to honor all contractual
commitments, based on the Company's periodic reviews of their financial
statements, insurance industry reports and reports filed with state
insurance departments.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover all new business of the Company.
The agreements are a yearly renewable term ("YRT") treaty where the Company
cedes amounts above its retention limit of $100,000 with a minimum cession
of $25,000.
One of the Company's insurance subsidiaries (UG) entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best assigned FILIC a Financial Performance Rating (FPR) of 7 (Strong)
on a scale of 1 to 9. A.M. Best assigned a Best's Rating of A++ (Superior)
to The Guardian Life Insurance Company of America ("Guardian"), parent of
FILIC, based on the consolidated financial condition and operating
performance of the company and its life/health affiliates. During 1997,
FILIC changed its name to Park Avenue Life Insurance Company ("PALIC").
The agreement with PALIC accounts for approximately 65% of the reinsurance
receivables as of December 31, 1997.
INVESTMENTS
At December 31, 1997, substantially all of the assets of UII represent
investments in or receivables from affiliates. UII does own one mortgage
loan as of December 31, 1997. The mortgage loan is in good standing.
Interest income was derived from mortgage loans and cash and cash
equivalents.
COMPETITION
The insurance business is a highly competitive industry and there are a
number of other companies, both stock and mutual, doing business in areas
where the Company operates. Many of these competing insurers are larger,
have more diversified lines of insurance coverage, have substantially
greater financial resources and have a greater number of agents. Other
significant competitive factors include policyholder benefits, service to
policyholders, and premium rates.
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The insurance industry is a mature industry. In recent years, the industry
has experienced virtually no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products.
The products offered (see Products) are similar to those offered by other
major companies. The product features are regulated by the states and are
subject to extensive competition among major insurance organizations. The
Company believes a strong service commitment to policyholders, efficiency
and flexibility of operations, timely service to the agency force and the
expertise of its key executives help minimize the competitive pressures of
the insurance industry.
The industry has experienced a downward trend in the total number of agents
who sell insurance products, and competition for the top sales producers
has intensified. As this trend appears to continue, the recruiting focus
of the Company has been on introducing quality individuals to the insurance
industry through an extensive internal training program. The Company feels
this approach is conducive to the mutual success of our new recruits and
the Company as these recruits market our products in a professional,
company structured manner.
GOVERNMENT REGULATION
The Company's insurance 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 form of
any future proposals or regulation. The Company's insurance affiliates,
USA, UG, APPL and ABE are domiciled in the states of Ohio, Ohio, West
Virginia and Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners ("NAIC"). The NAIC is an association whose membership
consists of the insurance commissioners or their designees of the various
states. The NAIC has no direct regulatory authority reporting from state
to state. This is accomplished through the issuance of model regulations,\
which can be adopted by individual states unmodified, modified to meet the
state's own needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled by
other corporations licensed to transact business within their respective
jurisdictions. The insurance affiliates are subject to such legislation
and registered as controlled insurers in those jurisdictions in which such
registration is required. Statutes vary from state to state but typically
require periodic disclosure concerning the corporation that controls the
registered insurers and all subsidiaries of such corporation. In addition,
prior notice to, or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 9 of the Notes to the Financial Statements), and
payment of dividends (see Note 2 of the Notes to the Financial Statements)
in excess of specified amounts by the insurance subsidiary within the
holding company system are required.
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Each year the NAIC calculates financial ratio results (commonly referred to
as IRIS ratios) for each company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement.
The results are then compared to pre-established normal ranges determined
by the NAIC. Results outside the range typically require explanation to
the domiciliary insurance department.
At year end 1997, the insurance companies had one ratio outside the normal
range. The ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last three years. The cause for the
decrease in premium income is related to the possible change in control of
UTI over the last two years to two different parties. At year end 1996 it
was announced that UTI was to be acquired by an unrelated party, but the
sale did not materialize. At this writing negotiations are progressing
with a different unrelated party for the change in control of UTI. Please
refer to the Notes to the Consolidated Financial Statements for additional
information. The possible changes in control over the last two years have
hurt the insurance companies' ability to recruit new agents. The active
agents were apprehensive due to uncertainties in relation to the change in
control of UTI. In recent years, the industry experienced a decline in the
total number of agents selling insurance products and therefore competition
has increased for quality agents. Accordingly, new business production
decreased significantly over the last two years.
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners ("NAIC"),
as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting
principles and are intended to reflect a more conservative view by, for
example, requiring immediate expensing of policy acquisition costs. The
achievement of long-term growth will require growth in the statutory
capital of the Company's insurance affiliates. The affiliates may secure
additional statutory capital through various sources, such as internally
generated statutory earnings or equity contributions by the Company from
funds generated through debt or equity offerings.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. The
risk-based capital formula measures the adequacy of statutory capital and
surplus in relation to investment and insurance risks such as asset
quality, mortality and morbidity, asset and liability matching and other
business factors. The RBC formula is used by state insurance regulators as
an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized.
In addition, the formula defines new minimum capital standards that will
supplement the current system of low fixed minimum capital and surplus
requirements on a state-by-state basis. Regulatory compliance is
determined by a ratio of the insurance company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level RBC, as
defined by the NAIC. Insurance companies below specific trigger points or
ratios are classified within certain levels, each of which requires
specific corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1997, each of the insurance subsidiaries has a Ratio that
is in excess of 3, which is 300% of the authorized control level;
accordingly the insurance subsidiaries meet the RBC requirements.
The 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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Legislative and regulatory initiatives regarding changes in the regulation
of banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on the company by altering the competitive
environment for its products. The outcome and timing of any such changes
cannot be anticipated at this time, but the company will continue to
monitor developments in order to respond to any opportunities or increased
competition that may occur.
The NAIC adopted the Life Illustration Model Regulation. Many states have
adopted the regulation effective January 1, 1997. This regulation requires
products which contain non-guaranteed elements, such as universal life and
interest sensitive life, to comply with certain actuarially established
tests. These tests are intended to target future performance and
profitability of a product under various scenarios. The regulation does
not prevent a company from selling a product that does not meet the various
tests. The only implication is the way in which the product is marketed to
the consumer. A product that does not pass the tests uses guaranteed
assumptions rather than current assumptions in presenting future product
performance to the consumer. The Company conducts an ongoing thorough
review of its sales and marketing process and continues to emphasize its
compliance efforts.
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
This project is not expected to be completed earlier than 1999. Specific
recommendations have been set forth in papers issued by the NAIC for
industry review. The Company is monitoring the process, but the potential
impact of any changes in insurance accounting standards is not yet known.
EMPLOYEES
UII has no employees of its own. There are approximately 90 persons who
are employed by the Company's affiliates.
ITEM 2. PROPERTIES
The Company leases approximately 1,951 square feet of office space at 2500
Corporate Exchange Drive, Suite 345, Columbus, Ohio 43231. The lease
expires June 30, 1999 with annual lease rent of $23,000 unadjusted for
additional rent for the Company's pro rata share of building taxes,
operating expenses and management expenses. Under the current lease
agreement, the Company will pay a minimum of $35,000 through the remaining
term of the lease. The rent expense will be approximately $35,000 for
1998. The lease contains no renewal or purchase option clause. The leased
space cannot be sublet without written approval of lessor. Rent expense
for 1997, 1996 and 1995 was approximately $35,000, $61,000 and $69,000,
respectively.
ITEM 3. 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 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.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDERS
MATTERS
As of March 13, 1998, there was no established public trading market for
the Company's common stock. The Company's common stock is not listed on
any exchange.
As of December 31, 1997, no cash dividends had been declared on the common
stock of UII.
See Note 7 in the accompanying financial statements for information
regarding dividend restrictions.
On May 13, 1997, UII effected a 1 for 14.2857 reverse stock split.
Fractional shares received a cash payment on the basis of $.70 for each old
share. Prior period numbers have been restated to give effect of the
reverse stock split.
Number of Common Shareholders as of March 13, 1998 is 6,487.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1997 1996 1995 1994 1993
Net Operating
Revenues $ 1,186 $ 1,791 $ 2,234 $ 1,667 $ 1,459
Operating Costs
and Expenses $ 909 $ 1,414 $ 1,976 $ 1,627 $ 1,384
Income taxes $ 0 $ 0 $ 0 $ 0 $ 0
Equity in loss
of investees $ (357) (696) $(2,406) $ (384) $ (580)
Net loss $ (79) $ (319) $(2,148) $ (344) $ (505)
Net loss
per common share $ (0.06) $ (0.23) $ (1.54) $ (0.25) $ (0.36)
Cash Dividend Declared
per common share $ 0 $ 0 $ 0 $ 0 $ 0
Total Assets $12,840 $12,881 $13,386 $15,414 $14,919
Long Term
Obligations $ 902 $ 902 $ 902 $ 902 $ 0
11
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ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
1997 COMPARED TO 1996
(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 $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.
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<PAGE>
Another cause for the decrease in premium revenues is related to the
potential change in control of UTI over the last two years to two
different parties. During September of 1996, it was announced that
control of UTI would pass to an unrelated party, but the change in
control did not materialize. At this writing, negotiations are
progressing with a different unrelated party for the change in control
of UTI. Please refer to the Notes to the Consolidated Financial
Statements of UTG for additional information. The possible changes and
resulting uncertainties have hurt the insurance companies' ability to
recruit and maintain sales agents.
New business production decreased significantly over the last two
years. New business production decreased 43% or $3,935,000 when
comparing 1997 to 1996. In recent years, the insurance industry as a
whole has experienced a decline in the total number of agents who sell
insurance products, therefore competition has intensified for top
producing sales agents. The relatively small size of our companies,
and the resulting limitations, have made it challenging to compete in
this area.
A positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained in relation to
the previous year. The average persistency rate for all policies in
force for 1997 and 1996 has been approximately 89.4% and 87.9%,
respectively.
Net investment income decreased 6% when comparing 1997 to 1996. The
decrease relates to the decrease in invested assets from a coinsurance
agreement. UTG's insurance subsidiary UG entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC"), an
unrelated party, as of September 30, 1996. During 1997, FILIC changed its
name to Park Avenue Life Insurance Company ("PALIC"). Under the terms of
the agreement, UG ceded to FILIC substantially all of its paidup 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.
13
<PAGE>
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 nonstandard
policies had a face amount of $22,700,000 and represented 1/2 of 1% of the
insurance in-force in 1994. Management's initial analysis indicated that
expected death claims on the business in-force was adequate in
relation to mortality assumptions inherent in the calculation of
statutory reserves. Nevertheless, management determined it was in the
best interest of UTG and its subsidiaries' to repurchase as many of the non-
standard policies as possible. Through December 31, 1996, the UTG and its
subsidiaries' spent approximately $7,099,000 for the settlement of non-
standard policies and for the legal defense of related litigation. In
relation to settlement of non-standard policies UTG and its
subsidiaries' incurred life benefit costs of $3,307,000, and $720,000 in
1996 and 1995, respectively. UTG and its subsidiaries' incurred legal
costs of $906,000 and $687,000 in 1996 and 1995, respectively. All
policies associated with this issue have been settled as of
December 31, 1996. Therefore, expense reductions for 1997 would follow.
Commissions and amortization of deferred policy acquisition costs
decreased 14% in 1997 compared to 1996. The decrease is due primarily due
to a reduction in commissions paid. Commissions decreased 19% in 1997
compared to 1996. The decrease in commissions was due to the decline
in new business production. There is a direct relationship premium
revenues and commission expense. First year premium production decreased
43% and first year commissions decreased 33% when comparing 1997 to
1996. Amortization of deferred policy acquisition costs decreased 6%
in 1997 compared to 1996. Management would expect commissions and
amortization of deferred policy acquisition costs to decrease in the
future if premium revenues continue to decline.
Amortization of cost of insurance acquired decreased 56% in 1997
compared to 1996. Cost of insurance acquired is amortized in relation to
expected future profits, including direct charge-offs for any excess of
the unamortized asset over the projected future profits. UTG and its
subsidiaries' did not have any charge-offs during the periods covered
by this report. The decrease in amortization during the current
period is a normal fluctuation due to the expected future profits.
Amortization of cost of insurance acquired is particularly sensitive to
changes in persistency of certain blocks of insurance inforce. 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. The
decrease in operating expenses is directly related to settlement of
certain litigation in December of 1996. UTG and its subsidiaries'
incurred legal costs of $0, $906,000 and $687,000 in 1997, 1996 and
1995, respectively in relation to the settlement of the non-standard
insurance policies.
Interest expense decreased 4% in 1997 compared to 1996. Since December 31,
1996, notes payable decreased approximately $758,000. Average
outstanding indebtedness was $19,461,000 with an average cost of 8.6% in
1997 compared to average outstanding indebtedness of 20,652,000 with an
average cost of 8.5% in 1996. In March 1997, the base interest rate for
most of the notes payable increased a quarter of a point. The base rate is
defined as the floating daily, variable rate of interest determined
and announced by First of America Bank. Please refer to Note 12
"Notes Payable" in the Notes to the Consolidated Financial Statements of
UTG for more information.
14
<PAGE>
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.
(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. UTG
and its subsidiaries' changed its marketing strategy from traditional
life insurance products to universal life insurance products.
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 its marketing strategy to remain competitive
based on consumer demand.
15
<PAGE>
In addition, UTG and its subsidiaries' changed its focus from primarily
a broker agency distribution system to a captive agent system.
Business written by the broker agency force, in recent years, did not
meet UTG and its subsidiaries' expectations. With the change in focus
of distribution systems, most of the broker agents were terminated.
(The termination of the broker agency force caused a non-recurring
write down of the value of agency force asset in 1995, see discussion
of amortization of agency force for further details.). The change in
distribution systems effectively reduced the total number of agents
representing and producing business. Broker agents sell insurance and
related products for several companies. Captive agents sell for only
one company.
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.
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 nonstandard 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.
16
<PAGE>
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 amortized in relation
to expected future profits, including direct charge-offs for any excess
of the unamortized asset over the projected future profits. UTG and
its subsidiaries' did not have any charge-offs during the periods
covered by this report. The increase in amortization during the
current period is a normal fluctuation due to the expected future
profits. Amortization of cost of insurance acquired is particularly
sensitive to changes in persistency of certain blocks of insurance in
force.
UTG and its subsidiaries' reported a non-recurring write down of value
of agency force of $0 and $8,297,000 in 1996 and 1995, respectively.
The write down was directly related to the change in distribution
systems. UTG and its subsidiaries' changed its focus from primarily a
broker agency distribution system to a captive agent system. Business
produced by the broker agency force in recent years did not meet
expectations. With the change in focus of distribution systems, most
of the broker agents were terminated. The termination of most of the
agents involved in the broker agency force caused management to re
evaluate and write-off the value of the agency force carried on the
balance sheet.
Operating expenses increased 6% in 1996 compared to 1995. The primary
factor that caused the increase in operating expenses is directly
related to increased legal costs and reserves established for
litigation. The legal costs are due to the settlement of non-standard
insurance policies as was discussed in the review of life benefits.
UTG and its subsidiaries' incurred legal costs of $906,000 and $687,000
in 1996 and 1995, respectively in relation to the settlement of the non
standard insurance policies.
Interest expense decreased 12% in 1996 compared to 1995. Since
December 31, 1995, notes payable decreased approximately $1,623,000
that has directly attributed to the decrease in interest expense during
1996. Interest expense was also reduced, as a result of the
refinancing of the senior debt under which the new interest rate is
more favorable. Please refer to Note 12 "Notes Payable" of the
Consolidated Notes to the Financial Statements of UTG for more
information on this matter.
NET LOSS OF UTG
UTG and its subsidiaries' had a net loss of $1,661,000 in 1996 compared
to a net loss of $5,321,000 in 1995. The net loss in 1996 is
attributed to the increase in life benefits net of reinsurance and
operating expenses primarily associated with settlement and other
related costs of the non-standard life insurance policies.
(d) NET LOSS
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.
17
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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. 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.
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. 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.
Management believes that the overall sources of liquidity available to the
Company will be more than sufficient to satisfy its financial obligations.
18
<PAGE>
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 form of
any future proposals or regulation. The Company's insurance affiliates,
USA, UG, APPL and ABE are domiciled in the states of Ohio, Ohio, West
Virginia and Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners ("NAIC"). The NAIC is an association whose membership
consists of the insurance commissioners or their designees of the various
states. The NAIC has no direct regulatory authority 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.
19
<PAGE>
The NAIC, in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC proposed changes
in the regulations governing insurance company investments and holding
company investments in subsidiaries and affiliates which were adopted by
the NAIC as model laws in 1996. The Company does not presently anticipate
any material adverse change in its business as a result of these changes.
Legislative and regulatory initiatives regarding changes in the regulation
of banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on the Company by altering the competitive
environment for its products. The outcome and timing of any such changes
cannot be anticipated at this time, but the Company will continue to
monitor developments in order to respond to any opportunities or increased
competition that may occur.
The NAIC adopted the Life Illustration Model Regulation. Many states have
adopted the regulation effective January 1, 1997. This regulation requires
products which contain non-guaranteed elements, such as universal life and
interest sensitive life, to comply with certain actuarially established
tests. These tests are intended to target future performance and
profitability of a product under various scenarios. The regulation does
not prevent a company from selling a product that does not meet the various
tests. The only implication is the way in which the product is marketed to
the consumer. A product that does not pass the tests uses guaranteed
assumptions rather than current assumptions in presenting future product
performance to the consumer. The Company conducts an ongoing thorough
review of its sales and marketing process and continues to emphasize its
compliance efforts.
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
This project is not expected to be completed earlier than 1999. Specific
recommendations have been set forth in papers issued by the NAIC for
industry review. The Company is monitoring the process, but the potential
impact of any changes in insurance accounting standards is not yet known.
ACCOUNTING AND LEGAL DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. The
Statement's objective is to simplify the computation of earnings per share,
and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS. Basic
EPS is calculated by dividing income available to common stockholders
(i.e., net income or loss adjusted for preferred stock dividends) by the
weighted-average number of common shares outstanding. Thus, in the most
significant change in current practice, options, warrants, and convertible
securities are excluded from the basic EPS calculation. Further,
contingently issuable shares are included in basic EPS only if all the
necessary conditions for the issuance of such shares have been satisfied by
the end of the period.
20
<PAGE>
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.
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.
21
<PAGE>
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.
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.
22
<PAGE>
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.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Listed below are the financial statements included in this Part of the
Annual Report on SEC Form 10-K:
Page No.
UNITED INCOME, INC.
Independent Auditor's Report for the
Years ended December 31, 1997, 1996, 1995 25
Balance Sheets 26
Statements of Operations 27
Statements of Shareholders' Equity 28
Statements of Cash Flows 29
Notes to Financial Statements 30-38
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
24
<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, 1997 and 1996, and the related
statements of operations, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of United Income,
Inc. as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1998
25
<PAGE>
<TABLE>
UNITED INCOME, INC. BALANCE SHEETS
As of December 31, 1997 and 1996
ASSETS
1997 1996
<S> <C> <C>
Cash and cash equivalents $ 710,897 $ 439,676
Mortgage loans 121,520 122,853
Notes receivable from affiliate 864,100 864,100
Accrued interest income 12,068 11,784
Property and equipment (net of accumulated
depreciation of $93,648 and $92,140) 1,070 2,578
Investment in affiliates 11,060,682 11,324,947
Receivable from affiliate 23,192 31,837
Other assets (net of accumulated amortization
of $138,810 and $101,794) 46,258 83,274
Total assets $ 12,839,787 $ 12,881,049
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 1,534 1,273
Total liabilities 903,834 903,573
Shareholders' equity:
Common stock - no par value, stated value $.033
per share. Authorized 2,310,001 shares - 1,391,919
and 1,392,130 shares issued after deducting
treasury shares of 177,590 and 177,590 45,934 45,940
Additional paid-in capital 15,242,365 15,244,471
Unrealized depreciation of investments
held for sale of affiliate (19,603) (59,508)
Accumulated deficit (3,332,743 (3,253,427)
Total shareholders' equity 11,935,953 11,977,476
Total liabilities and
shareholders' equity $12,839,787 $12,881,049
</TABLE>
See accompanying notes.
26
<PAGE>
<TABLE>
UNITED INCOME, INC.
STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1997
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Interest income $ 27,127 $ 13,099 $ 16,516
Interest income from affiliates 82,579 79,433 71,646
Service agreement income
from affiliates 989,295 1,567,891 2,015,325
Other income from affiliates 87,073 127,922 129,627
Realized investment gains 0 2,599 905
Other income 48 3 130
1,186,122 1,790,947 2,234,149
Expenses:
Management fee to affiliate 743,577 1,240,735 1,809,195
Operating expenses 80,173 89,529 78,505
Interest expense 85,155 84,027 88,538
908,905 1,414,291 1,976,238
Gain before income taxes and equity
in loss of investees 277,217 376,656 257,911
Provision for income taxes 0 0 0
Equity in loss of investees (356,533) (695,739) (2,405,813)
Net loss $ (79,316) $ (319,083) $ (2,147,902)
Net loss per
common share $ (0.06) $ (0.23) $ (1.54)
Average common
shares outstanding 1,391,996 1,392,084 1,392,060
</TABLE>
See accompanying notes.
27
<PAGE>
<TABLE>
UNITED INCOME, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1997
1997 1996 1995
<S> <C> <C> <C>
Common stock
Balance, beginning of year $ 45,940 $ 45,938 $ 45,938
Exercise of stock options 0 2 0
Stock retired from purchase of fractional
shares of reverse stock split (6) 0 0
Balance, end of year $ 45,934 $ 45,940 $ 45,938
Additional paid-in capital
Balance, beginning of year $15,244,471 $15,243,773 $15,243,773
Exercise of stock options 0 698 0
Stock retired from purchase of fractional
shares of reverse stock split (2,106) 0 0
Balance, end of year $15,242,365 $15,244,471 $15,243,773
Unrealized appreciation (depreciation) of
investments held for sale
Balance, beginning of year $ (59,508) $ (236) $ (99,907)
Change during year 39,905 (59,272) 99,671
Balance, end of year $ (19,603) $ (59,508) $ (236)
Accumulated deficit
Balance, beginning of year $(3,253,427) $(2,934,344) $ (786,442)
Net loss 79,316) (319,083) (2,147,902)
Balance, end of year $(3,332,743) $(3,253,427)$(2,934,344)
Total shareholders' equity,
end of year $11,935,953 $11,977,476 $12,355,131
</TABLE>
See accompanying notes.
28
<PAGE>
<TABLE>
UNITED INCOME, INC.
STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1997
1997 1996 1995
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
Cash flows from operating activities:
Net loss $ (79,316) $ (319,083) $(2,147,902)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities
Depreciation and amortization 38,524 45,331 52,169
Gain on payoff of mortgage loans 0 (2,599) 0
Accretion of discount
on mortgage loans (266) (481) (1,591)
Compensation expense through
stock option plan 0 667 0
Equity in loss of investees 356,533 695,739 2,405,813
Changes in assets and liabilities:
Change in accrued interest income (284) (4,744) (1,713)
Change in receivable from affiliates 8,645 (119,706) 25,598
Change in other liabilities 261 (39,449) (5,469)
Net cash provided by
operating activities 324,097 255,675 326,905
Cash flows from investing activities:
Change in notes receivable from affiliate 0 (150,000) 0
Purchase of investments in affiliates (52,363) 0 (26,091)
Capital contribution to investee 0 (94,000) (47,000)
Sale of investments in affiliates 0 0 1,810
Payments of principal on mortgage loans 1,599 62,434 4,480
Purchase of mortgage loan 0 0 (126,000)
Proceeds from sale of
property and equipment 0 1,164 0
Net cash used in investing activities (50,764) (180,402) (192,801)
Cash flows from financing activities:
Proceeds from sale of common stock 0 33 0
Payment for fractional shares
from reverse stock split (2,112) 0 0
Net cash provided by (used in)
financing activities (2,112) 33 0
Net increase in cash and
cash equivalents 271,221 75,306 134,104
Cash and cash equivalents
at beginning of year 439,676 364,370 230,266
Cash and cash equivalents
at end of year $ 710,897 $ 439,676 $ 364,370
</TABLE>
See accompanying notes.
29
<PAGE>
UNITED INCOME, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1997, the affiliates of United
Income, Inc. were as Depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
30
<PAGE>
The summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying consolidated
financial statements follows.
B.NATURE OF OPERATIONS - United Income, Inc. ("UII"), referred to as the
("Company"), was incorporated November 2, 1987, and commenced its
activities January 20, 1988. UII is an insurance holding company that
through its insurance affiliates sells individual life insurance
products. UII is an affiliate of UTI, an Illinois insurance holding
company. UTI owns 40.6% of UII.
C.MORTGAGE LOANS - at unpaid balances, adjusted for amortization premium
or discount, less allowance for possible losses. Realized gains and
losses on sales of mortgage loans are recognized in net income on a
specific identification basis.
D.PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost.
Depreciation is provided using a straight-line method. Accumulated
depreciation was $93,648 in 1997 and $92,140 in 1996. Depreciation
expense for the years ended December 1997, 1996, and 1995 was $1,508,
$8,315, and $11,265 respectively.
E.CASH AND CASH EQUIVALENTS - The Company considers certificates of
deposit and other short-term investment instruments with an original
purchased maturity of three months or less as cash equivalents.
F.EARNINGS PER SHARE - Earnings per share are based on the weighted
average number of common shares outstanding during each year,
retroactively adjusted to give effect to all stock splits. In
accordance with Statement of Financial Accounting Standards No. 128, the
computation of diluted earnings per share is not shown since the Company
has a loss from continuing operations in each period presented, and any
assumed conversion, exercise, or contingent issuance of securities would
have an antidilutive effect on earnings per share.
G.USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
H.RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the current year presentation. Such reclassifications had
no effect on previously reported net income (loss), total assets, or
shareholders' equity.
2. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value:
(a) Mortgage loans
Mortgage loans are carried at the unpaid principal balances net of
unamortized purchase discounts. Yields on these loans exceed current
mortgage loan rates in the market. Therefore, management believes the
market value of these loans is at least equal to carrying value.
(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.
31
<PAGE>
(c) Convertible debentures
For the convertible debentures, which are subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
3. RELATED PARTY TRANSACTIONS
Effective November 8, 1989, United Security Assurance Company ("USA")
entered a service agreement with its then direct parent, UII, for certain
administrative services. Pursuant to the terms of the agreement, USA pays
UII monthly fees equal to 22% of the amount of collected first year
premiums, 20% in second year and 6% of the renewal premiums in years three
and after. The Company recognized service agreement income of $989,295,
$1,567,891 and $2,015,325 in 1997, 1996 and 1995, respectively.
Effective September 1, 1990, UII entered a service agreement with United
Trust, Inc. (UTI) for certain administrative services. Through its
personnel, UTI performs such services as may be mutually agreed upon
between the parties. In compensation for its services, UII pays UTI a
contractually established fee. The Company incurred expenses of $593,577,
$940,735 and $1,209,195 during 1997, 1996 and 1995, respectively, pursuant
to the terms of the service agreement with UTI. In addition, the Company
incurred $150,000, $300,000 and $600,000 during 1997, 1996 and 1995,
respectively, as reimbursement for services performed on its behalf by FCC.
At December 31, 1997, the Company owns $864,100 in notes receivable from
affiliates. The notes carry interest at a rate of 1% above prime.
Interest is received quarterly. Principal is due upon maturity, with
$150,000 maturing in 1999, $700,000 maturing in 2006 and $14,100 maturing
in 2012.
4. STOCK OPTION PLANS
The Company has a stock option plan under which certain directors, officers
and employees may be issued options to purchase up to 31,500 shares of
common stock at $13.07 per share. Options become exercisable at 25%
annually beginning one year after date of grant and expire generally in
five years. In November 1992, 10,437 option shares were granted. At
December 31, 1997, options for 451 shares were exercisable and options for
20,576 shares were available for grant. Options for 10,437 shares expired
during 1997. No options were exercised during 1997.
A summary of the status of the Company's stock option plan for the three
years ended December 31, 1997, and changes during the years ending on those
dates is presented below.
1997 1996 1995
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 10,888 $ 13.07 10,888 $ 13.07 10,437 $ 13.07
Granted 0 0.00 0 0.00 451 13.07
Exercised 0 0.00 0 0.00 0 0.00
Forfeited 10,437 13.07 0 0.00 0 0.00
Outstanding at
end of year 451 $ 13.07 10,888 $ 13.07 10,888 $ 13.07
Options exercisable
at year end 451 $ 13.07 10,888 $ 13.07 10,888 $ 13.07
32
<PAGE>
The following information applies to options outstanding at December 31,
1997:
Number outstanding 451
Exercise price $ 13.07
Remaining contractual life 3 years
On January 15, 1991, the Company adopted an additional Non-Qualified Stock
Option Plan under which certain employees and sales personnel may be
granted options. The plan provides for the granting of up to 42,000
options at an exercise price of $.47 per share. The options generally
expire five years from the date of grant. Options for 10,220 shares of
common stock were granted in 1991, options for 1,330 shares were granted in
1993 and options for 301 shares were granted in 1995. A total of 11,620
option shares have been exercised as of December 31, 1997. At December 31,
1997, 231 options have been granted and are exercisable. Options for 0 and
70 shares were exercised during 1997 and 1996, respectively.
A summary of the status of the Company's stock option plan for the three
years ended December 31, 1997, and changes during the years ending on
those dates is presented below.
1997 1996 1995
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 231 $ 0.47 301 $ 0.47 0 $ 0.47
Granted 0 0.00 0 0.00 301 0.47
Exercised 0 0.00 (70) 0.47 0 0.00
Forfeited 0 0.00 0 0.00 0 0.00
Outstanding
at end of year 231 $ 0.47 231 $ 0.47 301 $ 0.47
Options exercisable
at year end 231 $ 0.47 231 $ 0.47 301 $ 0.47
Fair value of options
granted during
the year $ 0.00 $ 0.00 $ 8.40
The following information applies to options outstanding at December 31,
1997:
Number outstanding 231
Exercise price $ 0.47
Remaining contractual life 3 years
5. INCOME TAXES
The Company has net operating loss carryforwards for federal income tax
purposes expiring as follows:
UII
2006 $ 41,314
2007 531,747
TOTAL $ 573,061
The Company has established a deferred tax asset of $200,571 for its
operating loss carryforwards and has established an allowance of $200,571
against this asset. The Company has no other deferred tax components which
would be reflected in the balance sheets.
33
<PAGE>
The provision for income taxes shown in the statements of operations does
not bear the normal relationship to pre-tax income as a result of certain
permanent differences. The sources and effects of such differences are
summarized in the following table:
1997 1996 1995
Income tax at statutory rate of
35% of income before income taxes $ 97,026 $ 131,830 $ 90,269
Utilization of net operating loss
carryforward (97,026 (133,866) (92,049)
Depreciation 0 2,036 1,780
Provision for income taxes $ 0 $ 0 $ 0
6. 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, December31,
ASSETS 1997 1996
<S> <C> <C>
Total investments $ 222,601,494 $ 221,078,779
Cash and cash equivalents 15,763,639 16,903,789
Cost of insurance acquired 45,009,452 47,536,812
Other assets 64,576,450 69,480,242
Total assets $ 347,951,035 $ 354,999,622
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 268,237,887 $ 268,771,766
Notes payable 19,081,602 19,839,853
Deferred taxes 12,157,685 11,591,086
Other liabilities 4,053,293 6,335,866
Total liabilities 303,530,467 306,538,571
Minority interests in
consolidated subsidiaries 10,130,024 13,332,034
Shareholders' equity
Common stock no par value 45,926,705 45,926,705
Authorized 10,000 shares - 100 issued
Unrealized depreciation of
investment in stocks (41,708) (126,612)
Accumulated deficit (11,594,453) (10,671,076)
Total shareholders' equity 34,290,544 35,129,017
Total liabilities and
shareholders' equity $ 347,951,035 $ 354,999,622
</TABLE>
34
<PAGE>
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Premiums and policy fees,
net of reinsurance $ 28,639,245 $ 30,944,458 $ 33,098,536
Net investment income 14,882,677 15,902,107 15,497,547
Other (171,304) (370,454) 1,237
43,350,618 46,476,111 48,597,320
Benefits, claims and
settlement expenses 27,055,171 30,326,032 29,855,764
Other expenses 16,776,537 22,953,093 30,725,908
43,831,708 53,279,125 60,581,672
Loss before income tax and
minority interest (481,090) (6,803,014) (11,984,352)
Income tax credit (provision) (571,999) 4,643,961 4,724,792
Minority interest in loss of
consolidated subsidiaries 129,712 498,356 1,938,684
Net loss $ (923,377) $ (1,660,697) $ (5,320,876)
</TABLE>
7. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1997, substantially all of consolidated shareholders'
equity represents investment in affiliates. The payment of cash dividends
to shareholders is not legally restricted. However, insurance company
dividend payments are regulated by the state insurance department where the
company is domiciled. UTI is the ultimate parent of UG through ownership
of several intermediary holding companies. UG can not pay a dividend
directly to UII due to the ownership structure. UG's dividend limitations
are described below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,246.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,365. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
8. CONVERTIBLE DEBENTURES
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and
First of America Bank - Southeast Michigan, N.A., as trustee. The
Debentures are general unsecured obligations of UII, subordinate in right
of payment to any existing or future senior debt of UII. The Debentures
are exchangeable and transferable, and are convertible at any time prior to
March 31, 1999 into UII's Common Stock at a conversion price of $25.00 per
share, subject to adjustment in certain events. The Debentures bear
interest from March 31, 1994, payable quarterly, at a variable rate equal
to one percentage point above the prime rate published in the Wall Street
Journal from time to time. On or after March 31, 1999, the Debentures will
be redeemable at UII's option, in whole or in part, at redemption prices
declining from 103% of their principal amount. No sinking fund will be
established to redeem Debentures. The Debentures will mature on March 31,
2004. The Debentures are not listed on any national securities exchange or
the NASDAQ National Market System.
35
<PAGE>
9. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. The
Statement's objective is to simplify the computation of earnings per share,
and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS. Basic
EPS is calculated by dividing income available to common stockholders
(i.e., net income or loss adjusted for preferred stock dividends) by the
weighted-average number of common shares outstanding. Thus, in the most
significant change in current practice, options, warrants, and convertible
securities are excluded from the basic EPS calculation. Further,
contingently issuable shares are included in basic EPS only if all the
necessary conditions for the issuance of such shares have been satisfied by
the end of the period.
Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Income available to common stockholders continues to be
adjusted for assumed conversion of all potentially dilutive securities
using the treasury stock method to calculate the dilutive effect of options
and warrants. However, unlike the calculation of fully diluted EPS under
previous opinions, a new treasury stock method is applied using the average
market price or the ending market price. Further, prior opinion
requirement to use the modified treasury stock method when the number of
options or warrants outstanding is greater than 20% of the outstanding
shares also has been eliminated. SFAS 128 also includes certain shares
that are contingently issuable; however, the test for inclusion under the
new rules is much more restrictive.
SFAS No. 128 requires companies reporting discontinued operations,
extraordinary items, or the cumulative effect of accounting changes are to
use income from operations as the control number or benchmark to determine
whether potential common shares are dilutive or antidilutive. Only
dilutive securities are to be included in the calculation of diluted EPS.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the Company reported a loss from continuing operations so
any potential issuance of common shares would have an antidilutive effect
on EPS. Consequently, the adoption of SFAS No. 128 did not have an impact
on the Company's financial statement.
The FASB has issued SFAS No. 130 entitled Reporting Comprehensive Income
and SFAS No. 132 Employers' Disclosures about Pensions and Other
Postretirement Benefits. Both of the above statements are effective for
financial statements with fiscal years beginning after December 15, 1997.
SFAS No. 130 defines how to report and display comprehensive income and its
components in a full set of financial statements. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity
as owners.
SFAS No. 132 addresses disclosure requirements for post-retirement
benefits. The statement does not change post-retirement measurement or
recognition issues.
The Company will adopt both SFAS No. 130 and SFAS No. 132 for the 1998
financial statements. Management does not expect either adoption to have a
material impact on the Company's financial statements.
36
<PAGE>
10. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a three year period of
time. Under the terms of the letter of intent, Mr. Correll will buy
2,000,000 authorized but unissued shares of UTI common stock for $15.00 per
share and will also buy 389,715 shares of UTI common stock, representing
stock of UTI and UII, that UTI purchased during the last eight months in
private transactions at the average price UTI paid for such stock, plus
interest, or approximately $10.00 per share. Mr. Correll also will
purchase 66,667 shares of UTI common stock and $2,560,000 of face amount of
convertible bonds (which are due and payable on any change in control of
UTI) in private transactions, primarily from officers of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
11. REVERSE STOCK SPLIT
On May 13, 1997, UII effected a 1 for 14.2857 reverse stock split.
Fractional shares received a cash payment on the basis of $0.70 for each
old share. Prior period numbers have been restated to give effect of the
reverse split.
12. PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the third quarter of 1998.
37
<PAGE>
<TABLE>
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
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 87,596 213,518 194,086
Total revenues 342,657 33,661 266,816 242,988
Management fee 226,457 47,558 153,111 116,451
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)
Net income (loss)
per share 0.04 0.06 (0.10) (0.06)
1996
1st 2nd 3rd 4th
Net investment
income $ 3,673 $ 3,793 $ 2,893 $ 2,740
Interest income/affil. 18,078 20,717 20,249 20,389
Service agreement
income 536,604 459,454 406,952 164,881
Total revenues 583,627 535,094 456,715 215,511
Management fee 421,963 425,672 294,170 98,930
Operating expenses 51,804 14,514 12,045 11,166
Interest expense 21,430 20,865 20,866 20,866
Operating income 88,430 74,043 129,634 84,549
Net income (loss) 235,469 50,795 (583,728) (21,619)
Net income (loss)
per share 0.01 0.00 (0.03) 0.00
1995
1st 2nd 3rd 4th
Net investment
income $ 1,431 $ 7,283 $ 4,064 $ 3,738
Investment
income/affil. 22,111 13,830 17,778 17,927
Service agreement
income 505,118 529,411 494,867 485,929
Total revenues 570,284 587,002 540,031 536,832
Management fee 437,041 483,677 452,935 435,542
Operating expenses 46,264 23,951 12,243 (3,953)
Interest expense 21,485 22,676 22,384 21,993
Operating income
(loss) 65,494 56,698 52,469 83,250
Net income (loss) 137,752 (530,781) 132,804 (1,887,677)
Net income (loss)
per share 0.01 (0.03) 0.01 (0.11)
</TABLE>
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
THE BOARD OF DIRECTORS
In accordance with the laws of Ohio and the Certificate of Incorporation
and Bylaws of the Company, 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,
1997, the Board met five times. All directors attended at least 75% of all
meetings of the board except for Messers. Aveni and Teater.
The Board of Directors has an Audit Committee consisting of Messrs.
Berschet, Melville, and Mrs. Donahey. 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 the Company, the nature of
services performed for the Company and the fees to be paid to the
independent auditors, the performance of the Company's independent and
internal auditors and the accounting practices of the Company. 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 1997.
The Board of Directors has a Nominating Committee consisting of Messrs.
Aveni, Nash and Teater. The Nominating Committee reviews, evaluates and
recommends directors, officers and nominees for the Board of Directors.
There is no formal mechanism by which shareholders of the Company can
recommend nominees for the Board of Directors, although any recommendations
by shareholders of the Company will be considered. Shareholders desiring
to make nominations to the Board of Directors should submit their
nominations in writing to the Chairman of the Board no later than February
1st of the year in which the nomination is to be made. The Committee did
not meet in 1997.
The compensation of the Company's executive officers is determined by the
full Board of Directors (see report on Executive Compensation).
Under the Company'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 six. Shareholders elect
Directors to serve for a period of one year at the Company'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 the Company.
DIRECTORS
Name, Age Position with the Company, Business Experience and Other
Directorships
Vincent T. Aveni 71
Director of the Company since 1984; 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 63
Director of the Company since 1984; 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.
39
<PAGE>
James E. Melville 52
President and Chief Operating Officer since July 1997;
Chief Financial Officer of the Company since 1993, Senior
Executive ;Vice President of the Company 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 the Company since 1984; 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.
Larry E. Ryherd 58
Chairman of the Board of Directors since 1987, CEO since
1992; President since 1993 and a Director since 1987; 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 and 1993. He has also been a
Director of the National Alliance of Life Companies since
1992 and is the 1994 Membership Committee Chairman; he is a
member of the American Council of Life Companies and
Advisory Board Member of its Forum 500 since 1992.
Robert W. Teater 71
Director of the Company since 1984; Director of UTG and
certain affiliate companies since 1992; member of Columbus
School Board since 1991, President of Columbus School Board
since 1992; President of Robert W. Teater and Associates, a
comprehensive consulting firm in natural resources
development and organization management since 1983.
EXECUTIVE OFFICERS OF THE COMPANY
More detailed information on the following officers of the Company 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 the company are set forth below:
Name, Age Position with the Company, Business Experience and Other
Directorships
George E. Francis 53
Executive Vice President since July 1997;
Secretary of the Company 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 35
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.
40
<PAGE>
Others not completing the current term:
Thomas F. Morrow
Formerly Director and President of the Company
since 1992; retired effective July 31, 1997.
John K. Cantrell
Formerly Chairman of the Board of Directors since
1984; succumbed after a long illness in November 1997.
Gertrude W. Donahey
Formerly Director of the Company since 1984, resigned
from the Board of Directors effective December 9, 1997.
Mrs. Donahey stepped down due to scheduling reasons.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid to or earned by the Company's Chief Executive Officer and each of the
Executive Officers of the Company whose salary plus bonus exceeded $100,000
during each of the Company's last three fiscal years. Compensation for
services provided by the named executive officers to the Company and its
affiliates is paid by FCC as set forth in their employment agreements.
(See Employment Contracts).
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
Other Annual
Name and Compensation (2)
Principal Position Salary($) $
<S> <C> <C> <C>
Larry E. Ryherd 1997 400,000 18,863
Chairman of the Board 1996 400,000 17,681
Chief Executive Officer 1995 400,000 13,324
James E. Melville 1997 237,000 29,538
President, Chief 1996 237,000 27,537
Operating Officer 1995 237,000 38,206(3)
George E. Francis 1997 122,000 8,187
Executive Vice 1996 119,000 7,348
President, Secretary 1995 119,000 4,441
</TABLE>
(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) Includes $16,000 for the value of personal perquisites owing Mr.
Melville.
41
<PAGE>
AGGREGATED OPITON/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
The following table summarizes for fiscal year ending, December 31, 1997,
the number of shares subject to unexercised options and the value of
unexercised options of the Common Stock of UTI held by the named executive
officers. The values shown were determined by multiplying the applicable
number of unexercised share options by the difference between the per share
market price on December 31, 1997 and the applicable per share exercise
price. There were no options granted to the named executive officers for
the past three fiscal years.
<TABLE>
Number of Shares Number of Securities Underlying
Acquired on Value Unexercised Options/SARs
Exercise (#) Realized ($) at FY-End(#)
Name Exercisable Unexercisable
<S> <C> <C> <C> <C>
Larry E. Ryherd - - 13,800 -
James E. Melville - - 30,000 -
George E. Francis - - 4,600 -
Value of Unexercised In the
Money Options/SARs at
FY-End ($)
Exercisable Unexercisable
Larry E. Ryherd - -
James E. Melville - -
George E. Francis - -
</TABLE>
COMPENSATION OF DIRECTORS
The Company'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. The Company's director compensation policy also provides that
directors who are employees of the Company do not receive any compensation
for their services as directors except for reimbursement for reasonable
travel expenses for attending each meeting.
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 UTI at $17.50 per share. The option is
immediately exercisable and transferable. The option will expire December
31, 2000.
FCC entered into an employment agreement dated July 31, 1997 with James E.
Melville pursuant to which Mr. Melville is employed as President and Chief
Operating Officer and in addition, to serve in other positions of the
affiliated companies if appointed or elected at an annual salary of
$238,200. The term of the agreement expires July 31, 2002. Mr. Melville
has deferred portions of his income under a plan entitling him to a
deferred compensation payment on January 2, 2000 of $400,000 which includes
interest at the rate of approximately 8.5% annually. Additionally, Mr.
Melville was granted an option to purchase up to 30,000 shares of the
Common Stock of UTI at $17.50 per share. The option is immediately
exercisable and transferable. The option will expire December 31, 2000.
FCC entered into an employment agreement with George E. Francis on July 31,
1997. Under the terms of the agreement, Mr. Francis is employed as
42
<PAGE>
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 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 the Company's executive officers is determined by the
full Board of Directors. The Board of Directors strongly believes that the
Company's executive officers directly impact the short-term and long-term
performance of the Company. With this belief and the corresponding
objective of making decisions that are in the best interest of the
Company's shareholders, the Board of Directors places significant emphasis
on the design and administration of the Company'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 the Company'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 the Company's other
shareholders. The Board of Directors believes that this strategy motivates
executives to remain focused on the overall long-term performance of the
Company. 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 the Company'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 1988 and Chairman of the Board of the Company's parent, FCC, since
1984. The Board of Directors used the same compensation plan elements
described above for all executive officers to determine Mr. Ryherd's 1997
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 the Company's long-term strategic and
business goals.
Mr. Ryherd's base salary reflects a consideration of both competitive
forces and the Company's performance. The Board of Directors does not
assign specific weights to these categories.
43
<PAGE>
The Company surveys total cash compensation for chief executive officers at
the same group of companies described under "Base Salary" above. Based
upon its survey, the Company 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 the Company.
The Board of Directors considered the Company's financial results as
compared to other companies within the industry, financial performance for
fiscal 1997 as compared to fiscal 1996, the Company's progress as it
relates to the Company's growth through acquisitions and simplification of
the organization, the fact that since the Company 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 1997, Mr. Ryherd's annual salary was $400,000, the amount
the Board of Directors set in January 1996. In July 1997, the Board of
Directors reviewed Mr. Ryherd's salary. 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 the Company 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
Vincent T. Aveni Charlie E. Nash
Marvin W. Berschet Larry E. Ryherd
James E. Melville Robert W. Teater
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
Company's Common Stock during the five fiscal years ended December 31,
1997, with the cumulative total return on the NASDAQ Composite Index
Performance and the NASDAQ Insurance Stock Index (1):
Percent Change from Base
NASDAQ NASDAQ Insurance UII
1992 100.00 100.00 100.00
1993 114.68 106.83 100.00
1994 111.93 100.49 92.00
1995 158.72 142.93 92.00
1996 194.95 162.93 40.00
1997 239.45 238.54 32.00
44
<PAGE>
(1)The Company selected the NASDAQ Composite Index Performance as an
appropriate comparison because the Company's Common Stock is not listed
on any exchange but the Company's Common Stock is traded in the over
the-counter market. Furthermore, the Company 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 the Company's Common Stock is limited, which may be
in part a result of the Company's low profile from not being listed on
any exchange, and its reported operating losses. The Company 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 $333 million in 1997. The growth rate has been
the result of acquisitions of other companies and new insurance
writings. The Company 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
the Company's stock.
The foregoing graph shall not be deemed to be incorporated by reference
into any filing of the Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates such information by reference.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as directors of the Company during 1997 and
were officers or employees of the Company or its affiliates during 1997:
James E. Melville and Larry E. Ryherd. Accordingly, these individuals have
participated in decisions related to compensation of executive officers of
the Company and its affiliates.
During 1997, the following executive officers of the Company were also
members of the Board of Directors of FCC, two of whose executive officers
served on the Board of Directors of the Company: Messrs. Melville and
Ryherd.
During 1997, Larry E. Ryherd and James E. Melville, executive officers of
the Company, were also members of the Board of Directors of UTI, two of
whose executive officers served on the Board of Directors of the Company:
Messrs. Melville, and Ryherd.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 the Company's Common
Stock and shows: (i) the total number of shares of Common Stock
beneficially owned by such person as of March 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. 565,766 40.6%.
Stock no 5250 South Sixth Street
par value Springfield, IL 62703
45
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following tabulation shows with respect to each of the directors and
nominees of the Company, with respect to the Company's chief executive
officer and each of the Company's executive officers whose salary plus
bonus exceeded $100,000 for fiscal 1997, and with respect to all executive
officers and directors of the Company as a group: (i) the total number of
shares of all classes of stock of the Company or any of its parents or
affiliates, beneficially owned as of March 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 Vincent T. Aveni 0 *
Common Marvin W. Berschet 0 *
Stock, no George E. Francis 4,600 (1) *
Par value James E. Melville 52,500 (2) 3.2%
Charlie E. Nash 0 *
Larry E. Ryherd 562,431 (3) 33.8%
Robert W. Teater 0 *
All directors and
executive officers 619,531 37.2%
as a group (seven in number)
FCC's Vincent T. Aveni 0 *
Common Marvin W. Berschet 0 *
Stock,$1.00 George E. Francis 0 *
Par value James E. Melville 544 (4) *
Charlie E. Nash 0 *
Larry E. Ryherd 0 *
Robert W. Teater 0 *
All directors and
executive officers 544 *
as a group (seven in number)
Company's Vincent T. Aveni 7,716 (5) *
Common Marvin W. Berschet 7,161 (6) *
Stock, no George E. Francis 0 *
Par value James E. Melville 0 *
Charlie E. Nash 7,052 (7) *
Larry E. Ryherd 47,250 (9) *
Robert W. Teater 7,380 (8) *
All directors and
executive officers 76,559 5.5%
as a group (seven in number)
(1)Includes 4,600 shares which may be acquired upon the exercise of
outstanding stock options.
(2) 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.
46
<PAGE>
(3)Larry E. Ryherd owns 230,621 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) 14,800 shares of UTI's
Common Stock, 6,700 shares of which are in the name of Shari Lynette
Serr, 1,200 shares of which are held in the name of Derek Scott Ryherd,
6,900 shares of which are in the name of Jarad John Ryherd; (iv) 500
shares of UTI's Common Stock held in the name of Larry E. Ryherd as
custodian for Charity Lynn Newby, his niece; (v) 500 shares held in the
name of Larry E. Ryherd as custodian for Lesley Carol Newby, his niece;
(vi) 2,000 shares held by Dorothy LouVae Ryherd, his wife as custodian
for granddaughter, 160 shares held by Larry E. Ryherd as custodian for
granddaughter; and (vii) 13,800 shares which may be acquired by Larry E.
Ryherd upon exercise of outstanding stock options.
(4)James E. Melville owns 168 shares individually and 376 shares jointly
with his spouse.
(5)Includes 272 shares owned directly by Mr. Aveni's brother and 210
shares owned directly by Mr. Aveni's son.
(6)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.
(7)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.
(8)Includes 210 shares owned directly by Mr. Teater's spouse.
(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.
* Less than 1%.
Except as indicated above, the foregoing persons hold sole voting and
investment power.
Directors and officers of the Company file periodic reports regarding
ownership of Company 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTIONS
UTI has a service agreement with its affiliate, UII (equity investee), to
perform services and provide personnel and facilities. The services
included in the agreement are claim processing, underwriting, processing
and servicing of policies, accounting services, agency services, data
processing and all other expenses necessary to carry on the business of a
life insurance company.
The Company has a service agreement with USA which states that USA is to
pay the Company 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. A subcontract agreement with UTI states that the Company
is to pay UTI monthly fees equal to 60% of collected service fees from USA
as stated above.
47
<PAGE>
On January 1, 1993, FCC entered into an agreement with UG pursuant to which
FCC provides management services necessary for UG to carry on its business.
In addition to the UG agreement, FCC and its affiliates have either
directly or indirectly entered into management and/or cost-sharing
arrangements for FCC's management services. FCC received net management
fees of $9,893,321, $9,927,000 and $10,464,000 under these arrangements in
1997, 1996 and 1995, respectively. UG paid $8,660,481, $9,626,559 and
$10,164,000 to FCC in 1997, 1996 and 1995, respectively.
USA paid $989,295, $1,567,891 and $2,015,325 under their agreement with UII
for 1997, 1996 and 1995, respectively. The Company paid $593,577, $940,734
and $1,209,195 under their agreement with UTI for 1997, 1996 and 1995,
respectively.
Their respective domiciliary insurance departments have approved the
agreements of the insurance companies and it is Management's opinion that
where applicable, costs have been allocated fairly and such allocations are
based upon generally accepted accounting principles. The costs paid by UTI
for these services include costs related to the production of new business,
which are deferred as policy acquisition costs and charged off to the
income statement through "Amortization of deferred policy acquisition
costs". Also included are costs associated with the maintenance of
existing policies that are charged as current period costs and included in
"general expenses".
On July 31, 1997, UTI issued convertible notes for cash received totaling
$2,560,000 to seven individuals, all officers or employees of the Company.
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.
Approximately $1,048,000 of the cash received from the issuance of the
convertible notes was used to acquire stock holdings of UTI and the
Company's of Mr. Morrow and to acquire a portion of the UTI 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 of its own shares of common stock and 47,250 shares of the
Company's 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 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 UTI 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 UTI was completed as a
prerequisite to the convertible notes placed by other management personnel
to reduce the total holdings of Mr. Ryherd and his family in UTI to make
the stock more attractive to the investment community. Following the
transaction, Mr. Ryherd and his family own approximately 31% of the
outstanding common stock of UTI.
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.
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 the Company, 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.
48
<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.
PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and the Company 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 the Company's shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
the Company owns 47% of United Trust Group, Inc. Neither UTI nor the
Company 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 the Company regarding the proposed
merger is anticipated to occur sometime during the third quarter of 1998.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Kerber, Eck and Braeckel LLP served as the Company's independent certified
public accounting firm for the fiscal year ended December 31, 1997 and for
fiscal year ended December 31, 1996. In serving its primary function as
outside auditor for the Company, 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.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) Financial Statements:
See Item 8, Index to Financial Statements
NOTE: Schedules other than those listed above are omitted because they
are not required or the information is disclosed in the financial
statements or footnotes.
(b) Reports on Form 8-K filed during fourth quarter.
None
(c) Exhibits:
Index to Exhibits (See Page 51-52).
50
<PAGE>
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.
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) Employment Agreement dated as of July 31, 1997 between Larry
E. Ryherd and First Commonwealth Corporation
10(i) Employment Agreement dated as of July 31, 1997 between James
E. Melville and First Commonwealth Corporation
10(j) Employment Agreement dated as of July 31, 1997 between George
E. Francis and First Commonwealth Corporation. Agreements
containing the same terms and conditions excepting title
and current salary were also entered into by Joseph H.
Metzger, Brad M. Wilson, Theodore C. Miller, Michael K.
Borden and Patricia G. Fowler.
99(a) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s securities dated March 9, 1988.
99(b) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s Securities dated April 5, 1989.
99(c) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s Securities dated April 23, 1990.
99(d) Audited financial statements of United Trust Group, Inc.
51
<PAGE>
FOOTNOTE
(1) Incorporated by reference from the Company's Registration Statement
on Form 10, File No. 0-18540, filed on April 30, 1990.
(2) Incorporated by reference from the Company's Annual Report on Form 10-
K, File No. 0-18540, as of December 31, 1991.
(3) Incorporated by reference from the Company's Annual Report on Form 10-
K, File No. 0-18540, as of December 31, 1996.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
UNITED INCOME, INC.
Registrant
Date: March 24, 1998
Vincent T. Aveni, Director
/s/ Marvin W. Berschet Date: March 24, 1998
Marvin W. Berschet, Director
/s/ Charlie E. Nash Date: March 24, 1998
Charlie E. Nash, Director
/s/ Larry E. Ryherd Date: March 24, 1998
Larry E. Ryherd, Chairman of the
Board, Chief Executive Officer,
and Director
/s/ Robert W. Teater Date: March 24, 1998
Robert W. Teater, Director
/s/ James E. Melville Date: March 24, 1998
James E. Melville, Chief Operating
Officer; President and Director
/s/ Theodore C. Miller Date: March 24, 1998
Theodore C. Miller, Chief Financial
Officer
53
<PAGE>
EXHIBIT 99(d)
AUDITED FINANCIAL STATEMENTS OF
UNITED TRUST GROUP, INC.
54
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
United Trust Group, Inc.
We have audited the accompanying consolidated balance sheets of United
Trust Group, Inc. (an Illinois corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
United Trust Group, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1997, and Schedules
II, IV and V as of December 31, 1997 and 1996, of United Trust Group, Inc.
and subsidiaries and Schedules II, IV and V for each of the three years in
the period then ended. In our opinion, these schedules present fairly, in
all material respects, the information required to be set forth therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1998
55
<PAGE>
<TABLE>
UNITED TRUST GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1996
ASSETS
1997 1996
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $184,782,568 and $181,815,225) $ 180,970,333 $179,926,785
Investments held for sale:
Fixed maturities, at market
(cost $1,672,298 and $1,984,661) 1,668,630 1,961,166
Equity securities, at market
(cost $3,184,357 and $2,086,159) 3,001,744 1,794,405
Mortgage loans on real estate at
amortized cost 9,469,444 11,022,792
Investment real estate, at cost,
net of accumulated depreciation 9,760,732 9,779,984
Real estate acquired in satisfaction of debt 1,724,544 1,724,544
Policy loans 14,207,189 14,438,120
Short-term investments 1,798,878 430,983
222,601,494 221,078,779
Cash and cash equivalent 15,763,639 16,903,789
Investment in affiliates 350,000 350,000
Accrued investment incom 3,665,228 3,459,748
Reinsurance receivables:
Future policy benefits 37,814,106 38,745,013
Policy claims and other benefits 3,529,078 3,856,124
Other accounts and notes receivable 1,680,066 1,734,321
Cost of insurance acquired 45,009,452 47,536,812
Deferred policy acquisition costs 10,600,720 11,325,356
Cost in excess of net assets purchased,
net of accumulated amortization 2,777,089 5,496,808
Property and equipment, net of
accumulated depreciation 3,392,905 3,255,171
Other assets 767,258 1,257,701
Total assets $347,951,035 $354,999,622
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $248,805,695 $248,879,317
Policy claims and benefits payable 2,080,907 3,193,806
Other policyholder funds 2,445,469 2,784,967
Dividend and endowment accumulations 14,905,816 13,913,676
Income taxes payable:
Current 15,730 70,663
Deferred 12,157,685 11,591,086
Notes payable 19,081,602 19,839,853
Indebtedness to affiliates, net 49,977 62,084
Other liabilities 3,987,586 6,203,119
Total liabilities 303,530,467 306,538,571
Minority interests in
consolidated subsidiaries 10,130,024 13,332,034
Shareholders' equity:
Common stock - no par value
Authorized 10,000 shares - 100 shares issued 45,926,705 45,926,705
Unrealized depreciation of investments held
for sale (41,708) (126,612)
Accumulated deficit (11,594,453) (10,671,076)
Total shareholders' equity 34,290,544 35,129,017
Total liabilities and
shareholders' equity $347,951,035 $354,999,622
</TABLE>
See accompanying notes.
56
<PAGE>
<TABLE>
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1997
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Premiums and policy fees $ 33,373,950 $ 35,891,609 $ 38,481,638
Reinsurance premiums
and policy fees (4,734,705) (4,947,151) (5,383,102)
Net investment income 14,882,677 15,902,107 15,497,547
Realized investment gains
and (losses), net (279,096) (465,879) (114,235)
Other income 107,792 95,425 115,472
43,350,618 46,476,111 48,597,320
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 23,644,252 26,568,062 26,680,217
Reinsurance benefits and claims (2,078,982) (2,283,827) (2,850,228)
Annuity 1,560,828 1,892,489 1,797,475
Dividends to policyholders 3,929,073 4,149,308 4,228,300
Commissions and amortization of
deferred policy acquisition costs 3,616,365 4,224,885 4,907,653
Amortization of cost of
insurance acquired 2,527,360 5,690,069 4,509,755
Amortization of agency force 0 0 396,852
Non-recurring write down of
value of agency force 0 0 8,296,974
Operating expenses 8,957,372 11,285,566 10,634,314
Interest expense 1,675,440 1,752,573 1,980,360
43,831,708 53,279,125 60,581,672
Loss before income taxes, minority
interest and equity in loss
of investees (481,090) (6,803,014) (11,984,352)
Credit (provision) for income taxes (571,999) 4,643,961 4,724,792
Minority interest in loss
of consolidated subsidiaries 129,712 498,356 1,938,684
Net loss $ (923,377)$ (1,660,697) $(5,320,876)
Net loss per
common share $ (9,233.77)$ (16,606.97) $(53,208.76)
Average common
shares outstanding 100 100 100
</TABLE>
See accompanying notes.
57
<PAGE>
<TABLE>
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1997
1997 1996 1995
<S> <C> <C> <C>
Common stock
Balance, beginning of year $ 45,926,705 $ 45,726,705 $ 45,626,705
Capital contribution 0 200,000 100,000
Balance, end of year $ 45,926,705 $ 45,926,705 $ 45,726,705
Unrealized appreciation (depreciation)
of investments held for sale
Balance, beginning of year $ (126,612)$ (501)$ (212,567)
Change during year 84,904 (126,111) 212,066
Balance, end of year $ (41,708)$ (126,612)$ (501)
Accumulated deficit
Balance, beginning of year $ (10,671,076)$ (9,010,379)$ (3,689,503)
Net loss (923,377) (1,660,697) (5,320,876)
Balance, end of year $ (11,594,453)$ (10,671,076)$ (9,010,379)
Total shareholders' equity,
end of year $ 34,290,544 $ 35,129,017 $ 36,715,825
See accompanying notes.
58
<PAGE>
</TABLE>
<TABLE>
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1997
1997 1996 1995
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
Cash flows from operating activities:
Net loss $ (923,377)$ (1,660,697)$(5,320,876)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities net of changes in assets and
liabilities resulting from the sales
and purchases of subsidiaries:
Amortization/accretion
of fixed maturities 670,185 899,445 803,696
Realized investment (gains)
losses, net 279,096 465,879 114,235
Policy acquisition costs deferred (586,000) (1,276,000) (2,370,000)
Amortization of deferred
policy acquisition costs 1,310,636 1,387,372 1,567,748
Amortization of cost of
insurance acquired 2,527,360 5,690,069 4,509,755
Amortization of value of
agency force 0 0 396,852
Non-recurring write down of
value of agency force 0 0 8,296,974
Amortization of costs in excess
of net assets purchased 155,000 185,279 423,192
Depreciation 457,415 371,991 694,194
Minority interest 129,712 498,356 (1,938,684)
Change in accrued investment income (205,480) 195,821 (173,517)
Change in reinsurance receivables 1,257,953 83,871 (482,275)
Change in policy liabilities
and accruals (547,081) 3,326,651 3,581,928
Charges for mortality and
administration of universal
life and annuity products (10,588,874) (10,239,476) (9,757,354)
Interest credited to
account balances 7,212,406 7,075,921 6,644,282
Change in income taxes payable 511,666 (4,653,734) (4,749,335)
Change in indebtedness (to) from
affiliates, net (12,107) 224,472 (3,023)
Change in other assets and
liabilities, net (1,893,811) 396,226 (1,529,727)
Net cash provided by (used in)
operating activities (245,301) 2,971,446 708,065
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 290,660 1,219,036 619,612
Fixed maturities sold 0 18,736,612 0
Fixed maturities matured 21,488,265 20,721,482 16,265,140
Equity securities 76,302 8,990 104,260
Mortgage loans 1,794,518 3,364,427 2,252,423
Real estate 1,136,995 3,219,851 1,768,254
Policy loans 4,785,222 3,937,471 4,110,744
Short term 410,000 825,000 25,000
Total proceeds from investments
sold and matured 29,981,962 52,032,869 25,145,433
Cost of investments acquired:
Fixed maturities (23,220,172) (29,365,111)(25,112,358)
Equity securities (1,248,738) 0 (1,000,000)
Mortgage loans (245,234) (503,113) (322,129)
Real estate (1,444,980) (813,331) (1,902,609)
Policy loans (4,554,291) (4,329,124) (4,713,471)
Short term (1,726,035) (830,983) (100,000)
Total cost of investments
acquired (32,439,450) (35,841,662)(33,150,567)
Purchase of property and equipment (531,528) (383,411) (57,625)
Net cash provided by (used in)
investing activities (2,989,016) 15,807,796 (8,062,759)
Cash flows from financing activities:
Policyholder contract deposits 17,902,246 22,245,369 25,021,983
Policyholder contract withdrawals (14,515,576) (15,433,644)(16,008,462)
Net cash transferred from
coinsurance ceded 0 (19,088,371) 0
Proceeds from notes payable 1,000,000 9,300,000 300,000
Payments on principal of
notes payable (1,758,252) (10,923,475) (1,205,861)
Payment for fractional shares
from reverse stock split
of subsidiary (534,251) 0 0
Net cash provided by
financing activities 2,094,167 (13,900,121) 8,107,660
Net increase (decrease) in
cash and cash equivalents (1,140,150) 4,879,121 752,966
Cash and cash equivalents
at beginning of year 16,903,789 12,024,668 11,271,702
Cash and cash equivalents
at end of year $ 15,763,639 $ 16,903,789 $12,024,668
</TABLE>
See accompanying notes.
59
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UNITED TRUST, GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1997, the parent, significant
majority-owned subsidiaries and affiliates of United Trust
Group, Inc., were as depicted on the following organizational
chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
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The Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
are summarized as follows.
B. NATURE OF OPERATIONS - United Trust Group, Inc.
is an insurance holding company, which sells individual life
insurance products through its subsidiaries. The Company's
principal market is the Midwestern United States. The primary focus
of the Company has been the servicing of existing insurance business
in force, the solicitation of new life insurance products and the
acquisition of other companies in similar lines of business.
C. PRINCIPLES OF CONSOLIDATION - The consolidated
financial statements include the accounts of the Company and its
majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
D. BASIS OF PRESENTATION - The financial statements of United Trust
Group, Inc.'s life insurance subsidiaries have been prepared in
accordance with generally accepted accounting principles which differ from
statutory accounting practices permitted by insurance regulatory
authorities.
E. USE OF ESTIMATES - In preparing financial statements in conformity
with generally accepted accounting principles, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
F. INVESTMENTS - Investments are shown on the following bases: Fixed
maturities -- at cost, adjusted for amortization of premium or discount
and other-than-temporary market value declines. The amortized cost of
such investments differs from their market values; however, the Company
has the ability and intent to hold these investments to maturity, at
which time the full face value is expected to be realized.
Investments held for sale -- at current market value, unrealized
appreciation or depreciation is charged directly to shareholders'
equity.
Mortgage loans on real estate -- at unpaid balances, adjusted
for amortization of premium or discount, less allowance for possible
losses.
Real estate - Investment real estate at cost, less allowances
for depreciation and, as appropriate, provisions for possible
losses. Foreclosed real estate is adjusted for any impairment at
the foreclosure date. Accumulated depreciation on investment real
estate was $539,366 and $442,373 as of December 31, 1997 and 1996,
respectively.
Policy loans -- at unpaid balances including accumulated
interest but not in excess of the cash surrender value.
Short-term investments -- at cost, which approximates current market
value.
Realized gains and losses on sales of investments are
recognized in net income on the specific identification
basis.
G. RECOGNITION OF REVENUES AND RELATED EXPENSES - Premiums for
traditional life insurance products, which include those products
with fixed and guaranteed premiums and benefits, consist
principally of whole life insurance policies, limited-payment
life insurance policies, and certain annuities with life
contingencies are recognized as revenues when due. 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.
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<PAGE>
H. 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.
1997 1996 1995
Deferred, beginning of year $ 11,325,356 $ 11,436,728 $ 10,634,476
Acquisition costs deferred:
Commissions 312,000 845,000 1,838,000
Other expenses 274,000 431,000 532,000
Total 586,000 1,276,000 2,370,000
Interest accretion 425,000 408,000 338,000
Amortization charged to income (1,735,636) (1,795,372) (1,905,748)
Net amortization (1,310,636) (1,387,372) (1,567,748)
Change for the year (724,636) (111,372) 802,252
Deferred, end of year $ 10,600,720 $ 11,325,356 $ 11,436,728
The following table reflects the components of the income statement for
the line item Commissions and amortization of deferred policy
acquisition costs:
1997 1996 1995
Net amortization of
deferred policy acquisition costs $ 1,310,636 $ 1,387,372 $ 1,567,748
Commissions 2,305,729 2,837,513 3,339,905
Total $ 3,616,365 $ 4,224,885 $ 4,907,653
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Estimated net amortization expense of deferred policy acquisition
costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1998 $ 403,000 $ 1,530,000 $ 1,127,000
1999 365,000 1,359,000 994,000
2000 330,000 1,211,000 881,000
2001 299,000 1,082,000 783,000
2002 270,000 969,000 699,000
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. Cost of Insurance Acquired is
amortized with interest in relation to expected future profits,
including direct charge-offs for any excess of the unamortized asset
over the projected future profits.. The interest rates utilized in
the amortization calculation are 9% on approximately 24% of the
balance and 15% on the remaining balance. The interest rates vary
due to differences in the blocks of business. The amortization is
adjusted retrospectively when estimates of current or future gross
profits to be realized from a group of products are revised.
1997 1996 1995
Cost of insurance
acquired, beginning of year $ 47,536,812 $ 59,601,720 $ 64,111,475
Interest accretion 6,288,402 6,649,203 7,044,239
Amortization (8,815,762) (12,339,272) (11,553,994)
Net amortization (2,527,360) (5,690,069) (4,509,755)
Balance attributable
to coinsurance agreement 0 (6,374,839) 0
Cost of insurance
acquired, end of year $ 45,009,452 $ 47,536,812 $ 59,601,720
Estimated net amortization expense of cost of insurance acquired for
the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1998 $ 6,427,000 $ 8,696,000 $ 2,269,000
1999 6,090,000 7,688,000 1,598,000
2000 5,851,000 7,229,000 1,378,000
2001 5,649,000 7,229,000 1,580,000
2002 5,008,000 6,569,000 1,561,000
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<PAGE>
J. COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net
assets purchased is the excess of the amount paid to acquire a
company over the fair value of its net assets. Costs in excess of
net assets purchased are amortized on the straight-line basis over a
40-year period. Management continually reviews the value of goodwill
based on estimates of future earnings. As part of this review,
management determines whether goodwill is fully recoverable from
projected undiscounted net cash flows from
earnings of the subsidiaries over the remaining
amortization period. If management were to determine that changes
in such projected cash flows no longer supported the recoverability
of goodwill over the remaining amortization period, the carrying
value of goodwill would be reduced with a corresponding charge
to expense or by shortening the amortization period (no such
changes have occurred). Accumulated amortization of cost in excess of
net assets purchased was $1,420,146 and $1,265,146 as of December
31, 1997 and 1996, respectively. A reverse stock split of FCC in
May of 1997 created negative goodwill of $2,564,719. The credit to
goodwill resulted from the retirement of fractional shares. Please
refer to Note 11 to the Consolidated Financial Statements for
additional information concerning the reverse stock split.
K. PROPERTY AND EQUIPMENT - Company- occupied property, data processing
equipment and furniture and office equipment are stated at cost
less accumulated depreciation of$1,375,105 and $1,014,683 at
December 31, 1997 and 1996, respectively. Depreciation is
computed on a straight-line basis for financial reporting purposes
using estimated useful lives of three to thirty years. Depreciation
expense was $360,422 and $277,567 for the years ended December 31,
1997 and 1996, respectively.
L. FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for
traditional life insurance and accident and health insurance policy
benefits are computed using a net level method. These liabilities
include assumptions as to investment yields, mortality, withdrawals,
and other assumptions based on the life insurance subsidiaries'
experience adjusted to reflect anticipated trends and to include
provisions for possible unfavorable deviations. The Company makes
these assumptions at the time the contract is issued or, in the case
of contracts acquired by purchase, at the purchase date. Benefit
reserves for traditional life insurance policies include certain
deferred profits on limited-payment policies that are being
recognized in income over the policy term. Policy benefit claims are
charged to expense in the period that the claims are incurred.
Current mortality rate assumptions are based on 1975-80 select and
ultimate tables. Withdrawal rate assumptions are based upon Linton B
or Linton C, which are industry standard actuarial tables for
forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive
life insurance products are computed under a retrospective deposit
method and represent policy account balances before applicable
surrender charges. Policy benefits and claims that are charged to
expense include benefit claims in excess of related policy account
balances. Interest crediting rates for universal life
and interest sensitive products range from 5.0% to 6.0% in 1997, 1996
and 1995.
M. POLICY AND CONTRACT CLAIMS - Policy and contract claims include
provisions for reported claims in process of settlement, valued in
accordance with the terms of the policies and contracts, as well as
provisions for claims incurred and unreported based on prior
experience of the Company.
N. PARTICIPATING INSURANCE - Participating business represents 29% and
30% of the ordinary life insurance in force at December 31, 1997 and
1996, respectively. Premium income from participating business
represents 50%, 52%, and 55% of total premiums for the years ended
December 31, 1997, 1996 and 1995, respectively. The amount of
dividends to be paid is determined annually by the respective
insurance subsidiary's Board of Directors. Earnings allocable to
participating policyholders are based on legal requirements that vary
by state.
O. INCOME TAXES - Income taxes are reported under Statement of
Financial Accounting Standards Number 109. Deferred income taxes are
recorded to reflect the tax consequences on future periods of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at the end of each such period.
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<PAGE>
P. BUSINESS SEGMENTS - The Company operates principally in the
individual life insurance business.
Q. EARNINGS PER SHARE - Earnings per share are based on the weighted
average number of common shares outstanding during each year.
R. CASH EQUIVALENTS - The Company considers certificates of deposit
and other short-term instruments with an original purchased maturity
of three months or less cash equivalents.
S. RECLASSIFICATIONS - Certain prior year amounts have been
reclassified to conform with the 1997 presentation. Such
reclassifications had no effect on previously reported net loss,
total assets, or shareholders' equity.
T. REINSURANCE - In the normal course of business, the Company seeks to
limit its exposure to loss on any single insured and to recover a
portion of benefits paid by ceding reinsurance to other insurance
enterprises or reinsurers under excess coverage and coinsurance
contracts. The Company retains a maximum of $125,000 of coverage per
individual life.
Amounts paid or deemed to have been paid for reinsurance contracts
are recorded as reinsurance receivables. Reinsurance receivables is
recognized in a manner consistent with the liabilities relating to
the underlying reinsured contracts. The cost of reinsurance related
to long-duration contracts is accounted for over the life of the
underlying reinsured policies using assumptions consistent with those
used to account for the underlying policies.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1997, substantially all of consolidated shareholders'
equity represents net assets of UTG's subsidiaries. The payment of cash
dividends to shareholders is not legally restricted. However, insurance
company dividend payments are regulated by the state insurance department
where the company is domiciled. UTI is the ultimate parent of UG through
ownership of several intermediary holding companies. UG can not pay a
dividend directly to UII due to the ownership structure. UG's dividend
limitations are described below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,246.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,365. Extraordinary dividends (amounts in excess of ordinary
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".
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<PAGE>
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 $ 5,237,958 $ 1,149,693
APPL 5,417,825 1,525,367
UG 27,760,313 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:
1997 1996 1995
Current tax expense $ 5,400 $ (148,148) $ 1,897
Deferred tax expense (credit) 566,599 (4,495,813) (4,726,689)
(credit)
$ 571,999 $(4,643,961) $(4,724,792)
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
UG FCC
2004 $ 0 $ 163,334
2005 0 138,765
2006 2,400,574 33,345
2007 782,452 676,067
2008 939,977 4,595
2009 0 168,800
2010 0 19,112
2012 2,970,692 0
TOTAL $ 7,093,695 $ 1,204,018
The Company has established a deferred tax asset of $2,904,200 for its
operating loss carryforwards and has established an allowance of
$2,904,200.
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<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:
1997 1996 1995
Tax computed at statutory rate $ (168,382) $(2,381,055) $(4,194,523)
Changes in
taxes due to:
Cost in excess of net
assets purchased 54,250 64,848 60,594
Current year loss for which
no benefit realized 1,039,742 0 0
Benefit of prior losses (324,705) (2,393,395) (598,563)
Other (28,906) 65,641 7,700
Income tax expense (credit) $ 571,999 $(4,643,961) $(4,724,792)
The following table summarizes the major components that comprise the
deferred tax liability as reflected in the balance sheets:
1997 1996
Investments $ (228,027) $ (122,251)
Cost of insurance acquired 15,753,308 16,637,883
Deferred policy acquisition costs 3,710,252 3,963,875
Agent balances (23,954 (65,609)
Property and equipment (19,818) (37,683)
Discount of notes 896,113 922,766
Management/consulting fees (573,182) (733,867)
Future policy benefits (4,421,038) (5,906,087)
Other liabilities (756,482) (1,151,405)
Federal tax DAC (2,179,487) (1,916,536)
Deferred tax liability $12,157,685 $11,591,086)
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4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A. NET INVESTMENT INCOME - The following table reflects net
investment income by type of investment:
December 31,
1997 1996 1995
Fixed maturities and fixed
maturities held for sale $ 12,677,348 $ 13,326,312 $ 13,253,122
Equity securities 87,211 88,661 52,445
Mortgage loans 802,123 1,047,461 1,257,189
Real estate 745,502 794,844 975,080
Policy loans 976,064 1,121,538 1,041,900
Short-term investments 70,624 21,423 21,295
Other 721,866 724,771 620,954
Total consolidated
investment income 16,080,738 17,125,010 17,221,985
Investment expenses (1,198,061) (1,222,903) (1,724,438)
Consolidated net
investment income $ 14,882,677 $ 15,902,107 $ 15,497,547
At December 31, 1997, the Company had a total of $5,797,000 of investments,
comprised of $3,848,000 in real estate and $1,949,000 in equity securities,
which did not produce income during 1997.
The following table summarizes the Company's fixed maturity holdings and
investments held for sale by major classifications:
Carrying Value
1997 1996
Investments held for sale:
Fixed maturities $ 1,668,630 $ 1,961,166
Equity securities 3,001,744 1,794,405
Fixed maturitiies:
U.S. Government, government
agencies and authorities 28,259,322 28,554,631
State, municipalities and
political subdivisions 22,778,816 14,421,735
Collateralized mortgage obligations 11,093,926 13,246,781
Public utilities 47,984,322 51,821,989
All other corporate bonds 70,853,947 71,891,649
$ 185,640,707 $ 183,692,356
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.
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<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 1997 1996 1995
Investments
State, Municipalities
and Political Subdivisions $ 0 $ 10,042 $ 0
Public Utiliites 80,497 117,609 116,879
Corporate 656,784 813,717 819,010
Total $ 737,281 $ 941,368 $ 935,889
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in
securities including investments held for sale are as follows:
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
Investments Held
for Sale:
U.S. Government and govt.
agencies and authoriites $ 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
Obligations
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
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Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
Investments Held
for Sale:
U.S. Government and govt.
agencies and authoriites $ 1,461,068 $ 0 $ (17,458) $ 1,443,609
States, municipalities and
political subdivisions 145,199 665 (6,397) 139,467
Collateralized mortgage
obligations 0 0 0 0
Obligations
Public utilities 119,970 363 (675) 119,658
All other corporate bonds 258,424 4,222 (4,215) 258,432
1,984,661 5,250 (28,745) 1,961,166
Equity securities 2,086,159 37,000 (328,754) 1,794,405
Total $ 4,070,820 $ 42,250 $ (357,499) $ 3,755,571
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $ 28,554,631 $ 421,523 $ (136,410) $28,839,744
States, municipalities and
political subdivisions 14,421,735 318,682 (28,084) 14,712,333
Collateralized mortgage
obligations 13,246,780 175,163 (157,799) 13,264,145
Public utilities 51,821,990 884,858 (381,286) 52,325,561
All other corporate bonds 71,881,649 1,240,230 (448,437) 72,673,442
Total $ 179,926,785 $ 3,040,456 $(1,152,016)$181,815,225
The amortized cost of debt securities at December 31, 1997, by
contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Fixed Maturities Held Estimated
for Sale Amortized Market
December 31, 1997 Cost Value
Due in one year or less $ 83,927 $ 84,952
Due after one year through five years 1,533,202 1,528,211
Due after five years through ten years 55,169 55,467
Due after ten years 0 0
Collateralized mortgage obligations 0 0
Total $ 1,672,298 $ 1,668,630
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Fixed Maturities Held Estimated
to Maturity Amortized Market
December 31, 1997 Cost Value
Due in one year or less $ 15,023,173 $ 15,003,728
Due after one year through five years 118,849,668 120,857,201
Due after five years through ten years 30,266,228 31,726,265
Due after ten years 5,737,338 5,987,726
Collateralized mortgage obligations 11,093,926 11,207,648
Total $ 180,970,333 $ 184,782,568
An analysis of sales, maturities and principal repayments of the
Company's fixed maturities portfolio for the years ended December 31,
1997, 1996 and 1995 is as follows:
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Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December 31, 1997 Cost Gains Losses Sale
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
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December 31, 1996 Cost Gains Losses Sale
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
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Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December 31, 1995 Cost Gains Losses Sale
Scheduled principal repayments,
calls and tenders:
Held for sale $ 621,461 $ 0 $ (1,849) $ 619,612
Held to maturity 16,383,921 125,740 (244,521) 16,265,140
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
Total $17,005,382 $ 125,740 $ (246,370) $16,884,752
C.INVESTMENTS ON DEPOSIT - At December 31, 1997, investments carried at
approximately $17,801,000 were on deposit with various state insurance
departments.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information
at December 31, 1997 and 1996, as required by Statement of Financial
Accounting Standards 107, Disclosure about Fair Value of Financial
Instruments ("SFAS 107"). Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in
that Statement and does not purport to represent the aggregate net fair
value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value:
(a) Cash and Cash equivalents
The carrying amount in the financial statements approximates fair value
because of the relatively short period of time between the origination of
the instruments and their expected realization.
(b) Fixed maturities and investments held for sale
Quoted market prices, if available, are used to determine the fair value.
If quoted market prices are not available, management estimates the fair
value based on the quoted market price of a financial instrument with
similar characteristics.
(c) Mortgage loans on real estate
The fair values of mortgage loans are estimated using discounted cash flow
analyses and interest rates being offered for similar loans to borrowers
with similar credit ratings.
(d) Investment real estate and real estate acquired in satisfaction of
debt
An estimate of fair value is based on management's review of the individual
real estate holdings. Management utilizes sales of surrounding properties,
current market conditions and geographic considerations. Management
conservatively estimates the fair value of the portfolio is equal to the
carrying value.
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<PAGE>
(e) Policy loans
It is not practicable to estimate the fair value of policy loans as they
have no stated maturity and their rates are set at a fixed spread to
related policy liability rates. Policy loans are carried at the aggregate
unpaid principal balances in the consolidated balance sheets, and earn
interest at rates ranging from 4% to 8%. Individual policy liabilities in
all cases equal or exceed outstanding policy loan balances.
(f) Short-term investments
For short-term instruments, the carrying amount is a reasonable estimate of
fair value. Short-term instruments represent United States Government
Treasury Bills and certificates of deposit with various banks that are
protected under FDIC.
(g) Notes and accounts receivable and uncollected premiums
The Company holds a $840,066 note receivable for which the determination of
fair value is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Accounts
receivable and uncollected premiums are primarily insurance contract
related receivables which are determined based upon the underlying
insurance liabilities and added reinsurance amounts, and thus are excluded
for the purpose of fair value disclosure by paragraph 8(c) of SFAS 107.
(h) Notes payable
For borrowings under the senior loan agreement, which is subject to
floating rates of interest, carrying value is a reasonable estimate of fair
value. For subordinated borrowings fair value was determined based on the
borrowing rates currently available to the Company for loans with similar
terms and average maturities.
The estimated fair values of the Company's financial instruments required
to be valued by SFAS 107 are as follows as of December 31:
<TABLE>
1997 1996
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities $180,970,333 $184,782,568 $179,926,785 $181,815,225
Fixed maturities
held for sale 1,668,630 1,668,630 1,961,166 1,961,166
Equity securities 3,001,744 3,001,744 1,794,405 1,794,405
Mortgage loans on
real estate 9,469,444 9,837,530 11,022,792 11,022,792
Policy loans 14,207,189 14,207,189 14,438,120 14,438,120
Short-term
investments 1,798,878 1,798,878 430,983 430,983
Investment in
real estate 9,760,732 9,760,732 9,779,984 9,779,984
Real estate acquired
in satisfaction
of debt 1,724,544 1,724,544 1,724,544 1,724,544
Notes receivable 1,680,066 1,569,603 1,680,066 1,566,562
LIABILITIES
Notes payable 19,081,602 18,539,301 19,839,853 18,671,155
</TABLE>
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<PAGE>
6. STATUTORY EQUITY AND GAIN FROM OPERATIONS
The Company's insurance subsidiaries are domiciled in Ohio, Illinois and
West Virginia and prepare their statutory-based financial statements in
accordance with accounting practices prescribed or permitted by the
respective insurance department. These principles differ significantly
from generally accepted accounting principles. "Prescribed" statutory
accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners ("NAIC"). "Permitted" statutory
accounting practices encompass all accounting practices that are not
prescribed; such practices may differ from state to state, from company to
company within a state, and may change in the future. The NAIC currently
is in the process of codifying statutory accounting practices, the result
of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project, which has not
yet been completed, will likely change prescribed statutory accounting
practices and may result in changes to the accounting practices that
insurance enterprises use to prepare their statutory financial statements.
UG's total statutory shareholders' equity was $10,997,365 and $10,226,566
at December 31, 1997 and 1996, respectively. The Company's insurance
subsidiaries reported combined statutory gain from operations (exclusive of
intercompany dividends) was $3,978,000, $10,692,000 and $4,076,000 for
1997, 1996 and 1995, respectively.
7. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.
The Company assumes risks from, and reinsures certain parts of its risks
with other insurers under yearly renewable term and coinsurance agreements
that are accounted for by passing a portion of the risk to the reinsurer.
Generally, the reinsurer receives a proportionate part of the premiums less
commissions and is liable for a corresponding part of all benefit payments.
While the amount retained on an individual life will vary based upon age
and mortality prospects of the risk, the Company generally will not carry
more than $125,000 individual life insurance on a single risk.
The Company has reinsured approximately $1.022 billion, $1.109 billion and
$1.088 billion in face amount of life insurance risks with other insurers
for 1997, 1996 and 1995, respectively. Reinsurance receivables for future
policy benefits were $37,814,106 and $38,745,093 at December 31, 1997 and
1996, respectively, for estimated recoveries under reinsurance treaties.
Should any reinsurer be unable to meet its obligation at the time of a
claim, obligation to pay such claim would remain with the Company.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover all new business of the Company.
The agreements are a yearly renewable term ("YRT") treaty where the Company
cedes amounts above its retention limit of $100,000 with a minimum cession
of $25,000.
One of the Company's insurance subsidiaries (UG) entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best assigned FILIC a Financial Performance Rating (FPR) of 7 (Strong)
on a scale of 1 to 9. A.M. Best assigned a Best's Rating of A++ (Superior)
to The Guardian Life Insurance Company of America ("Guardian"), parent of
FILIC, based on the consolidated financial condition and operating
performance of the company and its life/health subsidiaries. During 1997,
FILIC changed its name to Park Avenue Life Insurance Company ("PALIC").
The agreement with PALIC accounts for approximately 65% of the reinsurance
receivables as of December 31, 1997.
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The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long-duration reinsurance contracts on premiums
earned in 1997, 1996 and 1995 was as follows:
Shown in thousands
1997 1996 1995
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 33,374 $ 35,891 $ 38,482
Assumed 0 0 0
Ceded (4,735) (4,947) (5,383)
Net premiums $ 28,639 $ 30,944 $ 33,099
8. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. Some of the lawsuits have resulted in the award
of substantial judgments against the insurer, including material amounts of
punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances.
Under the insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed insurance
companies. Although the Company cannot predict the amount of any future
assessments, most insurance guaranty fund laws currently provide that an
assessment may be excused or deferred if it would threaten an insurer's
financial strength. Mandatory assessments may be partially recovered
through a reduction in future premium tax in some states. The Company does
not believe such assessments will be materially different from amounts
already provided for in the financial statements.
The Company and its subsidiaries are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
liabilities. Management and its legal counsel are of the opinion that the
settlement of those actions will not have a material adverse effect on the
Company's financial position or results of operations.
9. RELATED PARTY TRANSACTIONS
UII has a service agreement with USA which states that USA is to pay UII
monthly fees equal to 22% of the amount of collected first year premiums,
20% in second year and 6% of the renewal premiums in years three and after.
UII's subcontract agreement with UTI states that UII is to pay UTI monthly
fees equal to 60% of collected service fees from USA as stated above.
USA paid $989,295, $1,567,891 and $2,015,325 under their agreement with UII
for 1997, 1996 and 1995, respectively. UII paid $593,577, $940,734 and
$1,209,195 under their agreement with UTI for 1997, 1996 and 1995,
respectively.
Respective domiciliary insurance departments have approved the agreements
of the insurance companies and it is Management's opinion that where
applicable, costs have been allocated fairly and such allocations are based
upon generally accepted accounting principles. The costs paid by UTG for
services include costs related to the production of new business, which are
deferred as policy acquisition costs and charged off to the income
statement through "Amortization of deferred policy acquisition costs".
Also included are costs associated with the maintenance of existing
policies that are charged as current period costs and included in "general
expenses".
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<PAGE>
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, 1997 no options were exercised. At
December 31, 1997 and 1996, the Company held a liability of $1,376,384 and
$1,267,598, respectively, relating to this plan. At December 31, 1997, UTI
common stock had a bid price of $8.00 and an ask price of $9.00 per share.
The following information applies to deferred compensation plan stock
options outstanding at December 31, 1997:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 3 years
11. REVERSE STOCK SPLIT OF FCC
On May 13, 1997, FCC effected a 1 for 400 reverse stock split. Fractional
shares received a cash payment on the basis of $.25 for each old share.
FCC maintained a significant number of shareholder accounts with less than
$100 of market value of stock. The reverse stock split enabled these
smaller shareholders to receive cash for their shares without incurring
broker costs and will save the Company administrative costs associated with
maintaining these small accounts.
12. NOTES PAYABLE
At December 31, 1997 and 1996, the Company has $19,081,602 and $19,839,853
in long-term debt outstanding, respectively. The debt is comprised of the
following components:
1997 1996
Senior debt $ 6,900,000 $ 8,400,000
Subordinated 10 yr. notes 5,746,774 6,209,293
Subordinated 20 yr. notes 4,034,828 3,830,560
Other notes payable 2,400,000 1,400,000
$19,081,602 $19,839,853
A. Senior debt
The senior debt is through First of America Bank - Illinois NA and is
subject to a credit agreement. The debt bears interest at a rate equal to
the "base rate" plus nine-sixteenths of one percent. The Base rate is
defined as the floating daily, variable rate of interest determined and
announced by First of America Bank from time to time as its "base lending
rate." The base rate at December 31, 1997 was 8.5%. Interest is paid
quarterly. Principal payments of $1,000,000 are due in May of each year
beginning in 1997, with a final payment due May 8, 2005. On November 8,
1997, the Company prepaid the May 1998 principal payment.
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<PAGE>
The credit agreement contains certain covenants with which the Company must
comply. These covenants contain provisions common to a loan of this type
and include such items as; a minimum consolidated net worth of FCC to be no
less than 400% of the outstanding balance of the debt; Statutory capital
and surplus of Universal Guaranty Life Insurance Company be maintained at
no less than $6,500,000; an earnings covenant requiring the sum of the pre
tax earnings of Universal Guaranty Life Insurance Company and its
subsidiaries (based on Statutory Accounting Practices) and the after-tax
earnings plus non-cash charges of FCC (based on parent only GAAP practices)
shall not be less than two hundred percent (200%) of the Company's interest
expense on all of its debt service. The Company is in compliance with all
of the covenants of the agreement.
B. Subordinated debt
The subordinated debt was incurred June 16, 1992 as a part of the
acquisition of the now dissolved Commonwealth Industries Corporation,
(CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum,
payable semi-annually beginning December 16, 1992. These notes, except for
one $840,000 note, provide for principal payments equal to 1/20th of the
principal balance due with each interest installment beginning December 16,
1997, with a final payment due June 16, 2002. The aforementioned $840,000
note provides for a lump sum principal payment due June 16, 2002. In June
1997, the Company refinanced a $204,267 subordinated 10-year note as a
subordinated 20-year note bearing interest at the rate of 8.75% per annum.
The repayment terms of the refinanced note are the same as the original
subordinated 20 year notes. The original 20-year notes bear interest at
the rate of 8 1/2% per annum on $3,397,620 and 8.75% per annum on $504,962
(of which the $204,267 note refinanced in the current year is included),
payable semi-annually with a lump sum principal payment due June 16, 2012.
C. Other notes payable
United Income, Inc. holds two promissory notes receivable totaling $850,000
due from FCC. Each note bears interest at the rate of 1% over prime as
published in the Wall Street Journal, with interest payments due quarterly.
Principal of $150,000 is due upon the maturity date of June 1, 1999, with
the remaining principal payment of $700,000 becoming due upon the maturity
date of May 8, 2006.
United Trust, Inc. holds three promissory notes receivable totaling
$1,550,000 due from FCC. Each note bears interest at the rate of 1% over
prime as published in the Wall Street Journal, with interest payments due
quarterly. Principal of $250,000 is due upon the maturity date of June 1,
1999, with the remaining principal payment of $1,300,000 becoming due upon
maturity in 2006.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1998 $ 516,504
1999 1,916,504
2000 1,516,504
2001 1,516,504
2002 2,356,504
13. OTHER CASH FLOW DISCLOSURES
On a cash basis, the Company paid $1,658,703, $1,700,973 and $1,934,326 in
interest expense for the years 1997, 1996 and 1995, respectively. The
Company paid $57,277, $17,634 and $25,821 in federal income tax for 1997,
1996 and 1995, respectively.
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<PAGE>
One of the Company's insurance subsidiaries ("UG") entered into a
coinsurance agreement with Park Avenue Life Insurance Company ("PALIC") at
September 30, 1996. At closing of the transaction, UG received a
coinsurance credit of $28,318,000 for policy liabilities covered under the
agreement. UG transferred assets equal to the credit received. This
transfer included policy loans of $2,855,000 associated with policies under
the agreement and a net cash transfer of $19,088,000 after deducting the
ceding commission due UG of $6,375,000. To provide the cash required to be
transferred under the agreement, the Company sold $18,737,000 of fixed
maturity investments.
14. NON-RECURRING WRITE DOWN OF VALUE OF AGENCY FORCE ACQUIRED
During the year-ended December 31, 1995, the Company recognized a non
recurring write down of $8,297,000 on its value of agency force acquired
The write down released $2,904,000 of the deferred tax liability and
$3,327,000 was attributed to minority interest in loss of consolidated
subsidiaries. In addition, equity loss of investees was negatively
impacted by $542,000. The effect of this write down resulted in an
increase in the net loss of $2,608,000. This write down is directly
related to the Company's change in distribution systems. Due to the broker
agency force not meeting management's expectations and lack of production,
the Company has changed its focus from a primarily broker agency
distribution system to a captive agent system. With the change in focus,
most of the broker agents were terminated and therefore, management re
evaluated the value of the agency force carried on the balance sheet. For
purposes of the write-down, the broker agency force has no future expected
cash flows and therefore warranted a write-off of the value. The write
down is reported as a separate line item "non-recurring write down of value
of agency force acquired" and the release of the deferred tax liability is
reported in the credit for income taxes payable in the Statement of
Operations. In addition, the impact to minority interest in loss of
consolidated subsidiaries and equity loss of investees is in the Statement
of Operations.
15. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions that at times
may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
16. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. The
Statement's objective is to simplify the computation of earnings per share,
and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS. Basic
EPS is calculated by dividing income available to common stockholders
(i.e., net income or loss adjusted for preferred stock dividends) by the
weighted-average number of common shares outstanding. Thus, in the most
significant change in current practice, options, warrants, and convertible
securities are excluded from the basic EPS calculation. Further,
contingently issuable shares are included in basic EPS only if all the
necessary conditions for the issuance of such shares have been satisfied by
the end of the period.
Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Income available to common stockholders continues to be
adjusted for assumed conversion of all potentially dilutive securities
using the treasury stock method to calculate the dilutive effect of options
and warrants. However, unlike the calculation of fully diluted EPS under
previous opinions, a new treasury stock method is applied using the average
market price or the ending market price. Further, prior opinion
requirement to use the modified treasury stock method when the number of
options or warrants outstanding is greater than 20% of the outstanding
shares also has been eliminated. SFAS 128 also includes certain shares
that are contingently issuable; however, the test for inclusion under the
new rules is much more restrictive.
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SFAS No. 128 requires companies reporting discontinued operations,
extraordinary items, or the cumulative effect of accounting changes are to
use income from operations as the control number or benchmark to determine
whether potential common shares are dilutive or antidilutive. Only
dilutive securities are to be included in the calculation of diluted EPS.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the Company reported a loss from continuing operations so
any potential issuance of common shares would have an antidilutive effect
on EPS. Consequently, the adoption of SFAS No. 128 did not have an impact
on the Company's financial statement.
The FASB has issued SFAS No. 130 entitled Reporting Comprehensive Income
and SFAS No. 132 Employers' Disclosures about Pensions and Other
Postretirement Benefits. Both of the above statements are effective for
financial statements with fiscal years beginning after December 15, 1997.
SFAS No. 130 defines how to report and display comprehensive income and its
components in a full set of financial statements. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity
as owners.
SFAS No. 132 addresses disclosure requirements for post-retirement
benefits. The statement does not change post-retirement measurement or
recognition issues.
The Company will adopt both SFAS No. 130 and SFAS No. 132 for the 1998
financial statements. Management does not expect either adoption to have a
material impact on the Company's financial statements.
17. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
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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18. PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the third quarter of 1998.
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<TABLE>
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
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
expenses 2,884,663 3,084,239 2,778,435 1,885,475
Operating income (loss) (491,654) 567,833 (757,382) 200,113
Net income (loss) (23,565) 27,351 (512,444) (414,719)
Net income (loss)
per share (235.65) 273.51 (5,124.44) (4,147.19)
1996
1st 2nd 3rd 4th
Premiums and policy
fees, net $ 7,637,503 $ 8,514,175 $ 7,348,199 $ 7,444,581
Net investment income 3,974,407 3,930,487 4,002,258 3,994,955
Total revenues 12,513,692 12,187,077 11,331,283 10,444,059
Policy benefits
including dividends 6,528,760 7,083,803 8,378,710 8,334,759
Commissions and
amortization of
DAC and COI 2,567,921 2,298,549 1,734,048 3,314,436
Operating and interest
expenses 3,616,660 3,072,535 3,685,600 910,771
Operating income (loss) (198,649) (267,810) (2,467,075) (3,869,480)
Net income (loss) (268,675) (93,640) (1,563,817) (271,915)
Net income (loss)
per share (2,686.75) (936.40) (15,638.17) (2,719.15)
1995
1st 2nd 3rd 4th
Premiums and policy
fees, net $ 8,703,332 $ 9,507,694 $ 7,868,803 $ 7,018,707
Net investment income 3,857,562 3,849,212 3,757,605 3,918,933
Total revenues 13,385,477 12,566,391 11,514,869 11,130,583
Policy benefits
including dividends 8,097,830 9,113,933 5,978,795 6,665,206
Commissions and
amortization of
DAC and COI 2,451,030 2,860,032 3,044,057 1,459,141
Operating and interest
expenses 3,449,062 2,742,174 2,498,472 3,924,966
Operating income (loss) (612,445) (2,149,748) (6,455) (9,215,704)
Net income (loss) 95,608 (1,305,599) 126,751 (4,237,636)
Net income (loss)
per share (956.08) (13,055.99) 1,267.51 (42,376.60)
</TABLE>
81
<PAGE>
<TABLE>
UNITED TRUST GROUP, INC. Schedule I
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES As of December 31, 1997
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 Government and
government agencies and
authorities $ 28,259,322 $ 28,622,970 $ 28,259,322
State, municipalities, and
political subdivisions 22,778,816 23,449,601 22,778,816
Collateralized mortgage
obligations 11,093,926 11,207,647 11,093,926
Public utilities 47,984,322 49,141,537 47,984,322
All other corporate bonds 70,853,947 72,360,813 70,853,947
Total fixed maturities 180,970,333 $184,782,568 180,970,333
Investments held for sale:
Fixed maturities:
United States Government and government agencies and
authorities 1,448,202 $ 1,442,557 1,442,557
State, municipalities, and
political subdivisions 35,000 35,485 35,485
Public utilities 80,169 80,496 80,496
All other corporate bonds 108,927 110,092 110,092
1,672,298 $ 1,668,630 1,668,630
Equity securities:
Banks, trusts and insurance
companies 2,473,969 $ 2,167,368 2,167,368
All other corporate securities 710,388 834,376 834,376
3,184,357 $ 3,001,744 3,001,744
Mortgage loans on real estate 9,469,444 9,469,444
Investment real estate 9,760,732 9,760,732
Real estate acquired in satisfaction
of debt 1,724,544 1,724,544
Policy loans 14,207,189 14,207,189
Short-term investments 1,798,878 1,798,878
Total investments $ 222,787,775 $ 222,601,494
</TABLE>
82
<PAGE>
<TABLE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1997 and 1996 Schedule II
1997 1996
<S> <C> <C>
ASSETS
Investment in affiliates $ 34,683,168 $ 35,548,414
Cash and cash equivalents 25,980 39,529
Notes receivable from affiliate 9,781,602 10,039,853
Accrued interest income 34,455 35,202
Total assets $ 44,525,205 $ 45,662,998
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 9,635,257 $ 10,009,853
Notes payable to affiliate 146,345 30,000
Income taxes payable 5,175 6,663
Accrued interest payable 34,455 35,202
Other liabilities 413,429 452,263
Total liabilities 10,234,661 10,533,981
Shareholders' equity:
Common stock 45,926,705 45,926,705
Unrealized depreciation of
investments held for sale
of affiliates (41,708) (126,612)
Accumulated deficit (11,594,453) (10,671,076)
Total shareholders' equity 34,290,544 35,129,017
Total liabilities and
shareholders' equity $ 44,525,205 $ 45,662,998
</TABLE>
83
<PAGE>
<TABLE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1997 Schedule II
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Interest income from affiliates $ 782,892 $ 792,046 $ 790,334
Other income 37,641 34,600 31,774
820,533 826,646 822,108
Expenses:
Interest expense 776,230 789,496 787,784
Interest expense to affiliates 6,662 2,550 2,550
Operating expenses 5,585 4,624 3,341
788,477 796,670 793,675
Operating income 32,056 29,976 28,433
Provision for income taxes (5,362) (4,664) (3,221)
Equity in loss of subsidiaries (950,071) (1,686,009) (5,346,088)
Net loss $ (923,377)$ (1,660,697)$ (5,320,876)
</TABLE>
84
<PAGE>
<TABLE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1997 Schedule II
1997 1996 1995
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
Cash flows from operating activities:
Net loss $ (923,377)$ (1,660,697)$ (5,320,876)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Equity in loss of subsidiaries 950,071 1,686,009 5,346,088
Change in accrued interest income 747 0 (167)
Change in accrued interest payable (747) 0 167
Change in income taxes payable (1,488) 3,442 3,221
Change in other liabilities (38,834) (139,256) (96,843)
Net cash used in operating activities (13,628) (110,502) (68,410)
Cash flows from investing activities:
Proceeds for fractional shares from reverse
stock split of subsidiary 79 0 0
Purchase of stock of affiliates 0 (95,000) (200)
Net cash provided by (used in)
investing activities 79 (95,000) (200)
Cash flows from financing activities:
Receipt of principal on notes
receivable from affiliate 258,252 0 0
Payments of principal on
notes payable (258,252) 0 0
Capital contribution
from affiliates 0 200,000 100,000
Net cash provided by
financing activities 0 200,000 100,000
Net increase (decrease) in cash
and cash equivalent (13,549) (5,502) 31,390
Cash and cash equivalents
at beginning of year 39,529 45,031 13,641
Cash and cash equivalents
at end of year $ 25,980 $ 39,529 $ 45,031
</TABLE>
85
<PAGE>
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1997 and the year ended December 31, 1997 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
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%
* All assumed business represents the Company's participation in
the Servicemen's Group Life Insurance Program (SGLI).
86
<PAGE>
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1996 and the year ended December 31, 1996 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
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%
* All assumed business represents the Company's participation in
the Servicemen's Group Life Insurance Program (SGLI).
87
<PAGE>
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1995 and the year ended December 31, 1995 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
Life insurance
in force $4,207,695,000 $1,087,774,000 $1,039,517,000 $4,159,438,000 25.0%
Premiums and policy fees:
Life
insurance $ 38,233,190 $ 5,330,351 $ 0 $ 32,902,839 0.0%
Accident and health
insurance 248,448 52,751 0 195,697 0.0%
$ 38,481,638 $ 5,383,102 $ 0 $ 33,098,536 0.0%
* All assumed business represents the Company's participation in
the Servicemen's Group Life Insurance Program (SGLI).
88
<PAGE>
UNITED TRUST GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, 1996 and 1995 Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
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
December 31, 1995
Allowance for doubtful
accounts - mortgage
loans $ 26,000 $ 0 $ 16,000 $ 10,000
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<DEBT-HELD-FOR-SALE> 0 0
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 121,520 122,853
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 121,520 122,853
<CASH> 710,897 439,676
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 0 0
<TOTAL-ASSETS> 12,839,787 12,881,049
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 902,300 902,300
0 0
0 0
<COMMON> 45,934 45,940
<OTHER-SE> 11,890,019 11,931,536
<TOTAL-LIABILITY-AND-EQUITY> 12,839,787 12,881,049
0 0
<INVESTMENT-INCOME> 27,127 13,099
<INVESTMENT-GAINS> 0 2,599
<OTHER-INCOME> 1,158,995 1,777,848
<BENEFITS> 0 0
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 908,905 1,414,291
<INCOME-PRETAX> 277,217 376,656
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 277,217 376,656
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (79,316) (319,083)
<EPS-PRIMARY> (0.06) (0.23)
<EPS-DILUTED> (0.06) (0.23)
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into this
31st day of July, 1997 by and between First Commonwealth
Corporation, a Virginia Corporation (the "Company") and Larry E.
Ryherd ("Executive").
WITNESSETH:
WHEREAS, the Company is engaged in the business of selling and
administering insurance; and
WHEREAS, the Executive is experienced in the management and
operations of insurance business; and
WHEREAS, the Company desires to employ the Executive in the
capacity, and on the terms as set forth herein, and the Executive
desires to be employed by the Company in such position and on the
terms and subject to the conditions herein contained; and
WHEREAS, the parties hereby acknowledge that notwithstanding any
other communication whether written or oral, this Employment Agreement
is intended to set forth the complete understanding of the parties
with respect to the employment of the Executive by the Company as of and
from the date hereof.
NOW, THEREFORE, in consideration of these premises and the
respective covenants and agreements hereinafter set forth, the
parties hereby agree as follows:
1. EMPLOYMENT AND DUTIES OF THE EXECUTIVE. The Company hereby
employs the Executive and the Executive accepts employment as
President/Chief Executive Officer of the Company. During the terms of
this Employment Agreement, the Executive will devote all of his business
time and energy to performing his duties on behalf of the Company. In
addition to his duties as President/Chief Executive Officer, the
Executive agrees to perform such duties as from time to time may be
assigned by the Board of Directors of the Company (the "Board"). In
the performance of such duties, the executive will at all times serve
the Company faithfully and to the best of his ability under the
direction and control of the Board. If the Executive is elected or
appointed to additional or substitute offices or positions with the
Company or any of its subsidiaries or affiliates, he agrees to accept
and serve in that position.
2. TERM. The term of employment under this Employment Agreement
will be for a period of sixty (60) consecutive months from the date
hereof, unless sooner terminated as hereinafter provided.
3. COMPENSATION. So long as the Executive is employed by the
Company pursuant to this Employment Agreement, the Executive will be
entitled to the following compensation and fringe benefits:
3.1. SALARY. For all services rendered by the Executive
pursuant to this Employment Agreement, the Company will pay to the
Executive, an annual salary of $400,000, less any
compensation received by reason of Executive's participation as
a director of the Company or any of its subsidiaries or
affiliates. Such salary will be payable in equal bi-monthly
installments or at such other frequency as will be consistent with
the Company's normal payroll practices with other employees
in effect from time to time. Payments of salary will be
subject to normal employee withholding and other tax deductions.
The parties acknowledge that the annual salary is a base salary
and annual consideration shall be given to granting Executive
a bonus based on factors such as: inflation, increase in the
scope of duties and extraordinary achievements.
3.2. FRINGE BENEFITS. The Executive will be entitled to
participate in the fringe benefit programs of the Company, in
existence from time to time (including any pension plan, bonus
program, group life and medical insurance programs and medical
expense reimbursement plans), as determined by the Board, and as
are made available to employees of like status to the
Executive on a comparable basis, and according to the rules and
regulations of such programs adopted by the Company from time to
time.
3.3. EXPENSES. Upon presentation of supporting
documentation as may reasonably be satisfactory to the
Company, the Company will pay or reimburse the Executive for all
reasonable travel, entertainment, and other business expenses
actually incurred by the Executive during the term of this
Employment Agreement in the performance of his services and
duties; provided, however, that the type and amount of expenses
will be consistent with expense reimbursement policies
adopted from time to time, formally or informally by the Company.
Any expense beyond such authorization must be specifically
authorized in advance by the president. In the event of a
dispute between the Company and the Executive as to the nature of
such expenses, the decision of the president will be binding. If
an income tax deduction (Federal, state or local) is disallowed
to the Company for any part of such expense payments, the
Executive agrees to repay the Company the amount of the expense
reimbursement to the Executive paid by the Company upon demand by
the Company.
4. TERMINATION. The Executive's employment with the Company may
be terminated and this Employment Agreement canceled upon the following
terms and conditions.
4.1. TERMINATION FOR CAUSE. During the terms of this
Employment Agreement, the Executive's employment may be
terminated immediately, with or without written or oral
notice, by the Company for "Cause" (as hereinafter defined). If
the Executive's employment with the Company is terminated for
"Cause" all compensation described in paragraphs 3.1 through
3.3 of this Employment Agreement will terminate as of the date of
such termination of employment. Termination for "Cause" is
limited to the following grounds: (i)misappropriation of
funds, embezzlement, or willful and material damage of or to any
material property of the Company, or defrauding or attempting to
defraud the Company; (ii) conviction of any crime (whether or
not involving the Company) which constitutes a felony in the
jurisdiction involved; (iii) malfeasance or non-feasance in the
performance by the Executive of his duties hereunder; (iv) failure
or refusal by the Executive to perform his duties in the best
interests of the Company and in accordance with the directions
given by the Board, the chairman of the board or the president
of the Company; or (v) a material breach by the Executive, in
the sole opinion of the Company, or any of the provisions of this
Employment Agreement; which breach continues after notice of the
breach, either oral or written, from the Company to the
Executive. Upon termination of the Executive for "Cause",
theCompany will pay the Executive's salary and other benefits,
including reimburse the Executive for authorized expenses
incurred, through the date of termination of the Executive's
employment. The Executive acknowledges and agrees that the
foregoing will be the Company's only obligations and total
liability to the Executive for termination of the Executive's
employment for "Cause".
4.2. TERMINATION WITHOUT CAUSE. The Company may
terminate the Executive without cause at any time by providing the
Executive thirty (30) days prior written notice of
termination. Upon termination without cause, the Company will
continue to pay the Executive compensation in the amount equal to
the Executive's then salary for the remainder of the term of this
Employment Agreement as if Executive had not been terminated,
plus any bonuses which the Executive would have been entitled to
had the Executive not been terminated, and reimburse the
Executive for authorized expenses incurred through the date of
termination of the Executive's employment. The Company will also, if
required by law, allow the Executive to continue any medical and
hospitalization plan and/or insurance at the Executive's sole
cost and responsibility. The Executive acknowledges and agrees
that the foregoing will be the Company's only obligations and total
liability to the Executive for termination of the Executive's
employment without cause.
4.3. VOLUNTARY RESIGNATION. The Executive may
voluntarily resign prior to the expiration of this Employment
Agreement, upon providing the Company with at least fifteen (15)
days' prior written notice. Upon the effective date of the
Executive's resignation, the Company will pay the Executive's
salary and other benefits, including reimbursement for authorized
expenses incurred, through the effective date of the Executive's
resignation. The Company will also, if required by law, allow the
Executive to continue any medical and hospitalization plans and/or
insurance at the Executive's sole cost and responsibility. The
Executive acknowledges and agrees that the foregoing will be
the Company's only obligations and total liability to the
Executive for termination of the Executive's employment due
to the Executive's voluntary resignation.
4.4. TERMINATION UPON DEATH. The Executive's employment
will be terminated automatically upon the Executive's death. As
the result of the Executive's death, the Company will pay to the
Executive's estate a death benefit equal to the Executive's
salary through the end of the month in which the Executive's
death occurs, plus reimbursement for authorized expenses incurred
by the Executive prior to his death. The Executive acknowledges
and agrees that the foregoing will be the Company's only
obligations and total liability to the Executive for termination
of the Executive's employment due to the Executive's death.
4.5. TERMINATION UPON DISABILITY. The Company may, upon
30 days prior written notice to the Executive, terminate the
Executive's employment effective as of the date specified in the
notice, if, due to any medical or psychological disability the
Executive is not able to perform his customary services and
duties for 30 continuous business days or 45 noncontinuous
business days within a 90-day period (the "Disability
Period"). The Company may retain a physician of its choice to
examine the Executive and to render a medical opinion to the
Company as to the Executive's medical or psychological
disability. The Executive consents to examination by such
physician, and further agrees that the opinion of such
physician will be binding upon both the Executive and the
Company. Upon termination of the Executive's employment due to
disability, the Company will pay to the Executive an amount
equivalent to three months salary as termination compensation, and
if required by law, allow the Executive to continue any medical
or hospitalization plan and/or insurance at the Executive's
sole cost and responsibility. The Executive will receive full
compensation for any period of temporary illness or
disability. The Executive acknowledges and agrees that the
foregoing will be the Company's only obligations and total
liability to the Executive fore termination of the Executive's
employment due to disability.
4.6. RETURN OF MATERIALS. Upon the termination of the
Executive's employment, irrespective of the time, manner or
reason of termination, the Executive will immediately
surrender and deliver to the Company all originals and all
copies of reproductions of books, records, summaries, lists,
computer software, and other tangible data and information, and
every form and every kind, relating to the Confidential
Information (as defined in Section 5 of this Employment
Agreement) and all other property belonging to the Company. The
prior and full performance by the Executive of the provisions
of this Section 4.6 is a condition to the payment by the Company
to the Executive of any compensation set forth in this Employment
Agreement.
5. NON-DISCLOSURE OF CONFIDENTIAL AND PROPRIETARY
INFORMATION. The Executive may not during the term of his
employment with the Company or any time thereafter, directly or
indirectly, copy, use, or disclose to any person or business any
"Confidential Information" (as defined below) except for the
benefit of the Company in connection with the performance of his
duties and in accordance with any guidelines or policies which
might be adopted from time to time by the Company. In addition, the
Executive will use his best efforts to cause all persons over whom he
has supervisory control to use, maintain and protect all "Confidential
Information" in a confidential manner and as a valuable asset of
the Company. As used in this Employment Agreement, "Confidential
Information" means trade secrets and other proprietary information and
data concerning the business of the Company, its subsidiaries and
affiliates (the "FCC Companies"), regardless of whether protectable
by law, including, but not limited to, information concerning the
names and addresses of any of the FCC Companies' policyholders and
prospective policyholders, any of the FCC Companies' operation manuals,
accounts, the names of employees and agents and their respective
duties, the names of reinsurance providers, financial data, pricing
lists and policies, profits or losses, product or service development
and all such similar information, all of which would not readily be
available to the Executive except for the Executive's employment
relationship with the Company. The Executive acknowledges that such
information and similar data is not generally known to the trade, is
of a confidential nature, is an asset of the Company, and to
preserve the Company's good will, must be kept strictly confidential
and used only in the conduct of its business. The provisions of this
Section will survive the termination of this Employment Agreement for
any reason.
6. INTERFERENCE WITH EXTERNAL BUSINESS RELATIONSHIPS. The
Executive agrees that, as a result of the Confidential Information, he
will receive, come in contact with, create, or have access to during
the term of his employment with the Company, and the Company's
customer relationships he will be exposed to, the Executive will
not, directly or indirectly (through any corporation which he is a
director, officer, consultant, agent or other relationship) during
the term of his employment service, perform or otherwise manage
insurance companies or insurance related businesses.
7 INTERFERENCE WITH INTERNAL BUSINESS RELATIONSHIPS. The
Executive agrees that, as a result of the Confidential Information he
will receive, come into contact with, create or have access to during
the term of his employment with the Company, and the Company's
employee and independent contractor relationships he will be exposed
to, the Executive will not, directly or indirectly (through any
corporation in which he is a director, officer, consultant, agent,
or other relationship), during the term of his employment interfere
with the Company's relationship with, or endeavor to entice away
from the Company or any of the FCC Companies or, directly or
indirectly, contact any person, firm or entity employed by, retained
by or associated with the Company or any of the FCC Companies, to
induce any such person, firm or entity, to leave the service of the
Company or any of the FCC Companies and provide the same or
substantially the same work as performed for the Company or any of
the FCC Companies to the Executive or to any other person, firm, or
entity.
8 INJUNCTIVE RELIEF. The Executive consents and agrees that
if he violates any of the provisions of Section 5 through 7 hereof,
the Company would sustain irreparable harm and, therefore in addition
to any other remedy at law or in equity the Company may have under this
Employment Agreement, the Company will be entitled to apply to any
court of competent jurisdiction for an injunction restraining the
Executive from committing or continuing any such violation of any
provisions of Section 5 through 7 of this Employment Agreement.
9. MISCELLANEOUS.
9.1 NOTICES. All notices and other communications
required or desire to be given to or in connection with this
Employment Agreement will be in writing and will be deemed
effectively given upon personal delivery three days after
deposit in the United States mail sent by certified mail,
return receipt requested, postage prepaid, or one day after
delivery to an overnight delivery service which retains
records of deliveries, to the parties at the addresses set
forth below or such other address as either party may
designate in like manner.
A. If to the Company:
First Commonwealth Corporation
5250 South Sixth Street
Springfield, Illinois 62703
B. If to the Executive:
Mr. Larry E. Ryherd
12 Red Bud Run
Springfield, Illinois 62707
9.2 GOVERNING LAW. This Employment Agreement will be
governed and construed in accordance with the laws of the
State of Illinois.
9.3 SEVERABILITY. If any provision contained in this
Employment Agreement is held to be invalid or unenforceable by a
court of competent jurisdiction, such provision will be severed
herefrom in such invalidity or unenforceability will not effect
any other provision of this Employment Agreement, the balance of
which will remain in and have its intended full force and effect;
provided, however, if such invalid or unenforceable provisions
may be modified so is to be valid and enforceable as a matter of
law, such provision will be deemed to have been modified so as to
be valid and enforceable to the maximum extent committed by law.
9.4 MODIFICATION. This Employment Agreement may not be
changed, modified, discharged, or terminated except by a
writing signed by all the parties hereto.
9.5 FULLING BINDING. This Employment Agreement will be
binding on and inure to the benefit of the parties hereto and
their respective successors, assigns and personal
representative; provided, however, that this Employment
Agreement is assignable by the Company with the prior consent,
either oral or written, of the Executive.
9.6 HEADINGS. The numbers, headings, titles, or
designations to the various sections are not a part of this
Employment Agreement, but are for convenience of reference
only, and do not and will not be used to define, limit or
construe the contents of this Employment Agreement or any part
thereof.
9.7 WAIVER. By execution of this Employment Agreement,
the Executive hereby waives and relinquishes any and all
rights, benefits and entitlements to which he may hereafter have
under any other contract with the Company or any of its corporate
parents, subsidiaries or affiliates prior to the date hereof;
excepting that certain agreement dated April 15, 1993 pertaining
to a deferred compensation payment and options to purchase stock of
UTI.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Employment Agreement on the date first above written.
EXECUTIVE: COMPANY:
First Commonwealth Corporation, a
Virginia corporation.
By: By:
Larry E. Ryherd Title:
ATTEST:
By:
Title:
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into this
31st day of July, 1997 by and between First Commonwealth
Corporation, a Virginia Corporation (the "Company") and James E.
Melville ("Executive").
WITNESSETH:
WHEREAS, the Company is engaged in the business of selling and
administering insurance; and
WHEREAS, the Executive is experienced in the management and
operations of insurance business; and
WHEREAS, the Company desires to employ the Executive in the
capacity, and on the terms as set forth herein, and the Executive
desires to be employed by the Company in such position and on the
terms and subject to the conditions herein contained; and
WHEREAS, the parties hereby acknowledge that notwithstanding any
other communication whether written or oral, this Employment Agreement
is intended to set forth the complete understanding of the parties
with respect to the employment of the Executive by the Company as of and
from the date hereof.
NOW, THEREFORE, in consideration of these premises and the
respective covenants and agreements hereinafter set forth, the
parties hereby agree as follows:
1. EMPLOYMENT AND DUTIES OF THE EXECUTIVE. The Company
hereby employs the Executive and the Executive accepts employment
as Senior Executive Vice President/Chief Financial Officer of the
Company. In addition to his duties as Senior Executive Vice
President/Chief Financial Officer, the Executive agrees to perform such
duties as from time to time may be assigned by the Board of Directors
of the Company (the "Board"). In the performance of such duties, the
executive will at all times serve the Company faithfully and to
the best of his ability under the direction and control of the Board.
If the Executive is elected or appointed to additional or substitute
offices or positions with the Company or any of its subsidiaries or
affiliates, he agrees to accept and serve in that position. The
parties acknowledge that as of the current date, such duties
require the Executive to work approximately 25 hours per week.
The Executive agrees that he will make himself available to work full
time with the understanding that such increase in time spent will be
considered by the Board in determining his annual bonus, if any.
2. TERM. The term of employment under this Employment
Agreement will be for a period of sixty (60) consecutive months from
the date hereof, unless sooner terminated as hereinafter provided.
3. COMPENSATION. So long as the Executive is employed by
the Company pursuant to this Employment Agreement, the Executive will
be entitled to the following compensation and fringe benefits:
3.1. SALARY. For all services rendered by the Executive
pursuant to this Employment Agreement, the Company will pay to the
Executive, an annual salary of $238,200, less any
compensation received by reason of Executive's participation as
a director of the Company or any of its subsidiaries or
affiliates. Such salary will be payable in equal bi-monthly
installments or at such other frequency as will be consistent with
the Company's normal payroll practices with other employees
in effect from time to time. Payments of salary will be
subject to normal employee withholding and other tax deductions.
The parties acknowledge that the annual salary is a base salary
and annual consideration shall be given to granting Executive
a bonus based on factors such as: inflation, increase in the
scope of duties and extraordinary achievements.
3.2. FRINGE BENEFITS. The Executive will be entitled to
participate in the fringe benefit programs of the Company, in
existence from time to time (including any pension plan, bonus
program, group life and medical insurance programs and medical
expense reimbursement plans), as determined by the Board, and as
are made available to employees of like status to the
Executive on a comparable basis, and according to the rules and
regulations of such programs adopted by the Company from time to
time. Executive will be granted eight weeks vacation each year.
3.3. EXPENSES. Upon presentation of supporting
documentation as may reasonably be satisfactory to the
Company, the Company will pay or reimburse the Executive for all
reasonable travel, entertainment, and other business expenses
actually incurred by the Executive during the term of this
Employment Agreement in the performance of his services and
duties; provided, however, that the type and amount of expenses
will be consistent with expense reimbursement policies
adopted from time to time, formally or informally by the Company.
Any expense beyond such authorization must be specifically
authorized in advance by the president. In the event of a
dispute between the Company and the Executive as to the nature of
such expenses, the decision of the president will be binding. If
an income tax deduction (Federal, state or local) is disallowed
to the Company for any part of such expense payments, the
Executive agrees to repay the Company the amount of the expense
reimbursement to the Executive paid by the Company upon demand by
the Company.
3.4. PURCHASE OF UNITED TRUST GROUP NOTE. The Company or
one of its affiliates will on August 1, 1997 purchase the
$116,344.90 note of United Trust Group held by Melville for its
then current principal balance plus accrued interest.
4. TERMINATION. The Executive's employment with the Company
may be terminated and this Employment Agreement canceled upon the
following terms and conditions.
4.1. TERMINATION FOR CAUSE. During the terms of this
Employment Agreement, the Executive's employment may be
terminated immediately, with or without written or oral
notice, by the Company for "Cause" (as hereinafter defined). If
the Executive's employment with the Company is terminated for
"Cause" all compensation described in paragraphs 3.1 through
3.3 of this Employment Agreement will terminate as of the date of
such termination of employment. Termination for "Cause" is
limited to the following grounds: (i) misappropriation of
funds, embezzlement, or willful and material damage of or to any
material property of the Company, or defrauding or attempting to
defraud the Company; (ii) conviction of any crime (whether or
not involving the Company) which constitutes a felony in the
jurisdiction involved; (iii) malfeasance or non-feasance in the
performance by the Executive of his duties hereunder; (iv) failure
or refusal by the Executive to perform his duties in the best
interests of the Company and in accordance with the directions
given by the Board, the chairman of the board or the president
of the Company; or (v) a material breach by the Executive, in
the sole opinion of the Company, or any of the provisions of this
Employment Agreement; which breach continues after notice of the
breach, either oral or written, from the Company to the
Executive. Upon termination of the Executive for "Cause", the
Company will pay the Executive's salary and other benefits,
including reimburse the Executive for authorized expenses
incurred, through the date of termination of the Executive's
employment. The Executive acknowledges and agrees that the
foregoing will be the Company's only obligations and total
liability to the Executive for termination of the Executive's
employment for "Cause".
4.2. TERMINATION WITHOUT CAUSE. The Company may
terminate the Executive without cause at any time by providing the
Executive thirty (30) days prior written notice of
termination. Upon termination without cause, the Company will
continue to pay the Executive compensation in the amount equal to
the Executive's then salary for the remainder of the term of this
Employment Agreement as if Executive had not been terminated,
plus any bonuses which the Executive would have been entitled to
had the Executive not been terminated, and reimburse the
Executive for authorized expenses incurred through the date of
termination of the Executive's employment. The Company will also, if
required by law, allow the Executive to continue any medical and
hospitalization plan and/or insurance at the Executive's sole
cost and responsibility. The Executive acknowledges and agrees
that the foregoing will be the Company's only obligations and total
liability to the Executive for termination of the Executive's
employment without cause.
4.3. VOLUNTARY RESIGNATION. The Executive may
voluntarily resign prior to the expiration of this Employment
Agreement, upon providing the Company with at least fifteen (15)
days' prior written notice. Upon the effective date of the
Executive's resignation, the Company will pay the Executive's
salary and other benefits, including reimbursement for authorized
expenses incurred, through the effective date of the Executive's
resignation. The Company will also, if required by law, allow
the Executive to continue any medical and hospitalization plans
and/or insurance at the Executive's sole cost and responsibility.
The Executive acknowledges and agrees that the foregoing will
be the Company's only obligations and total liability to the
Executive for termination of the Executive's employment due
to the Executive's voluntary resignation.
4.4. TERMINATION UPON DEATH. The Executive's employment
will be terminated automatically upon the Executive's death. As
the result of the Executive's death, the Company will pay to the
Executive's estate a death benefit equal to the Executive's
salary through the end of the month in which the Executive's
death occurs, plus reimbursement for authorized expenses incurred
by the Executive prior to his death. The Executive acknowledges and
agrees that the foregoing will be the Company's only obligations
and total liability to the Executive for termination of the
Executive's employment due to the Executive's death.
4.5. TERMINATION UPON DISABILITY. The Company may, upon 30
days prior written notice to the Executive, terminate the
Executive's employment effective as of the date specified in the
notice, if, due to any medical or psychological disability the
Executive is not able to perform his customary services and
duties for 30 continuous business days or 45 noncontinuous
business days within a 90-day period (the "Disability
Period"). The Company may retain a physician of its choice to
examine the Executive and to render a medical opinion to the
Company as to the Executive's medical or psychological
disability. The Executive consents to examination by such
physician, and further agrees that the opinion of such
physician will be binding upon both the Executive and the
Company. Upon termination of the Executive's employment due to
disability, the Company will pay to the Executive an amount
equivalent to three months salary as termination compensation, and
if required by law, allow the Executive to continue any medical
or hospitalization plan and/or insurance at the Executive's
sole cost and responsibility. The Executive will receive full
compensation for any period of temporary illness or
disability. The Executive acknowledges and agrees that the
foregoing will be the Company's only obligations and total
liability to the Executive for termination of the Executive's
employment due to disability.
4.6. RETURN OF MATERIALS. Upon the termination of the
Executive's employment, irrespective of the time, manner or
reason of termination, the Executive will immediately
surrender and deliver to the Company all originals and all
copies of reproductions of books, records, summaries, lists,
computer software, and other tangible data and information, and
every form and every kind, relating to the Confidential
Information (as defined in Section 5 of this Employment
Agreement) and all other property belonging to the Company. The
prior and full performance by the Executive of the provisions
of this Section 4.6 is a condition to the payment by the Company
to the Executive of any compensation set forth in this Employment
Agreement.
5. NON-DISCLOSURE OF CONFIDENTIAL AND PROPRIETARY
INFORMATION. The Executive may not during the term of his
employment with the Company or any time thereafter, directly or
indirectly, copy, use, or disclose to any person or business any
"Confidential Information" (as defined below) except for the
benefit of the Company in connection with the performance of his
duties and in accordance with any guidelines or policies which
might be adopted from time to time by the Company. In addition, the
Executive will use his best efforts to cause all persons over whom he
has supervisory control to use, maintain and protect all "Confidential
Information" in a confidential manner and as a valuable asset of
the Company. As used in this Employment Agreement, "Confidential
Information" means trade secrets and other proprietary information and
data concerning the business of the Company, its subsidiaries and
affiliates (the "FCC Companies"), regardless of whether protectable
by law, including, but not limited to, information concerning the
names and addresses of any of the FCC Companies' policyholders and
prospective policyholders, any of the FCC Companies' operation manuals,
accounts, the names of employees and agents and their respective
duties, the names of reinsurance providers, financial data, pricing
lists and policies, profits or losses, product or service development
and all such similar information, all of which would not readily be
available to the Executive except for the Executive's employment
relationship with the Company. The Executive acknowledges that such
information and similar data is not generally known to the trade, is
of a confidential nature, is an asset of the Company, and to
preserve the Company's good will, must be kept strictly confidential
and used only in the conduct of its business. The provisions of this
Section will survive the termination of this Employment Agreement for
any reason.
6. INTERFERENCE WITH EXTERNAL BUSINESS RELATIONSHIPS. The
Executive agrees that, as a result of the Confidential Information, he
will receive, come in contact with, create, or have access to during
the term of his employment with the Company, and the Company's
customer relationships he will be exposed to, the Executive will
not, directly or indirectly (through any corporation which he is a
director, officer, consultant, agent or other relationship) during
the term of his employment service, perform or otherwise manage
insurance companies or insurance related businesses.
7. INTERFERENCE WITH INTERNAL BUSINESS RELATIONSHIPS. The
Executive agrees that, as a result of the Confidential Information he
will receive, come into contact with, create or have access to during
the term of his employment with the Company, and the Company's
employee and independent contractor relationships he will be exposed
to, the Executive will not, directly or indirectly (through any
corporation in which he is a director, officer, consultant, agent,
or other relationship), during the term of his employment interfere
with the Company's relationship with, or endeavor to entice away
from the Company or any of the FCC Companies or, directly or
indirectly, contact any person, firm or entity employed by, retained
by or associated with the Company or any of the FCC Companies, to
induce any such person, firm or entity, to leave the service of the
Company or any of the FCC Companies and provide the same or
substantially the same work as performed for the Company or any of
the FCC Companies to the Executive or to any other person, firm, or
entity.
8. INJUNCTIVE RELIEF. The Executive consents and agrees that
if he violates any of the provisions of Section 5 through 7 hereof,
the Company would sustain irreparable harm and, therefore in addition
to any other remedy at law or in equity the Company may have under this
Employment Agreement, the Company will be entitled to apply to any
court of competent jurisdiction for an injunction restraining the
Executive from committing or continuing any such violation of any
provisions of Section 5 through 7 of this Employment Agreement.
9. MISCELLANEOUS.
9.1 NOTICES. All notices and other communications
required or desire to be given to or in connection with this
Employment Agreement will be in writing and will be deemed
effectively given upon personal delivery three days after
deposit in the United States mail sent by certified mail,
return receipt requested, postage prepaid, or one day after
delivery to an overnight delivery service which retains
records of deliveries, to the parties at the addresses set
forth below or such other address as either party may
designate in like manner.
A. If to the Company:
First Commonwealth Corporation
5250 South Sixth Street
Springfield, Illinois 62703
B. If to the Executive:
Mr. James E. Melville
2957 Battersea Point
Springfield, Illinois 62704
9.2 GOVERNING LAW. This Employment Agreement will be
governed and construed in accordance with the laws of the
State of Illinois.
9.3 SEVERABILITY. If any provision contained in this
Employment Agreement is held to be invalid or unenforceable by
a court of competent jurisdiction, such provision will be
severed herefrom in such invalidity or unenforceability will
not effect any other provision of this Employment Agreement,
the balance of which will remain in and have its intended full
force and effect; provided, however, if such invalid or
unenforceable provisions may be modified so is to be valid and
enforceable as a matter of law, such provision will be deemed
to have been modified so as to be valid and enforceable to the
maximum extent committed by law.
9.4 MODIFICATION. This Employment Agreement may not be
changed, modified, discharged, or terminated except by a
writing signed by all the parties hereto.
9.5 FULLY BINDING. This Employment Agreement will be
binding on and inure to the benefit of the parties hereto and
their respective successors, assigns and personal
representative; provided, however, that this Employment
Agreement is assignable by the Company with the prior consent,
either oral or written, of the Executive.
9.6 HEADINGS. The numbers, headings, titles, or
designations to the various sections are not a part of this
Employment Agreement, but are for convenience of reference
only, and do not and will not be used to define, limit or
construe the contents of this Employment Agreement or any part
thereof.
9.7 WAIVER. By execution of this Employment Agreement,
the Executive hereby waives and relinquishes any and all
rights, benefits and entitlements to which he may hereafter
have under any other contract with the Company or any of its
corporate parents, subsidiaries or affiliates prior to the
date hereof; excepting that certain agreement dated April 15,
1993 pertaining to a deferred compensation payment and options
to purchase stock of UTI.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Employment Agreement on the date first above written.
EXECUTIVE: COMPANY:
First Commonwealth Corporation, a
Virginia corporation.
By: By:
James E. Melville Title:
ATTEST:
By:
Title:
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into
this 31st day of July, 1997 by and between First Commonwealth
Corporation, a Virginia Corporation (the "Company") and George E.
Francis ("Executive").
WITNESSETH:
WHEREAS, the Company is engaged in the business of selling and
administering insurance; and
WHEREAS, the Executive is experienced in the management and
operations of insurance business; and
WHEREAS, the Company desires to employ the Executive in the
capacity, and on the terms as set forth herein, and the Executive
desires to be employed by the Company in such position and on the
terms and subject to the conditions herein contained; and
WHEREAS, the parties hereby acknowledge that notwithstanding
any other communication whether written or oral, this Employment
Agreement is intended to set forth the complete understanding of
the parties with respect to the employment of the Executive by the
Company as of and from the date hereof.
NOW, THEREFORE, in consideration of these premises and the
respective covenants and agreements hereinafter set forth, the
parties hereby agree as follows:
1. EMPLOYMENT AND DUTIES OF THE EXECUTIVE. The Company
hereby employs the Executive and the Executive accepts
employment as Senior Vice President of the Company. During the
terms of this Employment Agreement, the Executive will devote all
of his business time and energy to performing his duties on behalf
of the Company. In addition to his duties as Senior Vice President,
the Executive agrees to perform such duties as from time to time
may be assigned by the Board of Directors of the Company (the
"Board"). In the performance of such duties, the executive will
at all times serve the Company faithfully and to the best of his
ability under the direction and control of the Board. If the
Executive is elected or appointed to additional or substitute
offices or positions with the Company or any of its subsidiaries
or affiliates, he agrees to accept and serve in that position.
2. TERM. The term of employment under this Employment
Agreement will be for a period of thirty six (36) consecutive months
from the date hereof, unless sooner terminated as hereinafter
provided.
3. COMPENSATION. So long as the Executive is employed by
the Company pursuant to this Employment Agreement, the Executive
will be entitled to the following compensation and fringe benefits:
3.1. SALARY. For all services rendered by the Executive
pursuant to this Employment Agreement, the Company will pay to
the Executive, an annual salary of $126,200, less any
compensation received by reason of Executive's participation
as a director of the Company or any of its subsidiaries or
affiliates. Such salary will be payable in equal bi-monthly
installments or at such other frequency as will be consistent
with the Company's normal payroll practices with other
employees in effect from time to time. Payments of salary
will be subject to normal employee withholding and other tax
deductions. The parties acknowledge that the annual salary is
a base salary and annual consideration shall be given to
granting Executive salary increases based on factors such as:
inflation, increase in the scope of duties and extraordinary
achievements.
3.2. FRINGE BENEFITS. The Executive will be entitled to
participate in the fringe benefit programs of the Company, in
existence from time to time (including any pension plan, bonus
program, group life and medical insurance programs and medical
expense reimbursement plans), as determined by the Board, and
as are made available to employees of like status to the
Executive on a comparable basis, and according to the rules
and regulations of such programs adopted by the Company from
time to time.
3.3. EXPENSES. Upon presentation of supporting
documentation as may reasonably be satisfactory to the
Company, the Company will pay or reimburse the Executive for
all reasonable travel, entertainment, and other business
expenses actually incurred by the Executive during the term of
this Employment Agreement in the performance of his services
and duties; provided, however, that the type and amount of
expenses will be consistent with expense reimbursement
policies adopted from time to time, formally or informally by
the Company. Any expense beyond such authorization must be
specifically authorized in advance by the president. In the
event of a dispute between the Company and the Executive as to
the nature of such expenses, the decision of the president
will be binding. If an income tax deduction (Federal, state
or local) is disallowed to the Company for any part of such
expense payments, the Executive agrees to repay the Company
the amount of the expense reimbursement to the Executive paid
by the Company upon demand by the Company.
4. TERMINATION. The Executive's employment with the Company
may be terminated and this Employment Agreement canceled upon the
following terms and conditions.
4.1. TERMINATION FOR CAUSE. During the terms of this
Employment Agreement, the Executive's employment may be
terminated immediately, with or without written or oral
notice, by the Company for "Cause" (as hereinafter defined).
If the Executive's employment with the Company is terminated
for "Cause" all compensation described in paragraphs 3.1
through 3.3 of this Employment Agreement will terminate as of
the date of such termination of employment. Termination for
"Cause" is limited to the following grounds: (i)
misappropriation of funds, embezzlement, or willful and
material damage of or to any material property of the Company,
or defrauding or attempting to defraud the Company; (ii)
conviction of any crime (whether or not involving the Company)
which constitutes a felony in the jurisdiction involved; (iii)
malfeasance or non-feasance in the performance by the
Executive of his duties hereunder; (iv) failure or refusal by
the Executive to perform his duties in the best interests of
the Company and in accordance with the directions given by the
Board, the chairman of the board or the president of the
Company; or (v) a material breach by the Executive, in the
sole opinion of the Company, or any of the provisions of this
Employment Agreement; which breach continues after notice of
the breach, either oral or written, from the Company to the
Executive. Upon termination of the Executive for "Cause", the
Company will pay the Executive's salary and other benefits,
including reimburse the Executive for authorized expenses
incurred, through the date of termination of the Executive's
employment. The Executive acknowledges and agrees that the
foregoing will be the Company's only obligations and total
liability to the Executive for termination of the Executive's
employment for "Cause".
4.2. TERMINATION WITHOUT CAUSE. The Company
may terminate the Executive without cause at any time by
providing the Executive thirty (30) days prior written
notice of termination. Upon termination without cause, the
Company will continue to pay the Executive compensation in the
amount equal to the Executive's then salary for the remainder
of the term of this Employment Agreement as if Executive
had not been terminated, plus any bonuses which the
Executive would have been entitled to had the Executive not
been terminated, and reimburse the Executive for
authorized expenses incurred through the date of termination
of the Executive's employment. The Company will also, if
required by law, allow the Executive to continue any medical
and hospitalization plan and/or insurance at the
Executive's sole cost and responsibility. The Executive
acknowledges and agrees that the foregoing will be the
Company's only obligations and total liability to the
Executive for termination of the Executive's employment
without cause.
4.3. VOLUNTARY RESIGNATION. The Executive may
voluntarily resign prior to the expiration of this Employment
Agreement, upon providing the Company with at least fifteen
(15) days' prior written notice. Upon the effective date of
the Executive's resignation, the Company will pay the
Executive's salary and other benefits, including reimbursement
for authorized expenses incurred, through the effective date
of the Executive's resignation. The Company will also, if
required by law, allow the Executive to continue any medical
and hospitalization plans and/or insurance at the Executive's
sole cost and responsibility. The Executive acknowledges and
agrees that the foregoing will be the Company's only
obligations and total liability to the Executive for
termination of the Executive's employment due to the
Executive's voluntary resignation.
4.4. TERMINATION UPON DEATH. The Executive's
employment will be terminated automatically upon the
Executive's death. As the result of the Executive's death, the
Company will pay to the Executive's estate a death benefit
equal to the Executive's salary through the end of the month
in which the Executive's death occurs, plus reimbursement
for authorized expenses incurred by the Executive prior to his
death. The Executive acknowledges and agrees that the foregoing
will be the Company's only obligations and total liability
to the Executive for termination of the Executive's employment
due to the Executive's death.
4.5. TERMINATION UPON DISABILITY. The Company may,
upon 30 days prior written notice to the Executive, terminate
the Executive's employment effective as of the date specified
in the notice, if, due to any medical or psychological
disability the Executive is not able to perform his customary
services and duties for 30 continuous business days or
45 noncontinuous business days within a 90-day period
(the "Disability Period"). The Company may retain a physician
of its choice to examine the Executive and to render a
medical opinion to the Company as to the Executive's
medical or psychological disability. The Executive
consents to examination by such physician, and further agrees
that the opinion of such physician will be binding upon
both the Executive and the Company. Upon termination
of the Executive's employment due to disability, the Company
will pay to the Executive an amount equivalent to three months
salary as termination compensation, and if required by law,
allow the Executive to continue any medical or
hospitalization plan and/or insurance at the Executive's
sole cost andresponsibility. The Executive will receive full
compensation for any period of temporary illness or
disability. The Executive acknowledges and agrees that the
foregoing will be the Company's only obligations and total
liability to the Executive for termination of the Executive's
employment due to disability.
4.6. RETURN OF MATERIALS. Upon the termination of the
Executive's employment, irrespective of the time, manner or
reason of termination, the Executive will immediately
surrender and deliver to the Company all originals and all
copies of reproductions of books, records, summaries, lists,
computer software, and other tangible data and information,
and every form and every kind, relating to the Confidential
Information (as defined in Section 5 of this Employment
Agreement) and all other property belonging to the Company.
The prior and full performance by the Executive of the
provisions of this Section 4.6 is a condition to the payment
by the Company to the Executive of any compensation set forth
in this Employment Agreement.
5. NON-DISCLOSURE OF CONFIDENTIAL AND PROPRIETARY
INFORMATION. The Executive may not during the term of his
employment with the Company or any time thereafter, directly or
indirectly, copy, use, or disclose to any person or business any
"Confidential Information" (as defined below) except for the
benefit of the Company in connection with the performance of his
duties and in accordance with any guidelines or policies which
might be adopted from time to time by the Company. In addition,
the Executive will use his best efforts to cause all persons over
whom he has supervisory control to use, maintain and protect all
"Confidential Information" in a confidential manner and as a
valuable asset of the Company. As used in this Employment
Agreement, "Confidential Information" means trade secrets and other
proprietary information and data concerning the business of the
Company, its subsidiaries and affiliates (the "FCC Companies"),
regardless of whether protectable by law, including, but not
limited to, information concerning the names and addresses of any
of the FCC Companies' policyholders and prospective policyholders,
any of the FCC Companies' operation manuals, accounts, the names of
employees and agents and their respective duties, the names of
reinsurance providers, financial data, pricing lists and policies,
profits or losses, product or service development and all such
similar information, all of which would not readily be available to
the Executive except for the Executive's employment relationship
with the Company. The Executive acknowledges that such information
and similar data is not generally known to the trade, is of a
confidential nature, is an asset of the Company, and to preserve
the Company's good will, must be kept strictly confidential and
used only in the conduct of its business. The provisions of this
Section will survive the termination of this Employment Agreement
for any reason.
6. INTERFERENCE WITH EXTERNAL BUSINESS RELATIONSHIPS. The
Executive agrees that, as a result of the Confidential Information,
he will receive, come in contact with, create, or have access to
during the term of his employment with the Company, and the
Company's customer relationships he will be exposed to, the
Executive will not, directly or indirectly (through any corporation
which he is a director, officer, consultant, agent or other
relationship) during the term of his employment service, perform or
otherwise manage insurance companies or insurance related
businesses.
7. INTERFERENCE WITH INTERNAL BUSINESS RELATIONSHIPS. The
Executive agrees that, as a result of the Confidential Information
he will receive, come into contact with, create or have access to
during the term of his employment with the Company, and the
Company's employee and independent contractor relationships he will
be exposed to, the Executive will not, directly or indirectly
(through any corporation in which he is a director, officer,
consultant, agent, or other relationship), during the term of his
employment interfere with the Company's relationship with, or
endeavor to entice away from the Company or any of the FCC
Companies or, directly or indirectly, contact any person, firm or
entity employed by, retained by or associated with the Company or
any of the FCC Companies, to induce any such person, firm or
entity, to leave the service of the Company or any of the FCC
Companies and provide the same or substantially the same work as
performed for the Company or any of the FCC Companies to the
Executive or to any other person, firm, or entity.
8. INJUNCTIVE RELIEF. The Executive consents and agrees
that if he violates any of the provisions of Section 5 through 7
hereof, the Company would sustain irreparable harm and, therefore
in addition to any other remedy at law or in equity the Company may
have under this Employment Agreement, the Company will be entitled
to apply to any court of competent jurisdiction for an injunction
restraining the Executive from committing or continuing any such
violation of any provisions of Section 5 through 7 of this
Employment Agreement.
9. MISCELLANEOUS.
9.1 NOTICES. All notices and other communications
required or desire to be given to or in connection with this
Employment Agreement will be in writing and will be deemed
effectively given upon personal delivery three days after
deposit in the United States mail sent by certified mail,
return receipt requested, postage prepaid, or one day after
delivery to an overnight delivery service which retains
records of deliveries, to the parties at the addresses set
forth below or such other address as either party may
designate in like manner.
A. If to the Company:
First Commonwealth Corporation
5250 South Sixth Street
Springfield, Illinois 62703
B. If to the Executive:
Mr. George E. Francis
3201 Eagle Watch Drive
Springfield, Illinois 62707
9.2 GOVERNING LAW. This Employment Agreement will be
governed and construed in accordance with the laws of the
State of Illinois.
9.3 SEVERABILITY. If any provision contained in this
Employment Agreement is held to be invalid or unenforceable by
a court of competent jurisdiction, such provision will be
severed herefrom in such invalidity or unenforceability will
not effect any other provision of this Employment Agreement,
the balance of which will remain in and have its intended full
force and effect; provided, however, if such invalid or
unenforceable provisions may be modified so is to be valid and
enforceable as a matter of law, such provision will be deemed
to have been modified so as to be valid and enforceable to the
maximum extent committed by law.
9.4 MODIFICATION. This Employment Agreement may not be
changed, modified, discharged, or terminated except by a
writing signed by all the parties hereto.
9.5 FULLING BINDING. This Employment Agreement will be
binding on and inure to the benefit of the parties hereto and
their respective successors, assigns and personal
representative; provided, however, that this Employment
Agreement is assignable by the Company with the prior consent,
either oral or written, of the Executive.
9.6 HEADINGS. The numbers, headings, titles, or
designations to the various sections are not a part of this
Employment Agreement, but are for convenience of reference
only, and do not and will not be used to define, limit or
construe the contents of this Employment Agreement or any part
thereof.
9.7 WAIVER. By execution of this Employment Agreement,
the Executive hereby waives and relinquishes any and all
rights, benefits and entitlements to which he may hereafter
have under any other contract with the Company or any of its
corporate parents, subsidiaries or affiliates prior to the
date hereof; excepting that certain agreement dated April 15,
1993 pertaining to a deferred compensation payment and options
to Purchase stock of UTI.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Employment Agreement on the date first above written.
EXECUTIVE: COMPANY:
First Commonwealth Corporation, a
Virginia corporation.
By: By:
George E. Francis Title:
ATTEST:
By:
Title:
