SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number 0-18540
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. [X].
At March 12, 1999, the Registrant had outstanding 1,391,919 shares of
Common Stock, stated value $.033 per share.
DOCUMENTS INCORPORATED BY REFERENCE: None
Page 1 of 95
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UNITED INCOME, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I 3
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 11
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS 12
PART II 12
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED
SECURITY HOLDERS MATTERS 12
ITEM 6. SELECTED FINANCIAL DATA 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 44
PART III 44
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF UII 44
ITEM 11. EXECUTIVE COMPENSATION UII 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF UII 50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 52
PART IV 55
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 55
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING INFORMATION
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from those projected in forward-looking statements.
Additional information concerning factors that could cause actual results
to differ from those in the forward-looking statements is contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OVERVIEW
United Income, Inc. (the "Registrant") was incorporated in 1987 under the
laws of the State of Ohio to serve as an insurance holding company. The
Registrant and its affiliates (the "Company") have only one significant
industry segment - insurance. The Company's dominant business is
individual life insurance which includes the servicing of existing
insurance business in force, the solicitation of new individual life
insurance, and the acquisition of other companies in the insurance
business.
At December 31, 1998, the affiliates of the Registrant were as depicted on
the following organizational chart:
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1998
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
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The holding companies within the group, UTI, UII, UTG and FCC, are all life
insurance holding companies. These companies became members of the same
affiliated group through a history of acquisitions in which life insurance
companies were involved. The focus of the holding companies is the
acquisition of other companies in the insurance business and management of
the insurance subsidiaries. The companies have no activities outside the
life insurance focus.
The insurance companies of the group, UG, USA, APPL and ABE, all operate in
the individual life insurance business. The primary focus of these
companies has been the servicing of existing insurance business in force
and the solicitation of new insurance business.
HISTORY
United Income, Inc. ("UII"), was incorporated on November 2, 1987, as an
Ohio corporation. Between March 1988 and August 1990, UII raised a total
of approximately $15,000,000 in an intrastate public offering in Ohio.
During 1990, UII formed a life insurance subsidiary and began selling life
insurance products.
On February 20, 1992, UII and its affiliate, UTI, formed a joint venture,
United Trust Group, Inc., ("UTG"). On June 16, 1992, UII contributed $7.6
million in cash and 100% of the common stock of its wholly owned life
insurance subsidiary. UTI contributed $2.7 million in cash, an $840,000
promissory note and 100% of the common stock of its wholly owned life
insurance subsidiary. After the contributions of cash, subsidiaries, and
the note, UII owns 47% and UTI owns 53% of UTG.
On June 16, 1992, UTG acquired 67% of the outstanding common stock of the
now dissolved Commonwealth Industries Corporation, ("CIC") for a purchase
price of $15,567,000. Following the acquisition, UTG controlled eleven
life insurance subsidiaries. The Company has taken several steps to
streamline and simplify the corporate structure following the acquisitions.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders. Neither UTI nor UII have
any other significant holdings or business dealings. The Board of
Directors of each company thus concluded a merger of the two companies
would be in the best interests of the shareholders. The merger will result
in certain cost savings, primarily related to costs associated with
maintaining a corporation in good standing in the states in which it
transacts business. Additionally, the merger will further simplify the
group's holding company system making it easier to understand for outside
parties, including current investors, potential investors and lenders. A
vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the second quarter of 1999.
On November 20, 1998, First Southern Funding, LLC., a Kentucky corporation,
("FSF") and affiliates acquired 929,904 shares of common stock of United
Trust, Inc., an Illinois corporation, ("UTI") from UTI and certain UTI
shareholders. As consideration for the shares, FSF paid UTI $10,999,995
and certain shareholders of UTI $999,990 in cash.
UTI has granted, for nominal consideration, an irrevocable, exclusive
option to FSF to purchase up to 1,450,000 shares of UTI common stock for a
purchase price in cash equal to $15.00 per share, with such option to
expire on July 1, 2001. UTI has also caused three persons designated by
FSF to be appointed, as part of the maximum of 11, to the Board of
Directors of UTI.
Following the above transactions, and together with shares of UTI acquired
in the market, FSF and affiliates own 1,073,577 shares of UTI common stock
(43.1%) becoming the largest shareholder of UTI. Through the shares
acquired and options owned, FSF can ultimately own over 51% of UTI. Mr.
Jesse T. Correll is the majority shareholder of FSF, which is an affiliate
of First Southern Bancorp, Inc., a bank holding company that owns a bank
that operates out of 14 locations in central Kentucky.
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This transaction provides the Company with increased opportunities. The
additional capitalization has enabled UTI to significantly reduce its
outside debt and has enhanced its ability to make future acquisitions
through increased borrowing power and financial strength. Many synergies
exist between the Company and First Southern Funding and its affiliates.
The potential for cross selling of services to each customer base is
currently being explored. Legislation is currently pending that would
eliminate many of the barriers currently existing between banks and
insurance companies. Such alliances are already being formed within the
two industries. Management believes this transaction positions the Company
for continued growth and competitiveness into the future as the financial
industry changes.
PRODUCTS
The Company's portfolio consists of two universal life insurance products.
Universal life insurance is a form of permanent life insurance that is
characterized by its flexible premiums, flexible face amounts, and
unbundled pricing factors. The primary universal life insurance product is
referred to as the "Century 2000". This product was introduced to the
marketing force in 1993 and has become the cornerstone of current
marketing. This product has a minimum face amount of $25,000 and currently
credits 5.5% interest with a guaranteed rate of 4.5% in the first 20 years
and 3% in years 21 and greater. The policy values are subject to a $4.50
monthly policy fee, an administrative load and a premium load of 6.5% in
all years. The premium and administrative loads are a general expense
charge, which is added to a policy's net premium to cover the insurer's
cost of doing business. A premium load is assessed upon the receipt of a
premium payment. An administrative load is a monthly maintenance charge.
The administrative load and surrender charge are based on the issue age,
sex and rating class of the policy. A surrender charge is effective for
the first 14 policy years. In general, the surrender charge is very high
in the early years and then declines to zero at the end of 14 years.
Policy loans are available at 7% interest in advance. The policy's
accumulated fund will be credited the guaranteed interest rate in relation
to the amount of the policy loan.
The second universal life product referred to as the "UL90A", has a minimum
face amount of $25,000. The administrative load is based on the issue age,
sex and rating class of the policy. Policy fees vary from $1 per month in
the first year to $4 per month in the second and third years and $3 per
month each year thereafter. The UL90A currently credits 5% interest with a
4.5% guaranteed interest rate. Partial withdrawals, subject to a remaining
minimum $500 cash surrender value and a $25 fee, are allowed once a year
after the first duration. Policy loans are available at 7% interest in
advance. The policy's accumulated fund will be credited the guaranteed
interest rate in relation to the amount of the policy loan. Surrender
charges are based on a percentage of target premium starting at 120% for
years 1-5 then grading downward to zero in year 15. This policy contains a
guaranteed interest credit bonus for the long-term policyholder. From
years 10 through 20, additional interest bonuses are earned with a total in
the twentieth year of 1.375%. The bonus is credited from the policy issue
date and is contractually guaranteed.
The Company's actual experience for earned interest, persistency and
mortality vary from the assumptions applied to pricing and for determining
premiums. Accordingly, differences between the Company's actual experience
and those assumptions applied may impact the profitability of the Company.
The minimum interest spread between earned and credited rates is 1% on the
"Century 2000" universal life insurance product. The Company monitors
investment yields, and when necessary adjusts credited interest rates on
its insurance products to preserve targeted interest spreads. Credited
rates are reviewed and established by the Board of Directors of the
respective life insurance subsidiaries.
The premium rates are competitive with other insurers doing business in the
states in which the Company is marketing its products.
The Company markets other products, none of which is significant to
operations. The Company has a variety of policies in force different from
those which are currently being marketed. Interest sensitive products
including universal life and excess interest whole life ("fixed premium
UL") account for 50% of the insurance in force. Approximately 34% of the
insurance in force is participating business, which represents policies
under which the policyowner shares in the insurance companies statutory
divisible surplus. The Company's average persistency rate for its policies
in force for 1998 and 1997 has been 89.9% and 89.4%, respectively. The
Company does not anticipate any material fluctuations in these rates in the
future that may result from competition.
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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 1998. The Company's sales agents do not
have the power to bind the Company.
Marketing is based on a referral network of community leaders and
shareholders of UII and UTI. Recruiting of sales agents is also based on
the same referral network. New sales are marketed by UG and USA through
their agency forces using prepared presentation materials and personal
computer illustrations when appropriate. Current marketing efforts are
primarily focused on the Midwest region.
USA is licensed in Illinois, Indiana and Ohio. During 1998, Ohio accounted
for 96% of USA's direct premiums collected.
ABE is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1998, Illinois and Indiana accounted for 45% and 33%,
respectively of ABE's direct premiums collected.
APPL is licensed in Alabama, Arizona, Arkansas, Colorado, Georgia,
Illinois, Indiana, Kansas, Kentucky, Louisiana, Missouri, Montana,
Nebraska, Ohio, Oklahoma, Pennsylvania, Tennessee, Utah, Virginia, West
Virginia and Wyoming. During 1998, West Virginia accounted for 96% of
APPL's direct premiums collected.
UG is licensed in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma,
Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin.
During 1998, Illinois accounted for 32%, and Ohio accounted for 12% of
direct premiums collected. No other state accounted for more than 7% of
direct premiums collected in 1998.
In 1998, $35,899,905 of total direct premium was collected by USA, ABE,
APPL and UG. Ohio accounted for 32%, Illinois accounted for 21%, and West
Virginia accounted for 10% of total direct premiums collected.
New business production has decreased 43% from 1996 to 1997 and 39% from
1997 to 1998. Several factors have had a significant impact on new
business production. Over the last two years there has been the
possibility of a change in control of UTI. In September of 1996, an
agreement was reached effecting a change in control of UTI to an unrelated
party. The transaction did not materialize. On November 20, 1998, UTI
closed on a transaction with First Southern Funding, LLC in which First
Southern became the largest shareholder of UTI. These events, and the
uncertainty surrounding each event, have hurt the insurance companies'
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.
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The Company is currently in a position where it must increase its new
business writings or look at measures to reduce costs associated with new
business production to a level more in line with the current level of
production. In late 1998, A.M. Best Company, a leading insurance industry
rating agency, increased two levels its rating assigned to UG, the
Company's largest insurance subsidiary, from a C++ to a B. This rating
change should aid in the agents selling ability although to what extent is
currently unknown.
UNDERWRITING
The underwriting procedures of the insurance subsidiaries are established
by management. Insurance policies are issued by the Company based upon
underwriting practices established for each market in which the Company
operates. Most policies are individually underwritten. Applications for
insurance are reviewed to determine additional information required to make
an underwriting decision, which depends on the amount of insurance applied
for and the applicant's age and medical history. Additional information
may include inspection reports, medical examinations, and statements from
doctors who have treated the applicant in the past and, where indicated,
special medical tests. After reviewing the information collected, the
Company either issues the policy as applied for or with an extra premium
charge because of unfavorable factors or rejects the application.
Substandard risks may be referred to reinsurers for full or partial
reinsurance of the substandard risk.
The Company's insurance subsidiaries require blood samples to be drawn with
individual insurance applications for coverage over $45,000 (age 46 and
above) or $95,000 (ages 16-45). Blood samples are tested for a wide range
of chemical values and are screened for antibodies to the HIV virus.
Applications also contain questions permitted by law regarding the HIV
virus which must be answered by the proposed insureds.
RESERVES
The applicable insurance laws under which the insurance subsidiaries
operate require that each insurance company report policy reserves as
liabilities to meet future obligations on the policies in force. These
reserves are the amounts which, with the additional premiums to be received
and interest thereon compounded annually at certain assumed rates, are
calculated in accordance with applicable law to be sufficient to meet the
various policy and contract obligations as they mature. These laws specify
that the reserves shall not be less than reserves calculated using certain
mortality tables and interest rates.
The liabilities for traditional life insurance and accident and health
insurance policy benefits are computed using a net level method. These
liabilities include assumptions as to investment yields, mortality,
withdrawals, and other assumptions based on the life insurance
subsidiaries' experience adjusted to reflect anticipated trends and to
include provisions for possible unfavorable deviations. The Company makes
these assumptions at the time the contract is issued or, in the case of
contracts acquired by purchase, at the purchase date. Benefit reserves for
traditional life insurance policies include certain deferred profits on
limited-payment policies that are being recognized in income over the
policy term. Policy benefit claims are charged to expense in the period
that the claims are incurred. Current mortality rate assumptions are based
on 1975-80 select and ultimate tables. Withdrawal rate assumptions are
based upon Linton B or Linton C, which are industry standard actuarial
tables for forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life
insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges.
Policy benefits and claims that are charged to expense include benefit
claims in excess of related policy account balances. Interest crediting
rates for universal life and interest sensitive products range from 4.5% to
5.5% in 1998 and 5.0% to 6.0% in 1997 and 1996.
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REINSURANCE
As is customary in the insurance industry, the insurance affiliates cede
insurance to other insurance companies under reinsurance agreements.
Reinsurance agreements are intended to limit a life insurer's maximum loss
on a large or unusually hazardous risk or to obtain a greater
diversification of risk. The ceding insurance company remains primarily
liable with respect to ceded insurance should any reinsurer be unable to
meet the obligations assumed by it. However, it is the practice of
insurers to reduce their exposure to loss to the extent that they have been
reinsured with other insurance companies. The Company sets a limit on the
amount of insurance retained on the life of any one person. The Company
will not retain more than $125,000, including accidental death benefits, on
any one life. At December 31, 1998, the Company had insurance in force of
$3.536 billion of which approximately $924 million was ceded to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The
Company believes the assuming companies are able to honor all contractual
commitments, based on the Company's periodic reviews of their financial
statements, insurance industry reports and reports filed with state
insurance departments.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover all new business of the Company.
The agreements are a yearly renewable term ("YRT") treaty where the Company
cedes amounts above its retention limit of $100,000 with a minimum cession
of $25,000.
One of the Company's insurance subsidiaries (UG) entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best assigned FILIC a Financial Performance Rating (FPR) of 7 (Strong)
on a scale of 1 to 9. A.M. Best assigned a Best's Rating of A++ (Superior)
to The Guardian Life Insurance Company of America ("Guardian"), parent of
FILIC, based on the consolidated financial condition and operating
performance of the company and its life/health subsidiaries. During 1997,
FILIC changed its name to Park Avenue Life Insurance Company ("PALIC").
The agreement with PALIC accounts for approximately 65% of the reinsurance
receivables of UTG as of December 31, 1998.
INVESTMENTS
At December 31, 1998, substantially all of the assets of UII represent
investments in or receivables from affiliates. UII does own two mortgage
loans as of December 31, 1998. The mortgage loans are in good standing.
Interest income was derived from mortgage loans and cash and cash
equivalents.
COMPETITION
The insurance business is a highly competitive industry and there are a
number of other companies, both stock and mutual, doing business in areas
where the Company operates. Many of these competing insurers are larger,
have more diversified lines of insurance coverage, have substantially
greater financial resources and have a greater number of agents. Other
significant competitive factors include policyholder benefits, service to
policyholders, and premium rates.
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.
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GOVERNMENT REGULATION
UII's insurance affiliates are assessed contributions by life and health
guaranty associations in almost all states to indemnify policyholders of
failed companies. In several states the company may reduce premium taxes
paid to recover a portion of assessments paid to the states' guaranty fund
association. This right of "offset" may come under review by the various
states, and the company cannot predict whether and to what extent
legislative initiatives may affect this right to offset. Also, some state
guaranty associations have adjusted the basis by which they assess the cost
of insolvencies to individual companies. The Company believes that its
reserve for future guaranty fund assessments is sufficient to provide for
assessments related to known insolvencies. This reserve is based upon
management's current expectation of the availability of this right of
offset, known insolvencies and state guaranty fund assessment bases.
However, changes in the basis whereby assessments are charged to individual
companies and changes in the availability of the right to offset
assessments against premium tax payments could materially affect the
company's results.
Currently, the Company's insurance subsidiaries are subject to government
regulation in each of the states in which they conduct business. Such
regulation is vested in state agencies having broad administrative power
dealing with all aspects of the insurance business, including the power to:
(i) grant and revoke licenses to transact business; (ii) regulate and
supervise trade practices and market conduct; (iii) establish guaranty
associations; (iv) license agents; (v) approve policy forms; (vi)
approve premium rates for some lines of business; (vii) establish reserve
requirements; (viii) prescribe the form and content of required financial
statements and reports; (ix) determine the reasonableness and adequacy of
statutory capital and surplus; and (x) regulate the type and amount of
permitted investments. Insurance regulation is concerned primarily with
the protection of policyholders. The Company cannot predict the impact of
any future proposals, regulations or market conduct investigations. The
Company's insurance subsidiaries, USA, UG, APPL and ABE are domiciled in
the states of Ohio, Ohio, West Virginia and Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners ("NAIC"). The NAIC is an association whose membership
consists of the insurance commissioners or their designees of the various
states. The NAIC has no direct regulatory authority over insurance
companies. However, its primary purpose is to provide a more consistent
method of regulation and reporting from state to state. This is
accomplished through the issuance of model regulations, which can be
adopted by individual states unmodified, modified to meet the state's own
needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled by
other corporations licensed to transact business within their respective
jurisdictions. The insurance subsidiaries are subject to such legislation
and registered as controlled insurers in those jurisdictions in which such
registration is required. Statutes vary from state to state but typically
require periodic disclosure, concerning the corporation, that controls the
registered insurers and all subsidiaries of such corporation. In addition,
prior notice to, or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 6 in the Notes to the Financial Statements), and
payment of dividends (see Note 2 in the Notes to the Financial Statements)
in excess of specified amounts by the insurance subsidiary, within the
holding company system, are required.
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.
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At year-end 1998, the insurance companies had one ratio outside the normal
range. The ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last three years. A primary cause for
the decrease in premium revenues is related to the potential change in
control of UTI over the last two years to two different parties. During
September of 1996, it was announced that control of UTI would pass to an
unrelated party, but the transaction did not materialize. In February
1998, an announcement was made regarding negotiations with a different
unrelated party, First Southern Funding LLC, for the change in control of
UTI. In November 1998, the change in control with this second party was
completed. Please refer to the Notes to the Financial Statements for
additional information. The possible changes and resulting uncertainties
have hurt the insurance companies' ability to recruit and maintain sales
agents. The industry has experienced a downward trend in the total number
of agents who sell insurance products, and competition for the top sales
producers has intensified.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. The
risk-based capital formula measures the adequacy of statutory capital and
surplus in relation to investment and insurance risks such as asset
quality, mortality and morbidity, asset and liability matching and other
business factors. The RBC formula is used by state insurance regulators as
an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized.
In addition, the formula defines new minimum capital standards that will
supplement the current system of low fixed minimum capital and surplus
requirements on a state-by-state basis. Regulatory compliance is
determined by a ratio of the insurance company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level RBC, as
defined by the NAIC. Insurance companies below specific trigger points or
ratios are classified within certain levels, each of which requires
specific corrective action.
The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1998, each of the insurance subsidiaries has a Ratio that
is in excess of 4, which is 400% of the authorized control level;
accordingly, the insurance subsidiaries meet the RBC requirements.
The NAIC, in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC proposed changes
in the regulations governing insurance company investments and holding
company investments in subsidiaries and affiliates which were adopted by
the NAIC as model laws in 1996. The Company does not presently anticipate
any material adverse change in its business as a result of these changes.
Legislative and regulatory initiatives regarding changes in the regulation
of banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on the Company by altering the competitive
environment for its products. The outcome and timing of any such changes
cannot be anticipated at this time, but the Company will continue to
monitor developments in order to respond to any opportunities or increased
competition that may occur.
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The Clinton Administration has recently proposed tax changes that would
affect the insurance industry. One proposal is to require recapture of
untaxed profits on policyholder surplus accounts. Between 1959 and 1983,
stock life insurance companies deferred tax on a portion of their profits.
These untaxed profits were added to a policyholders surplus account
("PSA"). In 1984, Congress precluded life insurance companies from
continuing to defer taxes on any future profits. The Clinton
Administration argues that there is no continuing justification for
permitting stock life insurance companies to defer tax on profits that were
earned between 1959 and 1983. Accordingly, the stock life companies would
be required to include in their gross income over ten years their PSA
balances. The second proposal modifies rules for capitalizing policy
acquisition costs on the grounds that life insurance companies generally
only capitalize a fraction of their actual policy acquisition costs. This
modification would increase the current capitalization percentages. Either
of these changes would be onerous to the Company and to the insurance
industry as a whole. The outcome and timing of these proposals cannot be
anticipated at this time.
The NAIC adopted the Life Illustration Model Regulation. Many states have
adopted the regulation effective January 1, 1997. This regulation requires
products which contain non-guaranteed elements, such as universal life and
interest sensitive life, to comply with certain actuarially established
tests. These tests are intended to target future performance and
profitability of a product under various scenarios. The regulation does
not prevent a company from selling a product that does not meet the various
tests. The only implication is the way in which the product is marketed to
the consumer. A product that does not pass the tests uses guaranteed
assumptions rather than current assumptions in presenting future product
performance to the consumer. The Company conducts an ongoing thorough
review of its sales and marketing process and continues to emphasize its
compliance efforts.
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
Project results were recently approved by the NAIC with an implementation
date of January 1, 2001. Individual states in which the Company does
business must implement these new rules for them to become effective.
Specific recommendations have been set forth in papers issued by the NAIC.
The NAIC continues to modify and amend these papers. The Company is
monitoring the process, and is not aware of any new requirements that would
result in a material financial impact on the Company's financial position
or results of operations. The Company will continue to monitor this issue
as changes and new proposals are made.
EMPLOYEES
UII has no employees of its own. There are approximately 90 persons who
are employed by 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 $18,000 through the remaining
term of the lease. The lease contains no renewal or purchase option
clause. The leased space cannot be sublet without written approval of
lessor. Rent expense for 1998, 1997 and 1996 was approximately $36,000,
$65,000 and $61,000, respectively.
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 is of the opinion that the settlement of those actions will not
have a material adverse effect on the Company's financial position or
results of operations.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDERS
MATTERS
As of March 12, 1999, there was no established public trading market for
the Company's common stock. The Company's common stock is not listed on
any exchange.
The Company has no current plans to pay dividends on its common stock and
intends to retain all earnings for investment in and growth of the
Company's business. The payment of future dividends, if any, will be
determined by the Board of Directors in light of existing conditions,
including the Company's earnings, financial condition, business conditions
and other factors deemed relevant by the Board of Directors. See Note 2 in
the accompanying 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 12, 1999 is 6,453.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1998 1997 1996 1995 1994
<TABLE>
<S> <C> <C> <C> <C> <C>
Net operating
revenues $ 1,035 $ 1,186 $ 1,791 $ 2,234 $ 1,667
Operating costs
and expenses $ 667 $ 909 $ 1,414 $ 1,976 $ 1,627
Income taxes $ 0 $ 0 $ 0 $ 0 $ 0
Equity in loss
of investees $ (421) $ (357) $ (696) $(2,406)$ (384)
Net loss $ (53) $ (79) $ (319) $(2,148)$ (344)
Net loss
per common share$(0.04) $(0.06) $(0.23) $ (1.54)$ (0.25)
Cash dividend
declared
per common
share $ 0 $ 0 $ 0 $ 0 $ 0
Total assets $12,646 $12,840 $12,881 $13,386 $15,414
Long-term
obligations $ 902 $ 902 $ 902 $ 902 $ 902
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
At December 31, 1998 and 1997, the balance sheet reflects the assets and
liabilities of UII and its 47% equity interest in UTG. The statements of
operations and statements of cash flows presented for 1998, 1997 and 1996
include the operating results of UII.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from any such statement due to the following important
factors, among other risks and uncertainties inherent in the company's
business:
1. Prevailing interest rate levels, which may affect the ability of the
company to sell its products, the market value of the company's
investments and the lapse ratio of the company's policies,
notwithstanding product design features intended to enhance
persistency of the company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the company's products.
4. Other factors affecting the performance of the company, including, but
not limited to, market conduct claims, insurance industry
insolvencies, stock market performance, and investment performance.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
(A) REVENUES
UII's primary source of revenues is derived from service fee income, which
is provided via a service agreement with USA. The agreement was originally
established upon the formation of USA, which was a 100% owned subsidiary of
UII. Changes in the affiliate structure have resulted in USA no longer
being a direct subsidiary of UII, though still a member of the same
affiliated group. The original service agreement has remained in place
without modification. The fees are based on a percentage of premium
revenue of USA. The percentages are applied to both first year and renewal
premiums at different rates. Under the current structure, FCC pays all
general operating expenses of the affiliated group. FCC then receives
management and service fees from the various affiliates, including UTI and
UII. Pursuant to the terms of the agreement, USA pays UII monthly fees
equal to 22% of the amount of collected first year statutory premiums, 20%
in second year and 6% of the renewal premiums in years three and after.
The Company recognized service agreement income of $835,345, $989,295 and
$1,567,891 in 1998, 1997 and 1996, respectively, based on statutory
collected premiums in USA of $8,443,463, $10,300,332 and $13,298,597 in
1998, 1997 and 1996, respectively. First year premium revenues of USA
decreased 39% in 1998 from 1997. This decline is primarily related to the
potential change in control of UTI over the last two years to two different
parties. The possible changes and resulting uncertainties have hurt USA's
ability to recruit and maintain sales agents. In November 1998, the change
in control transaction was completed with First Southern Funding LLC.
The Company holds $1,364,100 of notes receivable from affiliates. The
notes receivable from affiliates consists of four separate notes. The
$700,000 note bears interest at the rate of 1% above the variable per annum
rate of interest most recently published by the Wall Street Journal as the
prime rate. Interest is payable quarterly with principal due at maturity
on May 8, 2006. In February 1996, FCC borrowed an additional $150,000 from
14
<PAGE>
UII to provide additional cash for liquidity. The note bears interest at
the rate of 1% over prime as published in the Wall Street Journal, with
interest payments due quarterly and principal due upon maturity of the note
on June 1, 1999. The remaining $14,100 are 20 year notes of UTG with
interest at 8.5% payable semi-annually. In December 1998, FCC borrowed an
additional $500,000 from UII to further reduce outside debt. The note
bears interest at the rate of 7.5%, with interest payments due quarterly
and principal due upon maturity of the note on March 31, 2004. At current
interest levels, the notes will generate approximately $122,000 in interest
earnings annually.
(B) EXPENSES
The Company has a sub-contract service agreement with United Trust, Inc.
("UTI") for certain administrative services. Through its facilities and
personnel, UTI performs such services as may be mutually agreed upon
between the parties. The fees are based on 60% of the fees paid to UII by
USA. The Company has incurred $501,207, $743,577 and $1,240,735 in
service fee expense in 1998, 1997, and 1996, respectively.
Interest expense of $85,155, $85,155 and $84,027 was incurred in 1998, 1997
and 1996, respectively. The interest expense is directly attributable to
the convertible debentures. The Debentures bear interest at a variable
rate equal to one percentage point above the prime rate published in the
Wall Street Journal from time to time.
(C) EQUITY IN LOSS OF INVESTEES
Equity in earnings of investees represents UII's 47% share of the net loss
of UTG. Included with this filing as Exhibit 99(d) are audited financial
statements of UTG. Following is a discussion of the results of operations
of UTG:
Revenues of UTG
Premiums and policy fee revenues, net of reinsurance premiums and
policy fees, decreased 8% when comparing 1998 to 1997. The Company
currently writes little new traditional business, consequently,
traditional premiums will decrease as the amount of traditional
business in-force decreases. Collected premiums on universal life and
interest sensitive products is not reflected in premiums and policy
revenues because Generally Accepted Accounting Principles ("GAAP")
requires that premiums collected on these types of products be treated
as deposit liabilities rather than revenue. Unless the Company
acquires a block of in-force business or marketing changes its focus to
traditional business, premium revenue will continue to decline at a
rate consistent with prior experience.
Another cause for the decrease in premium revenues is related to the
uncertainties regarding the pending change in control of UTI over the
last two years to two different parties. During September of 1996, it
was announced that control of UTI would pass to an unrelated party, but
the change in control did not materialize. In February 1998, an
announcement was made regarding negotiations with a different unrelated
party, First Southern Funding LLC, for the change in control of UTI.
In November 1998, the change in control with this second party was
completed. Please refer to the Notes to the Financial Statements for
additional information. The possible changes and resulting
uncertainties have hurt the insurance companies' ability to recruit and
maintain sales agents. Although the transaction has resulted in some
short term negative impacts, management believes the long term
potential to be gained from the increased capitalization and alliance
with a banking group will result in a stronger and more competitive
position in the future.
New business production decreased significantly over the last two
years. New business production decreased 39% or approximately
$2,063,000 when comparing 1998 to 1997. In recent years, the insurance
industry as a whole has experienced a decline in the total number of
agents who sell insurance products, therefore competition has
intensified for top producing sales agents. The relatively small size
of our companies, and the resulting limitations, have made it
challenging to compete in this area. The Company is currently in a
position where it must increase its new business writings or look at
measures to reduce costs associated with new business production to a
level more in line with the current level of production. In late 1998,
15
<PAGE>
A.M. Best Company, a leading insurance industry rating agency,
increased two levels its rating assigned to UG, the Company's largest
insurance subsidiary, from a C++ to a B. This rating change should aid
in the agents selling ability although to what extent is currently
unknown.
A positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained in relation to
the previous year. The Companies' average persistency rate for all
policies in force for 1998 and 1997 has been approximately 89.9% and
89.4%, respectively.
At the March 1998 Board of Directors meeting, the UG and USA Boards
approved a permanent premium reduction on certain of its participating
products in force commonly referred to as the initial contract and the
presidents plan. The premium reduction was generally 20% with 35% used
on initial contract plans of UG with original issue ages less than 56
years old. The dividends were also reduced, the net effect to the
policyholder was a slightly lower net premium. This change becomes
effective with the 1999 policy anniversary and is expected to result in
a $2,000,000 decline in premiums and a comparable reduction in
dividends to policyholders in 1999 as compared to 1998. This action
was taken by the Boards to ensure these policyholders will be protected
in future periods from potential dividend reductions at least to the
extent of the permanent premium reduction amount. By reducing the
required premium payment, it makes replacement activity by other
insurance companies more difficult as ongoing premium payments are
compared from the current policy to a potential replacement policy.
Net investment income increased 1% when comparing 1998 to 1997. The
increase in investment income is the result of a combination of
factors. The Company changed banks during 1997, which provided an
improvement in yield on cash balances. In late 1998, the Company again
transferred most of its cash balances to another bank, First Southern
National Bank, an affiliate of First Southern Funding, LLC. This
transfer resulted in an increase in earning rates on cash balances of
approximately one quarter of one percent (.25%) over those previously
received. During 1998, the Company directed a greater percentage of
its investing activity to mortgage loans. These new loans provide an
investment yield approximately 3% higher or $110,000 more than can be
obtained from quality fixed maturities currently available. During
September and October of 1998, the national prime rate declined three
quarters of one percent (.75%). This decline reduced yields on
investments available in the marketplace in which the Company invests,
primarily fixed maturities. The decline had a more immediate impact on
the earnings rates of the Company's cash and cash equivalents balances.
The overall investment yields for 1998, 1997 and 1996, are 6.69%, 6.71%
and 6.87%, respectively. Cash generated from the sales of universal
life insurance products, has been invested primarily in our fixed
maturity portfolio.
The Company's investments are generally managed to match related
insurance and policyholder liabilities. The comparison of investment
return with insurance or investment product crediting rates establishes
an interest spread. The minimum interest spread between earned and
credited rates is 1% on the "Century 2000" universal life insurance
product, which currently is the Company's primary sales product. The
Company monitors investment yields, and when necessary adjusts credited
interest rates on its insurance products to preserve targeted interest
spreads. It is expected that monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on the insurance policies the Company currently has in
force and will write in the future. At the September 1998 Board of
Directors meeting, the Board lowered crediting rates one half percent
on all products crediting 5.5% or more. This adjustment was in
response to continued declines in interest rates in the market place.
The change affected approximately $60,000,000 of policy reserves and
will result in interest crediting reductions of $300,000 per year.
Policy interest crediting rate changes become effective on an
individual policy basis on the next policy anniversary. Therefore, it
will take a full year from the time the change is determined for the
full impact of such change to be realized.
Realized investment losses were $1,119,000 and $279,000 in 1998 and
1997, respectively. Approximately $440,000 of realized losses in 1998
is due to the sale of real estate. During 1998 the Company re-
evaluated its real estate holdings, especially those properties
acquired through acquisitions of other companies and mortgage loan
foreclosures, and determined it would be in the long term interest of
16
<PAGE>
the Company to dispose of certain of these parcels. Parcels targeted
for sale were generally non-income or low income producing and located
in parts of the country where management has little other reason to
travel to. The disposal of these properties will free up management
time to focus on the properties that have a more viable long-term
benefit to the Company. The Company reduced its non-income producing
investments $1,610,000 during 1998, as a result of these actions. The
Company incurred losses of $339,000 on the foreclosure of three
mortgage loans during the second quarter of 1998. The foreclosed
properties were sold before the end of 1998. As a result of these
foreclosures, management reassessed its remaining mortgage loan
portfolio and determined an allowance of $70,000 was appropriate to
cover potential future losses in the portfolio. The Company realized a
loss of $88,000 on the investment in John Alden Financial Corporation
common stock. Under the terms of an acquisition agreement beween
Fortis, Inc. and John Alden all outstanding common shares of John Alden
were acquired. The Company had other gains and losses during the
period that comprised the remaining amount reported but were immaterial
on an individual basis.
Expenses of UTG
Life benefits, net of reinsurance benefits and claims, decreased 5% in
1998 as compared to 1997. The most significant influence on the
decrease in life benefits was from a decline of $1,036,000 in death
benefit claims. There was no specific incident or event in 1998 or
1997 that caused this to occur. At the September 1998 Board of
Directors meeting, the Board lowered crediting rates one half percent
on all products crediting 5.5% or more. This adjustment was in
response to continued declines in interest rates in the market place.
The change affected approximately $60,000,000 of policy reserves and
will result in interest crediting reductions of $300,000 per year.
This change had little effect on the 1998 results, but will influence
future periods. Policy interest crediting rate changes become
effective on an individual policy basis on the next policy anniversary.
Therefore, it will take a full year from the time the change is
determined for the full impact of such change to be realized.
Commissions and amortization of deferred policy acquisition costs
increased 78% in 1998 compared to 1997. At year-end 1998, the Company
recorded an impairment write off of deferred policy acquisition costs
of $2,983,000. The impairment was the result of the actuarial analysis
of the recoverability of the asset based on current trends and known
events compared to assumptions used in the establishment of the
original asset. The recent decline in interest rates in the
marketplace combined with lower than expected new policy writings
leaving the Company with greater per policy costs as a result of fixed
costs being spread over fewer policies caused the impairment.
Exclusive of the impairment write down, commissions and amortization of
deferred policy acquisition costs were comparable to 1997 results. The
write down will result in lower amortizations in future periods, as
there is now a smaller asset to amortize.
Amortization of cost of insurance acquired decreased 8% in 1998
compared to 1997. Cost of insurance acquired is established when an
insurance company is acquired. The Company assigns a portion of its
cost to the right to receive future cash flows from insurance contracts
existing at the date of the acquisition. The cost of policies
purchased represents the actuarially determined present value of the
projected future cash flows from the acquired policies. Cost of
insurance acquired is comprised of individual life insurance products
including whole life, interest sensitive whole life and universal life
insurance products. Cost of insurance acquired is amortized with
interest in relation to expected future profits, including direct
charge-offs for any excess of the unamortized asset over the projected
future profits. The interest rates utilized in the amortization
calculation are 9% on approximately 25% of the balance and 15% on the
remaining balance. The interest rates vary due to risk analysis
performed at the time of acquisition on the business acquired. The
amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are
revised. The Company did not have any charge-offs during the periods
covered by this report. Amortization of cost of insurance acquired is
particularly sensitive to changes in persistency of certain blocks of
insurance in-force. The improvement of persistency during the year had
a positive impact on amortization of cost of insurance acquired.
Persistency is a measure of insurance in force retained in relation to
the previous year. The Company's average persistency rate for all
policies in force for 1998 and 1997 has been approximately 89.9% and
89.4%, respectively. Persistency has shown a steady improvement over
the past several years.
17
<PAGE>
Operating expenses increased 17% in 1998 compared to 1997. Included in
operating expenses in 1998 is $2,367,474 from the release of discounts
associated with the Company's notes payable. The Company's
subordinated debt was issued at rates considered favorable to the
Company at time of issue, therefore the notes were discounted to
reflect an effective interest rate of 15%. With the payment of part of
this debt in November 1998, the unamortized discount was written off.
Management's plan to repay the remaining debt in a much shorter period
of time from required repayment resulted in the determination to write
off the entire remaining note discount. See information contained
below in interest expense analysis for further details regarding debt
retirement. Excluding the note discount write off, operating expenses
decreased 9% attributable primarily to reduced salary and employee
benefit costs in 1998, as a result of natural attrition.
Interest expense decreased 2% in 1998 compared to 1997. In November
1998, the Company's ultimate parent, UTI, received approximately
$11,000,000 from the issuance of common stock to First Southern Funding
and its affiliates. These funds were used to retire outside debt. On
November 23, 1998, the Company paid a $6,300,000 principle payment on
its senior debt, and paid a $2,608,099 principal payment on its 10 year
subordinated debt through intercompany borrowings from UTI. On
December 16, 1998 the Company paid an additional $500,000 principal
payment on its 10 year subordinated debt through an intercompany
borrowing from UII. In total these transactions retired $9,408,099 of
outside debt and replaced it with intercompany debt, which provides the
Company with increased flexibility when it comes to repayment options.
With the new capital and expectations of future growth, management has
formulated a plan to repay the remaining outside debt within the next
two years. At December 31, 1998, FCC had $17,369,993 in notes payable,
of which $5,561,894 is debt owed to outside parties. The Company
believes this can be accomplished in the next two years through
dividends from the subsidiaries, namely dividends to FCC from UG and
from expected operating cashflows.
The provision for income taxes reflected a significant change from the
same period one year ago. This is the result of changes in the
deferred tax liability. Deferred taxes are established to recognize
future tax effects attributable to temporary differences between the
financial statements and the tax return. As these differences are
realized in the financial statement or tax return, the deferred income
tax established on the difference is recognized in the financial
statements as an income tax expense or credit. During 1997, the
insurance subsidiaries incurred a loss on their federal income tax
return that was carried forward to future periods. A tax benefit was
not incurred in the financial statements as a corresponding allowance
was established against the deferred tax asset attributable to the tax
loss carryforward. In 1998, the insurance company subsidiaries
incurred taxable income for federal income tax purposes which was
offset through utilization of federal tax loss carryforwards. Since
these carryforwards had an allowance established against them for
deferred tax purposes, no corresponding expense was incurred in the
financial statements. Additionally, the Company incurred deferred tax
credits of $1,872,666 from the deferred policy acquisition costs
impairment and the notes payable discounts write offs.
Net loss of UTG
UTG had a net loss of $1,273,000 in 1998 compared to a net loss of
$923,000 in 1997. During 1998, the deferred policy acquisition costs
impairment resulted in a net loss of $1,551,000 and the notes discount
write offs resulted in a net loss of $1,231,000. Exclusive of these
two events, the Company would have reported net income of $1,509,000.
Lower death benefit claims and reduced operating expenses from 1997
results provided improvements to the 1998 results.
(D) NET LOSS
The Company recorded a net loss of $53,000 for 1998 compared to $79,000 for
the same period one year ago. The net loss is from the equity share of
UTG's operating results.
18
<PAGE>
1997 COMPARED TO 1996
(A) REVENUES
UII's primary source of revenues is derived from service fee income, which
is provided via a service agreement with USA. The agreement was originally
established upon the formation of USA, which was a 100% owned subsidiary of
UII. Changes in the affiliate structure have resulted in USA no longer
being a direct subsidiary of UII, though still a member of the same
affiliated group. The original service agreement has remained in place
without modification. The fees are based on a percentage of premium
revenue of USA. The percentages are applied to both first year and renewal
premiums at different rates. Under the current structure, FCC pays all
general operating expenses of the affiliated group. FCC then receives
management and service fees from the various affiliates, including UTI and
UII. Pursuant to the terms of the agreement, USA pays UII monthly fees
equal to 22% of the amount of collected first year statutory premiums, 20%
in second year and 6% of the renewal premiums in years three and after.
The Company recognized service agreement income of $989,295, $1,567,891 and
$2,015,325 in 1997, 1996 and 1995, respectively, based on statutory
collected premiums in USA of $10,300,332, $13,298,597, and $14,128,199 in
1997,1996 and 1995, respectively. First year premium revenues of USA
decreased 54% in 1997 from 1996. This decline is primarily related to the
potential change in control of UTI over the last two years to two different
parties. The possible changes and resulting uncertainties have hurt USA's
ability to recruit and maintain sales agents. Management expects first
year production to decline slightly in 1998, and then growth is anticipated
in subsequent periods following the resolution of the change in control of
UTI.
The Company holds $864,100 of notes receivable from affiliates. The notes
receivable from affiliates consists of three separate notes. The $700,000
note bears interest at the rate of 1% above the variable per annum rate of
interest most recently published by the Wall Street Journal as the prime
rate. Interest is payable quarterly with principal due at maturity on May
8, 2006. In February 1996, FCC borrowed an additional $150,000 from UII to
provide additional cash for liquidity. The note bears interest at the rate
of 1% over prime as published in the Wall Street Journal, with interest
payments due quarterly and principal due upon maturity of the note on June
1, 1999. The remaining $14,100 are 20 year notes of UTG with interest at
8.5% payable semi-annually. At current interest levels, the notes will
generate approximately $80,000 annually.
(B) EXPENSES
The Company has a sub-contract service agreement with United Trust, Inc.
("UTI") for certain administrative services. Through its facilities and
personnel, UTI performs such services as may be mutually agreed upon
between the parties. The fees are based on 60% of the fees paid to UII by
USA. The Company has incurred $744,000, $1,241,000 and $1,809,000 in
service fee expense in 1997, 1996, and 1995, respectively.
Interest expense of $85,000, $84,000 and $89,000 was incurred in 1997, 1996
and 1995, respectively. The interest expense is directly attributable to
the convertible debentures. The Debentures bear interest at a variable
rate equal to one percentage point above the prime rate published in the
Wall Street Journal from time to time.
(C) EQUITY IN LOSS OF INVESTEES
Equity in earnings of investees represents UII's 47% share of the net loss
of UTG. Included with this filing as Exhibit 99(d) are audited financial
statements of UTG. Following is a discussion of the results of operations
of UTG:
Revenues of UTG
Premiums and policy fee revenues, net of reinsurance premiums and
policy fees, decreased 7% when comparing 1997 to 1996. UTG and its
subsidiaries currently writes little new traditional business;
consequently, traditional premiums will decrease as the amount of
traditional business in-force decreases. Collected premiums on
universal life and interest sensitive products is not reflected in
premiums and policy revenues because Generally Accepted Accounting
Principles ("GAAP") requires that premiums collected on these types of
19
<PAGE>
products be treated as deposit liabilities rather than revenue. Unless
UTG and its subsidiaries' acquires a block of in-force business or
marketing changes its focus to traditional business, premium revenue
will continue to decline.
Another cause for the decrease in premium revenues is related to the
potential change in control of UTI over the last two years to two
different parties. During September of 1996, it was announced that
control of UTI would pass to an unrelated party, but the change in
control did not materialize. In February 1998, an announcement was
made regarding negotiations with a different unrelated party, First
Southern Funding LLC, for the change in control of UTI. In November
1998, the change in control of UTI with this second party was
completed. Please refer to the Notes to the Consolidated Financial
Statements of UTG for additional information. The possible changes and
resulting uncertainties have hurt the insurance companies' ability to
recruit and maintain sales agents.
New business production decreased significantly over the last two
years. New business production decreased 43% or $3,935,000 when
comparing 1997 to 1996. In recent years, the insurance industry as a
whole has experienced a decline in the total number of agents who sell
insurance products, therefore competition has intensified for top
producing sales agents. The relatively small size of our companies,
and the resulting limitations, have made it challenging to compete in
this area.
A positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained in relation to
the previous year. The average persistency rate for all policies in
force for 1997 and 1996 has been approximately 89.4% and 87.9%,
respectively.
Net investment income decreased 6% when comparing 1997 to 1996. The
decrease relates to the decrease in invested assets from a coinsurance
agreement. UTG's insurance subsidiary UG entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC"), an
unrelated party, as of September 30, 1996. During 1997, FILIC changed
its name to Park Avenue Life Insurance Company ("PALIC"). Under the
terms of the agreement, UG ceded to FILIC substantially all of its paid-
up life insurance policies. Paid-up life insurance generally refers to
non-premium paying life insurance policies. At closing of the
transaction, UG received a coinsurance credit of $28,318,000 for policy
liabilities covered under the agreement. UG transferred assets equal
to the credit received. This transfer included policy loans of
$2,855,000 associated with policies under the agreement and a net cash
transfer of $19,088,000, after deducting the ceding commission due UG
of $6,375,000. To provide the cash required to be transferred under
the agreement, UG sold $18,737,000 of fixed maturity investments.
The overall investment yields for 1997, 1996 and 1995, are 6.71%, 6.87%
and 6.07%, respectively. Since 1995 investment yield improved due to
the fixed maturity investments. Cash generated from the sales of
universal life insurance products, has been invested primarily in our
fixed maturity portfolio.
The investments are generally managed to match related insurance and
policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates
is 1% on the "Century 2000" universal life insurance product, which
currently is the primary sales product. UTG and its subsidiaries'
monitor investment yields, and when necessary adjusts credited interest
rates on its insurance products to preserve targeted interest spreads.
It is expected that monitoring of the interest spreads by management
will provide the necessary margin to adequately provide for associated
costs on the insurance policies the Company currently has in force and
will write in the future.
Realized investment losses were $279,000 and $466,000 in 1997 and 1996,
respectively. UTG and its subsidiaries sold two foreclosed real estate
properties that resulted in approximately $357,000 in realized losses
in 1996. There were other gains and losses during the period that
comprised the remaining amount reported but were immaterial in nature
on an individual basis.
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Expenses of UTG
Life benefits, net of reinsurance benefits and claims, decreased 11% in
1997 as compared to 1996. The decrease in premium revenues resulted in
lower benefit reserve increases in 1997. In addition, policyholder
benefits decreased due to a decrease in death benefit claims of
$162,000.
In 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be
not insurable by UTG and its subsidiaries' standards. These non-
standard policies had a face amount of $22,700,000 and represented 1/2
of 1% of the insurance in-force in 1994. Management's initial analysis
indicated that expected death claims on the business in-force was
adequate in relation to mortality assumptions inherent in the
calculation of statutory reserves. Nevertheless, management determined
it was in the best interest of UTG and its subsidiaries' to repurchase
as many of the non-standard policies as possible. Through December 31,
1996, the UTG and its subsidiaries' spent approximately $7,099,000 for
the settlement of non-standard policies and for the legal defense of
related litigation. In relation to settlement of non-standard policies
UTG and its subsidiaries' incurred life benefit costs of $3,307,000,
and $720,000 in 1996 and 1995, respectively. UTG and its subsidiaries'
incurred legal costs of $906,000 and $687,000 in 1996 and 1995,
respectively. All policies associated with this issue have been
settled as of December 31, 1996. Therefore, expense reductions for
1997 would follow.
Commissions and amortization of deferred policy acquisition costs
decreased 14% in 1997 compared to 1996. The decrease is due primarily
to a reduction in commissions paid. Commissions decreased 19% in 1997
compared to 1996. The decrease in commissions was due to the decline
in new business production. There is a direct relationship premium
revenues and commission expense. First year premium production
decreased 43% and first year commissions decreased 33% when comparing
1997 to 1996. Amortization of deferred policy acquisition costs
decreased 6% in 1997 compared to 1996. Management would expect
commissions and amortization of deferred policy acquisition costs to
decrease in the future if premium revenues continue to decline.
Amortization of cost of insurance acquired decreased 56% in 1997
compared to 1996. Cost of insurance acquired is established when an
insurance company is acquired. The Company assigns a portion of its
cost to the right to receive future cash flows from insurance contracts
existing at the date of the acquisition. The cost of policies
purchased represents the actuarially determined present value of the
projected future cash flows from the acquired policies. Cost of
insurance acquired is comprised of individual life insurance products
including whole life, interest sensitive whole life and universal life
insurance products. Cost of insurance acquired is amortized with
interest in relation to expected future profits, including direct
charge-offs for any excess of the unamortized asset over the projected
future profits. The interest rates utilized in the amortization
calculation are 9% on approximately 24% of the balance and 15% on the
remaining balance. The interest rates vary due to risk analysis
performed at the time of acquisition on the business acquired. The
amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are
revised. UTG and its subsidiaries' did not have any charge-offs during
the periods covered by this report. The decrease in amortization
during the current period is a fluctuation due to the expected future
profits. Amortization of cost of insurance acquired is particularly
sensitive to changes in persistency of certain blocks of insurance in-
force. The improvement of persistency during the year had a positive
impact on amortization of cost of insurance acquired. Persistency is a
measure of insurance in force retained in relation to the previous
year. The average persistency rate for all policies in force for 1997
and 1996 has been approximately 89.4% and 87.9%, respectively.
Operating expenses decreased 21% in 1997 compared to 1996.Approximately
one-half of the decrease in operating expenses is related to
the settlement of certain litigation in December of 1996 regarding
non-standard policies. Included in this decrease were legal fees and
payments to the litigants to settle the issue. In 1992, as part of
the acquisition of Commonwealth Industries Corporation, an agreement
was entered into between John Cantrell and FCC for future payments
to be made by FCC. A liability was established at the date of the
agreement. Upon the death of Mr. Cantrell in late 1997,
obligations under this agreement transferred to Mr. Cantrell's wife at
a reduced amount. This resulted in a reduction of approximately
$600,000 of the liability held for future payments under the
agreement. In addition, 1997 Consulting fees, primarily in the area
of actuarial services, were reduced approximately $400,000 as the
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Company was able to hire an actuary, on a part-time basis, at a cost
less than fees paid in the previous year to consulting actuaries. The
remaining reduction in operating expenses is attributable to reduced
salary and employee benefit costs in 1997, as a result of natural
attrition.
Interest expense decreased 4% in 1997 compared to 1996. Since December
31, 1996, notes payable decreased approximately $758,000. Average
outstanding indebtedness was $19,461,000 with an average cost of 8.6%
in 1997 compared to average outstanding indebtedness of $20,652,000
with an average cost of 8.5% in 1996. In March 1997, the base interest
rate for most of the notes payable increased a quarter of a point. The
base rate is defined as the floating daily, variable rate of interest
determined and announced by First of America Bank. Please refer to
Note 12 "Notes Payable" in the Notes to the Consolidated Financial
Statements of UTG for more information.
Net loss of UTG
UTG had a net loss of $923,000 in 1997 compared to a net loss of
$1,661,000 in 1996. The improvement is directly related to the
decrease in life benefits and operating expenses primarily associated
with the 1996 settlement and other related costs of the non-standard
life insurance policies.
(D) NET LOSS
The Company recorded a net loss of $79,000 for 1997 compared to $319,000
for the same period one year ago. The net loss is from the equity share of
UTG's operating results.
FINANCIAL CONDITION
The Company owns 47% equity interest in UTG which controls total assets of
approximately $342,000,000. Audited financial statements of UTG are
presented as Exhibit 99(d) of this filing.
LIQUIDITY AND CAPITAL RESOURCES
Since UII is a holding company, funds required to meet its debt service
requirements and other expenses are primarily provided by its affiliates.
UII's cash flow is dependent on revenues from a management agreement with
USA and its earnings received on invested assets and cash balances. At
December 31, 1998,substantially all of the shareholders equity represents
investment in affiliates. UII does not have significant day to day
operations of its own. Cash requirements of UII primarily relate to the
payment of interest on its convertible debentures and expenses related to
maintaining the Company as a corporation in good standing with the various
regulatory bodies which govern corporations in the jurisdictions where the
Company does business. The payment of cash dividends to shareholders is
not legally restricted. However, insurance company dividend payments are
regulated by the state insurance department where the company is domiciled.
UTI is the ultimate parent of UG through ownership of several intermediary
holding companies. UG can not pay a dividend directly to UII due to the
ownership structure. However, if UG paid a dividend to its direct parent
and each subsequent intermediate company within the holding company
structure paid a dividend equal to the amount it received, UII would
receive 37% of the original dividend paid by UG. Please refer to Note 2 of
the Notes to the Financial Statements. UG's dividend limitations are
described below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1998, UG had a statutory gain from operations of $3,226,364.
At December 31, 1998, UG statutory capital and surplus amounted to
$15,280,577. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
The Company currently has $368,692 in cash and cash equivalents. The
Company holds two mortgage loans. Operating activities of the Company
produced cash flows of $425,607, $324,097 and $255,675 in 1998, 1997 and
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1996, respectively. The Company had uses of cash from investing activities
of $767,812, $50,764 and $180,402 in 1998, 1997 and 1996, respectively.
Cash flows from financing activities were $0, $(2,112) and $33 in 1998,
1997 and 1996, respectively.
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and
National City Bank (formerly First of America Bank - Southeast Michigan,
N.A.), as trustee. The Debentures are general unsecured obligations of
UII, subordinate in right of payment to any existing or future senior debt
of UII. The Debentures are exchangeable and transferable, and are
convertible at any time prior to March 31, 1999 into UII's Common Stock at
a conversion price of $25 per share, subject to adjustment in certain
events. The Debentures bear interest from March 31, 1994, payable
quarterly, at a variable rate equal to one percentage point above the prime
rate published in the Wall Street Journal from time to time. The prime
rate was 8.5% during the first three quarters of 1998, decreasing to 8.25%
October 1, 1998, and decreasing to 7.75% January 1, 1999. On or after
March 31, 1999, the Debentures will be redeemable at UII's option, in whole
or in part, at redemption prices declining from 103% of their principal
amount. No sinking fund will be established to redeem the Debentures. The
Debentures will mature on March 31, 2004. The Debentures are not listed on
any national securities exchange or the NASDAQ National Market System.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. In addition, the
Company does not believe that the regulatory initiatives currently under
consideration by various regulatory agencies will have a material adverse
impact on the Company. The Company is not aware of any material pending or
threatened regulatory action with respect to the Company or any of its
affiliates. The Company does not believe that any insurance guaranty fund
assessments will be materially different from amounts already provided for
in the financial statements.
Management believes that the overall sources of liquidity available to the
Company will be more than sufficient to satisfy its financial obligations.
REGULATORY ENVIRONMENT
The Company's insurance affiliates are assessed contributions by life and
health guaranty associations in almost all states to indemnify
policyholders of failed companies. In several states the company may
reduce premium taxes paid to recover a portion of assessments paid to the
states' guaranty fund association. This right of "offset" may come under
review by the various states, and the company cannot predict whether and to
what extent legislative initiatives may affect this right to offset. Also,
some state guaranty associations have adjusted the basis by which they
assess the cost of insolvencies to individual companies. The Company
believes that its reserve for future guaranty fund assessments is
sufficient to provide for assessments related to known insolvencies. This
reserve is based upon management's current expectation of the availability
of this right of offset, known insolvencies and state guaranty fund
assessment bases. However, changes in the basis whereby assessments are
charged to individual companies and changes in the availability of the
right to offset assessments against premium tax payments could materially
affect the company's results.
Currently, UII's insurance affiliates are subject to government regulation
in each of the states in which they conduct business. Such regulation is
vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including the power to: (i) grant and
revoke licenses to transact business; (ii) regulate and supervise trade
practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) approve premium rates for
some lines of business; (vii) establish reserve requirements; (viii)
prescribe the form and content of required financial statements and
reports; (ix) determine the reasonableness and adequacy of statutory
capital and surplus; and (x) regulate the type and amount of permitted
investments. Insurance regulation is concerned primarily with the
protection of policyholders. UII cannot predict the impact of any future
proposals, regulations or market conduct investigations. UII's insurance
affiliates, USA, UG, APPL and ABE are domiciled in the states of Ohio,
Ohio, West Virginia and Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners ("NAIC"). The NAIC is an association whose membership
consists of the insurance commissioners or their designees of the various
states. The NAIC has no direct regulatory authority over insurance
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<PAGE>
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 6 in the Notes to the Financial Statements), and
payment of dividends (see note 2 in the Notes to the Financial Statements)
in excess of specified amounts by the insurance subsidiary, within the
holding company system, are required.
Each year the NAIC calculates financial ratio results (commonly referred to
as IRIS ratios) for each company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement.
The results are then compared to pre-established normal ranges determined
by the NAIC. Results outside the range typically require explanation to
the domiciliary insurance department.
At year-end 1998, the insurance companies had one ratio outside the normal
range. The ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last three years. A primary cause for
the decrease in premium revenues is related to the potential change in
control of UTI over the last two years to two different parties. During
September of 1996, it was announced that control of UTI would pass to an
unrelated party, but the transaction did not materialize. In February
1998, an announcement was made regarding negotiations with a different
unrelated party, First Southern Funding LLC, for the change in control of
UTI. In November 1998, the change in control with this second party was
completed. Please refer to the Notes to the Financial Statements for
additional information. The possible changes and resulting uncertainties
have hurt the insurance companies' ability to recruit and maintain sales
agents.
The NAIC, in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC proposed changes
in the regulations governing insurance company investments and holding
company investments in subsidiaries and affiliates which were adopted by
the NAIC as model laws in 1996. The Company does not presently anticipate
any material adverse change in its business as a result of these changes.
Legislative and regulatory initiatives regarding changes in the regulation
of banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on the Company by altering the competitive
environment for its products. The outcome and timing of any such changes
cannot be anticipated at this time, but the Company will continue to
monitor developments in order to respond to any opportunities or increased
competition that may occur.
The Clinton Administration has recently proposed tax changes that would
affect the insurance industry. One proposal is to require recapture of
untaxed profits on policyholder surplus accounts. Between 1959 and 1983,
stock life insurance companies deferred tax on a portion of their profits.
These untaxed profits were added to a policyholders surplus account
("PSA"). In 1984, Congress precluded life insurance companies from
continuing to defer taxes on any future profits. The Clinton
Administration argues that there is no continuing justification for
permitting stock life insurance companies to defer tax on profits that were
earned between 1959 and 1983. Accordingly, the stock life companies would
be required to include in their gross income over ten years their PSA
balances. The second proposal modifies rules for capitalizing policy
acquisition costs on the grounds that life insurance companies generally
only capitalize a fraction of their actual policy acquisition costs. This
modification would increase the current capitalization percentages. Either
of these changes would be onerous to the Company and to the insurance
industry as a whole. The outcome and timing of these proposals cannot be
anticipated at this time.
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The NAIC adopted the Life Illustration Model Regulation. Many states
have adopted the regulation effective January 1, 1997. This regulation
requires products which contain non-guaranteed elements, such as universal
life and interest sensitive life, to comply with certain actuarially
established tests. These tests are intended to target future performance
and profitability of a product under various scenarios. The regulation
does not prevent a company from selling a product that does not meet the
various tests. The only implication is the way in which the product is
marketed to the consumer. A product that does not pass the tests uses
guaranteed assumptions rather than current assumptions in presenting future
product performance to the consumer. The Company conducts an ongoing
thorough review of its sales and marketing process and continues to
emphasize its compliance efforts.
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
Project results were recently approved by the NAIC with an implementation
date of January 1, 2001. Individual states in which the Company does
business must implement these new rules for them to become effective.
Specific recommendations have been set forth in papers issued by the NAIC.
The NAIC continues to modify and amend these papers. The Company is
monitoring the process, and is not aware of any new requirements that would
result in a material financial impact on the Company's financial position
or results of operations. The Company will continue to monitor this issue
as changes and new proposals are made.
ACCOUNTING AND LEGAL DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS 128 specifies the computation, presentation,
and disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock. The Statement's
objective is to simplify the computation of earnings per share, and to make
the U.S. standard for computing EPS more compatible with the EPS standards
of other countries.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the Company reported a loss from continuing operations so
any potential issuance of common shares would have an antidilutive effect
on EPS. Consequently, the adoption of SFAS 128 did not have an impact on
the Company's financial statement.
The FASB has issued SFAS 130 entitled Reporting Comprehensive Income, which
is effective for financial statements for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in
shareholders' equity, except those arising from transactions with
shareholders, and includes net income and net unrealized gains (losses) on
securities. SFAS 130 was adopted as of January 1, 1998. Adopting the new
standard required the Company to make additional disclosures in the
financial statements, but did not affect the Company's financial position
or results of operations.
All items of other comprehensive income reflect no related tax effect,
since the Company has an allowance against the collection of any future tax
benefits. In addition, there was no sale or liquidation of investments
requiring a reclassification adjustment for the period presented.
The FASB has issued SFAS 131 entitled, Disclosures about Segments of an
Enterprise and Related Information, which is effective for financial
statements for fiscal years beginning after December 15, 1997. SFAS 131
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments
are components of an enterprise about which separate financial information
is available that is evaluated regularly in deciding how to allocate
resources and in assessing performance. SFAS 131 was adopted as of January
1, 1998. Adopting the new standard had no affect on the Company's
financial position or results of operations, since the Company has no
reportable operating segments.
The FASB has issued SFAS 132 entitled, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which is effective for
financial statements for fiscal years beginning after December 15, 1997.
SFAS 132 revises current disclosure requirements for employer provided post-
retirement benefits. The statement does not change retirement measurement
or recognition issues. SFAS 132 was adopted as of January 1, 1998.
Adopting the new standard had no affect on the Company's financial position
or results of operations, since the Company has no pension plan or other
obligation for post-retirement benefits.
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The FASB has issued SFAS 133 entitled, Accounting for Derivative
Instruments and Hedging Activities, which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as a specific type of exposure hedge. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. The adoption of SFAS 133 is
not expected to have a material effect on the Company's financial position
or results of operations, since the Company has no derivative or hedging
type investments.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. In addition, the
Company does not believe that the regulatory initiatives currently under
consideration by various regulatory agencies will have a material adverse
impact on the Company. The Company is not aware of any material pending or
threatened regulatory action with respect to the Company or any of its
subsidiaries. The Company does not believe that any insurance guaranty
fund assessments will be materially different from amounts already provided
for in the financial statements.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results. This could have a significant effect on the Company's
business/financial systems as well as products and services, if not
corrected.
The Company established a project to address year 2000 processing concerns
in September of 1996. In 1997 the Company completed the review of the
Company's internally and externally developed software, and made
corrections to all year 2000 non-compliant processing. The Company also
secured verification of current and future year 2000 compliance from all
major external software vendors. In December of 1997, a separate computer
operating environment was established with the system dates advanced to
December of 1999. A parallel model office was established with all dates
in the data advanced to December of 1999. Parallel model office processing
is being performed using dates from December of 1999 to January of 2001, to
insure all year 2000 processing errors have been corrected. Testing was
completed by the end of the first quarter of 1998. Periodic regression
testing is being performed to monitor continuing compliance. By addressing
year 2000 compliance in a timely manner, compliance has been achieved using
existing staff and without significant impact on the Company operationally
or financially.
CHANGE IN CONTROL OF UNITED TRUST, INC.
On November 20, 1998, First Southern Funding, LLC., a Kentucky corporation,
("FSF") and affiliates acquired 929,904 shares of common stock of United
Trust, Inc., an Illinois corporation, ("UTI") from UTI and certain UTI
shareholders. As consideration for the shares, FSF paid UTI $10,999,995
and certain shareholders of UTI $999,990 in cash. FSF and affiliates
employed working capital to make these purchases of common stock, including
funds on hand and amounts drawn under existing lines of credit with Star
Bank, NA. FSF borrowed $7,082,878 and First Southern Bancorp, Inc., an
affiliate of FSF, borrowed $495,775 in making the purchases. FSF and
affiliates expect to repay the borrowings through the sale of assets they
currently own.
Details of the transaction can be outlined as follows: FSF acquired 389,715
shares of UTI common stock at $10.00 per share. These shares represented
stock acquired during 1997 by UTI in private transactions. Additionally,
FSF acquired 473,523 shares of authorized but unissued common stock at
$15.00 per share. FSF acquired 66,666 shares of common stock from UTI CEO
Larry Ryherd, and his family, at $15.00 per share. FSF has committed to
purchase $2,560,000 of face amount of UTI convertible notes from certain
officers and directors of UTI for a cash price of $3,072,000 by March 1,
1999. FSF is required to convert the notes to UTI common stock by July 31,
2000. UTI has granted, for nominal consideration, an irrevocable,
exclusive option to FSF to purchase up to 1,450,000 shares of UTI common
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stock for a purchase price in cash equal to $15.00 per share, with such
option to expire on July 1, 2001. UTI has also caused three persons
designated by FSF to be appointed, as part of the maximum of 11, to the
Board of Directors of UTI.
Following the transactions described above, and together with shares of UTI
acquired on the market, FSF and affiliates currently own 1,073,577 shares
of UTI common stock (43.1%) becoming the largest shareholder of UTI.
Through the shares acquired and options owned, FSF can ultimately own over
51% of UTI. Mr. Jesse T. Correll is the majority shareholder of FSF, which
is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns a bank that operates out of 14 locations in central Kentucky.
This transaction provides UTI and its affiliates with increased
opportunities. The additional capitalization has enabled UTI to
significantly reduce its outside debt and has enhanced its ability to make
future acquisitions through increased borrowing power and financial
strength. Many synergies exist between UTI and its affiliates and First
Southern Funding and its affiliates. The potential for cross selling of
services to each customer base is currently being explored. Legislation is
currently pending that would eliminate many of the barriers currently
existing between banks and insurance companies. Such alliances are already
being formed within the two industries. Management believes this
transaction positions the Company for continued growth and competitiveness
into the future as the financial industry changes.
PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UII owns 47% of United Trust Group, Inc., an insurance holding company, and
UTI owns 53% of United Trust Group, Inc. Neither UTI nor UII had any other
significant holdings or business dealings at the time the merger was
recommended by the respective Boards of Directors. The Board of Directors
of each company thus concluded a merger of the two companies would be in
the best interests of the shareholders. The merger will result in certain
cost savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
Additionally, the merger will further simplify the group's holding company
system making it easier to understand for outside parties including current
investors, potential investors and lenders.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the second quarter of 1999.
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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, 1998, 1997, 1996 29
Balance Sheets 30
Statements of Operations 31
Statements of Shareholders' Equity 32
Statements of Cash Flows 33
Notes to Financial Statements 34-43
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
United Income, Inc.
We have audited the accompanying balance sheets of United Income, Inc.
(an Ohio corporation) as of December 31, 1998 and 1997, and the related
statements of operations, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of United Income,
Inc. as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1999
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UNITED INCOME, INC.
BALANCE SHEETS
As of December 31, 1998 and 1997
ASSETS
1998 1997
<TABLE>
<S> <C> <C>
Cash and
cash equivalents $ 368,692 $ 710,897
Mortgage loans 170,052 121,520
Notes receivable
from affiliate 1,364,100 864,100
Accrued
interest income 13,629 12,068
Property and equipment
(net of accumulated
depreciation of
$50,038 and $93,648) 444 1,070
Investment in affiliates 10,697,626 11,060,682
Receivable from affiliate 22,244 23,192
Other assets
(net of accumulated
amortization
of $175,826
and $138,810) 9,242 46,258
Total assets $ 12,646,029$ 12,839,787
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible
debentures $ 902,300 $ 902,300
Other
liabilities 22,209 1,534
Total liabilities 924,509 903,834
Shareholders' equity:
Common stock -
no par value, stated value
$.033 per share.
Authorized 2,310,001 shares -
1,391,919 and 1,391,919 shares
issued after deducting treasury
shares of 177,590 and
177,590 45,934 45,934
Additional paid-in
capital 15,242,365 15,242,365
Accumulated
deficit (3,385,700) (3,332,743)
Accumulated other comprehensive
income (181,079) (19,603)
Total shareholders'
equity 11,721,520 11,935,953
Total liabilities and
shareholders' equity $12,646,029$ 12,839,787
</TABLE>
See accompanying notes
30
<PAGE>
UNITED INCOME, INC.
STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1998
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Revenues:
Interest income $ 49,708 $ 27,127 $ 13,099
Interest income
from affiliates 83,317 82,579 79,433
Service agreement
income from
affiliates 835,345 989,295 1,567,891
Other income
from affiliates 66,553 87,073 127,922
Realized investment
gains 0 0 2,599
Other income 0 48 3
1,034,923 1,186,122 1,790,947
Expenses:
Management fee
to affiliate 501,207 743,577 1,240,735
Operating
expenses 80,396 80,173 89,529
Interest
expense 85,155 85,155 84,027
666,758 908,905 1,414,291
Gain before income
taxes and equity
in loss
of investees 368,165 277,217 376,656
Provision for
income taxes 0 0 0
Equity in loss
of investees (421,122) (356,533) (695,739)
Net loss $ (52,957)$ (79,316)$ (319,083)
Basic loss per share
from continuing
operations and
net loss $ (0.04)$ (0.06)$ (0.23)
Diluted loss per share
from continuing
operations and
net loss $ (0.04)$ (0.06)$ (0.23)
Basic weighted average
shares outstanding 1,391,919 1,391,996 1,392,084
Diluted weighted average
shares outstanding 1,391,919 1,391,996 1,392,084
</TABLE>
See accompanying notes
31
<PAGE>
UNITED INCOME, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1998
1998 1997 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Common stock
Balance, beginning
of year $ 45,934 $ 45,940 $ 45,938
Exercise of stock
options 0 0 2
Stock retired from purchase
of fractional
shares of reverse
stock split 0 (6) 0
Balance, end
of year $ 45,934 $ 45,934 $ 45,940
Additional paid-in capital
Balance, beginning
of year $ 15,242,365 $ 15,244,471 $ 15,243,773
Exercise of stock
options 0 0 698
Stock retired from purchase
of fractional
shares of reverse
stock split 0 (2,106) 0
Balance, end
of year $ 15,242,365 $ 15,242,365 15,244,471
Accumulated deficit
Balance, beginning
of year $ (3,332,743) $ (3,253,427) (2,934,344)
Net loss (52,957)$(52,957) (79,316)(79,316) (319,083)$(319,083)
Balance, end
of year $ (3,385,700) $ (3,332,743) $(3,253,427)
Accumulated other
comprehensive income
Balance, beginning
of year (19,603) (59,508) (236)
Other comprehensive
income
Unrealized holding gain (loss)
on securities (161,476)(161,476) 39,905 39,905 (59,272) (59,272)
Comprehensive
income $ (214,433) $ (39,411) $ (378,355)
Balance, end
of year (181,079) (19,603) (59,508)
Total shareholders' equity,
end
of year $ 11,721,520 $ 11,935,953 $11,977,476
</TABLE>
See accompanying notes
32
<PAGE>
UNITED INCOME, INC.
STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1998
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
Cash flows from
operating activities:
Net loss $ (52,957)$ (79,316)$(319,083)
Adjustments to reconcile
net loss to net cash
provided by operating
activities
Depreciation and
amortization 37,643 38,524 45,331
Gain on payoff of
mortgage loan 0 0 (2,599)
Accretion of discount
on mortgage loans (262) (266) (481)
Compensation expense through
stock option plan 0 0 667
Equity in loss
of investees 421,122 356,533 695,739
Changes in assets
and liabilities:
Change in accrued
interest income (1,561) (284) (4,744)
Change in receivable
from affiliates 948 8,645 (119,706)
Change in other
liabilities 20,674 261 (39,449)
Net cash provided by
operating activities 425,607 324,097 255,675
Cash flows from
investing activities:
Change in notes receivable
from affiliate (688,633) 0 (150,000)
Purchase of investments
in affiliates (30,909) (52,363) 0
Capital contribution
to investee 0 0 (94,000)
Payments of principal on
mortgage loans 1,730 1,599 62,434
Issuance of
mortgage loan (50,000) 0 0
Proceeds from sale of
property and equipment 0 0 1,164
Net cash used in
investing activities (767,812) (50,764) (180,402)
Cash flows from
financing activities:
Proceeds from sale of
common stock 0 0 33
Payment for fractional
shares from
reverse stock split 0 (2,112) 0
Net cash provided by (used in)
financing activities 0 (2,112) 33
Net increase (decrease) in cash and
cash equivalents (342,205) 271,221 75,306
Cash and cash equivalents at
beginning of year 710,897 439,676 364,370
Cash and cash equivalents
at end of year $ 368,692 $ 710,897 $ 439,676
</TABLE>
See accompanying notes
33
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A.ORGANIZATION - At December 31, 1998, the affiliates of United Income,
Inc. were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1998
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
34
<PAGE>
The summary of the Company's significant accounting policies, consistently
applied in the preparation of the accompanying financial statements, are
summarized as follows.
B.NATURE OF OPERATIONS - United Income, Inc. ("UII"), referred to as the
("Company"), was incorporated November 2, 1987, and commenced its
activities January 20, 1988. UII is an insurance holding company that
through its insurance affiliates sells individual life insurance
products. UII is an affiliate of UTI, an Illinois insurance holding
company. UTI owns 40.6% of UII. The officers of UII are the same as
those of its parent UTI.
C.MORTGAGE LOANS - Mortgage loans are shown on the following basis - at
unpaid balances, adjusted for amortization premium or discount, less
allowance for possible losses. Realized gains and losses on sales of
mortgage loans are recognized in net income on a specific identification
basis.
D.CASH AND CASH EQUIVALENTS - The Company considers certificates of
deposit and other short-term investment instruments with an original
purchased maturity of three months or less as cash equivalents.
E.PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost.
Depreciation is provided using a straight-line method. Accumulated
depreciation was $50,038 in 1998 and $93,648 in 1997. Depreciation
expense for the years ended December 1998, 1997, and 1996 was $627,
$1,508 and $8,315 respectively.
F.EARNINGS PER SHARE - Earnings per share are based on the weighted
average number of common shares outstanding during each year,
retroactively adjusted to give effect to all stock splits. In
accordance with Statement of Financial Accounting Standards No. 128, the
computation of diluted earnings per share is not shown since the Company
has a loss from continuing operations in each period presented, and any
assumed conversion, exercise, or contingent issuance of securities would
have an antidilutive effect on earnings per share. Had UII not been in
a loss position, the outstanding dilutive instruments would have been
convertible notes of 36,092, 36,092 and 36,092 shares in 1998, 1997 and
1996, respectively, and stock options exercisable of 231, 231, and 231
shares in 1998, 1997, and 1996, respectively. UII had stock options
outstanding for shares of common stock in 1998, 1997, and 1996
respectively, at a per share price in excess of the average market
price, and would therefore not have been included in the computation of
diluted earnings per share. For purposes of this calculation, book
value per share was utilized to represent market value.
G.RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform with the current year presentation. Such reclassifications had
no effect on previously reported net loss, total assets, or shareholders'
equity.
H.USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1998, substantially all of shareholders' equity represents
investment in affiliates. The payment of cash dividends to shareholders is
not legally restricted. However, insurance company dividend payments are
regulated by the state insurance department where the company is domiciled.
UTI is the ultimate parent of UG through ownership of several intermediary
holding companies. UG can not pay a dividend directly to UII due to the
ownership structure. UG's dividend limitations are described below without
effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1998, UG had a statutory gain from operations of $3,226,364.
At December 31, 1998, UG's statutory capital and surplus amounted to
$15,280,577. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
35
<PAGE>
3. INCOME TAXES
The Company has net operating loss carryforwards for federal income tax
purposes expiring as follows:
UII
2007 $ 206,309
TOTAL $ 206,309
The Company has established a deferred tax asset of $72,208 for its
operating loss carryforwards and has established an allowance of $72,208
against this asset. The Company has no other deferred tax components which
would be reflected in the balance sheets.
The provision for income taxes shown in the statements of operations does
not bear the normal relationship to pre-tax income as a result of certain
permanent differences. The sources and effects of such differences are
summarized in the following table:
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Income tax at statutory
rate of
35% of income before $ 128,858 $ 97,026 $ 131,830
income taxes
Utilization of net
operating loss
carryforward (128,858) (97,026) (133,866)
Depreciation 0 0 2,036
Provision for income taxes $ 0 $ 0 $ 0
</TABLE>
4. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value:
(a) Mortgage loans
The fair values of mortgage loans are estimated using discounted cash flow
analyses and interest rates being offered for similar loans to borrowers
with similar credit ratings. As of December 31, 1998, the estimated fair
value and carrying amounts were $248,216 and $170,052, respectively. As of
December 31, 1997, the estimated fair value and carrying amount were
$138,519 and $121,520, respectively.
(b) Notes receivable from affiliate
For notes receivable from affiliates, which is subject to a floating rate
of interest, carrying value is a reasonable estimate of fair value.
(c) Convertible debentures
For the convertible debentures, which are subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
36
<PAGE>
6. RELATED PARTY TRANSACTIONS
Under the current structure, FCC pays a majority of the general operating
expenses of the affiliated group. FCC then receives management, service
fees and reimbursements from the various affiliates.
UII has a service agreement with USA. The agreement was originally
established upon the formation of USA which was a 100% owned subsidiary of
UII. Changes in the affiliate structure have resulted in USA no longer
being a direct subsidiary of UII, though still a member of the same
affiliated group. The original service agreement has remained in place
without modification. USA is to pay UII monthly fees equal to 22% of the
amount of collected first year premiums, 20% in second year and 6% of the
renewal premiums in years three and after. UII has a subcontract agreement
with UTI to perform services and provide personnel and facilities. The
services included in the agreement are claim processing, underwriting,
processing and servicing of policies, accounting services, agency services,
data processing and all other expenses necessary to carry on the business
of a life insurance company. UII's subcontract agreement with UTI states
that UII is to pay UTI monthly fees equal to 60% of collected service fees
from USA as stated above. The service fees received from UII are recorded
in UTI's financial statements as other income.
On January 1, 1993, FCC entered into an agreement with UG pursuant to which
FCC provides management services necessary for UG to carry on its business.
In addition to the UG agreement, FCC and its affiliates have either
directly or indirectly entered into management and/or cost-sharing
arrangements for FCC's management services. FCC received net management
fees of $8,793,905, $9,893,321 and $9,927,000 under these arrangements in
1998, 1997 and 1996, respectively. UG paid $8,018,141, $8,660,481 and
$9,626,559 to FCC in 1998, 1997 and 1996, respectively.
USA paid $835,345, $989,295 and $1,567,891 under their agreement with UII
for 1998, 1997 and 1996, respectively. UII paid $501,207, $593,577 and
$940,734 under their agreement with UTI for 1998, 1997 and 1996,
respectively. Additionally, UII paid FCC $0, $150,000 and $300,000 in
1998, 1997 and 1996, respectively for reimbursement of costs attributed to
UII. These reimbursements are reflected as a credit to general expenses.
Respective domiciliary insurance departments have approved the agreements
of the insurance companies and it is Management's opinion that where
applicable, costs have been allocated fairly and such allocations are based
upon generally accepted accounting principles. The costs paid by UTI for
services include costs related to the production of new business, which are
deferred as policy acquisition costs and charged off to the income
statement through "Amortization of deferred policy acquisition costs".
Amounts recorded by USA as deferred acquisition costs are no greater than
what would have been recorded had all such expenses been directly incurred
by USA. Also included are costs associated with the maintenance of
existing policies that are charged as current period costs and included in
"general expenses".
On July 31, 1997, United Trust Inc. issued convertible notes for cash
received totaling $2,560,000 to seven individuals, all officers or
employees of United Trust Inc. The notes bear interest at a rate of 1%
over prime, with interest payments due quarterly and principal due upon
maturity of July 31, 2004. The conversion price of the notes are graded
from $12.50 per share for the first three years, increasing to $15.00 per
share for the next two years and increasing to $20.00 per share for the
last two years. Conditional upon the seven individuals placing the funds
with UTI were the acquisition by UTI of a portion of the holdings of UTI
owned by Larry E. Ryherd and his family and the acquisition of common stock
of UTI and UII held by Thomas F. Morrow and his family and the simultaneous
retirement of Mr. Morrow. Neither Mr. Morrow nor Mr. Ryherd was a party to
the convertible notes. On March 1, 1999, the individuals holding the
convertible notes sold their interests in said notes to First Southern
Bancorp, Inc. in private transactions.
Approximately $1,048,000 of the cash received from the issuance of the
convertible notes was used to acquire stock holdings of United Trust Inc.
and United Income, Inc. of Mr. Morrow and to acquire a portion of the
United Trust Inc. holdings of Larry E. Ryherd and his family. The
remaining cash received will be used by UTI to provide additional operating
liquidity and for future acquisitions of life insurance companies. On July
31, 1997, UTI acquired a total of 126,921 shares of United Trust Inc.
common stock and 47,250 shares of United Income, Inc. common stock from
Thomas F. Morrow and his family. Mr. Morrow simultaneously retired as an
executive officer of UTI and its affiliates. Mr. Morrow will remain as a
member of the Board of Directors of UTI. In exchange for his stock, Mr.
37
<PAGE>
Morrow and his family received approximately $348,000 in cash, promissory
notes valued at $140,000 due in eighteen months, and promissory notes
valued at $1,030,000 due January 31, 2005. These notes bear interest at a
rate of 1% over prime, with interest due quarterly and principal due upon
maturity. The notes do not contain any conversion privileges.
Additionally, on July 31, 1997, UTI acquired a total of 97,499 shares of
United Trust Inc. common stock from Larry E. Ryherd and his family. Mr.
Ryherd and his family received approximately $700,000 in cash and a
promissory note valued at $251,000 due January 31, 2005. The acquisition
of approximately 16% of Mr. Ryherd's stock holdings in United Trust Inc.
was completed as a prerequisite to the convertible notes placed by other
management personnel to reduce the total holdings of Mr. Ryherd and his
family in UTI to make the stock more attractive to the investment
community. Following the transaction, Mr. Ryherd and his family owned
approximately 31% of the outstanding common stock of United Trust Inc. The
market price of UTI common stock on July 31, 1997 was $6.00 per share. The
stock acquired in the above transaction was from the largest two
shareholders of UTI stock. There were no additional stated or unstated
items or agreements relating to the stock purchase.
On July 31,1997, UTI entered into employment agreements with eight
individuals, all officers or employees of UTI. The agreements have a term
of three years, excepting the agreements with Mr. Ryherd and Mr. Melville,
which have five-year terms. The agreements secure the services of these
key individuals, providing UTI a stable management environment and
positioning for future growth.
7. STOCK OPTION PLANS
The Company has a stock option plan under which certain directors, officers
and employees may be issued options to purchase up to 31,500 shares of
common stock at $13.07 per share. Options become exercisable at 25%
annually beginning one year after date of grant and expire generally in
five years. In November 1992, 10,437 option shares were granted. At
December 31, 1998, options for 451 shares were exercisable and options for
20,576 shares were available for grant. Options for 10,437 shares expired
during 1997. No options were exercised during 1998.
A summary of the status of the Company's stock option plan for the three
years ended December 31, 1998, and changes during the years ending on those
dates is presented below.
1998 1997 1996
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 451 $ 13.07 10,888 $ 13.07 10,888 $13.07
Granted 0 0.00 0 0.00 0 0.00
Exercised 0 0.00 0 0.00 0 0.00
Forfeited 0 0.00 10,437 13.07 0 0.00
Outstanding at
end of year 451 $ 13.07 451 $ 13.07 10,888 $13.07
Options exercisable
at year end 451 $ 13.07 451 $ 13.07 10,888 $13.07
The following information applies to options outstanding at December 31, 1998:
Number outstanding 451
Exercise price $ 13.07
Remaining contractual life 2 years
On January 15, 1991, the Company adopted an additional Non-Qualified Stock
Option Plan under which certain employees and sales personnel may be
granted options. The plan provides for the granting of up to 42,000
options at an exercise price of $.47 per share. The options generally
expire five years from the date of grant. Options for 10,220 shares of
common stock were granted in 1991, options for 1,330 shares were granted in
1993 and options for 301 shares were granted in 1995. A total of 11,620
option shares have been exercised as of December 31, 1998. At December 31,
1998, 231 options have been granted and are exercisable. No options were
exercised during 1998.
38
<PAGE>
A summary of the status of the Company's stock option plan for the three
years ended December 31, 1998, and changes during the years ending on
those dates is presented below.
1998 1997 1996
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 231 $ 0.47 231 $ 0.47 301 $0.47
Granted 0 0.00 0 0.00 0 0.00
Exercised 0 0.00 0 0.00 (70) 0.47
Forfeited 0 0.00 0 0.00 0 0.00
Outstanding at
end of year 231 $ 0.47 231 $ 0.47 231 $ 0.47
Options exercisable
at year end 231 $ 0.47 231 $ 0.47 231 $ 0.47
Fair value of
options granted
during the year $ 0.00 $ 0.00 $ 0.00
The following information applies to options outstanding at December 31, 1998:
Number outstanding 231
Exercise price $ 0.47
Remaining contractual life 2 years
8. CONVERTIBLE DEBENTURES
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and
National City Bank (formerly First of America Bank - Southeast Michigan,
N.A.), as trustee. The Debentures are general unsecured obligations of
UII, subordinate in right of payment to any existing or future senior debt
of UII. The Debentures are exchangeable and transferable, and are
convertible at any time prior to March 31, 1999 into UII's Common Stock at
a conversion price of $25.00 per share, subject to adjustment in certain
events. The Debentures bear interest from March 31, 1994, payable
quarterly, at a variable rate equal to one percentage point above the prime
rate published in the Wall Street Journal from time to time. On or after
March 31, 1999, the Debentures will be redeemable at UII's option, in whole
or in part, at redemption prices declining from 103% of their principal
amount. No sinking fund will be established to redeem Debentures. The
Debentures will mature on March 31, 2004. The Debentures are not listed on
any national securities exchange or the NASDAQ National Market System.
9. REVERSE STOCK SPLIT
On May 13, 1997, UII effected a 1 for 14.2857 reverse stock split.
Fractional shares received a cash payment on the basis of $0.70 for each
old share. Prior period numbers have been restated to give effect of the
reverse split.
39
<PAGE>
10. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for the Company's
50% or less owned affiliate:
ASSETS
December 31, 1998 December 31, 1997
<TABLE>
<S> <C> <C>
Total investments $ 216,247,582 $ 224,281,560
Cash and cash equivalents 25,867,577 15,763,639
Cost of insurance acquired 42,673,693 45,009,452
Other assets 57,499,087 62,896,384
TOTAL ASSETS $ 342,287,939 $ 347,951,035
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 268,054,867 $ 268,237,887
Notes payable 17,559,482 19,081,602
Deferred taxes 7,543,678 12,157,685
Other liabilities 6,055,611 4,053,293
TOTAL LIABILITIES 299,213,638 303,530,467
Minority interests in
consolidated subsidiaries 9,749,693 10,130,024
Shareholders' equity
Common stock no par value 46,577,216 45,926,705
Authorized 10,000 shares - 100
issued
Accumulated other
comprehensive income (385,275) (41,708)
Accumulated deficit (12,867,333) (11,594,453)
TOTAL SHAREHOLDERS' EQUITY 33,324,608 34,290,544
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 342,287,939 $ 347,951,035
</TABLE>
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Premiums and policy fees,
net of reinsurance $ 26,396,077 $ 28,639,245 $ 30,944,458
Net investment income 15,080,005 14,882,677 15,902,107
Other (1,101,219) (171,304) (370,454)
40,374,863 43,350,618 46,476,111
Benefits, claims and
settlement expenses 25,472,374 27,055,171 30,326,032
Other expenses 20,914,833 16,776,537 22,953,093
46,387,207 43,831,708 53,279,125
Loss before income tax and
minority interest (6,012,344) (481,090) (6,803,014)
Income tax credit (provision) 4,502,537 (571,999) 4,643,961
Minority interest in loss of
consolidated subsidiaries 236,927 129,712 498,356
Net loss $ (1,272,880) $ (923,377) $ (1,660,697)
</TABLE>
40
11. OTHER CASH FLOW DISCLOSURES
On a cash basis, UII paid $64,289, $85,155 and $84,027 in interest expense
for the years 1998, 1997 and 1996, respectively. UII paid $0, $0 and $0 in
federal income tax for 1998, 1997 and 1996, respectively.
12. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions that at times
may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
13. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS 128 specifies the computation, presentation,
and disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock. The Statement's
objective is to simplify the computation of earnings per share, and to make
the U.S. standard for computing EPS more compatible with the EPS standards
of other countries.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the Company reported a loss from continuing operations so
any potential issuance of common shares would have an antidilutive effect
on EPS. Consequently, the adoption of SFAS 128 did not have an impact on
the Company's financial statement.
The FASB has issued SFAS 130 entitled Reporting Comprehensive Income, which
is effective for financial statements for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in
shareholders' equity, except those arising from transactions with
shareholders, and includes net income and net unrealized gains (losses) on
securities. SFAS 130 was adopted as of January 1, 1998. Adopting the new
standard required the Company to make additional disclosures in the
financial statements, but did not affect the Company's financial position
or results of operations.
All items of other comprehensive income reflect no related tax effect,
since the Company has an allowance against the collection of any future tax
benefits. In addition, there was no sale or liquidation of investments
requiring a reclassification adjustment for the period presented.
The FASB has issued SFAS 131 entitled, Disclosures about Segments of an
Enterprise and Related Information, which is effective for financial
statements for fiscal years beginning after December 15, 1997. SFAS 131
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments
are components of an enterprise about which separate financial information
is available that is evaluated regularly in deciding how to allocate
resources and in assessing performance. SFAS 131 was adopted as of January
1, 1998. Adopting the new standard had no affect on the Company's
financial position or results of operations, since the Company has no
reportable operating segments.
The FASB has issued SFAS 132 entitled, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which is effective for
financial statements for fiscal years beginning after December 15, 1997.
SFAS 132 revises current disclosure requirements for employer provided post-
retirement benefits. The statement does not change retirement measurement
or recognition issues. SFAS 132 was adopted as of January 1, 1998.
Adopting the new standard had no affect on the Company's financial position
or results of operations, since the Company has no pension plan or other
obligation for post-retirement benefits.
41
<PAGE>
The FASB has issued SFAS 133 entitled, Accounting for Derivative
Instruments and Hedging Activities, which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as a specific type of exposure hedge. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. The adoption of SFAS 133 is
not expected to have a material effect on the Company's financial position
or results of operations, since the Company has no derivative or hedging
type investments.
14. CHANGE IN CONTROL OF UNITED TRUST, INC.
On November 20, 1998, First Southern Funding, Inc., a Kentucky corporation,
("FSF") and affiliates acquired 929,904 shares of common stock of United
Trust, Inc., an Illinois corporation, ("UTI") from UTI and certain UTI
shareholders. As consideration for the shares, FSF paid UTI $10,999,995
and certain shareholders of UTI $999,990 in cash. FSF and affiliates
employed working capital to make these purchases of common stock, including
funds on hand and amounts drawn under existing lines of credit with Star
Bank, NA. FSF borrowed $7,082,878 and First Southern Bancorp, Inc., an
affiliate of FSF, borrowed $495,775 in making the purchases. FSF and
affiliates expect to repay the borrowings through the sale of assets they
currently own.
Details of the transaction can be outlined as follows: FSF acquired 389,715
shares of UTI common stock at $10.00 per share. These shares represented
stock acquired during 1997 by UTI in private transactions. Additionally,
FSF acquired 473,523 shares of authorized but unissued common stock at
$15.00 per share. FSF acquired 66,666 shares of common stock from UTI CEO
Larry Ryherd, and his family, at $15.00 per share. FSF has committed to
purchase $2,560,000 of face amount of UTI convertible notes from certain
officers and directors of UTI for a cash price of $3,072,000 by March 1,
1999. FSF is required to convert the notes to UTI common stock by July 31,
2000. UTI has granted, for nominal consideration, an irrevocable,
exclusive option to FSF to purchase up to 1,450,000 shares of UTI common
stock for a purchase price in cash equal to $15.00 per share, with such
option to expire on July 1, 2001. UTI has also caused three persons
designated by FSF to be appointed, as part of the maximum of 11, to the
Board of Directors of UTI.
Following the transactions described above, and together with shares of UTI
acquired on the market, FSF and affiliates currently own 1,073,577 shares
of UTI common stock (43.1%) becoming the largest shareholder of UTI.
Through the shares acquired and options owned, FSF can ultimately own over
51% of UTI. Mr. Jesse T. Correll is the majority shareholder of FSF, which
is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns a bank that operates out of 14 locations in central Kentucky.
15. PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. At the time the decision to merge
was made, neither UTI nor UII have any other significant holdings or
business dealings. The Board of Directors of each company thus concluded a
merger of the two companies would be in the best interests of the
shareholders. The merger will result in certain cost savings, primarily
related to costs associated with maintaining a corporation in good standing
in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the second quarter of 1999.
42
<PAGE>
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1998
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Interest income $ 11,551 $ 12,220 $ 12,285 $ 13,652
Interest income/affil. 20,488 20,708 20,972 21,149
Service agreement
income 237,358 197,581 227,868 172,538
Total revenues 287,351 250,471 276,404 220,697
Management fee/affil 142,415 116,226 139,022 103,544
Operating expenses 50,140 10,203 10,444 9,609
Interest expense 21,430 21,429 21,430 20,866
Operating income (loss) 73,366 102,613 105,508 86,678
Net income (loss) 105,177 225,221 328,299 (711,654)
Basic earnings (loss)
per share 0.08 0.16 0.24 (0.52)
Diluted earnings (loss)
per share 0.09 0.17 0.24 (0.52)
</TABLE>
1997
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Interest income $ 2,659 $ 2,680 $ 10,806 $ 10,982
Interest income/affil. 19,956 20,171 21,521 20,931
Service agreement
income 294,095 287,596 213,518 194,086
Total revenues 342,657 333,661 266,816 242,988
Management fee/affil 226,457 247,558 153,111 116,451
Operating expenses 50,318 9,682 9,912 10,261
Interest expense 20,866 21,430 21,429 21,430
Operating income 45,016 54,991 82,364 94,846
Net income (loss) 55,572 84,941 (136,852) (82,977)
Basic earnings (loss)
per share 0.04 0.06 (0.10) (0.06)
Diluted earnings (loss)
per share 0.05 0.07 (0.10) (0.06)
</TABLE>
1996
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Net investment income $ 3,673 $ 3,793 $ 2,893 $ 2,740
Interest income/affil. 18,078 20,717 20,249 20,389
Service agreement
income 536,604 459,454 406,952 164,881
Total revenues 583,627 535,094 456,715 215,511
Management fee/affil 421,963 425,672 294,170 98,930
Operating expenses 51,804 14,514 12,045 11,166
Interest expense 21,430 20,865 20,866 20,866
Operating income 88,430 74,043 129,634 84,549
Net income (loss) 235,469 50,795 (583,728) (21,619)
Basic earnings (loss)
per share 0.01 0.00 (0.03) 0.00
Diluted earnings (loss)
per share 0.01 0.00 (0.03) 0.00
</TABLE>
43
<PAGE>
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF UII
THE BOARD OF DIRECTORS
In accordance with the laws of Ohio and the Certificate of Incorporation
and Bylaws of UII as amended, the Company is managed by its executive
officers under the direction of the Board of Directors. The Board elects
executive officers, evaluates their performance, works with management in
establishing business objectives and considers other fundamental corporate
matters, such as the issuance of stock or other securities, the purchase or
sale of a business and other significant corporate business transactions.
In the fiscal year ended December 31, 1998, the Board met five times. All
directors attended at least 75% of all meetings of the board except for Mr.
Aveni.
The Board of Directors has an Audit Committee consisting of Messrs.
Berschet, Melville and Teater. The Audit Committee reviews and acts or
reports to the Board with respect to various auditing and accounting
matters, the scope of the audit procedures and the results thereof, the
internal accounting and control systems of UII, the nature of services
performed for UII and the fees to be paid to the independent auditors, the
performance of the UII's independent and internal auditors and the
accounting practices of UII. The Audit Committee also recommends to the
full Board of Directors the auditors to be appointed by the Board. The
Audit Committee met once in 1998. All members were present with the
exception of Mr. Teater.
The compensation of the UII's executive officers is determined by the full
Board of Directors (see report on Executive Compensation).
Under the UII's Certificate of Incorporation, the Board of Directors may be
comprised of between five and twenty-one directors. The Board currently
has a fixed number of directors at nine. Shareholders elect Directors to
serve for a period of one year at the UII's Annual Shareholders' meeting.
The following information with respect to business experience of the Board
of Directors has been furnished by the respective directors or obtained
from the records of UII.
DIRECTORS
NAME, AGE POSITION WITH UII, BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
Randall L. Attkisson 53
Director of UII since 1998, Chief Financial
Officer, Treasurer, Director of First Southern Bancorp, Inc.
since 1986; Director of The Galilean Home, Liberty, KY since
1996; Treasurer, Director of First Southern Funding, Inc.
since 1992; Director of The River Foundation, Inc. since
1990; Treasurer, Director of Somerset Holdings, Inc. since
1987; President of Randall L. Attkisson & Associates from
1982 to 1986; Commissioner of Kentucky Department of Banking
& Securities from 1980 to 1982; Self-employed Banking
Consultant in Miami, FL from 1978 to 1980.
Vincent T. Aveni 72
Director of UII since 1987; Chairman Emeritus of
Realty One, Inc. and co-developer of the Three Village
Condominium; currently serving the Ohio Association of
Realtors as a trustee; past President of Ohio Association of
Realtors; past Regional Vice President of the Ohio and
Michigan National Association Marketing Institute, and Farm
and Land Institute.
Marvin W. Berschet 69
Director of UII since 1987; self-employed since
1956; charter member of National Cattlemen's Association;
Board member of Meat Export Federation for seven years and
Chairman of Beef Council for three years; served on the
National Livestock and Meat Board for 16 years; past
President of Ohio Cattlemen's Association.
44
<PAGE>
Jesse T. Correll 42
Director of UII since 1998, Chairman, President,
Director of First Southern Bancorp, Inc. since 1983;
President, Director of First Southern Funding, Inc. since
1992; President, Director of Somerset Holdings, Inc. and
Lancaster Life Reinsurance Company and First Southern
Insurance Agency since 1987; President, Director of The
River Foundation since 1990; President, Director of Dyscim
Holdings Company, Inc. since 1990; Director or Adamas
Diamond Corporation since 1980; Secretary, Director Lovemore
Holding Company since 1987; President, Director of North
Plaza of Somerset since 1990; Director of St. Joseph
Hospital, Lexington, KY since 1997; Managing Partner of
World Wide Minerals from 1978 to 1983.
James E. Melville 53
Director, President and Chief Operating Officer
since July 1997; Chief Financial Officer of UII since 1993,
Senior Executive Vice President of UII since September 1992;
President of certain Affiliate Companies from May 1989 until
September 1991; Chief Operating Officer of FCC from 1989 to
September 1991; Chief Operating Officer of certain Affiliate
Companies from 1984 until September 1991; Senior Executive
Vice President of certain Affiliate Companies from 1984
until September 1989; Consultant to UTI and UTG from March
to September, 1992; President and Chief Operating Officer of
certain affiliate life insurance companies and Senior
Executive Vice President of non-insurance affiliate
companies since 1992.
Charlie E. Nash 70
Director of UII since 1987; Executive Director and
State President of the Ohio Farmers Union; serves on the
Board of Directors for National Farmers Union Uniform
Pension Committee and a member of its Investment Committee
for pension funds; Chairman of the Putnam County Board of
Elections; serves on the Board of Directors of Farmers Union
Ventures, Inc., Green Thumb, Inc. and Farmers Education
Foundation; he is a farm owner.
Millard V. Oakley 68
Director of UII since 1998, Presently serves on
Board of Directors and Executive Committee of Thomas Nelson,
a publicly held publishing company based in Nashville, TN;
Director of First National Bank of the Cumberlands,
Livingston-Cooksville, TN; Lawyer with limited law practice
since 1980; State Insurance Commissioner for State of
Tennessee from 1975 to 1979; Served as General Counsel,
United States House of Representatives, Washington, D.C.,
Congressional Committee on Small Business from 1971-1973;
Served four elective terms as County Attorney for Overton
County, Tennessee; Elected delegate to National Democratic
Convention in 1964; Served four elective terms in the
Tennessee General Assembly from 1956 to 1964; Lawyer in
Livingston, TN from 1953 to 1971; Elected to the Tennessee
Constitutional Convention in 1952.
Larry E. Ryherd 58
Chairman of the Board of Directors since 1987, CEO
since 1992; UTI Chairman of the Board of Directors and a
Director since 1984, CEO since 1991; Chairman, CEO and
Director of UTG since 1992; President, CEO and Director of
certain affiliate companies since 1992. Mr. Ryherd has
served has Chairman of the Board, CEO, President and COO of
certain affiliate life insurance companies since 1992.
Robert W. Teater 71
Director of UII since 1987; Director of UTG and certain
affiliate companies since 1992; member of Columbus School
Board since 1991, President of Columbus School Board since
1992; President of Robert W. Teater and Associates, a
comprehensive consulting firm in natural resources
development and organization management since 1983.
45
<PAGE>
EXECUTIVE OFFICERS OF UII
More detailed information on the following officers of UII appears under
"The Board of Directors":
Larry E. Ryherd Chairman of the Board and Chief Executive Officer
James E. Melville President and Chief Operating Officer
Other officers of UII are set forth below:
NAME, AGE POSITION WITH UII, BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
George E. Francis 55
Executive Vice President and Chief Administrative
Officer since July 1997; Secretary of UII since February
1993; Director of certain Affiliate Companies since October
1992; Senior Vice President and Chief Administrative Officer
of certain Affiliate Companies since 1989; Secretary of
certain Affiliate Companies since March 1993; Treasurer and
Chief Financial Officer of certain Affiliate Companies from
1984 until September 1992.
Theodore C. Miller 36
Senior Vice President and Chief Financial Officer
since July 1997; Vice President and Treasurer since October
1992; Vice President and Controller of certain Affiliate
Companies from 1984 to 1992.
ITEM 11. EXECUTIVE COMPENSATION UII
EXECUTIVE COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid to or earned by UII's Chief Executive Officer and each of the
Executive Officers of UII whose salary plus bonus exceeded $100,000 during
each of UII's last three fiscal years. Compensation for services provided
by the named executive officers to UII and its affiliates is paid by FCC as
set forth in their employment agreements. (See Employment Contracts).
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
Other Annual
Name and Compensation (2)
Principal Position Salary($) $
Larry E. Ryherd 1998 400,000 20,373
Chairman of the Board 1997 400,000 18,863
Chief Executive Officer 1996 400,000 17,681
James E. Melville 1998 238,200 31,956
President, Chief 1997 238,200 29,538
Operating Officer 1996 238,200 27,537
George E. Francis 1998 126,200 8,791
Executive Vice 1997 122,000 8,187
President, Secretary 1996 119,000 7,348
(1) Compensation deferred at the election of named officers is included in
this section.
46
<PAGE>
(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.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
The following table summarizes for fiscal year ending, December 31, 1998,
the number of shares subject to unexercised options and the value of
unexercised options of the Common Stock of UTI held by the named executive
officers. The values shown were determined by multiplying the applicable
number of unexercised share options by the difference between the per share
market price on December 31, 1998 and the applicable per share exercise
price. There were no options granted to the named executive officers for
the past three fiscal years.
Number of Securities Value of Unexercised
Number of Underlying Unexercised in the Money Options/
Shares Options/SARs SARs at FY-End ($)
Acquired on Value at FY-End (#)
Exercise Realized
(#) ($)
Name Exerc- Unexer- Exerc- Unexer-
isable cisable isable cisable
Larry E. Ryherd - - 13,800 - - -
James E. Melville - - 30,000 - - -
George E. Francis - - 4,600 - - -
COMPENSATION OF DIRECTORS
UII's standard arrangement for the compensation of directors provide that
each director shall receive an annual retainer of $2,400, plus $300 for
each meeting attended and reimbursement for reasonable travel expenses.
UII's director compensation policy also provides that directors who are
either employees of UII or directors or officers of First Southern Funding,
LLC and affiliates do not receive any compensation for their services as
directors except for reimbursement for reasonable travel expenses for
attending each meeting; namely, Messrs Ryherd, Melville, Attkisson, Correll
and Oakley.
EMPLOYMENT CONTRACTS
On July 31, 1997, Larry E. Ryherd entered into an employment agreement with
FCC. Formerly, Mr. Ryherd had served as Chairman of the Board and Chief
Executive Officer of UII and its affiliates. Pursuant to the agreement,
Mr. Ryherd agreed to serve as Chairman of the Board and Chief Executive
Officer of UII and in addition, to serve in other positions of the
affiliated companies if appointed or elected. The agreement provides for
an annual salary of $400,000 as determined by the Board of Directors. The
term of the agreement is for a period of five years. Mr. Ryherd has
deferred portions of his income under a plan entitling him to a deferred
compensation payment on January 2, 2000 in the amount of $240,000 which
includes interest at the rate of approximately 8.5% per year.
Additionally, Mr. Ryherd was granted an option to purchase up to 13,800 of
the Common Stock of UTI at $17.50 per share. The option is immediately
exercisable and transferable. The option will expire December 31, 2000.
FCC entered into an employment agreement dated July 31, 1997 with James E.
Melville pursuant to which Mr. Melville is employed as President and Chief
Operating Officer and in addition, to serve in other positions of the
affiliated companies if appointed or elected at an annual salary of
$238,200. The term of the agreement expires July 31, 2002. Mr. Melville
has deferred portions of his income under a plan entitling him to a
deferred compensation payment on January 2, 2000 of $400,000 which includes
interest at the rate of approximately 8.5% annually. Additionally, Mr.
Melville was granted an option to purchase up to 30,000 shares of the
Common Stock of UTI at $17.50 per share. The option is immediately
exercisable and transferable. The option will expire December 31, 2000.
FCC entered into an employment agreement with George E. Francis on July 31,
1997. Under the terms of the agreement, Mr. Francis is employed as
Executive Vice President of the Company at an annual salary of $126,200.
47
<PAGE>
Mr. Francis also agreed to serve in other positions if appointed or elected
to such positions without additional compensation. The term of the
agreement expires July 31, 2000. Mr. Francis has deferred portions of his
income under a plan entitling him to a deferred compensation payment on
January 2, 2000 of $80,000 which includes interest at the rate of
approximately 8.5% per year. Additionally, Mr. Francis was granted an
option to purchase up to 4,600 shares of the Common Stock of UTI at $17.50
per share. The option is immediately exercisable and transferable. This
option will expire on December 31, 2000.
REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION
The compensation of UII's executive officers is determined by the full
Board of Directors. The Board of Directors strongly believes that UII's
executive officers directly impact the short-term and long-term performance
of UII. With this belief and the corresponding objective of making
decisions that are in the best interest of UII's shareholders, the Board of
Directors places significant emphasis on the design and administration of
UII's executive compensation plans.
EXECUTIVE COMPENSATION PLAN ELEMENTS
BASE SALARY. The Board of Directors establishes base salaries each year at
a level intended to be within the competitive market range of comparable
companies. In addition to the competitive market range, many factors are
considered in determining base salaries, including the responsibilities
assumed by the executive, the scope of the executive's position,
experience, length of service, individual performance and internal equity
considerations. During the last three fiscal years, there were no material
changes in the base salaries of the named executive officers.
STOCK OPTIONS. One of UII's priorities is for the executive officers to be
significant shareholders so that the interest of the executives are closely
aligned with the interests of UII's other shareholders. The Board of
Directors believes that this strategy motivates executives to remain
focused on the overall long-term performance of UII. Stock options are
granted at the discretion of the Board of Directors and are intended to be
granted at levels within the competitive market range of comparable
companies. During 1993, each of the named executive officers were granted
options under their employment agreements for UTI's Common Stock as
described in the Employment Contracts section. There were no options
granted to the named executive officers during the last three fiscal years.
DEFERRED COMPENSATION. A very significant component of overall Executive
Compensation Plans is found in the flexibility afforded to participating
officers in the receipt of their compensation. The availability, on a
voluntary basis, of the deferred compensation arrangements as described in
the Employment Contracts section may prove to be critical to certain
officers, depending upon their particular financial circumstance.
CHIEF EXECUTIVE OFFICER
Larry E. Ryherd has been Chairman of the Board and Chief Executive Officer
since 1987 and Chairman of the Board of the Company's parent, UTI, since
1984. The Board of Directors used the same compensation plan elements
described above for all executive officers to determine Mr. Ryherd's 1998
compensation.
In setting both the cash-based and equity-based elements of Mr. Ryherd's
compensation, the Board of Directors made an overall assessment of Mr.
Ryherd's leadership in achieving UII's long-term strategic and business
goals.
Mr. Ryherd's base salary reflects a consideration of both competitive
forces and UII's performance. The Board of Directors does not assign
specific weights to these categories.
UII surveys total cash compensation for chief executive officers of the
same group of companies described under "Base Salary" above. Based upon
its survey, UII then determines a median around which it builds a
competitive range of compensation for the CEO. As a result of this review,
the Board of Directors concluded that Mr. Ryherd's base salary was in the
low end of the competitive market, and his total direct compensation
(including stock incentives) was competitive for CEOs running companies
comparable in size and complexity to UII.
48
<PAGE>
The Board of Directors considered UII's financial results as compared to
other companies within the industry, financial performance for fiscal 1998
as compared to fiscal 1997, UII's progress as it relates to UII's growth
through acquisitions and simplification of the organization, the fact that
since UII does not have a Chief Marketing Officer, Mr. Ryherd assumes
additional responsibilities of the Chief Marketing Officer, and Mr.
Ryherd's salary history, performance ranking and total compensation
history.
Through fiscal 1998, Mr. Ryherd's annual salary was $400,000, the amount
the Board of Directors set in January 1997. Following a review of the
above factors, the Board of Directors decided to recognize Mr. Ryherd's
performance by placing a greater emphasis on long-term incentive awards,
and therefore retained Mr. Ryherd's base salary at $400,000.
CONCLUSION.
The Board of Directors believes the mix of structured employment agreements
with certain key executives, conservative market based salaries,
competitive cash incentives for short-term performance and the potential
for equity-based rewards for long term performance represents an
appropriate balance. This balanced Executive Compensation Plan provides a
competitive and motivational compensation package to the executive officer
team necessary to continue to produce the results UII strives to achieve.
The Board of Directors also believes the Executive Compensation Plan
addresses both the interests of the shareholders and the executive team.
BOARD OF DIRECTORS
Randall L. Attkisson Charlie E. Nash
Vincent T. Aveni Millard V. Oakley
Marvin W. Berschet Larry E. Ryherd
Jesse T. Correll Robert W. Teater
James E. Melville
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
UII's Common Stock during the five fiscal years ended December 31, 1998,
with the cumulative total return on the NASDAQ Composite Index Performance
and the NASDAQ Insurance Stock Index (1):
1993 1994 1995 1996 1997 1998
UII 100 92 92 40 32 34
NASDAQ 100 98 138 170 209 293
NASDAQ
Insurance 100 94 134 153 223 199
49
<PAGE>
(1)UII selected the NASDAQ Composite Index Performance as an appropriate
comparison because UII's Common Stock is not listed on any exchange but
UII's Common Stock is traded in the over-the-counter market.
Furthermore, UII selected the NASDAQ Insurance Stock Index as the
second comparison because there is no similar single "peer company" in
the NASDAQ system with which to compare stock performance and the
closest additional line-of-business index which could be found was the
NASDAQ Insurance Stock Index. Trading activity in UII's Common Stock
is limited, which may be in part a result of UII's low profile from not
being listed on any exchange, and its reported operating losses. UII
has experienced a tremendous growth rate over the period shown in the
Return Chart with assets growing from approximately $9 million in 1991
to approximately $13 million in 1998. The growth rate has been the
result of acquisitions of other companies and new insurance writings.
UII has incurred costs of conversions and administrative consolidations
associated with the acquisitions which has contributed to the operating
losses. The Return Chart is not intended to forecast or be indicative
of possible future performance of UII's stock.
The foregoing graph shall not be deemed to be incorporated by reference
into any filing of UII under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that UII specifically
incorporates such information by reference.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as directors of UII during 1998 and were
officers or employees of UII or its affiliates during 1998: James E.
Melville and Larry E. Ryherd. Accordingly, these individuals have
participated in decisions related to compensation of executive officers of
UII and its affiliates.
During 1998, Larry E. Ryherd, James E. Melville and George E. Francis,
executive officers of UII, were also members of the Board of Directors of
FCC, two of whose executive officers served on the Board of Directors of
UII: Messrs. Melville and Ryherd.
During 1998, Larry E. Ryherd and James E. Melville, executive officers of
UII, were also members of the Board of Directors of UTI, two of whose
executive officers served on the Board of Directors of UII: Messrs.
Melville, and Ryherd.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
UII
PRINCIPLE HOLDERS OF SECURITIES
The following tabulation sets forth the name and address of the entity
known to be the beneficial owners of more than 5% of UII's Common Stock and
shows: (i) the total number of shares of Common Stock beneficially owned
by such person as of December 31, 1998 and the nature of such ownership;
and (ii) the percent of the issued and outstanding shares of Common Stock
so owned as of the same date.
Title Number of Shares Percent
Of Name and Address and Nature of of
Class of Beneficial Owner Beneficial Ownership Class
Common United Trust, Inc. (1)(2) 565,766 40.6%.
Stock no 5250 South Sixth Street
par value Springfield, IL 62703
(1) Because Larry E. Ryherd owns 501,701 shares of UTI's Common Stock
(19.6%), and UTI owns 565,766 shares of UII Common Stock (40.6%) Mr.
Ryherd may be considered a beneficial owner of UII; however, Mr. Ryherd
disclaims any beneficial interest in the shares of UII owned by UTI as
UTI's board of directors controls the voting and investment decisions
regarding such
shares.
50
<PAGE>
(2) First Southern Funding, LLC & Affiliates owns 1,054,440 shares
of UTI's Common Stock (42.3%) and UTI owns 565,776 shares of UII
Common Stock (40.6%), and because Jesse T. Correll owns 83% of First
Southern Funding, LLC, Mr. Correll may be considered a beneficial owner
of UII.
SECURITY OWNERSHIP OF MANAGEMENT OF UII
The following tabulation shows with respect to each of the directors and
nominees of UII, with respect to UII's chief executive officer and each of
UII's executive officers whose salary plus bonus exceeded $100,000 for
fiscal 1998, and with respect to all executive officers and directors of
UII as a group: (i) the total number of shares of all classes of stock of
UII or any of its parents or affiliates, beneficially owned as of December
31, 1998 and the nature of such ownership; and (ii) the percent of the
issued and outstanding shares of stock so owned as of the same date.
Title Directors, Named ExecutiveNumber of Shares Percent
of Officers, & All Directors &and Nature of of
ClassExecutive Officers as a Group Ownership Class
UTI's Randall L. Attkisson 0 *
Common Vincent T. Aveni 0 *
Stock, no Jesse T. Correll 0 (1) *
Par value Marvin W. Berschet 0 *
George E. Francis 4,600 (2) *
James E. Melville 52,500 (3) 2.0%
Charlie E. Nash 0 *
Millard V. Oakley 9,000 *
Larry E. Ryherd 501,701 (4) 19.6%
Robert W. Teater 0 *
All directors and
executive officers as
a group (ten in number)567,801 21.8%
FCC's Randall L. Attkisson 0 *
Common Vincent T. Aveni 0 *
Stock,$1.00 Marvin W. Berschet 0 *
Par value Jesse T. Correll 0 *
George E. Francis 0 *
James E. Melville 544 (5) *
Charlie E. Nash 0 *
Millard V. Oakley 0 *
Larry E. Ryherd 0 *
Robert W. Teater 0 *
All directors and
executive officers as a
group (ten in number) 544 *
UII's Randall L. Attkisson 0 *
Common Vincent T. Aveni 7,716 (6) *
Stock, no Marvin W. Berschet 7,161 (7) *
Par value Jesse T. Correll 0 *
George E. Francis 0 *
James E. Melville 0 *
Charlie E. Nash 7,052 *
Millard V. Oakley 0 *
Larry E. Ryherd 47,250 (8) (9) *
Robert W. Teater 7,380 (10) *
All directors and executive
officers as a group
(ten in number) 76,559 5.5%
51
<PAGE>
(1)In addition, Mr. Correll is a director and officer of First Southern
Funding, LLC & Affiliates which own 1,054,440 shares (42.34%) of UTI.
(See Principle Holders of Securities)
(2)Includes 4,600 shares which may be acquired upon the exercise of
outstanding stock options.
(3)James E. Melville owns 2,500 shares individually and 14,000 shares
jointly with his spouse. Includes: (i) 3,000 shares of UTI's Common
Stock which are held beneficially in trust for his daughter, namely
Bonnie J. Melville; (ii) 3,000 shares of UTI's Common Stock, 750 shares
of which are in the name of Matthew C. Hartman, his nephew; 750 shares
of which are in the name of Zachary T. Hartman, his nephew; 750 shares
of which are in the name of Elizabeth A. Hartman, his niece; and 750
shares of which are in the name of Margaret M. Hartman, his niece; and
(iii) 30,000 shares which may be acquired by James E. Melville upon
exercise of outstanding stock options.
(4)Larry E. Ryherd owns 181,091 shares of UTI's Common Stock in his own
name. Includes: (i) 150,050 shares of UTI's Common Stock in the name of
Dorothy LouVae Ryherd, his wife; ii) 150,000 shares of UTI's Common Stock
which are held beneficially in trust for the three children of Larry E.
Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek Scott
Ryherd and Jarad John Ryherd; (iii) 4,600 shares of UTI's Common Stock,
2,700 shares of which are in the name of Shari Lynette Serr, 1,900 shares
of which are in the name of Jarad John Ryherd; (iv) 2,000 shares held by
Dorothy LouVae Ryherd, his wife as custodian for granddaughter, (v) 160
shares held by Larry E. Ryherd as custodian for granddaughter; and (vi)
13,800 shares which may be acquired by Larry E. Ryherd upon exercise of
outstanding stock options.
(5)James E. Melville owns 168 shares individually and 376 shares jointly with
his spouse.
(6)Includes 272 shares owned directly by Mr. Aveni's brother and 210 shares
owned directly by Mr. Aveni's son.
(7)Includes 42 shares owned directly by each of Mr. Berschet's two sons
and 77 shares owned directly by Mr. Berschet's daughter, a total of 161
shares.
(8)Includes 47,250 shares beneficially in trust for the three children of
Larry E. Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr,
Derek Scott Ryherd and Jarad John Ryherd.
(9)In addition, Mr. Ryherd is a director and officer of UTI, who owns
565,766 shares (29.9%) of the Company. Mr. Ryherd disclaims any beneficial
interest in the shares of the Company owned by UTI as the UTI board of
directors controls the voting and investment decisions regarding such
shares.
(10)Includes 210 shares owned directly by Mr. Teater's spouse.
* Less than 1%.
Except as indicated above, the foregoing persons hold sole voting and
investment power.
Directors and officers of UII file periodic reports regarding ownership of
UII securities with the Securities and Exchange Commission pursuant to
Section 16(a) of the Securities Exchange Act of 1934 as amended, and the
rules promulgated thereunder.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the current structure, FCC pays a majority of the general operating
expenses of the affiliated group. FCC then receives management, service
fees and reimbursements from the various affiliates.
UII has a service agreement with USA. The agreement was originally
established upon the formation of USA which was a 100% owned subsidiary of
UII. Changes in the affiliate structure have resulted in USA no longer
being a direct subsidiary of UII, though still a member of the same
affiliated group. The original service agreement has remained in place
without modification. USA is to pay UII monthly fees equal to 22% of the
52
<PAGE>
amount of collected first year premiums, 20% in second year and 6% of the
renewal premiums in years three and after. UII has a subcontract agreement
with UTI to perform services and provide personnel and facilities. The
services included in the agreement are claim processing, underwriting,
processing and servicing of policies, accounting services, agency services,
data processing and all other expenses necessary to carry on the business
of a life insurance company. UII's subcontract agreement with UTI states
that UII is to pay UTI monthly fees equal to 60% of collected service fees
from USA as stated above. The service fees received from UII are recorded
in UTI's financial statements as other income.
On January 1, 1993, FCC entered into an agreement with UG pursuant to which
FCC provides management services necessary for UG to carry on its business.
In addition to the UG agreement, FCC and its affiliates have either
directly or indirectly entered into management and/or cost-sharing
arrangements for FCC's management services. FCC received net management
fees of $8,793,905, $9,893,321 and $9,927,000 under these arrangements in
1998, 1997 and 1996, respectively. UG paid $8,018,141, $8,660,481 and
$9,626,559 to FCC in 1998, 1997 and 1996, respectively.
USA paid $835,345, $989,295 and $1,567,891 under their agreement with UII
for 1998, 1997 and 1996, respectively. UII paid $501,207, $593,577 and
$940,734 under their agreement with UTI for 1998, 1997 and 1996,
respectively. Additionally, UII paid FCC $0, $150,000 and $300,000 in
1998, 1997 and 1996, respectively for reimbursement of costs attributed to
UII. These reimbursements are reflected as a credit to general expenses.
Respective domiciliary insurance departments have approved the agreements
of the insurance companies and it is Management's opinion that where
applicable, costs have been allocated fairly and such allocations are based
upon generally accepted accounting principles. The costs paid by UTI for
services include costs related to the production of new business, which are
deferred as policy acquisition costs and charged off to the income
statement through "Amortization of deferred policy acquisition costs".
Amounts recorded by USA as deferred acquisition costs are no greater than
what would have been recorded had all such expenses been directly incurred
by USA. Also included are costs associated with the maintenance of
existing policies that are charged as current period costs and included in
"general expenses".
On July 31, 1997, United Trust Inc. issued convertible notes for cash
received totaling $2,560,000 to seven individuals, all officers or
employees of United Trust Inc. The notes bear interest at a rate of 1%
over prime, with interest payments due quarterly and principal due upon
maturity of July 31, 2004. The conversion price of the notes are graded
from $12.50 per share for the first three years, increasing to $15.00 per
share for the next two years and increasing to $20.00 per share for the
last two years. Conditional upon the seven individuals placing the funds
with UTI were the acquisition by UTI of a portion of the holdings of UTI
owned by Larry E. Ryherd and his family and the acquisition of common stock
of UTI and UII held by Thomas F. Morrow and his family and the simultaneous
retirement of Mr. Morrow. Neither Mr. Morrow nor Mr. Ryherd was a party to
the convertible notes. On March 1, 1999, the individuals holding the
convertible notes sold their interests in said notes to First Southern
Bancorp, Inc. in private transactions.
Approximately $1,048,000 of the cash received from the issuance of the
convertible notes was used to acquire stock holdings of United Trust Inc.
and United Income, Inc. of Mr. Morrow and to acquire a portion of the
United Trust Inc. holdings of Larry E. Ryherd and his family. The
remaining cash received will be used by UTI to provide additional operating
liquidity and for future acquisitions of life insurance companies. On July
31, 1997, UTI acquired a total of 126,921 shares of United Trust Inc.
common stock and 47,250 shares of United Income, Inc. common stock from
Thomas F. Morrow and his family. Mr. Morrow simultaneously retired as an
executive officer of UTI and its affiliates. Mr. Morrow will remain as a
member of the Board of Directors of UTI. In exchange for his stock, Mr.
Morrow and his family received approximately $348,000 in cash, promissory
notes valued at $140,000 due in eighteen months, and promissory notes
valued at $1,030,000 due January 31, 2005. These notes bear interest at a
rate of 1% over prime, with interest due quarterly and principal due upon
maturity. The notes do not contain any conversion privileges.
Additionally, on July 31, 1997, UTI acquired a total of 97,499 shares of
United Trust Inc. common stock from Larry E. Ryherd and his family. Mr.
Ryherd and his family received approximately $700,000 in cash and a
promissory note valued at $251,000 due January 31, 2005. The acquisition
of approximately 16% of Mr. Ryherd's stock holdings in United Trust Inc.
was completed as a prerequisite to the convertible notes placed by other
management personnel to reduce the total holdings of Mr. Ryherd and his
family in UTI to make the stock more attractive to the investment
community. Following the transaction, Mr. Ryherd and his family owned
53
<PAGE>
approximately 31% of the outstanding common stock of United Trust Inc. The
market price of UTI common stock on July 31, 1997 was $6.00 per share. The
stock acquired in the above transaction was from the largest two
shareholders of UTI stock. There were no additional stated or unstated
items or agreements relating to the stock purchase.
On July 31,1997, UTI entered into employment agreements with eight
individuals, all officers or employees of UTI. The agreements have a term
of three years, excepting the agreements with Mr. Ryherd and Mr. Melville,
which have five-year terms. The agreements secure the services of these
key individuals, providing UTI a stable management environment and
positioning for future growth.
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 UTI and UII's
business/financial systems as well as products and services, if not
corrected.
UTI and UII established a project to address year 2000 processing concerns
in September of 1996. In 1997 UTI and UII completed the review of UTI and
UII's internally and externally developed software, and made corrections to
all year 2000 non-compliant processing. UTI and UII also secured
verification of current and future year 2000 compliance from all major
external software vendors. In December of 1997, a separate computer
operating environment was established with the system dates advanced to
December of 1999. A parallel model office was established with all dates
in the data advanced to December of 1999. Parallel model office processing
is being performed using dates from December of 1999 to January of 2001, to
insure all year 2000 processing errors have been corrected. Testing should
be completed by the end of the first quarter of 1998. After testing is
completed, periodic regression testing will be performed to monitor
continuing compliance. By addressing year 2000 compliance in a timely
manner, compliance will be achieved using existing staff and without
significant impact on UTI and UII operationally or financially.
CHANGE IN CONTROL OF UNITED TRUST, INC.
On November 20, 1998, First Southern Funding, LLC., a Kentucky corporation,
("FSF") and affiliates acquired 929,904 shares of common stock of United
Trust, Inc., an Illinois corporation, ("UTI") from UTI and certain UTI
shareholders. As consideration for the shares, FSF paid UTI $10,999,995
and certain shareholders of UTI $999,990 in cash. FSF and affiliates
employed working capital to make these purchases of common stock, including
funds on hand and amounts drawn under existing lines of credit with Star
Bank, NA. FSF borrowed $7,082,878 and First Southern Bancorp, Inc., an
affiliate of FSF, borrowed $495,775 in making the purchases. FSF and
affiliates expect to repay the borrowings through the sale of assets they
currently own.
Details of the transaction can be outlined as follows: FSF acquired 389,715
shares of UTI common stock at $10.00 per share. These shares represented
stock acquired during 1997 by UTI in private transactions. Additionally,
FSF acquired 473,523 shares of authorized but unissued common stock at
$15.00 per share. FSF acquired 66,666 shares of common stock from UTI CEO
Larry Ryherd, and his family, at $15.00 per share. FSF has committed to
purchase $2,560,000 of face amount of UTI convertible notes from certain
officers and directors of UTI for a cash price of $3,072,000 by March 1,
1999. FSF is required to convert the notes to UTI common stock by July 31,
2000. UTI has granted, for nominal consideration, an irrevocable,
exclusive option to FSF to purchase up to 1,450,000 shares of UTI common
stock for a purchase price in cash equal to $15.00 per share, with such
option to expire on July 1, 2001. UTI has also caused three persons
designated by FSF to be appointed, as part of the maximum of 11, to the
Board of Directors of UTI.
Following the transactions described above, and together with shares of UTI
previously owned, FSF and affiliates currently own 1,035,165 shares of UTI
common stock (41.6%) becoming the largest shareholder of UTI. Through the
shares acquired and options owned, FSF can ultimately own over 51% of UTI.
Mr. Jesse T. Correll is the majority shareholder of FSF, which is an
affiliate of First Southern Bancorp, Inc., a bank holding company that owns
a bank that operates out of 14 locations in central Kentucky.
54
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 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 second quarter of 1999.
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, 1998 and for
fiscal year ended December 31, 1997. In serving its primary function as
outside auditor for the Company, Kerber, Eck and Braeckel LLP performed the
following audit services: examination of annual 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.
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.
On December 2, 1998, the Company filed a form 8-K regarding change in
control.
(c) Exhibits:
Index to Exhibits (See Page 56-57).
55
<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) (4) Employment Agreement dated as of July 31, 1997 between
Larry E. Ryherd and First Commonwealth Corporation
10(i) (4) Employment Agreement dated as of July 31, 1997 between
James E. Melville and First Commonwealth Corporation
10(j) (4) Employment Agreement dated as of July 31, 1997 between
George E. Francis and First Commonwealth Corporation.
Agreements containing the same terms and conditions
excepting title and current salary were also entered into
by Joseph H. Metzger, Brad M. Wilson, Theodore C. Miller,
Michael K. Borden and Patricia G. Fowler.
99(a) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s securities dated March 9, 1988.
99(b) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s Securities dated April 5, 1989.
99(c) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s Securities dated April 23, 1990.
99(d) Audited financial statements of United Trust Group, Inc.
56
<PAGE>
FOOTNOTE
(1) Incorporated by reference from the Company's Registration
Statement on Form 10, File No. 0-18540, filed on April 30, 1990.
(2) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-18540, as of December 31, 1991.
(3) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-18540, as of December 31, 1996.
(4) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-18540, as of December 31, 1997.
57
<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
/s/ Randall L. Attkisson Date: March 23, 1999
Randall L. Attkisson, Director
Date: March 23, 1999
Vincent T. Aveni, Director
/s/ Marvin W. Berschet Date: March 23, 1999
Marvin W. Berschet, Director
/s/ Jesse T. Correll Date: March 23, 1999
Jesse T. Correll, Director
Date: March 23, 1999
Charlie E. Nash, Director
/s/ Millard V. Oakley Date: March 23, 1999
Millard V. Oakley, Director
/s/ Larry E. Ryherd Date: March 23, 1999
Larry E. Ryherd, Chairman of the
Board, Chief Executive Officer,
and Director
/s/ Robert W. Teater Date: March 23, 1999
Robert W. Teater, Director
/s/ James E. Melville Date: March 23, 1999
James E. Melville, Chief Operating
Officer; President and Director
/s/ Theodore C. Miller Date: March 23, 1999
Theodore C. Miller, Chief Financial
Officer
58
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<DEBT-HELD-FOR-SALE> 0 0
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 170,052 121,520
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 170,052 121,520
<CASH> 368,692 710,897
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 0 0
<TOTAL-ASSETS> 12,646,029 12,839,787
<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 45,934
<OTHER-SE> 11,675,586 11,890,019
<TOTAL-LIABILITY-AND-EQUITY> 12,646,029 12,839,787
0 0
<INVESTMENT-INCOME> 49,708 27,127
<INVESTMENT-GAINS> 0 0
<OTHER-INCOME> 985,215 1,158,995
<BENEFITS> 0 0
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 666,758 908,905
<INCOME-PRETAX> 368,165 277,217
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 368,165 277,217
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (52,957) (79,316)
<EPS-PRIMARY> (0.04) (0.06)
<EPS-DILUTED> (0.04) (0.06)
<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>
EXHIBIT 99(d)
AUDITED FINANCIAL STATEMENTS OF
UNITED TRUST GROUP, INC.
59
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
United Trust Group, Inc.
We have audited the accompanying consolidated balance sheets of United
Trust Group, Inc. (an Illinois corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
United Trust Group, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1998, and Schedules
II, IV and V as of December 31, 1998 and 1997, of United Trust Group, Inc.
and subsidiaries and Schedules II, IV and V for each of the three years in
the period then ended. In our opinion, these schedules present fairly, in
all material respects, the information required to be set forth therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1999
60
<PAGE>
UNITED TRUST GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
ASSETS
1998 1997
<TABLE>
<S> <C> <C>
Investments:
Fixed maturities at
amortized cost $ 174,240,848$ 180,970,333
(market $179,885,379
and $184,782,568)
Investments held
for sale:
Fixed maturities,
at market (cost $1,494,636
and $1,672,298) 1,505,406 1,668,630
Equity securities, at
market (cost $2,725,061
and $3,184,357) 2,087,416 3,001,744
Mortgage loans on
real estate at
amortized cost 10,941,614 9,469,444
Investment real estate,
at cost, net of accumulated
depreciation 8,979,183 9,760,732
Real estate acquired in
satisfaction
of debt 1,550,000 1,724,544
Policy loans 14,134,041 14,207,189
Other long-term
investments 1,746,278 1,680,066
Short-term
investments 1,062,796 1,798,878
216,247,582 224,281,560
Cash and cash
equivalents 25,867,577 15,763,639
Investment in
affiliates 350,000 350,000
Accrued investment
income 3,543,937 3,665,228
Reinsurance
receivables:
Future policy
benefits 36,965,938 37,814,106
Policy claims and
other benefits 3,563,963 3,529,078
Cost of insurance
acquired 42,673,693 45,009,452
Deferred policy acquisition
costs 6,324,548 10,600,720
Cost in excess of net
assets purchased,
net of accumulated
amortization 2,642,210 2,777,089
Property and equipment, net of
accumulated depreciation 3,166,835 3,392,905
Other assets 941,656 767,258
Total assets $ 342,287,939 347,951,035
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy
benefits $ 248,391,753 248,805,695
Policy claims and
benefits payable 2,183,434 2,080,907
Other policyholder
funds 2,150,632 2,445,469
Dividend and endowment
accumulations 15,329,048 14,905,816
Income taxes payable:
Current 115,785 15,730
Deferred 7,543,678 12,157,685
Notes payable 17,559,482 19,081,602
Indebtedness to
affiliates, net 52,313 49,977
Other liabilities 5,887,513 3,987,586
Total
Liabilities 299,213,638 303,530,467
Minority interests in
consolidated subsidiaries 9,749,693 10,130,024
Shareholders' equity:
Common stock - no par value
Authorized 10,000 shares -
100 shares issued 46,577,216 45,926,705
Accumulated deficit (12,867,333)(11,594,453)
Accumulated other
comprehensive income (385,275) (41,708)
Total shareholders'
equity 33,324,608 34,290,544
Total liabilities
and shareholders'
equity 342,287,939 347,951,035
</TABLE>
See accompanying notes
61
<PAGE>
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Premiums and
policy fees $30,938,609$33,373,950$35,891,609
Reinsurance premiums
and policy fees (4,542,532)(4,734,705)(4,947,151)
Net investment
income 15,080,005 14,882,677 15,902,107
Realized investment gains
and (losses), net (1,119,156) (279,096) (465,879)
Other income 17,937 107,792 95,425
40,374,863 43,350,618 46,476,111
Benefits, claims and settlement expenses:
Life 23,078,145 23,644,252 26,568,062
Reinsurance benefits
and claims(2,499,394)(2,078,982)(2,283,827)
Annuity 1,462,385 1,560,828 1,892,489
Dividends to
Policyholders 3,431,238 3,929,073 4,149,308
Commissions and
amortization of deferred
policy acquisition
costs 6,450,529 3,616,365 4,224,885
Amortization of cost of
insurance acquired 2,335,759 2,527,360 5,690,069
Operating expenses 10,481,145 8,957,372 11,285,566
Interest expense 1,647,400 1,675,440 1,752,573
46,387,207 43,831,708 53,279,125
Loss before income taxes,
minority interest
and equity in loss
of investees (6,012,344) (481,090) (6,803,014)
Income tax credit
(expense) 4,502,537 (571,999) 4,643,961
Minority interest loss
of consolidated
subsidiaries 236,927 129,712 498,356
Net loss $(1,272,880)$ (923,377)(1,660,697)
Basic loss per share
from continuing
operations and
net loss $(12,728.80)$(9,233.77)(16,606.97)
Diluted loss per share
from continuing
operations and
net loss $(12,728.80)$(9,233.77)(16,606.97)
Basic weighted average
shares outstanding 100 100 100
Diluted weighted average
shares outstanding 100 100 100
See accompanying notes
62
</TABLE>
<PAGE>
1998 1997 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of year $45,926,705 45,926,705 45,726,705
Capital
contribution 650,511 0 200,000
Balance, end
of year $46,577,216 45,926,705 45,926,705
Accumulated deficit
Balance, beginning
of year $(11,594,453) (10,671,076) (9,010,379)
Net income
(loss) (1,272,880)(1,272,880) (923,377) (923,377) (1,660,697)(1,660,697)
Balance, end
of year $(12,867,333) (11,594,453) (10,671,076)
Balance, beginning
of year (41,708) (126,612) (501)
Other comprehensive
income
Unrealized holding gain
(loss) on
securities (343,567) (343,567) 84,904 84,904 (126,111) (126,111)
Comprehensive
income $(1,616,447) $(838,473) (1,786,808)
Balance, end
of year (385,275) (41,708) (126,612)
Total shareholders'
equity, end
of year $33,324,608 34,290,544 35,129,017
</TABLE>
See accompanying notes
63
<PAGE>
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1998
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
Cash flows from
operating activities:
Net loss $ (1,272,880)$ (923,377)$ (1,660,697)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities net
of changes in assets and
liabilities resulting from the sales
and purchases of subsidiaries:
Amortization/accretion
of fixed maturities 657,863 670,185 899,445
Realized investment (gains)
losses, net 1,119,156 279,096 465,879
Policy acquisition
costs deferred (892,000) (586,000) (1,276,000)
Amortization of deferred policy
acquisition costs 5,168,172 1,310,636 1,387,372
Amortization of cost of
of insurance
acquired 2,335,759 2,527,360 5,690,069
Amortization of costs in
excess of net
assets purchased 90,000 155,000 185,279
Depreciation 486,681 457,415 371,991
Minority interest (236,927) (129,712) (498,356)
Change in accrued
investment income 121,291 (205,480) 195,821
Change in reinsurance
receivables 813,283 1,257,953 83,871
Change in policy liabilities
and accruals 75,087 (547,081) 3,326,651
Charges for mortality and
administration of
universal life and
annuity
products (10,771,795)(10,588,874)(10,239,476)
Interest credited to
account balances 7,014,683 7,212,406 7,075,921
Change in income
taxes payable (4,513,952) 511,666 (4,653,734)
Change in
indebtedness (to) from
affiliates, net 2,336 (12,107) 224,472
Change in other assets
and liabilities,
net 1,725,527 (1,634,387) 1,392,938
Net cash provided by (used in)
operating activities 1,922,284 (245,301) 2,971,446
Cash flows from investing activities:
Proceeds from investments
sold and matured:
Fixed maturities
held for sale 164,520 290,660 1,219,036
Fixed maturities
sold 0 0 18,736,612
Fixed maturities
matured 54,642,223 21,488,265 20,721,482
Equity securities 450,000 76,302 8,990
Mortgage loans 1,785,859 1,794,518 3,364,427
Real estate 1,716,124 1,136,995 3,219,851
Policy loans 3,661,834 4,785,222 3,937,471
Short term 1,593,749 410,000 825,000
Total proceeds from investments
sold and matured 64,014,309 29,981,962 52,032,869
Cost of investments acquired:
Fixed maturities (48,745,594)(23,220,172)(29,365,111)
Equity securities (79,053) (1,248,738) 0
Mortgage loans (3,667,061) (245,234) (503,113)
Real estate (1,346,299) (1,444,980) (813,331)
Policy loans (3,588,686) (4,554,291) (4,329,124)
Other long-term
investments (66,212) 0 0
Short term (851,198) (1,726,035) (830,983)
Total cost of investments
acquired (58,344,103)(32,439,450)(35,841,662)
Purchase of property
and equipment (114,449) (531,528) (383,411)
Net cash provided by (used in)
investing activities 5,555,757 (2,989,016) 15,807,796
Cash flows from financing activities:
Policyholder contract
deposits 15,480,745 17,902,246 22,245,369
Policyholder contract
withdrawals (12,402,530)(14,515,576)(15,433,644)
Net cash transferred from
coinsurance ceded 0 0 (19,088,371)
Net cash transferred from
coinsurance assumed 420,790 0 0
Proceeds from notes
payable 9,408,099 1,000,000 9,300,000
Payments on principal of
notes payable (10,279,707) (1,758,252)(10,923,475)
Purchase of stock
of affiliates (1,500) 0 0
Payment for fractional shares
from reverse stock split
of subsidiary 0 (534,251) 0
Net cash provided by (used in)
financing activities 2,625,897 2,094,167 (13,900,121)
Net increase (decrease) in cash
and cash equivalents 10,103,938 (1,140,150) 4,879,121
Cash and cash equivalents at
beginning of year 15,763,639 16,903,789 12,024,668
Cash and cash equivalents
at end of year $ 25,867,577$ 15,763,639$ 16,903,789
</TABLE>
See accompanying notes
64
<PAGE>
UNITED TRUST, GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1998, the parent, significant
majority-owned subsidiaries and affiliates of United Trust Group,
Inc., were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1998
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
The Company's significant accounting policies, consistently applied in
the preparation of the accompanying consolidated financial statements,
are summarized as follows.
B. NATURE OF OPERATIONS - United Trust Group, Inc. is an
insurance holding company, which sells individual life insurance
products through its subsidiaries. The Company's principal market
is the Midwestern United States. The Company's dominant business
is individual life insurance which includes the servicing of
existing insurance business in force, the solicitation of new
individual life insurance and the acquisition of other companies
in the insurance business.
C.BUSINESS SEGMENTS - The Company has only one significant business
segment - insurance.
65
<PAGE>
D. BASIS OF PRESENTATION - The financial statements of United Trust
Group, Inc.'s life insurance subsidiaries have been prepared in
accordance with generally accepted accounting principles which differ
from statutory accounting practices permitted by insurance regulatory
authorities.
E. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its majority-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.
F. INVESTMENTS - Investments are shown on the following bases:
Fixed maturities -- at cost, adjusted for amortization of premium or
discount and other-than-temporary market value declines. The amortized
cost of such investments differs from their market values; however,
the Company has the ability and intent to hold these investments to
maturity, at which time the full face value is expected to be realized.
Investments held for sale -- at current market value, unrealized
appreciation or depreciation is charged directly to shareholders'
equity.
Mortgage loans on real estate -- at unpaid balances, adjusted
for amortization of premium or discount, less allowance for possible
losses.
Real estate - Investment real estate at cost, less allowances for
depreciation and, as appropriate, provisions for possible losses.
Foreclosed real estate is adjusted for any impairment at the
foreclosure date. Accumulated depreciation on investment real estate
was $685,526 and $539,366 as of December 31, 1998 and 1997,
respectively.
Policy loans -- at unpaid balances including accumulated interest
but not in excess of the cash surrender value.
Short-term investments -- at cost, which approximates current market
value.
Realized gains and losses on sales of investments are recognized
in net income on the specific identification basis.
G.CASH EQUIVALENTS - The Company considers certificates of deposit
and other short-term instruments with an original purchased maturity
of three months or less cash equivalents.
H.REINSURANCE - In the normal course of business, the Company seeks
to limit its exposure to loss on any single insured and to recover a
portion of benefits paid by ceding reinsurance to other insurance
enterprises or reinsurers under excess coverage and coinsurance
contracts. The Company retains a maximum of $125,000 of coverage per
individual life.
Amounts paid or deemed to have been paid for reinsurance contracts
are recorded as reinsurance receivables. Reinsurance receivables is
recognized in a manner consistent with the liabilities relating to
the underlying reinsured contracts. The cost of reinsurance related
to long-duration contracts is accounted for over the life of the
underlying reinsured policies using assumptions consistent with those
used to account for the underlying policies.
I.FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for
traditional life insurance and accident and health insurance policy
benefits are computed using a net level method. These liabilities
include assumptions as to investment yields, mortality, withdrawals,
and other assumptions based on the life insurance subsidiaries'
experience adjusted to reflect anticipated trends and to include
provisions for possible unfavorable deviations. The Company makes
these assumptions 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
66
<PAGE>
recognized in income over the policy term. Policy benefit claims are
charged to expense in the period that the claims are incurred.
Current mortality rate assumptions are based on 1975-80 select and
ultimate tables. Withdrawal rate assumptions are based upon Linton B
or Linton C, which are industry standard actuarial tables for
forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive
life insurance products are computed under a retrospective deposit
method and represent policy account balances before applicable
surrender charges. Policy benefits and claims that are charged to
expense include benefit claims in excess of related policy account
balances. Interest crediting rates for universal life and interest
sensitive products range from 4.5% to 5.5% in 1998 and 4.5% to 6.0%
in 1997 and 1996.
J.POLICY AND CONTRACT CLAIMS - Policy and contract claims include
provisions for reported claims in process of settlement, valued in
accordance with the terms of the policies and contracts, as well as
provisions for claims incurred and unreported based on prior
experience of the Company.
K.COST OF INSURANCE ACQUIRED - When an insurance company is acquired,
the Company assigns a portion of its cost to the right to receive
future cash flows from insurance contracts existing at the date of
the acquisition. The cost of policies purchased represents the
actuarially determined present value of the projected future cash
flows from the acquired policies. The Company utilized 9% discount
rate on approximately 31% of the business and 15% discount rate on
approximately 69% of the business. Cost of Insurance Acquired is
amortized with interest in relation to expected future profits,
including direct charge-offs for any excess of the unamortized asset
over the projected future profits. The interest rates utilized in
the amortization calculation are 9% on approximately 31% of the
balance and 15% on the remaining balance. The interest rates vary
due to differences in the blocks of business. The amortization is
adjusted retrospectively when estimates of current or future gross
profits to be realized from a group of products are revised.
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Cost of insurance
acquired,
beginning of year $ 45,009,452 $ 47,536,812 $ 59,601,720
Interest accretion 5,938,673 6,288,402 6,649,203
Amortization (8,274,432) (8,815,762) (12,339,272)
Net amortization (2,335,759) (2,527,360) (5,690,069)
Balance attributable
to coinsurance agreement 0 0 (6,374,839)
Cost of insurance
acquired,
end of year $ 42,673,693 $ 45,009,452 $ 47,536,812
</TABLE>
Estimated net amortization expense of cost of insurance acquired for
the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1999 5,622,000 7,304,000 1,682,000
2000 5,400,000 6,840,000 1,440,000
2001 5,216,000 6,825,000 1,609,000
2002 5,008,000 6,569,000 1,561,000
2003 4,804,000 6,521,000 1,717,000
L. DEFERRED POLICY ACQUISITION COSTS - Commissions and other costs of
acquiring life insurance products that vary with and are primarily
related to the production of new business.
67
<PAGE>
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.
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Deferred, beginning
of year $ 10,600,720 $ 11,325,356 $ 11,436,728
Acquisition costs deferred:
Commissions 690,000 998,000 1,441,000
Other expenses 202,000 274,000 431,000
Total 892,000 1,272,000 1,872,000
Interest accretion 397,000 425,000 408,000
Amortization
charged to income (2,582,172) (2,421,636) (2,391,372)
Net amortization (2,185,172) (1,996,636) (1,983,372)
Amortization due to (2,983,000) 0 0
impairment
Change for the year (4,276,172) (724,636) (111,372)
Deferred, end of year $ 6,324,548 $ 10,600,720 $ 11,325,356
</TABLE>
The following table reflects the components of the income statement
for the line item Commissions and amortization of deferred policy
acquisition costs:
1998 1997 1996
Net amortization of deferred
policy acquisition costs $ 5,168,172 $ 1,996,636 $ 1,983,372
Commissions 1,282,357 1,619,729 2,241,513
Total $ 6,450,529 $ 3,616,365$ $ 4,224,885
Estimated net amortization expense of deferred policy acquisition
costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1999 $ 157,000 $ 1,367,000 $ 1,210,000
2000 140,000 1,202,000 1,062,000
2001 124,000 1,053,000 929,000
2002 110,000 920,000 810,000
2003 98,000 803,000 705,000
68
<PAGE>
M.COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net
assets purchased is the excess of the amount paid to acquire a
company over the fair value of its net assets. Costs in excess of
net assets purchased are amortized on the straight-line basis over a
40-year period. Management continually reviews the value of goodwill
based on estimates of future earnings. As part of this review,
management determines whether goodwill is fully recoverable from
projected undiscounted net cash flows from earnings of the
subsidiaries over the remaining amortization period. If management
were to determine that changes in such projected cash flows no longer
supported the recoverability of goodwill over the remaining
amortization period, the carrying value of goodwill would be reduced
with a corresponding charge to expense or by shortening the
amortization period (no such changes have occurred). Accumulated
amortization of cost in excess of net assets purchased was $1,510,146
and $1,420,146 as of December 31, 1998 and 1997, respectively.
N. PROPERTY AND EQUIPMENT - Company-occupied property, data processing
equipment and furniture and office equipment are stated at cost less
accumulated depreciation of $1,715,626 and $1,375,105 at December 31, 1998
and 1997, respectively. Depreciation is computed on a straight-line basis
for financial reporting purposes using estimated useful lives of three to
thirty years. Depreciation expense was $340,521 and $360,422 for the years
ended December 31, 1998 and 1997, respectively.
O.INCOME TAXES - Income taxes are reported under Statement of Financial
Accounting Standards Number 109. Deferred income taxes are recorded to
reflect the tax consequences on future periods of differences between the
tax bases of assets and liabilities and their financial reporting amounts
at the end of each such period.
P.EARNINGS PER SHARE - Earnings per share are based on the weighted
average number of common shares outstanding during each year,
retroactively adjusted to give effect to all stock splits, in
accordance with Statement of Financial Accounting Standards 128. The
computation of diluted earnings per share is the same as basic
earnings per share since the Company has no dilutive instruments
outstanding.
Q.RECOGNITION OF REVENUES AND RELATED EXPENSES-Premiums for traditional
life insurance products, which include those products with fixed
and guaranteed premiums and benefits, consist principally of whole
life insurance policies, limited-payment life insurance policies, and
certain annuities with life contingencies are recognized as revenues
when due. Accident and health insurance premiums are recognized as
revenue pro rata over the terms of the policies. Benefits and related
expenses associated with the premiums earned are charged to expense
proportionately over the lives of the policies through a provision
for future policy benefit liabilities and through deferral and
amortization of deferred policy acquisition costs. For universal
life and investment products, generally there is no requirement for
payment of premium other than to maintain account values at a level
sufficient to pay mortality and expense charges.Consequently, premiums
for universal life policies and investment products are not reported
as revenue, but as deposits. Policy fee revenue for universal life
policies and investment products consists of charges for the cost
of insurance and policy administration fees assessed during the
period. Expenses include interest credited to policy account balances
and benefit claims incurred in excess of policy account balances.
R.PARTICIPATING INSURANCE - Participating business represents 34% and
39% of the ordinary life insurance in force at December 31, 1998 and
1997, respectively. Premium income from participating business
represents 39%, 50%, and 52% of total premiums for the years ended
December 31, 1998, 1997 and 1996, respectively. The amount of
dividends to be paid is determined annually by the respective
insurance subsidiary's Board of Directors. Earnings allocable to
participating policyholders are based on legal requirements that vary
by state.
S.RECLASSIFICATIONS - Certain prior year amounts have been
reclassified to conform with the 1998 presentation. Such
reclassifications had no effect on previously reported net loss,
total assets, or shareholders' equity.
69
<PAGE>
T.USE OF ESTIMATES - In preparing financial statements in conformity
with generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1998, substantially all of consolidated shareholders'
equity represents net assets of UTG's subsidiaries. The payment of cash
dividends to shareholders is not legally restricted. However, insurance
company dividend payments are regulated by the state insurance department
where the company is domiciled. UTI is the ultimate parent of UG through
ownership of several intermediary holding companies. UG can not pay a
dividend directly to UII due to the ownership structure. UG's dividend
limitations are described below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1998, UG had a statutory gain from operations of $3,226,364.
At December 31, 1998, UG's statutory capital and surplus amounted to
$15,280,577. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
3. INCOME TAXES
Until 1984, the insurance companies were taxed under the provisions of the
Life Insurance Company Income Tax Act of 1959 as amended by the Tax Equity
and Fiscal Responsibility Act of 1982. These laws were superseded by the
Deficit Reduction Act of 1984. All of these laws are based primarily upon
statutory results with certain special deductions and other items available
only to life insurance companies. Under the provision of the pre-1984 life
insurance company income tax regulations, a portion of "gain from
operations" of a life insurance company was not subject to current taxation
but was accumulated, for tax purposes, in a special tax memorandum account
designated as "policyholders' surplus account". Federal income taxes will
become payable on this account at the then current tax rate when and if
distributions to shareholders, other than stock dividends and other limited
exceptions, are made in excess of the accumulated previously taxed income
maintained in the "shareholders surplus account".
The following table summarizes the companies with this situation and the
maximum amount of income that has not been taxed in each.
Shareholder Untaxed
Company Surplus Balance
ABE $ 5,180,494 $ 1,149,693
APPL 6,137,321 1,525,367
UG 30,998,215 4,363,821
USA 0 0
The payment of taxes on this income is not anticipated; and, accordingly,
no deferred taxes have been established.
The life insurance company subsidiaries file a consolidated federal income
tax return. The holding companies of the group file separate returns.
70
<PAGE>
Life insurance company taxation is based primarily upon statutory
results with certain special deductions and other items available only to
life insurance companies. Income tax expense consists of the following
components:
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Current tax
expense $ 111,470 $ 5,400 $ (148,148)
Deferred tax
expense (credit) (4,614,007) 566,599 (4,495,813)
$ (4,502,537)$ 571,999 $(4,643,961)
</TABLE>
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
UG FCC
<TABLE>
<S> <C> <C>
2007 $ 0 $ 136,058
2008 0 4,595
2009 0 168,800
2010 0 19,112
2012 386,669 0
TOTAL $ 386,669 $ 328,565
</TABLE>
The Company has established a deferred tax asset of $250,332 for its
operating loss carryforwards and has established an allowance of $250,332.
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:
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Tax computed
at statutory rate $ (2,104,320) $ (168,382) $ (2,381,055)
Changes in taxes due to:
Cost in
excess of net
assets purchased 31,500 54,250 64,848
Current year
loss for which
no benefit realized 0 1,039,742 0
Benefit of
prior losses (2,587,353) (324,705) (2,393,395)
Other 157,636 (28,906) 65,641
Income tax
expense (credit) $ (4,502,537) $ 571,999 $ (4,643,961)
</TABLE>
71
<PAGE>
The following table summarizes the major components that comprise the
deferred tax liability as reflected in the balance sheets:
1998 1997
<TABLE>
<S> <C> <C>
Investments $ (182,000) $ (228,027)
Cost of
insurance acquired 14,935,793 15,753,308
Deferred policy
acquisition costs 2,213,592 3,710,252
Agent balances (22,257) (23,954)
Property and
equipment (149) (19,818)
Discount of
notes 0 896,113
Management/consulting
fees (376,852) (573,182)
Future policy
benefits (6,144,399) (4,421,038)
Other liabilities (797,833) (756,482)
Federal tax DAC (2,082,217) (2,179,487)
Deferred tax
liability $ 7,543,678 $ 12,157,685
</TABLE>
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A.NET INVESTMENT INCOME - The following table reflects net investment
income by type of investment:
December 31,
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Fixed maturities and fixed
maturities held for sale $ 11,981,660 $ 12,677,348 $ 13,326,312
Equity securities 92,196 87,211 88,661
Mortgage loans 859,543 802,123 1,047,461
Real estate 842,724 745,502 794,844
Policy loans 984,761 976,064 1,121,538
Other long-term investments 125,478 126,532 126,005
Short-term investments 29,907 70,624 17,664
Cash 1,210,605 595,334 602,525
Total consolidated
investment income 16,126,874 16,080,738 17,125,010
Investment expenses (1,046,869) (1,198,061) (1,222,903)
Consolidated net
investment income $ 15,080,005 $ 14,882,677 $ 15,902,107
</TABLE>
At December 31, 1998, the Company had a total of $4,187,000 of investments,
comprised of $3,152,000 in real estate, $968,000 in equity securities and
$66,000 in other invested assets, which did not produce income during 1998.
72
<PAGE>
The following table summarizes the Company's fixed maturities
distribution at December 31, 1998 and 1997 by ratings category as issued by
Standard and Poor's, a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
1998 1997
Investment Grade
AAA 38% 31%
AA 18% 14%
A 36% 46%
BBB 7% 9%
Below investment
grade 1% 0%
100% 100%
The following table summarizes the Company's fixed maturity holdings and
investments held for sale by major classifications:
Carrying Value
1998 1997
<TABLE>
<S> <C> <C>
Investments held for sale:
Fixed maturities $ 1,505,406 $ 1,668,630
Equity securities 2,087,416 3,001,744
Fixed maturities:
U.S. Government, government
agencies and authorities 36,809,239 28,259,322
State, municipalities
and political subdivisions 23,835,306 22,778,816
Collateralized mortgage
obligations 9,406,895 11,093,926
Public
utilities 41,724,208 47,984,322
All other
corporate bonds 62,465,200 70,853,947
$ 177,833,670 $ 185,640,707
</TABLE>
By insurance statute, the majority of the Company's investment portfolio is
required to be invested in investment grade securities to provide ample
protection for policyholders. The Company does not invest in so-called
"junk bonds" or derivative investments.
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.
73
<PAGE>
The following table summarizes by category securities held that are
below investment grade at amortized cost:
<TABLE>
<S> <C> <C> <C>
Below Investment
Grade Investments 1998 1997 1996
State,
Municipalities
and political
Subdivisions $ 0 $ 0 $ 10,042
Public
Utilities 970,311 80,497 117,609
Corporate 47,281 656,784 813,717
Total $ 1,017,592 $ 737,281 $ 941,368
</TABLE>
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in
securities including investments held for sale are as follows:
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1998 Cost Gains Losses Value
<TABLE>
<S> <C> <C> <C> <C>
Investments Held for Sale:
U.S. Government and
govt. agencies and
authorities $ 1,434,636 $ 3,265 $ 0 $ 1,437,901
States, municipalities
and political
subdivisions 35,000 7,224 0 42,224
Collateralized mortgage
obligations 0 0 0 0
Public utilities 0 0 0 0
All other corporate
bonds 25,000 281 0 25,281
1,494,636 10,770 0 1,505,406
Equity
securities 2,725,061 42,520 (680,165) 2,087,416
Total $ 4,219,697 $ 53,290 $ (680,165) $ 3,592,822
Held to Maturity Securities:
U.S. Government
and govt. agencies
and autorities $ 36,809,239 $ 378,136 $ (53,868) $ 37,133,507
States,
municipalities and
political
subdivisions 23,835,306 1,042,876 0 24,878,182
Collateralized
mortgage obligations 9,406,895 182,805 (64,769) 9,524,931
Public utilities 41,724,208 1,810,290 (8,585) 43,525,913
All other
corporate bonds 62,465,200 2,358,259 (613) 64,822,846
Total $ 174,240,848 $ 5,772,366 $ (127,835) $ 179,885,379
</TABLE>
74
<PAGE>
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
<TABLE>
<S> <C> <C> <C> <C>
Investments Held for Sale:
U.S. Government
and govt. agencies
and authorities $ 1,448,202 $ 0 $ (5,645) $ 1,442,557
States,
municipalities and
political subdivisions 35,000 485 0 35,485
Collateralized
mortgage obligations 0 0 0 0
Public utilities 80,169 328 0 80,497
All other corporate
bonds 108,927 1,164 0 110,091
1,672,298 1,977 (5,645) 1,668,630
Equity securities 3,184,357 176,508 (359,121) 3,001,744
Total $ 4,856,655 $ 178,485 $ (364,766) $ 4,670,374
Held to Maturity Securities:
U.S. Government
and govt. agencies
and authorities $ 28,259,322 $ 415,419 $ (51,771) $ 28,622,970
States,
municipalities and
political
subdivisions 22,778,816 672,676 (1,891) 23,449,601
Collateralized
mortgage obligations 11,093,926 210,435 (96,714) 11,207,647
Public utilities 47,984,322 1,241,969 (84,754) 49,141,537
All other corporate
bonds 70,853,947 1,599,983 (93,117) 72,360,813
Total $ 180,970,333 $ 4,140,482 $ (328,247) $ 184,782,568
</TABLE>
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<PAGE>
The amortized cost of debt securities at December 31, 1998, by
contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Fixed Maturities Held Estimated
for Sale Amortized Market
December 31, 1998 Cost Value
<TABLE>
<S> <C> <C>
Due in one year or less $ 1,434,636 $ 1,437,901
Due after one year
through five years 35,000 42,224
Due after five years
through ten years 25,000 25,281
Due after ten years 0 0
Collateralized mortgage
obligations 0 0
Total $ 1,494,636 $ 1,505,406
</TABLE>
Fixed Maturities Held to Amortized Estimated
Maturity Cost Market
December 31, 1998 Value
<TABLE>
<S> <C> <C>
Due in one year or less $ 16,996,673 $ 17,079,985
Due after one year
through five years 82,960,251 85,927,556
Due after five years
through ten years 58,630,433 60,814,932
Due after ten years 6,246,596 6,537,975
Collateralized mortgage
obligations 9,406,895 9,524,931
Total $ 174,240,848 $ 179,885,379
</TABLE>
An analysis of sales, maturities and principal repayments of the
Company's fixed maturities portfolio for the years ended December 31,
1998, 1997 and 1996 is as follows:
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
<TABLE>
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Scheduled principal repayments, calls and tenders:
Held for sale $ 164,161 $ 359 $ 0 $ 164,520
Held to maturity 54,824,249 126,285 (308,311) 54,642,223
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
Total $ 54,988,410 $ 126,644 $ (308,311) $ 54,806,743
</TABLE>
76
<PAGE>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C>
Scheduled principal repayments, calls and tenders:
Held for sale $ 299,390 $ 931 $ (9,661) $ 290,660
Held to maturity 21,467,552 21,435 (722) 21,488,265
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
Total $ 21,766,942 $ 22,366 $(10,383) $ 21,778,925
</TABLE>
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
<TABLE>
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Scheduled principal repayments, calls and tenders:
Held for sale $ 699,361 $ 6,035 $ (813) $ 704,583
Held to maturity 20,900,159 13,469 (192,146) 20,721,482
Sales:
Held for sale 517,111 0 (2,658) 514,453
Held to maturity 18,735,848 81,283 (80,519) 18,736,612
Total $ 40,852,479 $ 100,787 $ (276,136) $ 40,677,130
</TABLE>
C.INVESTMENTS ON DEPOSIT - At December 31, 1998, investments carried at
approximately $15,854,000 were on deposit with various state insurance
departments.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information
at December 31, 1998 and 1997, as required by Statement of Financial
Accounting Standards 107, Disclosure about Fair Value of Financial
Instruments ("SFAS 107"). Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in
that Statement and does not purport to represent the aggregate net fair
value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value:
(a) Cash and Cash equivalents
The carrying amount in the financial statements approximates fair value
because of the relatively short period of time between the origination of
the instruments and their expected realization.
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<PAGE>
(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.
(e) Policy loans
It is not practicable to estimate the fair value of policy loans as they
have no stated maturity and their rates are set at a fixed spread to
related policy liability rates. Policy loans are carried at the aggregate
unpaid principal balances in the consolidated balance sheets, and earn
interest at rates ranging from 4% to 8%. Individual policy liabilities in
all cases equal or exceed outstanding policy loan balances.
(f) Short-term investments
For short-term instruments, the carrying amount is a reasonable estimate of
fair value. Short-term instruments represent mortgage loans and
certificates of deposit with various banks that are protected under FDIC.
(g) Other long-term investments
The Company holds a $840,066 note receivable for which the determination of
fair value is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
(h) Notes payable
For borrowings under the senior loan agreement, which is subject to
floating rates of interest, carrying value is a reasonable estimate of fair
value. For subordinated borrowings fair value was determined based on the
borrowing rates currently available to the Company for loans with similar
terms and average maturities.
78
<PAGE>
The estimated fair values of the Company's financial instruments
required to be valued by SFAS 107 are as follows as of December 31:
1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
<TABLE>
<S> <C> <C> <C> <C>
Fixed
maturities $ 174,240,848 $ 179,885,379 $ 180,970,333 $ 184,782,568
Fixed
maturities
held for sale 1,505,406 1,505,406 1,668,630 1,668,630
Equity
securities 2,087,416 2,087,416 3,001,744 3,001,744
Mortgage
loans on
real estate 10,941,614 10,979,378 9,469,444 9,837,530
Investment
in real estate 8,979,183 8,979,183 9,760,732 9,760,732
Real estate
acquired
in satisfaction
of debt 1,550,000 1,550,000 1,724,544 1,724,544
Policy loans 14,134,041 14,134,041 14,207,189 14,207,189
Other long
term invested
assets 906,278 879,037 1,680,066 1,569,603
Short-term
investments 1,036,251 1,036,251 1,798,878 1,798,878
Liabilities
Notes payable 17,559,482 17,203,574 19,081,602 18,539,301
</TABLE>
6. STATUTORY EQUITY AND GAIN FROM OPERATIONS
The Company's insurance subsidiaries are domiciled in Ohio, Illinois and
West Virginia and prepare their statutory-based financial statements in
accordance with accounting practices prescribed or permitted by the
respective insurance department. These principles differ significantly
from generally accepted accounting principles. "Prescribed" statutory
accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners ("NAIC"). "Permitted" statutory
accounting practices encompass all accounting practices that are not
prescribed; such practices may differ from state to state, from company to
company within a state, and may change in the future. The NAIC currently
is in the process of codifying statutory accounting practices, the result
of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project, which is
expected to become effective January 1, 2001, will likely change prescribed
statutory accounting practices and may result in changes to the accounting
practices that insurance enterprises use to prepare their statutory
financial statements. UG's total statutory shareholders' equity was
$15,280,577 and $10,997,365 at December 31, 1998 and 1997, respectively.
The Company's four life insurance subsidiaries reported combined statutory
operating income before taxes (exclusive of intercompany dividends) of
$5,485,000, $2,067,000 and $2,134,000 for 1998, 1997 and 1996,
respectively.
79
<PAGE>
7. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.
The Company assumes risks from, and reinsures certain parts of its risks
with other insurers under yearly renewable term and coinsurance agreements
that are accounted for by passing a portion of the risk to the reinsurer.
Generally, the reinsurer receives a proportionate part of the premiums less
commissions and is liable for a corresponding part of all benefit payments.
While the amount retained on an individual life will vary based upon age
and mortality prospects of the risk, the Company generally will not carry
more than $125,000 individual life insurance on a single risk.
The Company has reinsured approximately $924 million, $1.022 billion and
$1.109 billion in face amount of life insurance risks with other insurers
for 1998, 1997 and 1996, respectively. Reinsurance receivables for future
policy benefits were $36,965,938 and $37,814,106 at December 31, 1998 and
1997, respectively, for estimated recoveries under reinsurance treaties.
Should any reinsurer be unable to meet its obligation at the time of a
claim, obligation to pay such claim would remain with the Company.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover all new business of the Company.
The agreements are a yearly renewable term ("YRT") treaty where the Company
cedes amounts above its retention limit of $100,000 with a minimum cession
of $25,000.
One of the Company's insurance subsidiaries (UG) entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best assigned FILIC a Financial Performance Rating (FPR) of 7 (Strong)
on a scale of 1 to 9. A.M. Best assigned a Best's Rating of A++ (Superior)
to The Guardian Life Insurance Company of America ("Guardian"), parent of
FILIC, based on the consolidated financial condition and operating
performance of the company and its life/health subsidiaries. During 1997,
FILIC changed its name to Park Avenue Life Insurance Company ("PALIC").
The agreement with PALIC accounts for approximately 65% of the reinsurance
receivables as of December 31, 1998.
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long-duration reinsurance contracts on premiums
earned in 1998, 1997 and 1996 was as follows:
Shown in thousands
1998 1997 1996
Premiums Premiums Premiums
Earned Earned Earned
<TABLE>
<S> <C> <C> <C>
Direct $ 30,919 $ 33,374 $ 35,891
Assumed 20 0 0
Ceded (4,543) (4,735) (4,947)
Net
premiums $ 26,396 $ 28,639 $ 30,944
</TABLE>
80
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. Some of the lawsuits have resulted in the award
of substantial judgments against the insurer, including material amounts of
punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances.
Under the insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed insurance
companies. Although the Company cannot predict the amount of any future
assessments, most insurance guaranty fund laws currently provide that an
assessment may be excused or deferred if it would threaten an insurer's
financial strength. Mandatory assessments may be partially recovered
through a reduction in future premium tax in some states. The Company does
not believe such assessments will be materially different from amounts
already provided for in the financial statements.
The Company and its subsidiaries are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
liabilities. Management and its legal counsel are of the opinion that the
settlement of those actions will not have a material adverse effect on the
Company's financial position or results of operations.
9. RELATED PARTY TRANSACTIONS
Under the current structure, FCC pays a majority of the general operating
expenses of the affiliated group. FCC then receives management, service
fees and reimbursements from the various affiliates.
UII has a service agreement with USA. The agreement was originally
established upon the formation of USA which was a 100% owned subsidiary of
UII. Changes in the affiliate structure have resulted in USA no longer
being a direct subsidiary of UII, though still a member of the same
affiliated group. The original service agreement has remained in place
without modification. USA is to pay UII monthly fees equal to 22% of the
amount of collected first year premiums, 20% in second year and 6% of the
renewal premiums in years three and after. UII has a subcontract agreement
with UTI to perform services and provide personnel and facilities. The
services included in the agreement are claim processing, underwriting,
processing and servicing of policies, accounting services, agency services,
data processing and all other expenses necessary to carry on the business
of a life insurance company. UII's subcontract agreement with UTI states
that UII is to pay UTI monthly fees equal to 60% of collected service fees
from USA as stated above. The service fees received from UII are recorded
in UTI's financial statements as other income.
On January 1, 1993, FCC entered into an agreement with UG pursuant to which
FCC provides management services necessary for UG to carry on its business.
In addition to the UG agreement, FCC and its affiliates have either
directly or indirectly entered into management and/or cost-sharing
arrangements for FCC's management services. FCC received net management
fees of $8,793,905, $9,893,321 and $9,927,000 under these arrangements in
1998, 1997 and 1996, respectively. UG paid $8,018,141, $8,660,481 and
$9,626,559 to FCC in 1998, 1997 and 1996, respectively.
USA paid $835,345, $989,295 and $1,567,891 under their agreement with UII
for 1998, 1997 and 1996, respectively. UII paid $501,207, $593,577 and
$940,734 under their agreement with UTI for 1998, 1997 and 1996,
respectively. Additionally, UII paid FCC $0, $150,000 and $300,000 in
1998, 1997 and 1996, respectively for reimbursement of costs attributed to
UII. These reimbursements are reflected as a credit to general expenses.
Respective domiciliary insurance departments have approved the agreements
of the insurance companies and it is Management's opinion that where
applicable, costs have been allocated fairly and such allocations are based
upon generally accepted accounting principles. The costs paid by UTI for
services include costs related to the production of new business, which are
deferred as policy acquisition costs and charged off to the income
statement through "Amortization of deferred policy acquisition costs".
81
<PAGE>
Amounts recorded by USA as deferred acquisition costs are no greater than
what would have been recorded had all such expenses been directly incurred
by USA. Also included are costs associated with the maintenance of
existing policies that are charged as current period costs and included in
"general expenses".
On July 31, 1997, United Trust Inc. issued convertible notes for cash
received totaling $2,560,000 to seven individuals, all officers or
employees of United Trust Inc. The notes bear interest at a rate of 1%
over prime, with interest payments due quarterly and principal due upon
maturity of July 31, 2004. The conversion price of the notes are graded
from $12.50 per share for the first three years, increasing to $15.00 per
share for the next two years and increasing to $20.00 per share for the
last two years. Conditional upon the seven individuals placing the funds
with the Company were the acquisition by UTI of a portion of the holdings
of UTI owned by Larry E. Ryherd and his family and the acquisition of
common stock of UTI and UII held by Thomas F. Morrow and his family and the
simultaneous retirement of Mr. Morrow. Neither Mr. Morrow nor Mr. Ryherd
was a party to the convertible notes. On March 1, 1999, the individuals
holding the convertible notes sold their interests in said notes to First
Southern Bancorp, Inc. in private transactions.
Approximately $1,048,000 of the cash received from the issuance of the
convertible notes was used to acquire stock holdings of United Trust Inc.
and United Income, Inc. of Mr. Morrow and to acquire a portion of the
United Trust Inc. holdings of Larry E. Ryherd and his family. The
remaining cash received will be used by the Company to provide additional
operating liquidity and for future acquisitions of life insurance
companies. On July 31, 1997, the Company acquired a total of 126,921
shares of United Trust Inc. common stock and 47,250 shares of United
Income, Inc. common stock from Thomas F. Morrow and his family. Mr. Morrow
simultaneously retired as an executive officer of the Company. Mr. Morrow
will remain as a member of the Board of Directors. In exchange for his
stock, Mr. Morrow and his family received approximately $348,000 in cash,
promissory notes valued at $140,000 due in eighteen months, and promissory
notes valued at $1,030,000 due January 31, 2005. These notes bear interest
at a rate of 1% over prime, with interest due quarterly and principal due
upon maturity. The notes do not contain any conversion privileges.
Additionally, on July 31, 1997, the Company acquired a total of 97,499
shares of United Trust Inc. common stock from Larry E. Ryherd and his
family. Mr. Ryherd and his family received approximately $700,000 in cash
and a promissory note valued at $251,000 due January 31, 2005. The
acquisition of approximately 16% of Mr. Ryherd's stock holdings in United
Trust Inc. was completed as a prerequisite to the convertible notes placed
by other management personnel to reduce the total holdings of Mr. Ryherd
and his family in the Company to make the stock more attractive to the
investment community. Following the transaction, Mr. Ryherd and his family
owned approximately 31% of the outstanding common stock of United Trust
Inc. The market price of UTI common stock on July 31, 1997 was $6.00 per
share. The stock acquired in the above transaction was from the largest
two shareholders of UTI stock. There were no additional stated or unstated
items or agreements relating to the stock purchase.
On July 31,1997, the Company entered into employment agreements with eight
individuals, all officers or employees of the Company. The agreements have
a term of three years, excepting the agreements with Mr. Ryherd and Mr.
Melville, which have five-year terms. The agreements secure the services
of these key individuals, providing the Company a stable management
environment and positioning for future growth.
10. DEFERRED COMPENSATION PLAN
UTI and FCC established a deferred compensation plan during 1993 pursuant
to which an officer or agent of FCC, UTI or affiliates of UTI, could defer
a portion of their income over the next two and one-half years in return
for a deferred compensation payment payable at the end of seven years in
the amount equal to the total income deferred plus interest at a rate of
approximately 8.5% per annum and a stock option to purchase shares of
common stock of UTI. At the beginning of the deferral period an officer or
agent received an immediately exercisable option to purchase 2,300 shares
of UTI common stock at $17.50 per share for each $25,000 ($10,000 per year
for two and one-half years) of total income deferred. The option expires
on December 31, 2000. A total of 105,000 options were granted in 1993
under this plan. As of December 31, 1998 no options were exercised. At
December 31, 1998 and 1997, the Company held a liability of $1,494,520 and
$1,376,384, respectively, relating to this plan. At December 31, 1998, UTI
common stock had a market price of $8.125 per share.
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<PAGE>
The following information applies to deferred compensation plan stock
options outstanding at December 31, 1998:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 2 years
11. NOTES PAYABLE
At December 31, 1998 and 1997, the Company has $17,559,482 and $19,081,602
in long-term debt outstanding, respectively. The debt is comprised of the
following components:
1998 1997
<TABLE>
<S> <C> <C>
Senior debt $ 100,000 $ 6,900,000
Subordinated 10 yr.
notes 2,267,067 5,746,774
Subordinated 20 yr.
notes 3,384,316 4,034,828
Other notes payable 11,808,099 2,400,000
$ 17,559,482 $ 19,081,602
</TABLE>
A. SENIOR DEBT
The senior debt is through National City Bank (formerly First of America
Bank - Illinois NA) and is subject to a credit agreement. The debt bears
interest at a rate equal to the "base rate" plus nine-sixteenths of one
percent. The Base rate is defined as the floating daily, variable rate of
interest determined and announced by National City Bank from time to time
as its "base lending rate." The base rate at December 31, 1998 was 7.75%.
Interest is paid quarterly. Principal payments of $1,000,000 are due in
May of each year beginning in 1997, with a final payment due May 8, 2005.
On November 8, 1998, the Company prepaid $500,000 of the May 1999 principal
payment, and on November 23, 1998, the Company paid a $6,300,000 principal
payment. The November 23, 1998 principal payment was facilitated through a
borrowing from United Trust, Inc., which is an affiliate, and ultimate
parent to the Company. The remaining principal balance of $100,000 will be
payable on or before the debt maturity date of May 8, 2005, and is being
maintained to keep the Company's credit relationship with National City
Bank in place.
The credit agreement contains certain covenants with which the Company must
comply. These covenants contain provisions common to a loan of this type
and include such items as; a minimum consolidated net worth of FCC to be no
less than 400% of the outstanding balance of the debt; Statutory capital
and surplus of Universal Guaranty Life Insurance Company be maintained at
no less than $6,500,000; an earnings covenant requiring the sum of the pre-
tax earnings of Universal Guaranty Life Insurance Company and its
subsidiaries (based on Statutory Accounting Practices) and the after-tax
earnings plus non-cash charges of FCC (based on parent only GAAP practices)
shall not be less than two hundred percent (200%) of the Company's interest
expense on all of its debt service. The Company is in compliance with all
of the covenants of the agreement.
B. SUBORDINATED DEBT
The subordinated debt was incurred June 16, 1992 as a part of the
acquisition of the now dissolved Commonwealth Industries Corporation,
(CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum,
payable semi-annually beginning December 16, 1992. These notes provide for
principal payments equal to 1/20th of the principal balance due with each
interest installment beginning December 16, 1997, with a final payment due
June 16, 2002. In addition to regularly scheduled semi-annual principal
payments, the Company made principal reduction payments totaling $2,608,099
on November 23, 1998, and $500,000 on December 16, 1998, on its 10 year
subordinated debt. The additional principal payments were facilitated
through borrowings from affiliated party and ultimate parent, United Trust,
Inc. The original 20-year notes bear interest at the rate of 8 1/2% per
annum on $2,879,354 and 8.75% per annum on $504,962 payable semi-annually
with a lump sum principal payment due June 16, 2012. In May of 1998,
$650,511 of the 20 year debt was retired through a capital contribution by
UTG's parent companies. The capital contribution was facilitated through
the aforementioned parent companies acquisition of the debt.
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<PAGE>
C. AFFILIATED NOTES PAYABLE
United Income, Inc. holds two promissory notes receivable totaling $850,000
due from FCC. Each note bears interest at the rate of 1% over prime as
published in the Wall Street Journal, with interest payments due quarterly.
Principal of $150,000 is due upon the maturity date of June 1, 1999, with
the remaining principal payment of $700,000 becoming due upon the maturity
date of May 8, 2006.
United Trust, Inc. holds three promissory notes receivable totaling
$1,550,000 due from FCC. Each note bears interest at the rate of 1% over
prime as published in the Wall Street Journal, with interest payments due
quarterly. Principal of $250,000 is due upon the maturity date of June 1,
1999, with the remaining principal payment of $1,300,000 becoming due upon
maturity in 2006.
In November 1998 FCC borrowed $2,608,099 from UTI to facilitate the
prepayment of principal on its 10 year subordinated 10-year debt. The note
bears interest at the rate of 7.50%, with interest payments due quarterly
and principal due upon maturity of the note on December 31, 2005. In
addition, FCC borrowed $6,300,000 from UTI to facilitate the prepayment of
principal on the senior debt. This note bears interest at the rate of
9/16% over the prime rate of interest as published in the Wall Street
Journal, with interest payments due quarterly and principal due upon
maturity of the note on December 31, 2006.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1999 $ 626,714
2000 226,714
2001 226,714
2002 1,586,925
2003 0
12. OTHER CASH FLOW DISCLOSURES
On a cash basis, the Company paid $1,686,657, $1,658,703 and $1,700,973 in
interest expense for the years 1998, 1997 and 1996, respectively. The
Company paid $15,805, $57,277 and $17,634 in federal income tax for 1998,
1997 and 1996, respectively.
One of the Company's insurance subsidiaries ("UG") entered into a
coinsurance agreement with Park Avenue Life Insurance Company ("PALIC") at
September 30, 1996. At closing of the transaction, UG received a
coinsurance credit of $28,318,000 for policy liabilities covered under the
agreement. UG transferred assets equal to the credit received. This
transfer included policy loans of $2,855,000 associated with policies under
the agreement and a net cash transfer of $19,088,000 after deducting the
ceding commission due UG of $6,375,000. To provide the cash required to be
transferred under the agreement, the Company sold $18,737,000 of fixed
maturity investments.
13. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions that at times
may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
84
<PAGE>
14. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS 128 specifies the computation, presentation,
and disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock. The Statement's
objective is to simplify the computation of earnings per share, and to make
the U.S. standard for computing EPS more compatible with the EPS standards
of other countries.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the computation of diluted earnings per share is the same
as basic earnings per share since the Company had no dilutive instruments
outstanding. Adopting the new standard required the Company to change its
financial presentation and disclosure, but did not affect the Company's
financial position or results of operations.
The FASB has issued SFAS 130 entitled Reporting Comprehensive Income, which
is effective for financial statements for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in
shareholders' equity, except those arising from transactions with
shareholders, and includes net income and net unrealized gains (losses) on
securities. SFAS 130 was adopted as of January 1, 1998. Adopting the new
standard required the Company to make additional disclosures in the
consolidated financial statements, but did not affect the Company's
financial position or results of operations.
All items of other comprehensive income reflect no related tax effect,
since the Company has an allowance against the collection of any future tax
benefits. In addition, there was no sale or liquidation of investments
requiring a reclassification adjustment for the period presented.
The FASB has issued SFAS 131 entitled, Disclosures about Segments of an
Enterprise and Related Information, which is effective for financial
statements for fiscal years beginning after December 15, 1997. SFAS 131
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments
are components of an enterprise about which separate financial information
is available that is evaluated regularly in deciding how to allocate
resources and in assessing performance. SFAS 131 was adopted as of January
1, 1998. Adopting the new standard had no affect on the Company's
financial position or results of operations, since the Company has no
reportable operating segments.
The FASB has issued SFAS 132 entitled, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which is effective for
financial statements for fiscal years beginning after December 15, 1997.
SFAS 132 revises current disclosure requirements for employer provided post-
retirement benefits. The statement does not change retirement measurement
or recognition issues. SFAS 132 was adopted as of January 1, 1998.
Adopting the new standard had no affect on the Company's financial position
or results of operations, since the Company has no pension plan or other
obligation for post-retirement benefits.
The FASB has issued SFAS 133 entitled, Accounting for Derivative
Instruments and Hedging Activities, which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as a specific type of exposure hedge. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. The adoption of SFAS 133 is
not expected to have a material effect on the Company's financial position
or results of operations, since the Company has no derivative or hedging
type investments.
85
<PAGE>
15. CHANGE IN CONTROL OF UNITED TRUST, INC.
On November 20, 1998, First Southern Funding, Inc., a Kentucky corporation,
("FSF") and affiliates acquired 929,904 shares of common stock of United
Trust, Inc., an Illinois corporation, ("UTI") from UTI and certain UTI
shareholders. As consideration for the shares, FSF paid UTI $10,999,995
and certain shareholders of UTI $999,990 in cash. FSF and affiliates
employed working capital to make these purchases of common stock, including
funds on hand and amounts drawn under existing lines of credit with Star
Bank, NA. FSF borrowed $7,082,878 and First Southern Bancorp, Inc., an
affiliate of FSF, borrowed $495,775 in making the purchases. FSF and
affiliates expect to repay the borrowings through the sale of assets they
currently own.
Details of the transaction can be outlined as follows: FSF acquired 389,715
shares of UTI common stock at $10.00 per share. These shares represented
stock acquired during 1997 by UTI in private transactions. Additionally,
FSF acquired 473,523 shares of authorized but unissued common stock at
$15.00 per share. FSF acquired 66,666 shares of common stock from UTI CEO
Larry Ryherd, and his family, at $15.00 per share. FSF has committed to
purchase $2,560,000 of face amount of UTI convertible notes from certain
officers and directors of UTI for a cash price of $3,072,000 by March 1,
1999. FSF is required to convert the notes to UTI common stock by July 31,
2000. UTI has granted, for nominal consideration, an irrevocable,
exclusive option to FSF to purchase up to 1,450,000 shares of UTI common
stock for a purchase price in cash equal to $15.00 per share, with such
option to expire on July 1, 2001. UTI has also caused three persons
designated by FSF to be appointed, as part of the maximum of 11, to the
Board of Directors of UTI.
Following the transactions described above, and together with shares of UTI
acquired on the market, FSF and affiliates currently own 1,073,577 shares
of UTI common stock (43.1%) becoming the largest shareholder of UTI.
Through the shares acquired and options owned, FSF can ultimately own over
51% of UTI. Mr. Jesse T. Correll is the majority shareholder of FSF, which
is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns a bank that operates out of 14 locations in central Kentucky.
16. PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. At the time the decision to merge
was made, neither UTI nor UII have any other significant holdings or
business dealings. The Board of Directors of each company thus concluded a
merger of the two companies would be in the best interests of the
shareholders. The merger will result in certain cost savings, primarily
related to costs associated with maintaining a corporation in good standing
in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the second quarter of 1999.
86
<PAGE>
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1998
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Premiums and policy
fees, net $ 7,231,481 $ 7,111,079 $ 6,243,869 $ 5,809,648
Net investment
income 3,738,105 3,797,376 3,804,066 3,740,458
Total revenues 11,080,718 10,436,960 9,632,383 9,224,802
Policy benefits
including dividends 6,827,040 6,287,460 6,217,272 6,140,602
Commissions and
amortization of
DAC and COI 1,686,864 1,418,423 1,350,553 4,330,448
Operating and
interest expenses 2,620,664 2,776,983 2,321,915 4,408,983
Operating income
(loss) (53,850) (45,906) (257,357) (5,655,231)
Net income (loss) 31,311 (24,667) 446,540 (1,726,064)
Basic and diluted earnings
(loss) per share 313.11 (246.67) 4,465.40 (17,260.64)
</TABLE>
1997
1st 2nd 3rd 4th
<TABLE>
<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)
Basic and diluted earnings
(loss) per share (235.65) 273.51 (5,124.44) (4,147.19)
</TABLE>
1996
1st 2nd 3rd 4th
<TABLE>
<S> <C> <C> <C> <C>
Premiums and policy
fees, net $ 7,637,503 $ 8,514,175 $ 7,348,199 $ 7,444,581
Net investment
income 3,974,407 3,930,487 4,002,258 3,994,955
Total revenues 12,513,692 12,187,077 11,331,283 10,444,059
Policy benefits
including dividends 6,528,760 7,083,803 8,378,710 8,334,759
Commissions and
amortization of
DAC and COI 2,567,921 2,298,549 1,734,048 3,314,436
Operating and interest
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)
Basic and diluted earnings
(loss) per share 2,686.75 (936.40) (15,638.17) (2,719.15)
</TABLE>
87
<PAGE>
UNITED TRUST GROUP, INC.
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1998
Schedule I
Column A Column B Column C Column D
Amount at
Which Shown
in Balance
Cost Value Sheet
<TABLE>
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Goverment and
government agencies
and authorities $ 36,809,239 $ 37,133,507 $ 36,809,239
State, municipalities,
and political
subdivisions 23,835,306 24,878,182 23,835,306
Collateralized mortgage
obligations 9,406,895 9,524,931 9,406,895
Public utilities 41,724,208 43,525,913 41,724,208
All other corporate
bonds 62,465,200 64,822,846 62,465,200
Total fixed maturities 174,240,848$ 179,885,379 174,240,848
Investments held for sale:
Fixed maturities:
United States Goverment and
government agencies
and authorities 1,434,636 $ 1,437,901 1,437,901
State, municipalities,
and political
subdivisions 35,000 42,224 42,224
Public utilities 0 0 0
All other corporate
bonds 25,000 25,281 25,281
1,494,636 $ 1,505,406 1,505,406
Equity securities:
Banks, trusts and
insurance companies 1,935,619 $ 1,607,798 1,607,798
All other corporate
securities 789,442 479,618 479,618
2,725,061 $ 2,087,416 2,087,416
Mortgage loans on real estate 10,941,614 10,941,614
Investment real estate 8,979,183 8,979,183
Real estate acquired in
satisfaction of debt 1,550,000 1,550,000
Policy loans 14,134,041 14,134,041
Other long-term
investments 1,746,278 1,746,278
Short-term investments 1,062,796 1,062,796
Total investments $ 216,874,457 $ 216,247,582
</TABLE>
88
<PAGE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1998 and 1997
Schedule II
1998 1997
<TABLE>
<S> <C> <C>
ASSETS
Investment in affiliates$ 33,012,770$ 34,683,168
Cash and cash equivalents 52,127 25,980
Notes receivable from
Affiliate 6,301,894 9,781,602
Accrued interest income 22,856 34,455
Total assets $ 39,389,647$ 44,525,205
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 5,505,038 $ 9,635,257
Notes payable to affiliate 146,345 146,345
Income taxes payable 12,467 5,175
Accrued interest payable 21,074 34,455
Other liabilities 380,115 413,429
Total liabilities 6,065,039 10,234,661
Shareholders' equity:
Common stock 46,577,216 45,926,705
Accumulated deficit (12,867,333)(11,594,453)
Accumulated other
comprehensive income (385,275) (41,708)
Total shareholders'
equity 33,324,608 34,290,544
Total liabilities and
shareholders'
equity $ 39,389,647$ 44,525,205
</TABLE>
89
<PAGE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1998
Schedule II
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Revenues:
Interest income from
Affiliates $ 743,080 $ 782,892 $ 792,046
Other income 37,435 37,641 34,600
780,515 820,533 826,646
Expenses:
Interest expense 696,543 776,230 789,496
Interest expense to
Affiliates 12,439 6,662 2,550
Operating expenses 5,115 5,585 4,624
714,097 788,477 796,670
Operating income 66,418 32,056 29,976
Income tax credit
(expense) (12,467) (5,362) (4,664)
Equity in loss of
Subsidiaries (1,326,831) (950,071)(1,686,009)
Net loss $ (1,272,880)$(923,377)(1,660,697)
Basic loss per
share from continuing
operations and
net loss $ (12,728.80)(9,233.77)(16,606.97)
Diluted loss per
share from continuing
operations and
net loss $ (12,728.80)(9,233.77)(16,606.97)
Basic weighted average
shares outstanding 100 100 100
Diluted weighted average
shares outstanding 100 100 100
</TABLE>
90
<PAGE>
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1998
Schedule II
1998 1997 1996
<TABLE>
<S> <C> <C> <C>
Increase (decrease) in cash
and cash equivalents
Cash flows from operating activities:
Net loss $(1,272,880)$(923,377)(1,660,697)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Equity in loss of subsidiaries 1,326,831 950,071 1,686,009
Change in accrued interest income 11,599 747 0
Change in accrued interest payable (13,381) (747) 0
Change in income taxes payable 7,292 (1,488) 3,442
Change in other liabilities (33,314) (38,834) (139,256)
Net cash provided by (used in)
operating activities 26,147 (13,628) (110,502)
Cash flows from investing activities:
Proceeds for fractional shares
from reverse stock
split of subsidiary 0 79 0
Purchase of stock of affiliates 0 0 (95,000)
Net cash provided by (used in)
investing activities 0 79 (95,000)
Cash flows from financing activities:
Receipt of principal on notes
receivable from affiliate 3,479,707 258,252 0
Payments of principal
on notes payable (3,479,707) (258,252) 0
Capital contribution from
affiliates 0 0 200,000
Net cash provided by
financing activities 0 0 200,000
Net increase (decrease) in
cash and cash equivalents 26,147 (13,549) (5,502)
Cash and cash equivalents
at beginning of year 25,980 39,529 45,031
Cash and cash equivalents
at end of year $ 52,127 $ 25,980 $ 39,529
</TABLE>
91
<PAGE>
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1998 and the year ended December 31, 1998
Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<TABLE>
<S> <C> <C> <C> <C> <C>
Life insurance
in force $3,424,677,000 $924,404,000 $1,036,005,000 $3,536,278,000 29.3%
Premiums and policy fees:
Life
insurance$ 30,685,493 $ 4,492,304 $ 20,091 $ 26,213,280 0.1%
Accident and health
insurance 233,025 50,228 0 182,797 0.0%
$ 30,918,518 $ 4,542,532 $ 20,091 $ 26,396,077 0.1%
</TABLE>
92
<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
<TABLE>
<S> <C> <C> <C> <C> <C>
Life insurance
in
force $3,691,867,000 $1,022,458,000 $1,079,885,000 $3,749,294,000 28.8%
Premiums and policy fees:
Life
Insurance $33,133,414 $ 4,681,928 $ 0 $ 28,451,486 0.0%
Accident and health
insurance 240,536 52,777 0 187,759 0.0%
$ 33,373,950 $ 4,734,705 $ 0 $ 28,639,245 0.0%
</TABLE>
* All assumed business represents the Company's
participation in the Servicemen's Group Life
Insurance Program (SGLI).
93
<PAGE>
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1996 and the year ended December 31, 1996
Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<TABLE>
<S> <C> <C> <C> <C> <C>
Life insurance
in
force $3,952,958,000 $1,108,534,000 $1,271,766,000 4,116,190,000 30.9%
Premiums and policy fees:
Life
Insurance$ 35,633,232 $ 4,896,896 $ 0 30,736,336 0.0%
Accident
and health
insurance 258,377 50,255 0 208,122 0.0%
$ 35,891,609 $ 4,947,151 $ 0 30,944,458 0.0%
</TABLE>
* All assumed business represents the Company's
participation in the Servicemen's Group Life
Insurance Program (SGLI).
94
<PAGE>
UNITED TRUST GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1998, 1997 and 1996
Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
<TABLE>
<S> <C> <C> <C> <C>
December 31, 1998
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 70,000 $ 10,000 $ 70,000
December 31, 1997
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
December 31, 1996
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
</TABLE>
95
<PAGE>
