Registration No.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4 REGISTRATION STATEMENT
UNDER
The Securities Act of 1933
UNITED TRUST, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 6711
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
37-1172848
(I.R.S. Employer Identification No.)
5250 SOUTH SIXTH STREET ROAD
SPRINGFIELD, ILLINOIS 62703
(217) 241-6300
(Address, including ZIP code, and telephone number,
including area code, of registrant's principal executive offices)
James E. Melville
President and Chief Operating Officer
5250 South Sixth Street Road
Springfield, Illinois 62703
(217) 241-6300
(Names, address, including ZIP code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale of the
securities to the public: Upon completion of the merger as described in
this Registration Statement
This Registration Statement shall hereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or on such
date as the commission, acting pursuant to said Section 8(a), may
determine.
UNITED TRUST, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K, showing the location in
the Prospectus of the answers to the items in Part I of Form S-4.
Item No. and Caption Location in Prospectus
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus Facing page;Cross-reference
Sheet; Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus Inside Front and Outside Back
Cover Pages of Prospectus;
Table of Contents; Available
Information
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information Proxy Statement Summary
4. Terms of the Transaction Information Regarding the
Proposed Merger; Description
of UTI and UII Capital Stock
5. Pro Forma Financial Information UTI and UII Pro Forma
Consolidated Condensed
Financial Information-
Unaudited
6. Material Contracts with the Company Being
Acquired The UTI Holding Company System;
Business or UTI; Business of
UII: Certain Relationships
and Related Transactions
7. Additional Information Required for Reoffering
By Persons and Parties Deemed to be
Underwriters *
8. Interests of Named Experts and Counsel *
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities *
10.Information with Respect to S-3 Registrants *
11.Incorporation of Certain Information by
Reference *
12.Information with Respect to S-2 or S-3
Registrants *
13.Incorporation of Certain Information by
Reference *
14.Information with Respect to Registrants Other
Than S-2 or S-3 Registrants Selected Financial Data of UTI;
Business of UTI; Market Prices
and Dividends; UTI Management's
Discussion and Analysis of
UTI's Financial Condition and
Results of Operations;
Potential Conflicts of
Interest; Index to Financial
Statements
15.Information with Respect to S-3 Companies *
16.Information with Respect to S-2 or S-3
Companies *
17.Information with Respect to Companies Other
Than S-2 or S-3 Companies Selected Financial Data of UII;
Business Of UII; Market Prices
and Dividends; UII
Management's Discussion and
Analysis Of UII's Financial
Condition and Results Of
Operations; Relationship with
Independent Public Accountants;
Index To Financial Statements
2
18.Information if Proxies, Consents or
Authorizations are to be Solicited Solicitations and Revocability
of UTI and UII Proxies;
Principal Stockholders and
Stock Ownership of Management;
Dissenters' Appraisal Rights;
Information Regarding the
Proposed Merger; Management of
UTI
19.Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer *
________
* Not applicable or answer thereto is negative
3
UNITED INCOME, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On March 2, 1998
To the Stockholders of United Income, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders
of United Income, Inc. ("UII") will be held on March 2, 1998 at 1:00
p.m. at the Holiday Inn Select Airport, 2501 South High School Road,
Indianapolis, Indiana 46241 for the following purposes:
1. To consider and act upon a proposal to approve and adopt an
Agreement and Plan of Reorganization by and between UII and United
Trust, Inc., an Illinois corporation ("UTI"), which provides for the
merger of UII into UTI, the conversion of each outstanding share of UII
Common Stock, no par value into one share of UTI Common Stock, no par
value. Upon the Effective date of the Merger the corporate name of
United Trust, Inc. shall be changed to United Trust Group, Inc.
Stockholders of UII who dissent from approval of this proposal have the
right to obtain payment for the fair value of their shares pursuant
to statutory procedures under Ohio state law, a copy of the relevant
provisions of which is attached as Appendix B to the Proxy Statement; and
2. To transact such other business as may properly come before
the meeting.
The Board of Directors has fixed the close of business on January 5,
1998 as the record date for the determination of stockholders entitled
to notice of and to vote at the Special Meeting.
Whether or not you plan to attend the Special Meeting, you are urged
to mark, date, and sign the enclosed proxy and return it promptly so that
your vote can be recorded. If you are present at the meeting and desire
to do so, you may revoke your proxy and vote in person.
By Order of the Board of Directors,
George E. Francis
George E. Francis, Secretary
Dated: February 9, 1998
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, DATE, SIGN AND PROMPTLY
RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING IN PERSON.
4
UNITED TRUST, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On March 2, 1998
To the Stockholders of United Trust, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders
of United Trust, Inc. ("UTI") will be held on March 2, 1998 at 1:00
p.m. at the Holiday Inn Select Airport, 2501 South High School Road,
Indianapolis, Indiana 46241 for the following purposes:
1. To consider and act upon a proposal to approve and adopt an
Agreement and Plan of Reorganization by and between UTI and
United Income, Inc., an Ohio corporation ("UII"), which provides for
the merger of UII into UTI and the conversion of each
outstanding share of UII Common Stock, no par value, into one share of
UTI Common Stock, no par value. Stockholders of UTI who dissent
from approval of this proposal have the right to obtain payment
for the fair value of their shares pursuant to statutory procedures
under Illinois state law, a copy of the relevant provisions of which
is attached as Appendix C to the Proxy Statement; and
2. To consider and act upon a proposal to approve an amendment
to UTI's Articles of Incorporation increasing the amount of
authorized Common Stock, no par value from 3,500,000 shares to
7,000,000 shares; and
3. To consider and act upon a proposal to approve an amendment
to UTI's Articles of Incorporation to change the corporate name
of United Trust, Inc. to United Trust Group, Inc., subject to
and upon the Effective date of the Merger; and
4. To transact such other business as may properly come
before the meeting.
The Board of Directors has fixed the close of business on January 5,
1998 as the record date for the determination of stockholders entitled to
notice of and to vote at the Special Meeting.
Whether or not you plan to attend the Special Meeting, you are urged
to mark, date and sign the enclosed proxy and return it promptly so that
your vote can be recorded. If you are present at the meeting and desire
to do so, you may revoke your proxy and vote in person.
By Order of the Board of Directors,
George E. Francis
George E. Francis, Secretary
Dated: February 9, 1998
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, DATE, SIGN AND PROMPTLY
RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING IN PERSON.
5
Preliminary Prospectus/Proxy Statement dated December 8, 1997
UNITED INCOME, INC.
Proxy Statement for Special Meeting of Stockholders
March 2, 1998
UNITED TRUST, INC.
Prospectus
826,153 Shares
Common Stock, No Par Value
United Trust, Inc., an Illinois corporation ("UTI"), has filed
with the Securities and Exchange Commission a Registration Statement
under the Securities Act of 1933 covering 826,153 shares of UTI's Common
Stock, no par value ("UTI Common Stock"), to be issued in connection
with the proposed merger ("Merger") of United Income, Inc., ("UII") into
UTI. UTI presently owns 40.6% of the capital stock of UII.
This Prospectus/Proxy Statement ("Proxy Statement"), constitutes a
proxy statement for the Special Meeting of stockholders of each UTI and
UII to be held on March 2, 1998 and a prospectus covering the issuance of
826,153 shares of UTI Common Stock to UII stockholders.
If the Merger is approved and consummated, each one share of UII
Common Stock, no par value outstanding, excluding those held by UII
as treasury shares will be converted into one share of UTI Common
Stock (See "INFORMATION REGARDING THE PROPOSED MERGER").
On December 8, 1997, the high bid for each of the UII Common Stock
and the UTI Common Stock in the over-the-counter market was $7.875.
The UII common stock is not listed on an exchange and is not actively
traded, therefore no quote is available.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENCE.
The date of this Prospectus/Proxy Statement is December 8, 1997.
6
AVAILABLE INFORMATION
UTI is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Securities and Exchange Commission. The
reports, proxy statements distributed to stockholders of UTI, and
other information filed by UTI can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. and at the Commission's Regional
Offices located at Seven World Trade Center, New York, New York 10048,
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
This Prospectus does not contain all of the information set forth in
the Registration Statement (of which this Prospectus is a part) and
exhibits thereto which UTI has filed with the Securities and
Exchange Commission in Washington, D.C. For further information,
reference is made to the Registration Statement including the exhibits
filed or incorporated as a part of it.
________________
No person is authorized in connection with any offering made hereby
to give any information or to make any representation
other than as contained in this Prospectus, and, if given or made, such
information or representation must not be relied upon as having been
authorized by UTI or UII. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, by any person in any
jurisdiction in which it is unlawful for such person to make such an offer
or solicitation. Neither the delivery of this Prospectus nor any sale
made hereunder shall under any circumstances create any implication
that the information contained herein is correct as of any time
subsequent to the date hereof.
7
Preliminary Proxy Material dated December 8, 1997
UNITED INCOME, INC.
5250 South Sixth Street Road
Springfield, Illinois 62703
SOLICITATION AND REVOCABILITY OF UII PROXIES
This Proxy Statement is furnished in connection with the
solicitation by UII's Board of Directors of proxies to be voted at a
Special Meeting of Stockholders, or any adjournment thereof, to be held
on March 2, 1998 at 1:00 p.m. at the Holiday Inn Select Airport, 2501
South High School Road, Indianapolis, Indiana 46201. The purpose of
the Special Meeting of Stockholders, as set forth in the accompanying
notice, is (i) to vote on the proposal for the merger of UII into UTI,
pursuant to the terms of an Agreement and Plan of Reorganization
(the "Merger Agreement"), and (ii) to conduct such other business as may
properly come before the meeting or any adjournment thereof. The Proxy
Statement and accompanying proxy are being mailed to stockholders on or
about February 9, 1998.
Any proxy may be revoked by the person giving it at any time
before it is voted by delivering to the Secretary of UII a written notice
of revocation or a duly executed proxy bearing a later date. Shares
represented by a proxy, properly executed and returned to UII and not
revoked, will be voted at the Special Meeting.
Shares will be voted in accordance with the directions of the
stockholder as specified on the proxy. In the absence of directions,
the proxy will be voted FOR the approval of the Merger Agreement.
Any other matters that may properly come before the meeting will be acted
upon by the persons named in the accompanying proxy in accordance with
their discretion.
The close of business on January 5, 1998 has been fixed as the record
date (the "Record Date") for the determination of stockholders entitled to
notice of and to vote at the Special Meeting and any adjournment
thereof. As of the Record Date, UII had 1,391,919 shares of Common
Stock, no par value, outstanding and entitled to vote. No other
voting securities of UII are outstanding. There are no cumulative
voting rights.
The cost of soliciting proxies will be borne by UII. UII may
reimburse brokers and other persons for their reasonable expenses in
forwarding proxy material to the beneficial owners of UII Common Stock.
Solicitations may be made by telephone, by telegram or by personal calls.
A copy of the Merger Agreement is included as Appendix A to this
Proxy Statement. The description of the Merger contained in this Proxy
Statement, including the summary of the terms of the Merger Agreement,
is qualified in its entirety by reference to the full text of the
Merger Agreement which is incorporated herein by reference.
The date of this Proxy Statement is February 9, 1998.
8
Preliminary Proxy Material dated December 8, 1997
UNITED TRUST, INC.
5250 South Sixth Street Road
Springfield, Illinois 62703
PROXY STATEMENT
SOLICITATION AND REVOCABILITY OF UTI PROXIES
This Proxy Statement is furnished in connection with the
solicitation by the Board of Directors of UTI of proxies to be voted at a
Special Meeting of Stockholders, or at any adjournment thereof, to be held
on March 2, 1998, at 1:00 p.m. at the Holiday Inn Select Airport, 2501
South High School Road, Indianapolis, Indiana 46201. The purpose of
the Special Meeting of Stockholders as set forth in the accompanying
notice is (i) to vote on the proposal for the merger of UII into UTI,
pursuant to the terms of an Agreement and Plan of
Reorganization ("the Merger Agreement"); (ii) to vote on a proposal
to amend UTI's Articles of Incorporation to increase the amount of
authorized Common Stock from 3,500,000 shares to 7,000,000 shares; (iii)
to vote on a proposal to amend UTI's Articles of Incorporation to change
the corporate name from United Trust, Inc. to United Trust Group, Inc.;
and (iv) to conduct such other business as may properly come before the
meeting or any adjournment thereof. The Proxy Statement and
accompanying proxy are being mailed to stockholders on or about February
9, 1998.
Any proxy may be revoked by the person giving it at any time before
it is voted by delivering to the Secretary of UTI a written notice of
revocation or a duly executed proxy bearing a later date. Shares
represented by a proxy, properly executed and returned to UTI and not
revoked, will be voted at the Special Meeting.
Shares will be voted in accordance with the directions of the
stockholder as specified on the proxy. In the absence of directions, the
proxy will be voted FOR the approval of the proposals described above.
Any other matters that may properly come before the meeting will be acted
upon by the persons named in the accompanying proxy in accordance with
their discretion.
The close of business on January 5, 1998 has been fixed as the record
date (the "Record Date") for the determination of stockholders entitled to
notice of and to vote at the Special Meeting and any adjournment
thereof. As of the Record Date, UTI had 1,655,200 shares of Common
Stock, no par value, outstanding and entitled to vote. No other
voting securities of UTI are outstanding. There are no cumulative
voting rights.
The cost of soliciting proxies will be borne by UTI. UTI may
reimburse brokers and other persons for their reasonable expenses in
forwarding proxy material to the beneficial owners of UTI Common Stock.
Solicitations may be made by telephone, by telegram or by personal calls.
A copy of the Merger Agreement is included as Appendix A to this
Proxy Statement. The description of the Merger contained in this Proxy
Statement, including the summary of the terms of the Merger Agreement,
is qualified in its entirety by reference to the full text of the
Merger Agreement which is incorporated herein by reference.
The date of this Proxy Statement is February 9, 1998.
9
TABLE OF CONTENTS
Page
PROXY STATEMENT SUMMARY 11
INTRODUCTION 14
THE UTI HOLDING COMPANY SYSTEM 14
PRINCIPAL STOCKHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT 16
INFORMATION REGARDING THE PROPOSED MERGER 18
DISSENTERS' RIGHTS 22
SELECTED FINANCIAL DATA OF UII 25
UII MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 26
SELECTED FINANCIAL DATA OF UTI 41
UTI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 42
FEDERAL INCOME TAXES 58
CAPITALIZATION OF UTI AND UII 58
UTI AND UII PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
INFORMANTION - UNAUDITED 59
MARKET PRICES AND DIVIDENDS 66
BUSINESS OF UII 67
BUSINESS OF UTI 73
MANAGEMENT OF UTI 86
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 92
POTENTIAL CONFLICTS OF INTEREST 92
DESCRIPTION OF UTI AND UII CAPITAL STOCK 93
PROPOSED INCREASE IN THE AUTHORIZED COMMON STOCK OF UTI 95
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS 96
OTHER MATTERS TO COME BEFORE THE MEETING 96
INDEX TO FINANCIAL STATEMENTS OF UTI AND UII 97
Appendix A Agreement and Plan of Reorganization 163
Appendix B Rights of Dissenting Stockholders of
United Income, Inc. 181
Appendix C Rights of Dissenting Stockholders of
United Trust, Inc. 185
Appendix D Proposed Amendment to Articles of
Incorporation of UTI 188
10
PROXY STATEMENT SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in
the Proxy Statement and by the full text of the Agreement and Plan
of Reorganization (the "Merger Agreement") which is attached hereto as
Appendix A and incorporated herein by reference.
Date of Special Meetings
of UTI and UII
Stockholders March 2, 1998
Record Date January 5, 1998
Shares of UTI and UII
Capital Stock Outstanding
On Record Date UTI Common Stock 1,655,200
UII Common Stock 1,391,919
Proposed Merger UII will be merged into UTI pursuant to the
Merger Agreement.
Reason for Merger The Board of Directors of each UTI and UII has
concluded that the Merger will benefit the
business operations of UTI and UII and their
respective stockholders by creating a larger,
more viable life insurance holding company
with lower administrative costs, a
simplified corporate structure, and more readily
marketable securities.
Conversion Ratio One share of UII Common Stock, excluding shares
held by UII as treasury shares and shares as
to which dissenter's appraisal rights shall have
been perfected, will be converted into one
share of UTI Common Stock.
Vote Required The affirmative votes of the holders of two-
thirds of the outstanding UTI Common Stock are
required for approval of the merger by UTI. The
affirmative vote of the holders of a majority
of the outstanding UII Common Stock is
required for approval of the merger by UII. All
directors and officers of UTI and UII as a group
own 42.8% of the outstanding UTI Common Stock.
(See "PRINCIPAL STOCKHOLDERS AND STOCK OWNERSHIP
OF MANAGEMENT".)
Tax Consequences The Merger will qualify as a tax-free
reorganization for federal income tax purposes.
No gain or loss will be recognized by UTI or
UII, or stockholders of UTI or UII, except that
gain or loss will be recognized to the extent
of cash received by a dissenting
stockholder.
Management
Recommendation Management of each of UTI and UII recommends
approval of the Merger.
Dissenters' Appraisal
Rights UTI and UII stockholders who dissent from
approval of the Merger pursuantto certain
procedures under Illinois and Ohio state laws
have the right to obtain payment for the fair
value of their shares. (See DISSENTERS' APPRAISAL
RIGHTS".)
11
Businesses of UTI
and UII UTI and UII are both engaged through
subsidiaries in the life insurance business.
Potential Conflicts of
Interest Because of the existence of minority interests
in the holding companies within the UTI holding
company system, potential conflicts of interest
exist with respect to intercompany
transactions. (See "POTENTIAL CONFLICTS OF
INTEREST".)
Related Transactions See "THE UTI HOLDING COMPANY SYSTEM" and
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
Proposed Increase in UTI
Authorized Common
Stock The number of authorized shares of Common
Stock of UTI will be increased from 3,500,000
to 7,000,000
Change in Corporate
Name Upon the Effectiveness of the Merger, the
corporate name of United Trust, Inc. will
change to United Trust Group, Inc.
12
SELECTED FINANCIAL INFORMATION
Proposed Merger of UTI and UII
(000's omitted except on per share data)
Nine Months Ended Year Ended
September 30, December 31,
1997 1996 1996 1995 1994
UTI - Historical
Revenues $ 34,192 $ 36,963 $ 46,976 $ 49,869 $ 49,207
Net Income (loss)$ (376) $ (579) $ (938) $ (3,001) $ (1,624)
Per common share:
Income (loss) $ (0.21) $ (0.31) $ (0.50) $ (1.61) $ (0.87)
Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0
Balance sheet data:
Assets $ 351,653 $ 359,158 $ 355,474 $ 356,305 $ 360,258
Common stockholders equity:
Total $ 15,708 $ 18,369 $ 18,014 $ 19,022 $ 21,869
Per Share $ 9.61 $ 9.83 $ 9.63 $ 10.19 $ 11.71
UII - Historical
Revenues $ 943 $ 1,575 $ 1,791 $ 2,234 $ 1,667
Net Income (loss)$ 4 $ (297) $ (319) $ (2,148) $ (344)
Per common share:
Income (loss) $ 0.00 $ (0.21) $ (0.23) $ (1.54) $ (0.25)
Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0
Balance sheet data:
Assets $ 13,039 $ 12,899 $ 12,881 $ 13,298 $ 15,414
Common Stockholders equity:
Total $ 12,137 $ 11,997 $ 11,977 $ 12,355 $ 14,403
Per common
share $ 8.72 $ 8.62 $ 9.25 $ 9.55 $ 10.37
UTI and UII - Pro Forma:
Revenues $ 33,651 $ 46,051
Net Income (loss)$ (373) $ (1,162)
Per common share:
Income (loss) $ (0.14) $ (0.41)
Cash dividends $ 0 $ 0
Balance sheet data:
Assets $ 345,043 $ 347,232
Common stockholders equity:
Total $ 24,631 $ 27,410
Per Share $ 8.96 $ 9.63
13
PROXY STATEMENT FOR SPECIAL MEETINGS OF STOCKHOLDERS OF
UNITED TRUST, INC.
And
UNITED INCOME, INC.
INTRODUCTION
This Proxy Statement is being provided to stockholders of United
Trust, Inc. an Illinois corporation ("UTI"), and to stockholders of
United Income, Inc. an Ohio corporation ("UII"), in connection with the
solicitation of proxies by and on behalf of the management of UTI
and UII, respectively, to be used in voting at the Special Meetings of
Stockholders of UTI and UII, respectively, in accordance with the
foregoing Notices of Special Meetings of UTI and UII. The mailing
address and telephone number of each UTI and UII is 5250 South Sixth
Street, Springfield, Illinois 62703 and (217) 241-6300.
THE UTI HOLDING COMPANY SYSTEM
UTI and UII are members of an insurance holding company
system of which UTI is the ultimate parent company. The following is the
current organizational chart for the companies that are members of
the Company's insurance holding company system and affiliates of the
Company, and the acronyms that will be used herein to reference the
companies:
ORGANIZATIONAL CHART
AS OF DECEMBER 15, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI
owns 53% of United Trust Group ("UTG") and 40.6% of United Income, Inc.
("UII"). UII owns 47% of UTG. UTG owns 79.4% 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 83.9% of Appalachian Life Insurance Company ("APPL") and APPL
owns 100% of Abraham Lincoln Insurance Company ("ABE").
14
For purposes of this proxy statement, the term "affiliate
life insurance companies" shall mean UG, USA, APPL and ABE, and the
term "non-insurance affiliate companies" shall mean the affiliated
companies other than UG, USA, APPL and ABE.
All of these companies, either directly or through subsidiaries
operate principally in the individual life insurance business. The
primary business of the companies has been the servicing of existing
insurance business in force, the solicitation of new insurance business,
and the acquisition of other companies in similar lines of business.
UTI was incorporated December 14, 1984, as an Illinois corporation.
During the next two and a half years, UTI was engaged in an intrastate
public offering of its securities, raising over $12,000,000 net of
offering costs. In 1986, UTI formed a life insurance subsidiary and by
1987 began selling life insurance products.
UII was incorporated on November 2, 1987, as an Ohio corporation.
Between March 1988 and August 1990, UII raised a total of approximately
$15,000,000 in an intrastate public offering in Ohio. During 1990, UII
formed a life insurance subsidiary and began selling life insurance
products.
UTI currently owns 40.6% of the outstanding common stock of UII
and accounts for its investment in UII using the equity method.
On February 20, 1992, UTI and UII, formed a joint venture,
United Trust Group, Inc. On June 16, 1992, UTI contributed $2.7
million in cash, an $840,000 promissory note and 100% of the common
stock of its wholly owned life insurance subsidiary. UII contributed $7.6
million in cash and 100% of its life insurance subsidiary to UTG. After
the contributions of cash, subsidiaries, and the note, UII owns 47% and
UTI owns 53% of UTG.
On June 16, 1992, UTG acquired 67% if the outstanding common stock
of the now dissolved Commonwealth Industries Corporation ("CIC"), for a
purchase price of $15,567,000. Following the acquisition, UTI
controlled eleven life insurance subsidiaries. UTI and UII have taken
several steps to streamline and simplify the corporate structure
following the acquisitions.
On December 28, 1992, Universal Guaranty Life Insurance Company was
the surviving company of a merger with Roosevelt National Life Insurance
Company, United Trust Assurance Company, Cimarron Life Insurance and
Home Security Life Insurance Company. On June 30, 1993, Alliance
Life Insurance Company, a subsidiary of UG, was merged into UG.
On March 30, 1994, Farmers and Ranchers Life Insurance Company
("F&R) was sold to an unrelated third party. F&R was a small life
insurance company which did not significantly contribute to the
operations of the group. F&R primarily represented a marketing
opportunity. Management determined it would not be able to allocate the
time and resources necessary to properly develop the opportunity, due
to continued focus and emphasis on certain other agency forces of the
Company.
On July 31, 1994, Investors Trust Assurance Company was merged into
Abraham Lincoln Insurance Company.
On August 15, 1995, the shareholders of CIC, Investors Trust, Inc.,
and Universal Guaranty Investment Company, all intermediate holding
companies within the UTI group, voted to voluntarily liquidate each of
the companies and distribute the assets to the shareholders (consisting
solely of common stock of their respective subsidiary). As a result,
the shareholders of the liquidated companies became shareholders of FCC.
The proposed merger described in the Proxy
Statement/Prospectus is a further step in the consolidation and
restructuring of the UTI holding company system.
15
PRINCIPAL STOCKHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table shows with respect to any person who is known
to be the beneficial owner of more than 5% of the UTI Common Stock or UII
Common Stock and shows for each: (i) the total number of shares of such
stock beneficially owned as of January 5, 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
UII Common United Trust, Inc 565,766 40.6%
Stock, 5250 South Sixth Street
Springfield, IL 62703
UTI Common Larry E. Ryherd 562,431 33.9%
Stock, 12 Red Bud Lane
Springfield, IL 62707
(1) Larry E. Ryherd owns 230,621 shares of UTI's Common Stock in his
own name. Includes; (i) 150,050 shares of UTI's Common Stock in the
name of Dorothy LouVae Ryherd, his wife; (ii) 150,000 shares of UTI's
Common Stock which are held beneficially in trust for the three
children of Larry E. Ryherd and Dorothy LouVae Ryherd, namely Shari
Lynette Serr, Derek Scott Ryherd and Jarad John Ryherd; (iii) 14,800
shares of UTI's Common Stock , 6,700 shares of which are in the name
of Shari Lynette Serr, 1,200 shares of which are held in the name of
Derek Scott Ryherd and 6,900 shares of which are in the name of Jarad
John Ryherd; (iv) 500 shares of UTI's Common Stock held in the name of
Larry E. Ryherd as custodian for Charity Lynn Newby, his niece; (v)
500 shares held in the name of Larry E. Ryherd as custodian for Lesley
Carol Newby, his niece; (vi) 2,000 shares held by Dorothy LouVae
Ryherd, his wife as custodian for granddaughter; 160 shares held by
Larry E. Ryherd as custodian for granddaughter; and (viii) 13,800
shares which may be acquired by Larry E. Ryherd upon the exercise
of outstanding stock options.
The following table shows with respect to each of the directors of
UTI and UII and with respect to officers and directors of UTI and UII as a
group, (i) the total number of shares of common stock of UTI and UII
beneficially owned as of January 5, 1998 and the nature of such
ownership; (ii) the percent of such classes of common stock so owned as
of the same date.
Title Directors, Named Executive Number of Shares Percent
of Officers, & All Directors & and Nature of of
Class Executive Officers as a Group Ownership Class
UII Common Vincent T. Aveni 7,716 (1) *
Stock Marvin W. Berschet 7,161 (2) *
Gertrude W. Donahey 7,000 *
George E. Francis 0 *
James E. Melville 0 *
Charlie E. Nash 7,052 *
Larry E. Ryherd 47,250 (3)(5) 3.4%
Robert W. Teater 7,380 (4) *
All directors and executive officers 83,559 6.0%
as a group (eight in number)
16
Title Directors, Named Executive Number of Shares Percent
Of Officers, & All Directors & and Nature of of
Class Executive Officers as a Group Ownership Class
UTI John S. Albin 10,503 (6) *
Common William F. Cellini 1,000 *
Stock, Robert E. Cook 10,199 *
Larry R. Dowell 10,142 *
George E. Francis 4,600 (7) *
Donald G. Geary 1,200 *
Raymond L. Larson 4,400 (8) *
Dale E. McKee 11,122 (9) *
James E. Melville 52,500 (10) 3.2%
Thomas F. Morrow 40,555 (11) 2.4%
Larry E. Ryherd 562,431 (12) 33.9%
All directors and 715,808 42.8%
Executive officers as a
Group (eleven in number)
(1) Includes 272 shares owned directly by Mr. Aveni's brother and
210 shares owned directly by Mr. Aveni's son.
(2) 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.
(3) 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.
(4) Includes 210 shares owned directly by Mr. Teater's spouse.
(5) In addition, Mr. Ryherd is a director and officer of UTI, which owns
565,766 shares (40.6%) of UII. Mr. Ryherd disclaims any beneficial
interest in the 416,185 shares of UII owned by UTI as the board of
directors controls the voting and investment decisions regarding such
shares.
(6) Includes 392 shares owned directly by Mr. Ablin's spouse.
(7) Includes 4,600 shares which may be acquired upon the exercise of
outstanding stock options.
(8) Includes 375 shares owned directly by Mr. Larson's spouse.
(9) Includes 778 shares owned jointly with his spouse. (10) James E.
Melville owns 2,500 shares individually and 14,000 shares jointly with
his spouse. Includes; (i) 3,000 shares of UII's Common Stock which
are held beneficially in trust for his daughter, namely Bonnie J.
Melville; (ii) 3,000 shares of UII'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
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 the
exercise of outstanding stock options.
(11) Thomas F. Morrow owns 21,855 shares individually. Includes (i) 1,500
shares held in the name of Thomas F. Morrow as custodian for his
grandchildren, and (ii) 17,200 shares which may be acquired by Thomas
F. Morrow upon the exercise of outstanding stock options.
(12) See footnote 1 under "Principal Stockholders".
* Less than 1%.
Except as indicated above, the foregoing persons hold sole voting and
investment power.
17
INFORMATION REGARDING THE PROPOSED MERGER
On December 9, 1997, the Board of Directors of each UTI and UII
unanimously approved an Agreement and Plan of Reorganization (the
"Merger Agreement") providing for the merger of UII into UTI. UTI and
UII jointly own 100% of the outstanding capital stock of UTG.
Simultaneously at closing, UTG shall be liquidated and UTI's name
will be changed to United Trust Group, Inc. A summary of certain
provisions of the Merger Agreement is set forth below and is qualified in
its entirety by reference to the full text of the Merger Agreement which
is attached hereto as Appendix A to this Proxy Statement.
THE PROPOSED MERGER
The Merger Agreement provides that, if approved, UII will be merged
into UTI. UTI will continue in existence as the surviving company
("Surviving Company"), its name will be changed to United Trust Group,
Inc. and will be governed by the State of Illinois. The separate
existence of UII will cease, but its business will be continued by
the Surviving Company. No change in the present business of UII is now
contemplated. The Surviving Company will succeed to ownership of all of
UII's assets and will assume all of UII's liabilities.
The officers and directors of UTI and UII in office on the effective
date of the Merger will continue in office as officers and directors of
the Surviving Company, until the next annual meeting of UTI
stockholders or until their successors are duly elected and qualified.
The certificate of incorporation of UTI, as amended, will continue
to be the certificate of incorporation of the Surviving company following
the Effective Date of the Merger (as hereinafter defined), and is not
amended by the Merger Agreement. The by-laws of UTI will continue as the
by-laws of the Surviving Company until altered, amended or repealed.
REASONS FOR THE MERGER
The Board of Directors of each of UTI and UII have concluded
that the Merger will benefit the business operations of UTI and UII
and their respective stockholders by creating a larger, more viable life
insurance holding company with lower administrative costs, a
simplified corporate structure, and more readily marketable securities. The
Merger will increase commonality of ownership and thus decrease potential
conflicts of interest among stockholders of the companies. (See
"POTENTIAL CONFLICTS OF INTEREST".) The Board of Directors and management
of each of UTI and UII also believe that the terms of the Merger are
fair and equitable to the stockholders of the respective companies.
EFFECTIVE DATE
The Merger would become effective after the adoption of the Merger
Agreement by the required two thirds affirmative vote of the UTI Common
Stock entitled to vote thereon and the required majority affirmative
vote of the UII Common Stock, the execution of the Merger Agreement
by the respective officers of UTI and UII, the filing of the merger
Agreement and Articles of Merger with the Secretary of State of Illinois
and the Secretary of State of Ohio, and the issuance by the Secretary of
State of Ohio, a certificate of merger (the "Effective Date").
CONVERSION OF UII SHARES AND DETERMINATION OF MERGER EXCHANGE RATIOS
The terms of the Merger Agreement provide that on the Effective
Date, each (one) issued and outstanding share of UII Common Stock,
excluding shares of UII capital stock held as treasury shares by UII or as
to which dissenters' rights have been perfected, shall immediately,
without any further action by UII, UTI or UII stockholders, be converted
into one share of UTI Common Stock. On the Effective Date of the Merger,
all further sales or transfers of UII shares will cease. All shares of
UII Common Stock held as treasury shares will be cancelled and no
consideration issued with respect thereto.
18
The exchange ratio was arrived at based upon a review of a number
of factors, including (1) the relationship of the current number of
shares of UTI and UII common stock outstanding and the percentage
ownership of each company of their common affiliate, United Trust Group,
Inc. and (2) the relative historical and projected earnings per share,
the relative historical book value per share, and the relative historical
market value per share of each of UTI and UII. Taking all these factors
into account, the Board of Directors of each UTI and UII determined
that the exchange ratio of each (one) share of UII Common Stock for one
share of UTI Common Stock would be fair to the stockholders of UTI and UII
respectively.
INCREASE IN AUTHORIZED UTI COMMON STOCK
The merger will require the issuance of almost all of the remaining
authorized but unissued shares of UTI. In order to provide UTI with
flexibility regarding future merger options, the raising of additional
capital or the granting of stock options, a proposal to amend
UTI's Certificate of Incorporation to increase the number of shares
of UTI's authorized Common Stock from 3,500,000 shares to 7,000,000
shares will be voted upon by UTI's stockholders at the same special
meeting on March 2, 1998 at which the proposed Merger will be voted
upon by UTI stockholders. UTI has no pending arrangements or plans for
these additional authorized shares at this time. The purpose of the
Amendment is to provide UTI with the flexibility to engage in
future transactions that UTI's Board of Directors may deem necessary or
desirable without further shareholder action. (See PROPOSED INCREASE IN
THE AUTHORIZED COMMON STOCK OF UII)
EFFECT ON CURRENT STOCKHOLDERS
The Merger will have no effect on the rights and privileges of
current stockholders of UTI. The name of the company will be changed to
United Trust Group, Inc. and the shares of UTI Common Stock will be
converted to the new shares of United Trust Group, Inc. (the "New
Shares"). The shares of UTI Common Stock to be received by UII
stockholders for their UII shares will be identical to the New Shares.
After the Merger, assuming no stockholders execute their
dissenters' rights, the former UII stockholders would receive 826,153 New
Shares which would constitute 33.7% of the then issued and outstanding
shares.
EXPENSES
Each of UTI and UII will bear its respective expenses relating to
the Merger.
TERMINATION AND AMENDMENT
The Merger Agreement may be terminated at any time before the
Merger becomes effective; (i) by mutual consent of the Boards of Directors
of UTI and UII; (ii) by the Board of Directors of either UTI or UII if the
merger is for any reason not consummated on or before December 31, 1998;
or (iii) by the Board of Directors of either UTI or UII if any of the
conditions for closing described below at "INFORMATION REGARDING
THE PROPOSED MERGER- Other Provisions" has not been met.
No material changes may be made to the terms of the Merger
Agreement either before or after the Special Meeting of Stockholders of
UII and the Special Meeting of Stockholders of UTI without the
written agreement of the Board of Directors of each of UTI and UII.
Additionally, should the Merger Agreement be approved by a vote of UTI and
UII stockholders at their respective Special Meetings, no amendment or
modification that would materially and adversely affect the rights of
UTI or UII stockholders may be made to the terms of the Merger Agreement.
If any such change were made, UTI and UII stockholders would be notified
and a resolicitation of the stockholders made.
19
OTHER PROVISIONS
The Merger Agreement contains certain representations and
warranties of each of UTI and UII. In the Merger Agreement, UTI and
UII each represent and warrant regarding their current organization and
standing; the existence of subsidiaries; their current respective
capitalizations; the accuracy and completeness of financial statements
delivered in connection with the Merger; the absence of undisclosed
liabilities; the absence of certain materially adverse changes,
events or conditions; the absence of litigation or proceedings affecting
each company or its properties; the compliance by each company with all
licensing and regulatory laws and requirements; the accuracy and
completeness of information supplied by the respective company for
this Proxy Statement; the absence of conflicts between the Merger Agreement
and any other contract or document or any judgment or decree; the
authority of the respective company to execute, deliver and perform
the Merger Agreement; the absence of material undisclosed tax
liabilities; and the absence of material undisclosed liens
against or encumbrances of each company's respective assets.
The Merger Agreement also contains certain covenants by each of UTI
and UII. In the Merger Agreement, each of UTI and UII covenants to
conduct its business in the ordinary course; to refrain from materially
amending any employment contract, pension or retirement plan, or charter
documents and by-laws; to refrain from issuing securities or declaring or
paying any dividends; to refrain from incurring additional
significant debt; to provide access to the other company to properties,
books and records of the company; and to attempt to obtain all necessary
consents for consummation of the Merger including a favorable vote of
stockholders.
Additionally, the Merger Agreement contains several conditions to
the obligation of each of UTI and UII to close the Merger Agreement and
consummate the Merger. Neither UTI nor UII is required to close the
Merger Agreement and consummate the Merger if any representation or
warranty of the other company is untrue; if any covenant is unfulfilled;
if approval of the other company's stockholders has not been obtained; if
the Registration Statement pertaining to the Merger is not fully
effective; if all necessary governmental approvals have not been obtained;
if statements made in this Proxy Statement are inaccurate or incomplete;
if an action or proceedings exist against any party or its officers or
directors seeking to restrain or prohibit or obtain damages or other
relief in connection with the Merger; or if all necessary third party
consents have not been obtained.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase of UII by UTI at a
cost of $8,922,731.
TAX CONSEQUENCES
The Merger will constitute a statutory merger under the applicable
laws of Illinois and Ohio and will qualify for treatment as a
reorganization within the meaning of section 368(a)(1)(A) of the
Internal Revenue Code of 1986 as amended. A tax ruling will not be
requested. The Merger will result in the following federal income tax
effects:
(a) no gain or loss will be recognized by UTI or UII.
(b) the basis of assets acquired by UTI in the Merger will be the
same as UII's basis in such assets;
(c) no gain or loss will be recognized by UII stockholders upon
receipt of UTI Common Stock;
(d) the basis of UTI Common Stock received by an UII stockholder
will be the same as that stockholder's basis in the stock held
by him immediately prior to the Merger;
(e) the holding period of UTI Common Stock received by an UII
stockholder will include that stockholder's holding period
for the stock previously held by him, provided that the stock
was a capital asset in the stockholder's hands at the time of
the Merger;
(f) no gain or loss will be recognized by current stockholders of
UTI, and no change in the basis of their shares will occur.
20
Stockholders should consult their own tax advisors as to the effects on
them of the Merger under federal, state and local tax laws.
COMPARISON OF OHIO AND ILLINOIS LAW
If the proposed Merger is consummated, the UII stockholders
immediately prior to the Merger will become stockholders of UTI, an
Illinois corporation, and, as such, will have rights of stockholders
under Illinois law rather than Ohio law. The following summary is
intended to highlight some substantive differences in stockholders'
rights under Ohio and Illinois law, but does not purport to be an
exhaustive discussion of all distinctions.
STOCKHOLDER APPROVAL OF SIGNIFICANT CORPORATE CHANGES
Under Ohio law, amendment of the Articles of Incorporation
requires approval of the holders of two-thirds of the outstanding
capital stock entitled to vote. Similarly, a merger consolidation,
acquisition by exchange of shares or sale of substantially all of the
assets of an Ohio corporation requires the approval of the holders of two-
thirds of the outstanding capital stock entitled to vote. The articles
of incorporation of an Ohio corporation may modify this statutory two-
thirds vote requirement. UII has modified its articles of
incorporation requiring the affirmative vote of holders of the
majority of the outstanding shares. Thus, a majority of the
outstanding shares of UII entitled to vote will be required to merge UII
into UTI.
Under Illinois law, the vote of shareholders of the surviving
corporation to a merger is required if the authorized but unissued
common stock of the surviving corporation which is to be issued in the
merger exceeds 20% of the common stock of such corporation
outstanding immediately prior to the effective date of such merger.
Because the number of shares to be issued in the merger exceeds the
20% threshold amount, the merger of UII into UTI must receive the
affirmative vote of holders of at least twothirds of the outstanding common
stock of UTI.
STOCKHOLDER VOTING IN GENERAL
Under Ohio and Illinois laws, voting for directors is cumulative;
however, the articles of incorporation, may be amended to eliminate
cumulative voting. Both UTI and UII have amended their articles of
incorporation to eliminate cumulative voting.
Under Ohio and Illinois laws, proxies for stock are valid for 11
months unless a different period is stated in the proxy.
DISSENTING STOCKHOLDERS' RIGHTS
Under the Illinois Law, each shareholder of UTI may, in lieu of
receiving the consideration set forth in the Merger Agreement, seek the
fair value of his or her shares of UTI common stock and, if the
Merger is consummated, receive payment of such fair value in cash from
UTI. To receive such payment, a dissenting shareholder must follow
the procedures set forth in Section 11.70 of the Illinois Law, a copy of
which Is attached hereto as Appendix C. Failure to follow such
procedures shall result in the loss of such shareholder's dissenters'
rights. Any UTI shareholder who returns a blank executed proxy card will
be deemed to have approved the Merger Agreement and to have waived
any dissenters' rights he or she may have. See `Dissenters' Rights of
Shareholders of UTI".
Pursuant to Section 1701.84 of the Ohio Revised Code, UII
Shareholders entitled to vote on the Merger who follow the procedures
set forth in Section 1701.85 of the Ohio Revised Code have the right to
demand payment of the "fair cash value" of their shares of UII Common
Stock if the Merger is consummated. See "Dissenters' Rights of
Shareholders of UII," Section 1701.85 of the Ohio Revised Code is
attached as Appendix B to this Proxy Statement/Prospectus.
21
STOCKHOLDER RIGHTS TO INSPECT BOOKS AND RECORDS
A shareholder of a corporation in both Illinois and Ohio may
examine the books and records of the corporation or have an agent examine
such books only for a proper purpose.
REMOVAL OF DIRECTORS
Both Ohio and Illinois allow stockholders to remove directors
with or without cause. Such action requires the affirmative vote of
holders of a majority of the voting power then entitled to vote in the
election of directors.
MANAGEMENT RECOMMENDATIONS
The board of directors of each UTI and UII has unanimously
approved the Merger Agreement and recommends to the stockholders of UTI
and UII that they vote for approval of the Merger Agreement. (See
"INFORMATION REGARDING PROPOSED MERGER - Reasons for the Merger").
Management of each UTI and UII believes that the Merger is fair and
equitable to its stockholders. UTI intends to vote its shares of UII
in favor of the Merger and Merger Agreement.
DISSENTERS' RIGHTS OF SHAREHOLDERS OF UII
Section 1701.84 of the Ohio Revised Code provides that each
shareholder of UII Common Stock who is entitled to vote on the Merger may
dissent from the Merger. The following is a summary of the principal
steps a dissenting shareholder must take to perfect his or her
dissenters' rights under Section 1701.85 of the Ohio Revised Code. This
summary does not purport to be complete and is qualified in its entirety
by reference to Section 1701.85 of the Ohio Revised Code, a copy of
which is attached as Appendix B to this Proxy Statement/Prospectus.
To perfect his or her dissenters' rights, a dissenting UII
Shareholder must not vote in favor of the Merger and must deliver to
UII, within ten days after the vote on the Merger is taken, a written
demand for payment of the fair cash value of his or her shares of UII
Common Stock. A proxy that is returned signed but on which no
voting preference is indicated will be voted in favor of the Merger and
will constitute a waiver of dissenters' rights. A dissenting
shareholder's written demand for payment of the fair cash value of his or
her shares should be delivered to UII, 5250 South Sixth Street,
Springfield, Illinois 62703, Attention: Corporate Secretary. Voting
against the Merger will not by itself constitute a written demand.
The written demand for payment must identify the name and address
of the holder of record of such shareholder's UII Common Stock, the
number of shares of UII common stock held by such shareholder, and the
amount claimed by such shareholder as the fair cash value of his or her
shares. A beneficial owner of shares of UII common stock must, in all
cases, have the record holder of such shares deliver the written
demand for payment. The written demand for payment must be signed by the
shareholder of record (or by the duly authorized representative of the
shareholder) exactly as the shareholder's name appears on the shareholder
records of UII. A written demand for payment with respect to shares of
common stock of UII owned jointly by more than one person must identify
and be signed by all of the shareholders of record. Any person signing a
written demand for payment on behalf of a partnership or corporation or
in any other representative capacity (such as an attorney-in-fact,
executor, administrator, trustee or guardian) must indicate the nature of
the representative capacity and, if requested, must furnish written
proof of this capacity and such person's authority to sign such
written demand.
Because only shareholders of record on the Record Date may exercise
dissenters' rights, any person who beneficially owns shares that are held
of record by a broker, fiduciary, nominee or other holder and who
wishes to exercise dissenters' rights must instruct the record holder of
shares to satisfy the condition outlined above. If a record holder does
not satisfy, in a timely manner, all of the conditions outlined in this
section entitled "Rights of Dissenting Shareholders," the dissenters'
rights for all of the shares held by that shareholder will be lost.
22
Unless UII and the dissenting shareholder reach an agreement on
the fair cash value of the shares of UII Common Stock held by the
dissenting shareholder, the dissenting shareholder of UII may, within
three months after the dissenting shareholder has delivered his or
her written demand for payment to UII, file a complaint in the Court of
Common Pleas of Franklin County, Ohio (the "Common Pleas Court"), or
join or be joined in an action similarly brought by another dissenting
UII shareholder, for a judicial determination of the fair cash value
(as defined below) of the shares of UII Common Stock held by the
dissenting shareholder.
Upon motion of the complainant, the Common Pleas Court will hold a
hearing to determine whether the dissenting UII shareholder is entitled
to be paid the fair cash value of his or her shares of UII Common Stock.
If the Common Pleas Court finds that the dissenting shareholder is so
entitled, it may appoint one or more appraisers to receive evidence and
recommend a decision on the amount of the fair cash value of the
shares of UII Common Stock held by such shareholder. The Common Pleas
Court is required to make a finding as to the fair cash value of the
shares of UII common stock and to render judgment against UII for
the payment thereof, with interest at such rate and from such date as
the Common Pleas Court considers equitable. Costs of the proceedings,
including reasonable compensation to the appraiser or appraisers to be
fixed by the Common Pleas Court, are to be apportioned or assessed as
the Common Pleas Court considers equitable. Payment of the fair cash
value of the shares of UII common stock held by the dissenting
shareholder is required to be made within 30 days after the date of
final determination of such value or the date on which the Merger is
consummated, whichever is later, only upon surrender to UII of the
certificates representing such shares.
Under the Ohio Revised Code, "fair cash value" is the amount that a
willing seller, under no compulsion to sell, would be willing to accept,
and that a willing buyer, under no compulsion to buy, would be willing to
pay. The fair cash value is to be determined as of the date prior to
the day of the vote on the Merger, and, in computing the fair cash
value, any appreciation or depreciation in market value resulting from
the Merger shall be excluded from the computation. In no event may
the fair cash value exceed the amount specified in the written demand for
payment delivered to UII by a dissenting shareholder.
Under the Ohio Revised Code, a shareholder's dissenters'
rights will terminate if among other things, the dissenting
shareholder has not complied with Section 1701.85 of the Ohio Revised
Code (unless the Board of Directors of UII waives compliance), the
Merger is abandoned or otherwise not carried out or the dissenting
shareholder, upon obtaining the consent of the Board of Directors of UII,
withdraws his or her written demand for payment, or no agreement is
reached between UII and the dissenting shareholder with respect to
the fair cash value of his or her shares of UII Common Stock and no
complaint is timely filed in the Common Pleas Court.
FAILURE TO COMPLY STRICTLY WITH THE FOREGOING PROCEDURES
SHALL CAUSE A SHAREHOLDER TO LOSE HIS OR HER DESSENTERS' RIGHTS. ANY
SHAREHOLDER WHO WISHES TO EXERCISE HIS OR HER DISSENTERS' RIGHTS IS
URGED TO CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
DISSENTERS' RIGHTS OF SHAREHOLDERS OF UTI
Section 11.65 and 11.70 of the Illinois Act provides that each
shareholder of UTI Common Stock who is entitled to vote on the Merger
may dissent from the Merger. The following is a
summary of the principal steps a dissenting shareholder must take to
perfect his or her dissenters' rights under Section 11.65 and 11.70 of
the Illinois Act. This summary does not purport to be complete
and is qualified in its entirety by reference to Section 11.65 and 11.70
of the Illinois Act, a copy of which is attached as Appendix C to this
Proxy Statement/Prospectus.
To perfect his or her dissenters' rights, a dissenting UTI
Shareholder must not vote in favor of the merger and must deliver to
UTI, before the vote on the merger is taken, a written demand for payment
of the fair value of his or her shares of UTI Common Stock. A proxy that
is returned signed but on which no voting preference is indicated will be
voted in favor of the Merger and will constitute a waiver of
dissenters' rights. A dissenting shareholder's written demand for
payment of the fair value of his or her shares should be delivered to
UTI at 5250 South Sixth Street, Springfield, Illinois 62703, Attention:
Corporate Secretary. Voting against the Merger will not by itself
constitute a written demand.
23
Within ten days after the date on which the Merger is effective or
thirty days after the dissenting shareholder delivers to UTI a written
demand for payment, whichever is later, UTI will send each shareholder
who has delivered a written demand for payment a statement setting forth
UTI's opinion as to the estimated fair value of the shares of UTI Common
Stock, a copy of UTI's latest balance sheet as of the end of a fiscal year
ending not earlier than sixteen months before the delivery of the
foregoing statement, together with the statement of income for that year
and the latest available interim financial statements, and a commitment
to pay for the shares of the dissenting shareholder at the estimated
fair value of such shares. A VOTE AGAINST THE MERGER, WHETHER BY PROXY
OR IN PERSON WILL NOT, BY ITSELF, BE REGARDED AS A WRITTEN DEMAND FOR
PAYMENT FOR PURPOSES OF ASSERTING DISSENTERS' RIGHTS.
Upon consummation of the merger, UTI will pay to each dissenting
shareholder who transmits to UTI the certificate or other evidence of
ownership of the shares of UTI Common Stock the amount that UTI estimates
to be the fair value of such shares, plus accrued interest, accompanied by
a written explanation of how the interest was calculated. Under the
Illinois Act, "fair value" means the value of shares of UTI Common Stock
immediately before the consummation of the Merger, exclusive of any
appreciation or depreciation of the value of such shares in anticipation of
the merger, unless such exclusion would be inequitable. "Interest"
means interest, at the average rate currently paid by UTI on its
principal bank loans or, if none, at a rate that is fair and equitable
under all the circumstances, from the effective date of the Merger until
the date on which UTI pays to the dissenting shareholder the fair value of
his or her shares. If the dissenting shareholder agrees with UTI's
estimate as to the fair value of UTI common stock, upon consummation of
the Merger and payment of the agreed fair value, the dissenting
shareholder shall cease to have any interest in shares of UTI Common
Stock.
If a dissenting shareholder does not agree with the opinion of UTI
as to the estimated fair value of the shares or the amount of interest
due, such shareholder, within 30 days from the delivery of UTI's
statement of fair value, must notify UTI in writing of his or her
estimated fair value and amount of interest due and demand payment for
the difference between his or her estimate of fair value and interest
due and the amount of payment by UTI or the proceeds of sale by
the shareholder, whichever is applicable. If, within 60 days from
delivery to UTI of the shareholder's notification of estimate of fair
value of the shares and interest due, UTI and the dissenting shareholder
have not agreed in writing upon the fair value of the shares and interest
due, UTI will either pay the difference in value demanded by the
shareholder, with interest, or file a petition in the circuit court of the
county in which either the registered office of the principal office of
UTI is located, asking such court to determine the fair value of the
shares and interest due. If such a petition is filed, UTI will make
all dissenting shareholders whose demands remain unsettled parties to
the proceeding, whether or not such shareholders are residents of
Illinois, and all such parties will be served with a copy of the
petition. The "fair value" determined by
the court may be more or less than the amount offered to UTI shareholders
under the Merger Agreement. Any judgment entered by the court with
respect to the fair value of the dissenting shareholders' shares will
be payable only upon, and simultaneously with, the surrender to UTI
of the certificate or certificates, or other evidence of ownership,
representing shares of UTI Common Stock. Upon the payment of such
judgment, the dissenting shareholders will cease to have any interest in
shares of UTI common stock.
FAILURE TO COMPLY STRICTLY WITH THE FOREGOING PROCEDURES
SHALL CAUSE A SHAREHOLDER TO LOSE HIS OR HER DISSENTERS' RIGHTS. ANY
SHAREHOLDER WHO WISHES TO EXERCISE HIS OR HER DISSENTERS' RIGHTS IS
URGED TO CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
24
SELECTED FINANCIAL DATA OF UII
The following table provides selected financial data for the Company for
five (5) years:
FINANCIAL
HIGHLIGHTS
(000's omitted, except per share data)
1996 1995 1994 1993 1992
Net Operating
Revenues $ 1,791 $ 2,234 $ 1,667 $ 1,459 $ 4,255
Operating Costs
and Expenses $ 1,414 $ 1,976 $ 1,627 $ 1,384 $ 4,092
Income taxes $ 0 $ 0 $ 0 $ 0 $ 40
Equity in loss
of investees $ (696) $ (2,406) $ (384) $ (580) $ (346)
Net Income (loss) $ (319) $ (2,148) $ (344) $ (505) $ (223)
Net Income (loss)
per common share(1) $ (0.23) $ (1.54) $ (0.25) $ (0.36)$ (0.16)
Cash Dividend Declared
per common share $ 0 $ 0 $ 0 $ 0 $ 0
Total Assets $ 12,881 $ 13,298 $ 15,414 $14,919 $ 15,038
Long Term
Obligations $ 902 $ 902 $ 902 $ 0 $ 0
(1) The comparability of the selected financial data for the year 1992 is
materially affected by the formation of United Trust Group, Inc. ("UTG")
and the sale of UII's subsidiary, United Security Assurance Company
("USA").
25
UII MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED December 31, 1996
At December 31, 1996 and 1995, 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
1996, 1995 and 1994 include the operating results of UII.
LIQUIDITY AND CAPITAL RESOURCES
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, 1996, 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. UG's
dividend limitations are described below.
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, 1996, UG had a statutory gain from operations of
$8,006,000. At December 31, 1996, UG statutory capital and surplus
amounted to $10,227,000. Extraordinary dividends (amounts in
excess of ordinary dividend limitations) require prior approval of
the insurance commissioner and are not restricted to a specific
calculation.
The Company currently has $440,000 in cash and cash equivalents.
The Company holds one mortgage loan. Operating activities of the
Company produced cash flows of $256,000, $ 327,000 and $27,000 in 1996,
1995 and 1994, respectively. The Company had uses of cash from
investing activities of $180,000, $193,000 and $811,000 in 1996, 1995 and
1994, respectively. Cash flows from financing activities were $0, $0
and $905,000 in 1996, 1995 and 1994, respectively.
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company
and First of America Bank Southeast Michigan, N.A., as trustee. The
Debentures are general unsecured obligations of UII, subordinate in
right of payment to any existing or future senior debt of UII. The
Debentures are exchangeable and transferable, and are convertible at any
time prior to March 31, 1999 into UII's Common Stock at a conversion
price of $1.75 per share, subject to adjustment in certain events.
The Debentures bear interest from March 31, 1994, payable quarterly, at
a variable rate equal to one percentage point above the prime rate
published in the Wall Street Journal from time to time. On or after
March 31, 1999, the Debentures will be redeemable at UII's option,
in whole or in part, at redemption prices declining from 103% of
their principal amount. No sinking fund will be established to redeem
the Debentures. The Debentures will mature on March 31, 2004. The
Debentures are not listed on any national securities exchange or the
NASDAQ National Market System.
Management believes that the overall sources of liquidity available to
the Company will be more than sufficient to satisfy its financial
obligations.
26
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
(a) REVENUES
The Company's source of revenues is derived from service fee income
which is provided via a service agreement with USA. The service
agreement between UII and USA is to provide USA with certain
administrative services. The fees are based on a percentage of premium
revenue of USA. The percentages are applied to both first year and
renewal premiums at different rates.
The Company holds $864,100 of notes receivable from affiliates.
The notes receivable from affiliates consists of three separate notes.
The $700,000 note bears interest at the rate of 1% above the variable
per annum rate of interest most recently published by the Wall Street
Journal as the prime rate. Interest is payable quarterly with
principal due at maturity on May 8, 2006. In February 1996, FCC borrowed
an additional $150,000 from UII to provide additional cash for
liquidity. The note bears interest at the rate of 1% over prime as
published in the Wall Street Journal, with interest payments due
quarterly and principal due upon maturity of the note on June 1,
1999. The remaining $14,100 are 20 year notes of UTG with interest at
8.5% payable semi-annually. At current interest levels, the notes will
generate approximately $80,000 annually.
(b) EXPENSES
The Company has a sub-contract service agreement with United
Trust, Inc. ("UTI") for certain administrative services. Through its
facilities and personnel, UTI performs such services as may be
mutually agreed upon between the parties. The fees are based on a
percentage of the fees paid to UII by USA. The Company has incurred
$1,241,000, $1,809,000, and $1,210,000 in service fee
expense in 1996, 1995, and 1994, respectively.
Interest expense of $84,000, $89,000 and $59,000 was incurred in
1996, 1995 and 1994, respectively. The interest expense is directly
attributable to the convertible debentures. The Debentures bear
interest at a variable rate equal to one percentage point above the prime
rate published in the Wall Street Journal from time to time.
(c) EQUITY IN LOSS OF INVESTEES
Equity in loss of investees represents UII's 47% share of the net loss
of UTG. Following is a discussion of the results of operations of UTG:
REVENUES OF UTG
Premium income, net of reinsurance premium, decreased 8% when
comparing 1996 to 1995. The decrease in premium income is primarily
attributed to the change in marketing strategy and to a lesser
extent the change in distribution systems. The Company changed its
marketing strategy from traditional life insurance products to
universal life insurance products. Universal life and interest
sensitive products contribute only the risk charge to premium
income, however traditional insurance products contribute all monies
received to premium income. The Company changed its marketing
strategy to remain competitive.
27
The Company changed its focus from primarily a broker agency
distribution system to a captive agent system. Business written by
the broker agency force, in recent years, did not meet Company
expectations. With the change in focus of distribution systems,
most of the broker agents were terminated. (The termination of the
broker agency force caused a non-recurring write down of the value of
agency force asset in 1995. See discussion of amortization of agency
force for further details.)
One factor that has had 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 Company's
average persistency rate for all policies in force for 1996 and 1995
has been approximately 87.9% and 87.5%, respectively.
Other considerations, net of reinsurance, increased 7% compared
to one year ago. Other considerations consists of administrative
charges on universal life and interest sensitive life insurance
products. The insurance in force relating to these types of products
continues to increase as marketing efforts are focused on universal life
insurance products.
Net investment income increased 3% when comparing 1996 to 1995.
The overall investment yields for 1996, 1995 and 1994, are 7.21%, 7.04%
and 7.13%, respectively. The improvement in investment yield is
primarily attributed to the fixed maturity portfolio. The Company has
invested financing cash flows generated by cash received through
sales of universal life insurance products.
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, the Company's primary product. The Company monitors
investment yields, and when necessary adjusts credited interest rates
on its insurance products to preserve targeted spreads. It is expected
that the monitoring of the interest spreads by management will provide
the necessary margin to adequately provide for associated costs on
insurance policies the Company has in force and will write in the
future.
Realized investment losses were $466,000 and $114,000 in 1996 and
1995, respectively. The Company sold two foreclosed real estate
properties that resulted in approximately $357,000 in realized losses in
1996. The Company had other gains and losses during the period that
comprised the remaining amount reported but were immaterial in nature
on an individual basis.
EXPENSES OF UTG UTG
Life benefits, net of reinsurance benefits and claims,
increased 2% compared to 1995. The increase in life benefits is due
primarily to settlement expenses discussed in the following paragraph:
In 1994, UG became aware that certain new insurance business was
being solicited by certain agents and issued to individuals considered to
be not insurable by Company standards. These non-standard policies had a
face amount of $22,700,000 and represented 1/2 of 1% of the insurance in-
force in 1994. Management's initial analysis indicated that expected
death claims on the business inforce was adequate in relation to
mortality assumptions inherent in the calculation of statutory
reserves. Nevertheless, management determined it was in the best
interest of the Company to repurchase as many of the nonstandard policies
as possible. Through December 31, 1996, the Company spent
approximately $7,099,000 for the settlement of non-standard policies and
for the legal defense of related litigation. In relation to settlement
of non-standard policies the Company incurred life benefits of
$3,307,000, $720,000 and $1,250,000 in 1996, 1995 and 1994, respectively.
The Company incurred legal costs of $906,000, $687,000 and $229,000 in
1996, 1995 and 1994, respectively. All the policies associated with this
issue have been settled as of December 31, 1996. The Company has
approximately $3,742,000 of insurance in-force and $1,871,000 of reserves
from the issuance of paid-up life insurance policies for settlement of
matters related to the original non-standard policies.
28
Management believes the reserves are adequate in relation to expected
mortality on this block of in-force.
Commissions and amortization of deferred policy acquisition
costs decreased 14% in 1996 compared to 1995. The decrease was due to the
decline in first year premium production.
Amortization of cost of insurance acquired increased 26% in 1996
compared to 1995. Cost of insurance acquired is amortized in relation
to expected future profits, including direct charge-offs for any
excess of the unamortized asset over the projected future profits. The
Company did not have any charge-offs during the periods covered by
this report. The increase in amortization during the current period is
a normal fluctuation due to the expected future profits. Amortization
of cost of insurance acquired is particularly sensitive to changes in
persistency of certain blocks of insurance in-force.
The Company reported a non-recurring write down of value of
agency force of $0 and $8,297,000 in 1996 and 1995, respectively. The
write down was directly related to the Company's change in distribution
systems. The Company changed its focus from primarily a broker agency
distribution system to a captive agent system. Business produced by the
broker agency force in recent years did not meet Company expectations.
With the change in focus of distribution systems, most of the broker
agents were terminated. The termination of most of the agents
involved in the broker agency force caused management to re-evaluate the
value of the agency force carried on the balance sheet.
Operating expenses increased 6% in 1996 compared to 1995. The
primary factor that caused the increase in operating expenses is
directly related to increased legal costs and reserves established for
litigation. The legal costs are due to the settlement of non-standard
insurance policies as was discussed in the review of life benefits. The
Company incurred legal costs of $906,000, $687,000 and $229,000 in
1996, 1995 and 1994, respectively in relation to the settlement of the
non-standard insurance policies.
Interest expense decreased 12% in 1996 compared to 1995. Since
December 31, 1995, notes payable decreased approximately $1,623,000 which
has directly attributed to the decrease in interest expense during
1996. Interest expense was also reduced as a result of the refinancing
of the senior debt under which the new interest rate is more favorable.
Please refer to Note 10 "Notes Payable" of the Consolidated Notes to the
Financial Statements for more information on this matter.
NET LOSS OF UTG
UTG had a net loss of $1,661,000 in 1996 compared to a net loss of
$5,321,000 in 1995. The net loss in 1996 is attributed to the increase
in life benefits net of reinsurance and operating expenses primarily
associated with settlement and other related costs of the non-
standard life insurance policies.
(d) NET LOSS
The Company recorded a net loss of $319,000 for 1996 compared to a
net loss of $2,148,000 for the same period one year ago. The net loss is
from the equity share of UTG's operating results.
29
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
(a) REVENUES
The Company's source of revenues is derived from service fee income
which is provided via a service agreement with USA. The service
agreement between UII and USA is to provide USA with certain
administrative services. The fees are based on a percentage of premium
revenue of USA. The percentages are applied to both first year and
renewal premiums at different rates.
The Company holds $714,100 of notes receivable from affiliates.
$700,000 of these notes represent a participation interest in the
senior debt of FCC. The notes carry interest at a rate of 1% above prime,
with interest received quarterly. 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 $66,000
annually.
(b) EXPENSES
The Company has a sub-contract service agreement with United
Trust, Inc. ("UTI") for certain administrative services. Through
its facilities and personnel, UTI performs such services as may be
mutually agreed upon between the parties. The fees are based on a
percentage of the fees paid to UII by USA. The Company has incurred
$1,809,000, $1,210,000, and $921,000 in service fee expense in 1995, 1994,
and 1993 respectively.
Interest expense of $89,000 and $59,000 was incurred in 1995 and
1994, respectively. The interest expense is directly attributable to
the convertible debentures. The Debentures bear interest at a variable
rate equal to one percentage point above the prime rate published in the
Wall Street Journal from time to time.
(c) EQUITY IN LOSS OF INVESTEES
Equity in loss of investees represents UII's 47% share of the net loss
of UTG. Following is a discussion of the results of operations of UTG:
REVENUES OF UTG
Total revenue increased slightly when comparing 1995 to 1994.
Premium income, net of reinsurance premium, decreased 7% when
comparing 1995 to 1994. The decrease is primarily attributed to the
reduction in new business production and the change in products
marketed. In 1995, the Company has streamlined the product portfolio,
as well as restructured the marketing force. The decrease in first
year premium production is directly related to the Company's change in
distribution systems. The Company has changed its focus from primarily
a broker agency distribution system to a captive agent system.
Business written by the broker agency force in recent years did not
meet Company expectations. With the change in focus of distribution
systems, most of the broker agents were terminated. (The termination
of the broker agency force caused a non-recurring write down of the
value of agency force asset. See discussion of amortization of
agency force for further details.)
The change in marketing strategy from traditional life insurance
products to universal life insurance products had a significant
impact on new business production. As a result of the change in
marketing strategy the agency force went through a restructuring and
retraining process. Cash collected from the universal life and
interest sensitive products contribute only the risk charge to
premium income, however traditional insurance products contribute monies
received to premium income. One factor that has had 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. Overall, persistency improved to 87.5% in 1995
compared to 86.3% in 1994.
Other considerations, net of reinsurance, increased 13% compared
to one year ago. Other considerations consists of administrative
charges on universal life and interest sensitive life insurance
products. The insurance in force relating to these types of products
continues to increase as marketing efforts are focused on universal life
insurance products.
30
Net investment income increased 8% when comparing 1995 to 1994.
The change reflected an increase in the amount of invested assets, which
was partially offset by a lower effective yield on investments made
during 1995. The overall investment yields for 1995, 1994 and 1993,
are 7.04%, 7.13% and 7.22%, respectively. The Company has been able
to increase its investment portfolio through financing cash flows,
generated by cash received through sales of universal life insurance
products. Although the Company sold no fixed maturities during the last
few years, it did experience a significant turnover in the portfolio.
Many companies with bond issues outstanding took advantage of lower
interest rates and retired older debt which carried higher rates. This
was accomplished through early calls and accelerated paydowns of fixed
maturity investments.
The Company's investments are generally managed to match related
insurance and policyholder liabilities. The Company, in conjunction
with the decrease in average yield of the Company's fixed maturity
portfolio has decreased the average crediting rate for the insurance
and investment products. 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, the Company's primary product. The Company monitors
investment yields, and when necessary takes action to adjust credited
interest rates on its insurance products to preserve targeted spreads.
Over 60% of the insurance and investment product reserves are crediting
5% or less in interest and 39% of the insurance and investment
product reserves are crediting 5.25% to 6% in interest. It is expected
that the monitoring of the interest spreads by management will
provide the necessary margin to adequately provide for associated costs
on insurance policies the Company has in force and will write in the
future.
Realized investment losses were $114,000 and $1,224,000 in
1995 and 1994, respectively. Fixed maturities and equity securities
realized net investment losses of $224,000 and real estate realized
net investment gains of $100,000 in 1995. The realized loss in 1995
can not be attributed to any one specific transaction. In 1994,
the Company realized losses of $865,000 due to a permanent
impairment of property located in Louisiana. The permanent impairment
was based on recent appraisals and marketing analysis of surrounding
properties.
The Company realized a gain of $467,000 from the sale of an
insignificant subsidiary in 1994. The Company had other gains and
losses during the period that comprised the remaining amount reported
but were routine or immaterial in nature to disclose on an individual
basis.
EXPENSES OF UTG
Total expenses increased 16% when comparing 1995 to 1994.
Life benefits, net of reinsurance benefits and claims,
decreased 4% compared to 1994. The decrease is related to the decrease
in first year premium production. Another factor that has caused life
benefits to decrease is that during 1994, the Company lowered its
crediting rates on interest sensitive products in response to
financial market conditions. This action will facilitate the appropriate
spreads between investment returns and credited interest rates. It takes
approximately one year to fully realize a change in credited rates
since a change becomes effective on each policy's next
anniversary. Please refer to discussion of net investment income
for analysis of interest spreads.
The Company experienced an increase of 6% in mortality during
1995 compared to 1994. The increase in mortality is due primarily
to settlement expenses discussed in the following paragraph:
During the third quarter of 1994, UG became aware that certain
new insurance business was being solicited by certain agents and issued
to individuals considered to be not insurable by Company standards.
These policies had a face amount of $22,700,000 and represent 1/2 of 1%
of the insurance in force. Management's
31
analysis indicates that the expected death claims on the business in
force to be adequately covered by the mortality assumptions inherent
in the calculation of statutory reserves. Nevertheless, management has
determined it is in the best interest of the Company to repurchase as
many of the policies as possible. As of December 31, 1995, there
remained approximately $5,738,000 of the original face amount which
have not been settled. The Company will continue its efforts to
repurchase as many of the policies as possible and regularly
apprise the Ohio Department of Insurance regarding the status of
this situation. Through December 31, 1995, the Company spent a total of
$2,886,000 for the repurchase of these policies and for the legal
defense of related litigation. In relation to the repurchase of insurance
policies the Company incurred life benefits of $720,000 and $1,250,000 in
1995 and 1994, respectively. The Company incurred legal costs of
$687,000 and $229,000 in 1995 and 1994, respectively.
Dividends to policyholders increased approximately 16% when
comparing 1995 to 1994. USA continued to market participating policies
through most of 1994. Management expects dividends to policyholders
will continue to increase in the future. A significant portion of
the insurance in force is participating insurance. A significant
portion of the participating business is relatively newer business,
and the dividend scale for participating policies increases in the early
durations. The dividend scale is subject to approval of the Board of
Directors and may be changed at their discretion. The Company has
discontinued its marketing of participating policies.
Commissions and amortization of deferred policy acquisition
costs increased 21% in 1995 compared to 1994. The increase is directly
attributed to the amortization of a larger asset. The increase is also
caused by the reduction in first year premium production. To a lesser
extent the increase in amortization of deferred policy acquisition
costs is directly related to the change in products that is currently
marketed. The Company revised its portfolio of products as previously
discussed in premium income. These new products pay lower first year
commissions than the products sold in prior periods. The asset increased
due to first year premium production by the agency force. The Company
did benefit from improved persistency.
Amortization of cost of insurance acquired decreased 40% in 1995
compared to 1994. Cost of insurance acquired is amortized in relation
to expected future profits, including direct charge-offs for any
excess of the unamortized asset over the projected future profits. The
Company did not have any charge-offs during the periods covered by
this report. The decrease in amortization during the current period is
a normal fluctuation due to the expected future profits. Amortization
of cost of insurance acquired is particularly sensitive to changes in
persistency of certain blocks of insurance in force. The Company's
average persistency rate for all policies in force for 1995 and 1994
has been approximately 87.5% and 86.3%, respectively.
During 1995, the Company reported a non-recurring write down of
value of agency force of $8,297,000. The write down is directly
related to the Company's change in distribution systems. The Company has
changed its focus from primarily a broker agency distribution system to
a captive agent system. Business produced by the broker agency force
in recent years did not meet Company expectations. With the change
in focus of distribution systems, most of the broker agents were
terminated. The termination of most of the agents involved in the broker
agency force caused management to re-evaluate the value of the agency
force carried on the balance sheet. As of December 31, 1995, the
remaining value of the agency force on the balance sheet represents
the active agency forces that continue to originate premium production.
Operating expenses increased 20% in 1995 compared to 1994. The
increase was caused by several factors. The primary factor for the
increase in operating expenses is due to the decrease in production.
The decrease in production was discussed in the analysis of
premium income. As such, the Company was positioned to handle
significantly more first year production than was produced. First
year operating expenses that were deferred and capitalized as a
deferred policy acquisition costs asset was $532,000 in 1995 compared to
$1,757,000 in 1994. The difference between the policy acquisition costs
deferred in 1995 compared to 1994, effected the increase in
operating expenses. The increase in operating expenses was offset, to
a lesser extent, from a 12% reduction in staff in 1995 compared to
1994. The reduction in staff was achieved by attrition.
32
Another factor that caused the increase in operating expenses is
directly related to increased legal costs. During the third quarter of
1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be
not insurable by Company standards. These policies had a face amount of
$22,700,000 and represent 1/2 of 1% of the insurance in force of the
Company. As of December 31, 1995, there remained approximately
$5,738,000 of the original face amount which have not been settled.
The Company will continue its efforts to repurchase as many of the
policies as possible and regularly apprise the Ohio Department of
Insurance regarding the status of this situation. The Company incurred
legal costs of $687,000 and $229,000 in 1995 and 1994, respectively,
for the legal defense of related litigation.
Interest expense increased slightly in 1995 compared to 1994. The
increase was due to the increase in the interest rate on the Company's
senior debt, which is tied to the base rate of the First Bank of
Missouri. The interest rate on the senior debt increased to 10% on
March 1, 1995 compared to 7% on March 1, 1994. The Company was
able to minimize the effect of the higher interest rate in 1995 by
early payments of principal. The Company paid $600,000 in principal
payments in early 1995. The interest rate on the senior debt has
decreased to 9.25% as of March 1, 1996.
NET LOSS OF UTG
UTG had a net loss of $5,321,000 in 1995 compared to a net loss of
$1,116,000 in 1994. The decline in 1995 is attributed to the non-
recurring write down of the value of agency force and the increase in
operating expenses.
(d) NET LOSS
The Company recorded a net loss of $2,148,000 for 1995 compared to a
net loss of $344,000 for the same period one year ago. The increase in
net loss is from the equity share of UTG's operating results for the year.
FINANCIAL CONDITION
The Company owns 47% equity interest in UTG which controls total assets
of approximately $355,000,000.
REGULATORY ENVIRONMENT
The Company's insurance affiliates are subject to government
regulation in each of the states in which they conduct business. Such
regulation is vested in state agencies having broad administrative
power dealing with all aspects of the insurance business, including the
power to: (i) grant and revoke licenses to transact business; (ii)
regulate and supervise trade practices and market conduct; (iii)
establish guaranty associations; (iv) license agents; (v) approve policy
forms; (vi) approve premium rates for some lines of business; (vii)
establish reserve requirements; (viii) prescribe the form and content
of required financial statements and reports; (ix) determine the
reasonableness and adequacy of statutory capital and surplus; and (x)
regulate the type and amount of permitted investments. Insurance
regulation is concerned primarily with the protection of policyholders.
The Company cannot predict the form of any future proposals or regulation.
The Company's insurance affiliates, USA, UG, APPL and ABE are domiciled
in the states of Ohio, Ohio, West Virginia and Illinois, respectively.
33
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 are 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,
and payment of dividends in excess of specified amounts by the
insurance affiliate within the holding company system are required.
The National Association of Insurance Commissioners (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 the individual states unmodified,
modified to meet the state's own needs or requirements, or dismissed
entirely.
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 1996, UG had two ratios outside the normal range. The
first ratio compared commission allowances with statutory capital and
surplus. The ratio was outside the normal range due to the coinsurance
agreement with First International Life Insurance Company ("FILIC").
Management does not believe that this ratio will be outside the normal
range in future periods.
The second ratio is related to the decrease in premium income. The
ratio fell outside the normal range the last two years. The decrease
in premium income is directly attributable to the change in
distribution systems and marketing strategy. The Company changed its
focus from primarily a broker agency distribution system to a captive
agent system and changed its marketing strategy from traditional
whole life insurance products to universal life insurance products.
Management is taking a long-term approach to its recent changes to
the marketing and distribution systems and believes these changes will
provide long-term benefits to the Company.
The Company receives funds from its insurance affiliates in the form
of management and cost sharing arrangements and through dividends. Annual
dividends in excess of maximum amounts prescribed by state statutes
("extraordinary dividends") may not be paid without the prior approval
of the insurance commissioner in which an insurance affiliate is
domiciled.
The NAIC has adopted Risk-Based Capital ("RBC") requirements for
life/health insurance companies to evaluate 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 will be 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:
34
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, 1996, each of the Company's insurance affiliates has
a Ratio that is in excess of 300% of the authorized control level;
accordingly the Company's affiliates meet the RBC requirements.
The NAIC has recently released the Life Illustration Model Regulation.
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 which does not meet the various tests. The only implication
is the way in which the product is marketed to the consumer. A product
which does not pass the tests uses guaranteed assumptions rather than
current assumptions in presenting future product performance to the
consumer.
As states in which the Company does business adopt the regulation or
adopt a modified version of the regulation, the Company will be
required to comply with this new regulation. The Company may need
to modify existing products or sales methods.
The NAIC has proposed a new Model Investment Law that may affect the
statutory carrying values of certain investments; however, the final
outcome of that proposal is not certain, nor is it possible to predict
what impact the proposal will have on the Company or whether the proposal
will be adopted in the foreseeable future.
FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection
with the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which
have financial resources or ratings greater than those of the Company.
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. Management believes that the Company's
ability to compete is dependent upon, among other things, its ability to
attract and retain agents to market its insurance products and its
ability to develop competitive and profitable products.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF UII FOR THE PERIOD ENDED SEPTEMBER 30, 1997
The purpose of this section is to discuss and analyze the Company's
financial condition, changes in financial condition and results of
operations, which reflect the performance of the Company. The
information in the financial statements and related notes should be
read in conjunction with this section.
At September 30, 1997 and December 31, 1996, the balance sheet
reflects UII's 47% equity interest in United Trust Group, Inc.
("UTG"). The statements of operations and statements of cash flows
presented include UII and UII's equity share of UTG.
LIQUIDITY AND CAPITAL RESOURCES
UII's cash flow is dependent on revenues from a management agreement
with USA and its earnings received on invested assets and cash
balances. At September 30, 1997, substantially all of the
shareholders' equity represents investment in affiliates. UII does not
have significant day to day operations of its own. Cash requirements
of UII primarily relate to the payment of interest on its
convertible debentures and expenses related to maintaining the Company
as a corporation in good standing with the various regulatory bodies
which govern corporations in the jurisdictions where the Company does
business. The payment of cash dividends to shareholders is not legally
restricted. However, the state insurance department regulates insurance
company dividend payments where the company is domiciled. UG's dividend
limitations are described below.
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, 1996, UG had a statutory gain from operations of
$8,006,000. At December 31, 1996, UG statutory capital and surplus
amounted to $10,227,000. Extraordinary dividends (amounts in
excess of ordinary dividend limitations) require prior approval of
the insurance commissioner and are not restricted to a specific
calculation.
The Company currently has $654,000 in cash and cash equivalents.
The Company holds one mortgage loan. Operating activities of the
Company produced cash flows of $235,000 and $179,000 in the first nine
months of 1997 and 1996, respectively. The Company had uses of cash
from investing activities of $18,000 and $134,000 in the first nine
months of 1997 and 1996, respectively. The Company had a use of cash of
$2,000 from financing activities related to the purchase of fractional
shares in connection with the reverse stock split in 1997.
In early 1994, UII received $902,300 from the sale of Debentures.
The Debentures were issued pursuant to an indenture between the
Company and First of America Bank Southeast Michigan, N.A., as trustee.
The Debentures are general unsecured obligations of UII, subordinate in
right of payment to any existing or future senior debt of UII. The
Debentures are exchangeable and transferable, and are convertible at any
time prior to March 31, 1999 into UII's common stock at a conversion
price of $25.00 per share, subject to adjustment in certain events.
The Debentures bear interest from March 31, 1994, payable quarterly, at
a variable rate equal to one percentage point above the prime rate
published in the Wall Street Journal from time to time. On or after
March 31, 1999, the Debentures will be redeemable at UII's option,
in whole or in part, at redemption prices declining from 103% of
their principal amount. No sinking fund will be established to redeem
the Debentures. The Debentures will mature on March 31, 2004. The
Debentures are not listed on any national securities exchange or the
NASDAQ National Market System.
Management believes the overall sources of liquidity available to the
Company will be more than sufficient to satisfy its financial
obligations.
36
RESULTS OF OPERATIONS
YEAR-TO-DATE 1997 COMPARED TO 1996:
a) REVENUES
The Company's source of revenues is derived from service fee income, which
is provided via a service agreement with USA. The service agreement
between UII and USA is to provide USA with certain administrative services.
The fees are based on a percentage of premium revenue of USA. The
percentages are applied to both first year and renewal premiums at
different rates.
The Company holds $864,100 of notes receivable from affiliates.
The notes receivable from affiliates consists of three separate notes.
The $700,000 note bears interest at the rate of 1% above the variable
per annum rate of interest most recently published by the Wall Street
Journal as the prime rate. Interest is payable quarterly with
principal due at maturity on May 8, 2006. In February 1996, FCC borrowed
an additional $150,000 from UII to provide additional cash for
liquidity. The note bears interest at the rate of 1% over prime as
published in the Wall Street Journal, with interest payments due
quarterly and principal due upon maturity of the note on June 1,
1999. The remaining $14,100 are 20 year notes of UTG with interest at
8.5% payable semi-annually. At current interest levels, the notes will
generate income of approximately $80,000 annually.
(b) EXPENSES
The Company has a sub-contract service agreement with UTI for certain
administrative services. Through its facilities and personnel, UTI
performs such services as may be mutually agreed upon between the parties.
The fees are based on a percentage of the fees paid to UII by USA. The
Company has incurred $627,000 and $1,142,000 in service fee expense in
the first nine months of 1997 and 1996, respectively.
Interest expense of $63,000 was incurred in the first nine months of
1997 and 1996. The interest expense is directly attributable to the
convertible debentures. The Debentures bear interest at a variable rate
equal to one percentage point above the prime rate published in the
Wall Street Journal from time to time.
(c) EQUITY IN INCOME OR (LOSS) OF INVESTEES
Equity in income or (loss) of investees represents UII's 47% share of net
income or (loss) of UTG for the first nine months of 1997 and 1996.
Following is a discussion of the operating results of UTG for the first
nine months of 1997 compared to 1996. Please refer to Note 6 of United
Income, Inc.'s Notes to Financial Statements for Condensed Financial
Statements of United Trust Group, Inc.
REVENUES OF UTG
Premium income, net of reinsurance premium, decreased 7% when
comparing the first six months of 1997 to the first six months of 1996.
The Company's primary product is the "Century 2000" universal life
insurance product. Universal life and interest sensitive life
insurance products contribute only the risk charge to premium
income, however traditional insurance products contribute all monies
received to premium income. Since the Company does not actively
market traditional life insurance products, it is expected that
premium income will continue to decrease in future periods as a result
of expected lapses of business in force.
Net investment income decreased 3% when comparing the first six
months of 1997 to 1996. The decrease is the result of a smaller
invested asset base from one year ago. During the fourth quarter 1996,
the Company transferred approximately $22,000,000 in assets as
part of a coinsurance agreement with First International Life
Insurance Company ("FILIC"). The overall annualized investment
yields for the first six months of 1997 and 1996 are 7.2% and 7.0%,
respectively. The improvement in investment yield is primarily
attributed to the fixed maturity portfolio. The Company has invested
excess cash and financing activities generated through sales of
universal life insurance products.
37
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, the Company's primary product. The Company
monitors investment yields, and when necessary adjusts credited
interest rates on its insurance products to preserve targeted spreads.
It is expected that the monitoring of the interest spreads by
management will provide the necessary margin to adequately provide
for associated costs on insurance policies the Company has in force and
will write in the future.
EXPENSES OF UTG
Benefits, claims and settlement expenses, increased 7% in the first
six months of 1997 compared to 1996. The increase in benefits is
attributed to an increase in mortality. Mortality increased 21%
in the first six months of 1997 compared to 1996. There is no single
event that caused mortality to increase. Policy claims vary from
year to year and therefore, fluctuations in mortality are to be
expected and are not considered unusual by management. The Company
experienced a decline of 33% in dollar volume of new business
production. This decline results in less of an increase in
reserves from new business as compared to the previous year.
Commissions, DAC and cost of insurance acquired amortizations
decreased $2,022,000 for the first six months of 1997 compared to
the first six months of 1996. The decrease is attributed to the
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 paidup life
insurance policies. Paid-up life insurance generally refers to a
non-premium paying life insurance policy. Cost of insurance
acquired is amortized in relation to expected future profits,
including direct charge-offs for any excess of the unamortized asset
over the projected future profits. The Company did not have any
charge-offs during the periods covered by this report.
Operating expenses decreased 11% when comparing the first six months of
1997 to the first six months of 1996. The decrease in operating
expenses is attributed to the settlement of certain litigation in the
fourth quarter of 1996. The Company incurred elevated legal fees in
the previous year due to the litigation. Operating expenses were
further reduced from a restructuring of the home office personnel
completed in late 1996.
On May 8, 1996, FCC refinanced its senior debt of $8,900,000.
The refinanced debt bears interest to a rate equal to the "base
rate" plus nine-sixteenths of one percent. Prior to refinancing,
the interest rate was equal to the base rate plus one percent. The
decrease in interest rate and principal reductions made during the
last year provided the decrease in interest expense for the first six
months of 1997.
NET INCOME (LOSS) OF UTG
The Company had net income of $4,000 for the first nine months of
1997 compared to $175,000 for the first nine months of 1996. The
decline in net income for the current period is primarily due to the
increase in mortality.
(d) NET INCOME
The Company recorded net income of $4,000 for the first nine months of 1997
compared to a net loss of $(297,000) for the same period one year ago.
The net income is attributed primarily to service agreement income,
partially offset by the operating results of the Company's 47% equity
interest in UTG.
38
THIRD QUARTER 1997 COMPARED TO 1996:
(a) REVENUES
The Company's source of revenues is derived from service fee income, which
is provided via a service agreement with USA. The service agreement
between UII and USA is to provide USA with certain administrative services.
The fees are based on a percentage of premium revenue of USA. The
percentages are applied to both first year and renewal premiums at
different rates.
The Company holds $864,100 of notes receivable from affiliates.
The notes receivable from affiliates consists of three separate notes.
The $700,000 note bears interest at the rate of 1% above the variable
per annum rate of interest most recently published by the Wall Street
Journal as the prime rate. Interest is payable quarterly with
principal due at maturity on May 8, 2006. In February 1996, FCC borrowed
an additional $150,000 from UII to provide additional cash for
liquidity. The note bears interest at the rate of 1% over prime as
published in the Wall Street Journal, with interest payments due
quarterly and principal due upon maturity of the note on June 1,
1999. The remaining $14,100 are 20 year notes of UTG with interest at
8.5% payable semi-annually. At current interest levels, the notes will
generate income of approximately $80,000 annually.
(b) EXPENSES
The Company has a sub-contract service agreement with UTI for certain
administrative services. Through its facilities and personnel, UTI
performs such services as may be mutually agreed upon between the parties.
The fees are based on a percentage of the fees paid to UII by USA. The
Company has incurred $153,000 and $294,000 in service fee expense in the
third quarter of 1997 and 1996, respectively.
Interest expense of $21,000 was incurred in the third quarter of
1997 and 1996. The interest expense is directly attributable to the
convertible debentures. The Debentures bear interest at a variable rate
equal to one percentage point above the prime rate published in the
Wall Street Journal from time to time.
(c) EQUITY IN INCOME OR (LOSS) OF INVESTEES
Equity in income or (loss) of investees represents UII's 47% share of net
income or (loss) of UTG for the third quarter of 1997 and 1996.
Following is a discussion of the operating results of UTG for the
third quarter of 1997 compared to 1996. Please refer to Note 6 of
United Income, Inc.'s Notes to Financial Statements for Condensed
Financial Statements of United Trust Group, Inc.
REVENUES OF UTG
Premium and other considerations decreased 8% when comparing
second quarter of 1997 to second quarter of 1996. The Company's
primary product is the "Century 2000" universal life insurance product.
Universal life and interest sensitive life insurance products
contribute only the risk charge to premium income, however
traditional insurance products contribute all monies received to
premium income. Since the Company does not actively market
traditional life insurance products, it is expected that premium income
will continue to decrease in future periods as a result of expected
lapses of business in force.
Net investment income decreased 2% when comparing second quarter of
1997 to 1996. The decrease is the result of a smaller invested asset
base from one year ago. During the fourth quarter 1996, the Company
transferred approximately $22,000,000 in assets as part of a coinsurance
agreement with First International Life Insurance Company ("FILIC").
39
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, the Company's primary product. The Company monitors
investment yields, and when necessary adjusts credited interest rates on
its insurance products to preserve targeted spreads. It is expected
that the monitoring of the interest spreads by management will
provide the necessary margin to adequately provide for associated costs
on insurance policies the Company has in force and will write in the
future.
EXPENSES OF UTG
Benefits, claims and settlement expenses decreased 3% in the third
quarter of 1997 compared to 1996. The decrease in benefits is due to
the decrease in new business production. Although life benefits
decreased, mortality increased $137,000 in third quarter of 1997
compared to 1996. There is no single event that caused mortality to
increase. Policy claims vary from year to year and therefore,
fluctuations in mortality are to be expected and are not considered
unusual by management.
Commissions, DAC and cost of insurance acquired amortizations
decreased $1,124,000 for the third quarter of 1997 compared to third
quarter of 1996. The decrease is attributed to the 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 a non-premium paying
life insurance policy. Cost of insurance acquired is amortized in
relation to expected future profits, including direct charge-offs for
any excess of the unamortized asset over the projected future
profits. The Company did not have any charge-offs during the periods
covered by this report.
NET INCOME (LOSS) OF UTG
The Company had net income of $102,000 for third quarter of 1997
compared to $9,000 for third quarter of 1996. The improvement in net
income is due to the decrease in amortization of cost of insurance
acquired.
(d) NET INCOME
The Company recorded a net loss of ($137,000) for the third quarter 1997
compared to a net loss of ($584,000) for the same period one year
ago. The net loss is attributed primarily to the operating results
of the Company's 47% equity interest in UTG.
FINANCIAL CONDITION
The Company owns 47% equity interest in UTG, which controls total assets
of approximately $349,000,000. Summarized financial information of UTG
is provided in Note 6 of the Notes to the Financial Statements.
FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection
with the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which
have financial resources or ratings greater than those of the Company.
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. Management believes that the Company's
ability to compete is dependent upon, among other things, its ability to
attract and retain agents to market its insurance products and its
ability to develop competitive and profitable products.
40
SELECTED FINANCIAL DATA OF UTI
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1996 1995 1994 1993 1992
Premium income
Net of reinsurance $ 27,619 $ 29,998 $ 32,404 $ 31,160 $ 19,076
Total revenue $ 46,976 $ 49,869 $ 49,207 $ 48,541 $ 36,826
Net income (loss)* $ (938) $ (3,001) $ (1,624) $ (862) $ 5,661
Net income (loss)
per share $ (0.50) $ (1.61) $ (0.87) $ (0.46) $ 3.02
Total assets $355,474 $356,305 $ 360,258 $ 375,755 $ 370,259
Total long term debt $ 19,574 $ 21,447 $ 22,053 $ 24,359 $ 27,494
Dividends paid
per share NONE NONE NONE NONE NONE
* Includes equity earnings of investees.
41
UTI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
LIQUIDITY AND CAPITAL RESOURCES
The Company and its consolidated subsidiaries have three principal
needs for cash - the insurance companies' contractual obligations
to policyholders, the payment of operating expenses and servicing of
its long-term debt. Cash and cash equivalents as a percentage of total
assets were 5% and 4% as of December 31, 1996, and 1995,
respectively. Fixed maturities as a percentage of total invested
assets were 80% and 78% as of December 31, 1996 and 1995, respectively.
Future policy benefits are primarily long-term in nature and therefore,
the Company's investments are predominantly in long term fixed
maturity investments such as bonds and mortgage loans which provide a
sufficient return to cover these obligations. Most of the insurance
company assets, other than policy loans, are invested in fixed
maturities and other investments, substantially all of which are
readily marketable. Although there is no present need or intent to
dispose of such investments, the life companies could liquidate portions
of their investments if such a need arose. The Company has the ability and
intent to hold these investments to maturity; consequently, the
Company's investment in long term fixed maturities are reported in the
financial statements at their amortized cost.
Many of the Company's products contain surrender charges and other
features which reward persistency and penalize the early withdrawal of
funds. With respect to such products, surrender charges are generally
sufficient to cover the Company's unamortized deferred policy
acquisition costs with respect to the policy being surrendered.
Consolidated operating activities of the Company produced cash flows of
$2,785,000, $453,000 and $2,145,000 in 1996, 1995 and 1994,
respectively. The net cash provided by operating activities plus net
policyholder contract deposits after the payment of policyholder
withdrawals, equalled $9,596,000 in 1996, $9,466,000 in 1995, and
$10,361,000 in 1994. Management utilizes this measurement of cash flows
as an indicator of the performance of the Company's insurance operations,
since reporting regulations require cash inflows and outflows from
universal life insurance products to be shown as financing activities.
Cash provided by (used in) investing activities was $16,163,000,
($8,030,000) and ($28,595,000), for 1996, 1995 and 1994, respectively.
The most significant aspect of cash provided by (used in) investing
activities is the fixed maturity transactions. Fixed maturities
account for 82%, 76% and 79% of the total cost of investments acquired
in 1996, 1995 and 1994, respectively. The net cash provided by investing
activities in 1996, is due to the fixed maturities sold in conjunction
with the coinsurance agreement with FILIC. The Company has not directed
its investable funds to so-called "junk bonds" or derivative investments.
Net cash provided by (used in) financing activities was ($14,150,000),
$8,408,000 and $5,844,000 for 1996, 1995 and 1994, respectively. The
change between 1996 and 1995 is due to a coinsurance agreement with
First International Life Insurance Company as of September 30, 1996. At
closing of the transaction, UG received a reinsurance credit of
$28,318,000 for policy liabilities covered under the agreement. UG
transferred assets equal to the credit received. This transfer
included policy loans of $2,855,000 associated with policies under the
agreement and a net cash transfer of $19,088,000 after deducting the
ceding commission due UG of $6,375,000.
Policyholder contract deposits decreased 11% in 1996 compared to
1995, and increased 8% in 1995 when compared to 1994. Policyholder
contract withdrawals has decreased 4% in 1996 compared to 1995, and
increased 7% in 1995 compared to 1994. The changes in policyholder
contract withdrawals is not attributable to any one significant event.
Factors that impact policyholder contract withdrawals are fluctuation of
interest rates, competition and other economic factors. The Company's
current marketing strategy and product portfolio is directly structured
to conserve the existing customer base and at the same time increase the
customer base through new policy production.
42
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinancing was completed through First of America Bank - NA and is
subject to a credit agreement. The refinanced debt bears interest to a
rate equal to the "base rate" plus nine-sixteenths of one percent. The
Base rate is defined as the floating daily, variable rate of interest
determined and announced by First of America Bank from time to time as
its "base lending rate". The base rate at issuance of the loan was
8.25%, and has remained unchanged through March 1, 1997. Interest is
paid quarterly and principal payments of $1,000,000 are due in May of
each year beginning in 1997, with a final payment due May 8, 2005. On
November 8, 1996, the Company prepaid $500,000 of the May 8, 1997 principal
payment.
On a parent only basis, UTI's cash flow is dependent on revenues from
a management agreement with UII and its earnings received on invested
assets and cash balances. At December 31, 1996, substantially all of the
consolidated shareholders equity represents net assets of its
subsidiaries. UTI does not have significant day to day operations of
its own. Cash requirements of UTI primarily relate to the payment of
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. UG's dividend
limitations are described below.
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, 1996, UG had a statutory gain from operations of
$8,006,000. At December 31, 1996, UG's statutory capital and surplus
amounted to $10,227,000. Extraordinary dividends (amounts in
excess of ordinary dividendlimitations) require prior approval of
the insurance commissioner and are not restricted to a specific
calculation.
A life insurance company's statutory capital is computed according to
rules prescribed by the National Association of Insurance Commissioners
("NAIC"), as modified by the insurance company's state of domicile.
Statutory accounting rules are different from generally accepted
accounting principles and are intended to reflect a more conservative
view by, for example, requiring immediate expensing of policy
acquisition costs. The achievement of long-term growth will require
growth in the statutory capital of the Company's insurance subsidiaries.
The subsidiaries may secure additional statutory capital through various
sources, such as internally generated statutory earnings or equity
contributions by the Company from funds generated through debt or equity
offerings.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula.
These requirements are intended to allow insurance regulators to
identify inadequately capitalized insurance companies based upon the
types and mixtures of risks inherent in the insurer's operations. The
formula includes components for asset risk, liability risk, interest rate
exposure, and other factors. Based upon their December 31, 1996,
statutory financial reports, the Company's insurance subsidiaries are
adequately capitalized under the formula.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. The Company
does not believe that the regulatory initiatives currently under
consideration by various regulatory agencies will have a material
adverse impact on the Company. The Company is not aware of any
material pending or threatened regulatory action with respect to the
Company or any of its subsidiaries. The Company does not believe that
any insurance guaranty fund assessments will be materially different from
amounts already provided for in the financial statements.
Management believes the overall sources of liquidity available
will be sufficient to satisfy its financial obligations.
43
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
(a) REVENUES
Premium income, net of reinsurance premium, decreased 8% when comparing
1996 to 1995. The decrease in premium income is primarily attributed to
the change in marketing strategy and to a lesser extent the change in
distribution systems. The Company changed its marketing strategy from
traditional life insurance products to universal life insurance
products. Universal life and interest sensitive products contribute
only the risk charge to premium income, however traditional insurance
products contribute all monies received to premium income. The
Company changed its marketing strategy to remain competitive.
The Company changed its focus from primarily a broker agency distribution
system to a captive agent system. Business written by the broker agency
force, in recent years, did not meet Company expectations. With the
change in focus of distribution systems, most of the broker agents
were terminated. (The termination of the broker agency force caused a
non-recurring write down of the value of agency force asset in 1995.
See discussion of amortization of agency force for further details.)
One factor that has had 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 Company's average
persistency rate for all policies in force for 1996 and 1995 has been
approximately 87.9% and 87.5%, respectively.
Other considerations, net of reinsurance, increased 7% compared to
one year ago. Other considerations consists of administrative charges
on universal life and interest sensitive life insurance products. The
insurance in force relating to these types of products continues to
increase as marketing efforts are focused on universal life insurance
products.
Net investment income increased 3% when comparing 1996 to 1995. The
overall investment yields for 1996, 1995 and 1994, are 7.21%, 7.04%
and 7.13%, respectively. The improvement in investment yield is
primarily attributed to the fixed maturity portfolio. The Company has
invested financing cash flows generated by cash received through sales
of universal life insurance products.
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, the
Company's primary product. The Company monitors investment
yields, and when necessary adjusts credited interest rates on its
insurance products to preserve targeted spreads. It is expected that
the monitoring of the interest spreads by management will provide the
necessary margin to adequately provide for associated costs on
insurance policies the Company has in force and will write in the future.
Realized investment losses were $988,000 and $124,000 in 1996 and 1995,
respectively. Approximately $522,000 of the realized losses in 1996 is
due to the charge-off of two investments. The Company realized a loss
of $207,000 from a single loan and $315,000 from an investment in
First Fidelity Mortgage Company ("FFMC"). The charge-off of the loan
represented the entire loan balance at the time of the charge-off.
Additionally, the Company sold two foreclosed real estate properties
that resulted in approximately $357,000 in realized losses in 1996. The
Company had other gains and losses during the period that comprised
the remaining amount reported but were immaterial in nature on an
individual basis.
44
(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, increased 2%
compared to 1995. The increase in life benefits is due primarily to
settlement expenses discussed in the following paragraph:
In 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to
be not insurable by Company standards. These non-standard policies had
a face amount of $22,700,000 and represented 1/2 of 1% of the insurance
inforce in 1994. Management's initial analysis indicated that expected
death claims on the business in-force was adequate in relation to
mortality assumptions inherent in the calculation of statutory
reserves. Nevertheless, management determined it was in the best
interest of the Company to repurchase as many of the non-standard
policies as possible. Through December 31, 1996, the Company spent
approximately $7,099,000 for the settlement of non-standard policies and
for the legal defense of related litigation. In relation to settlement of
non-standard policies the Company incurred life benefits of
$3,307,000, $720,000 and $1,250,000 in 1996, 1995 and 1994,
respectively. The Company incurred legal costs of $906,000, $687,000 and
$229,000 in 1996, 1995 and 1994, respectively. All the policies
associated with this issue have been settled as of December 31, 1996.
The Company has approximately $3,742,000 of insurance in-force and
$1,871,000 of reserves from the issuance of paid-up life insurance policies
for settlement of matters related to the original non-standard policies.
Management believes the reserves are adequate in relation to expected
mortality on this block of in-force.
Commissions and amortization of deferred policy acquisition costs
decreased 14% in 1996 compared to 1995. The decrease was due to the
decline in first year premium production.
Amortization of cost of insurance acquired increased 28% in 1996 compared
to 1995. Cost of insurance acquired is amortized in relation to
expected future profits, including direct charge-offs for any excess of
the unamortized asset over the projected future profits. The Company did
not have any charge-offs during the periods covered by this report. The
increase in amortization during the current period is a normal
fluctuation due to the expected future profits. Amortization of cost
of insurance acquired is particularly sensitive to changes in
persistency of certain blocks of insurance in-force.
The Company reported a non-recurring write down of value of agency force
of $0 and $8,297,000 in 1996 and 1995, respectively. The write
down was directly related to the Company's change in distribution
systems. The Company changed its focus from primarily a broker
agency distribution system to a captive agent system. Business produced
by the broker agency force in recent years did not meet Company
expectations. With the change in focus of distribution systems, most
of the broker agents were terminated. The termination of most of the
agents involved in the broker agency force caused management to re-
evaluate the value of the agency force carried on the balance sheet.
Operating expenses increased 4% in 1996 compared to 1995. The primary
factor that caused the increase in operating expenses is directly
related to increased legal costs and reserves established for
litigation. The legal costs are due to the settlement of non-standard
insurance policies as was discussed in the review of life benefits. The
Company incurred legal costs of $906,000, $687,000 and $229,000 in 1996,
1995 and 1994, respectively in relation to the settlement of the non-
standard insurance policies.
Interest expense decreased 12% in 1996 compared to 1995. Since
December 31, 1995, notes payable decreased approximately
$1,873,000 which has directly attributed to the decrease in interest
expense during 1996. Interest expense was also reduced as a result of
the refinancing of the senior debt under which the new interest rate is
more favorable. Please refer to Note 11 "Notes Payable" of the
Consolidated Notes to the Financial Statements for more information on
this matter.
45
(c) NET LOSS
The Company had a net loss of $938,000 in 1996 compared to a net loss of
$3,001,000 in 1995. The net loss in 1996 is attributed to the
increase in life benefits net of reinsurance and operating expenses
primarily associated with settlement and other related costs of the non-
standard life insurance policies.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
(a) REVENUES
Total revenue increased 1% when comparing 1995 to 1994. Premium income,
net of reinsurance premium, decreased 7% when comparing 1995 to 1994.
The decrease is primarily attributed to the reduction in new business
production and the change in products marketed. In 1995, the
Company streamlined the product portfolio, as well as restructured the
marketing force. The decrease in first year premium production was
directly related to the Company's change in distribution systems. The
Company has changed its focus from primarily a broker agency
distribution system to a captive agent system. Business written by the
broker agency force in recent years did not meet Company expectations.
With the change in focus of distribution systems, most of the broker
agents were terminated. (The termination of the broker agency force caused
a non-recurring write down of the value of agency force asset. See
discussion of amortization of agency force for further details.)
The change in marketing strategy from traditional life insurance
products to universal life insurance products had a significant impact
on new business production. As a result of the change in marketing
strategy the agency force went through a restructuring and retraining
process. Cash collected from the universal life and interest
sensitive products contribute only the risk charge to premium income,
however traditional insurance products contribute monies received to
premium income. One factor that has had 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. Overall, persistency improved to 87.5% in 1995 compared to 86.3%
in 1994.
Other considerations, net of reinsurance, increased 13% compared to
one year ago. Other considerations consists of administrative charges
on universal life and interest sensitive life insurance products. The
insurance in force relating to these types of products continues to
increase as marketing efforts are focused on universal life insurance
products.
Net investment income increased 8% when comparing 1995 to 1994. The
change reflected an increase in the amount of invested assets, which
was partially offset by a lower effective yield on investments
acquired during 1995. The overall investment yields for 1995, 1994
and 1993, are 7.04%, 7.13% and 7.22%, respectively. The Company has
been able to increase its investment portfolio through financing cash
flows, generated by cash received through sales of universal life
insurance products. Although the Company sold no fixed maturities
during the last few years, it did experience a significant turnover in
the portfolio. Many companies with bond issues outstanding took
advantage of lower interest rates and retired older debt which carried
higher rates. This was accomplished through early calls and accelerated
pay-downs of fixed maturity investments.
The Company's investments are generally managed to match related
insurance and policyholder liabilities. The Company, in conjunction
with the decrease in average yield of the Company's fixed maturity
portfolio has decreased the average crediting rate for the insurance
and investment products. 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, the
Company's primary product. The Company monitors investment yields, and
when necessary takes action to adjust credited interest rates on its
insurance products to preserve targeted spreads. Over 60% of the
insurance and investment product reserves are crediting 5% or less in
interest and 39% of the insurance and investment product reserves are
crediting 5.25% to 6% in interest. It is expected that the
monitoring of the interest spreads by management will provide the
necessary margin to adequately provide for associated costs on
insurance policies the Company has in force and will write in the future.
46
Realized investment losses were $124,000 and $1,437,000 in 1995 and
1994, respectively. Fixed maturities and equity securities realized net
investment losses of $224,000 and real estate realized net investment
gains of $100,000 in 1995. The realized loss in 1995 cannot be
attributed to any one specific transaction. In 1994, the Company
realized losses of $865,000 due to a permanent impairment of property
located in Louisiana. The permanent impairment was based on recent
appraisals and marketing analysis of surrounding properties. The
Company realized a gain of $467,000 from the sale of an insignificant
subsidiary in 1994. In 1994, the Company realized a loss of $212,000
from the charge off of its investment in its equity subsidiary, United
Fidelity, Inc. The Company had other gains and losses during the
period that comprised the remaining amount reported but were routine or
immaterial in nature to disclose on an individual basis.
(b) EXPENSES
Total expenses increased 16% when comparing 1995 to 1994.
Life benefits, net of reinsurance benefits and claims, decreased 4%
compared to 1994. The decrease is related to the decrease in first
year premium production. Another factor that has caused life benefits
to decrease is that during 1994, the Company lowered its crediting
rates on interest sensitive products in response to financial market
conditions. This action will facilitate the appropriate spreads
between investment returns and credited interest rates. It takes
approximately one year to fully realize a change in credited rates since a
change becomes effective on each policy's next anniversary. Please refer
to discussion of net investment income for analysis of interest spreads.
The Company experienced an increase of 6% in mortality during 1995
compared to 1994. The increase in mortality is due primarily to
settlement expenses discussed in the following paragraph:
During the third quarter of 1994, UG became aware that certain new
insurance business was being solicited by certain agents and issued
to individuals considered to be not insurable by Company standards.
These non-standard policies had a face amount of $22,700,000 and
represented 1/2 of 1% of the insurance in force in 1994. Management's
initial analysis indicated that the expected death claims on the business
in force to be adequately covered by the mortality assumptions
inherent in the calculation of statutory reserves. Nevertheless,
management determined it was in the best interest of the Company to
repurchase as many of the non-standard policies as possible. As of
December 31, 1995, there remained approximately $5,738,000 of the
original face amount which had not been settled. Through December 31,
1995, the Company spent a total of $2,886,000 for the repurchase of the
non-standard policies and for the legal defense of related
litigation. In relation to settlement of non-standard policies the
Company incurred life benefits of $720,000 and $1,250,000 in 1995 and
1994, respectively. The Company incurred legal costs of $687,000 and
$229,000 in 1995 and 1994, respectively.
Dividends to policyholders increased approximately 16% when comparing
1995 to 1994. USA continued to market participating policies
through most of 1994. Management expects dividends to policyholders
will continue to increase in the future. A significant portion of the
insurance in force is participating insurance. A significant portion of
the participating business is relatively newer business, and the dividend
scale for participating policies increases in each duration. The dividend
scale is subject to approval of the Board of Directors and may be
changed at their discretion. The Company has discontinued its marketing
of participating policies.
47
Commissions and amortization of deferred policy acquisition costs
increased 21% in 1995 compared to 1994. The increase is directly
attributed to the amortization of a larger asset. The increase is
also caused by the reduction in first year premium production. To a
lesser extent the increase in amortization of deferred policy
acquisition costs is directly related to the change in products that is
currently marketed. The Company revised its portfolio of products as
previously discussed in premium income. These new products pay lower
first year commissions than the products sold in prior periods. The
asset increased due to first year premium production by the agency
force. The Company did benefit from improved persistency.
Amortization of cost of insurance acquired decreased 37% in 1995 compared
to 1994. Cost of insurance acquired is amortized in relation to
expected future profits, including direct charge-offs for any excess of
the unamortized asset over the projected future profits. The Company did
not have any charge-offs during the periods covered by this report. The
decrease in amortization during the current period is a normal
fluctuation due to the expected future profits. Amortization of cost
of insurance acquired is particularly sensitive to changes in
persistency of certain blocks of insurance in force. The Company's
average persistency rate for all policies in force for 1995 and 1994
has been approximately 87.5% and 86.3%, respectively.
During 1995, the Company reported a non-recurring write down of value of
agency force of $8,297,000. The write down is directly related to the
Company's change in distribution systems. The Company has changed its
focus from primarily a broker agency distribution system to a captive agent
system. Business produced by the broker agency force in recent years did
not meet Company expectations. With the change in focus of distribution
systems, most of the broker agents were terminated. The termination of
most of the agents involved in the broker agency force caused management
to re-evaluate the value of the agency force and write-off the remaining
value carried on the balance sheet.
Operating expenses increased 18% in 1995 compared to 1994. The increase
was caused by several factors. The primary factor for the increase in
operating expenses is due to the decrease in production. The decrease
in production was discussed in the analysis of premium income. As such,
the Company was positioned to handle significantly more first year
production than was produced. First year operating expenses that were
deferred and capitalized as a deferred policy acquisition costs asset was
$532,000 in 1995 compared to $1,757,000 in 1994. The difference between
the policy acquisition costs deferred in 1995 compared to 1994,
affected the increase in operating expenses. The increase in operating
expenses was offset, to a lesser extent, from a 12% reduction in staff
in 1995 compared to 1994. The reduction in staff was achieved by
attrition.
Another factor that caused the increase in operating expenses is
directly related to increased legal costs. During the third quarter
of 1994, UG became aware that certain new insurance business was
being solicited by certain agents and issued to individuals considered
to be not insurable by Company standards. These policies had a face
amount of $22,700,000 and represent 1/2 of 1% of the insurance in force
of the Company. As of December 31, 1995, there remained approximately
$5,738,000 of the original face amount which have not been settled.
The Company will continue its efforts to repurchase as many of the
policies as possible and regularly apprise the Ohio Department of
Insurance regarding the status of this situation. The Company
incurred legal costs of $687,000 and $229,000 in 1995 and 1994,
respectively, for the legal defense of related litigation.
Interest expense increased slightly in 1995 compared to 1994. The
increase was due to the increase in the interest rate on the Company's
senior debt, which is tied to the base rate of the First Bank of
Missouri. The interest rate on the senior debt increased to 10% on March
1, 1995 compared to 7% on March 1, 1994. The Company was able to
minimize the effect of the higher interest rate in 1995 by early
payments of principal. The Company paid $600,000 in principal
payments in early 1995. The interest rate on the senior debt has
decreased to 9.25% as of March 1, 1996.
48
(c) NET LOSS
The Company had a net loss of $3,001,000 in 1995 compared to a net loss
of $1,624,000 in 1994. The decline in 1995 is attributed to the non-
recurring write down of the value of agency force and the increase in
operating expenses. The write down of agency force, net of deferred income
taxes and minority interest, caused $2,608,000 of the $3,001,000 net loss
in 1995. The net loss was minimized by the improvement of net investment
income and realized investment losses when compared to the previous year.
FINANCIAL CONDITION
The financial condition of the Company was affected by a coinsurance
agreement between First International Life Insurance Company
("FILIC") and the Company's insurance subsidiary Universal Guaranty Life
Insurance Company ("UG") on September 30, 1996. The agreement
provided UG an additional $6,375,000 of statutory capital and
surplus. 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. Certain balance sheet line items were impacted by this
agreement and affects the comparability of the current period with the
prior period.
(a) ASSETS
The Company's insurance subsidiaries are regulated by insurance
statutes and regulations as to the type of investments that they are
permitted to make and the amount of funds that may be used for any one
type of investment. In light of these statutes and regulations and the
Company's business and investment strategy, the Company generally
seeks to invest in United States government and government agency
securities and corporate securities rated investment grade by
established nationally recognized rating organizations.
The liabilities are predominantly long term in nature and therefore,
the Company invests in long term fixed maturity investments which are
reported in the financial statements at their amortized cost. The
Company has the ability and intent to hold these investments to maturity;
consequently, the Company does not expect to realize any significant loss
from these investments. The Company does not own any derivative
investments or "junk bonds". As of December 31, 1996, the carrying
value of fixed maturity securities in default as to principal or
interest was immaterial in the context of consolidated assets or
shareholders' equity. The Company has identified securities it may sell
and classified them as "investments held for sale". Investments held for
sale are carried at market, with changes in market value charged
directly to shareholders' equity.
Mortgage loans decreased 21% in 1996 as compared to 1995. The Company
is not actively seeking new mortgage loans, and the decrease is due to
early pay-offs from mortgagee's seeking refinancing at lower interest
rates. All mortgage loans held by the Company are first position
loans. The Company has $603,000 in mortgage loans, net of a $10,000
reserve allowance, which are in default or in the process of foreclosure,
this represents approximately 5% of the total portfolio. The mortgage
delinquency rate for the insurance industry as published by the
National Association of Insurance Commissioners ("NAIC") as the "Industry
Experience Factor" is 6.5%.
Investment real estate and real estate acquired in satisfaction of
debt decreased 17% in 1996 compared to 1995. The decrease was due to the
sale of lots from the Company's Lake Pointe development and the sale of
two foreclosed properties. Real estate holdings represent approximately
4% of the total assets of the Company. Total real estate is separated
into four categories: Home Office 20%, Commercial 17%, Residential
Development 36% and Foreclosed Properties 27%.
49
Policy loans decreased 15% in 1996 compared to 1995. Policy loans
decreased approximately $2,787,000 due to the coinsurance agreement
with FILIC. Industry experience for policy loans indicates few policy
loans are ever repaid by the policyholder other than through
termination of the policy. Policy loans are systematically reviewed to
ensure that no individual policy loan exceeds the underlying cash value
of the policy. Policy loans will generally increase due to new loans and
interest compounding on existing policy loans.
Reinsurance receivables increased significantly due to the coinsurance
agreement with FILIC. The coinsurance agreement contributed
approximately $28,000,000 to reinsurance receivables for future
policy benefits as of December 31, 1996.
Deferred policy acquisition costs decreased 1% in 1996 compared to
1995. The costs, which vary with, and are primarily related to
producing new business are referred to as deferred policy acquisition
costs ("DAC"). DAC consists primarily of commissions and certain
costs of policy issuance and underwriting, net of fees charged to the
policy in excess of ultimate fees charged. To the extent that these
costs are recoverable from future profits, the Company defers these costs
and amortizes them with interest in relation to the present value of
expected gross profits from the contracts, discounted using the interest
rate credited by the policy. The Company had $1,276,000 in policy
acquisition costs deferred, $408,000 in interest accretion and $1,796,000
in amortization in 1996. The Company did not recognize any impairments
during the period.
Cost of insurance acquired decreased significantly during 1996. The
decrease is primarily attributed to the coinsurance agreement with
FILIC.
(b) LIABILITIES
Total liabilities increased slightly in 1996 compared to 1995. Future
policy benefits increased 2% in 1996 and represented 81% of total
liabilities at December 31, 1996. Management expects future policy
benefits to increase in the future due to the aging of the volume of
insurance in force and continued production by the Company's sales force.
Policy claims and benefits payable increased 3% in 1996 compared to
1995. There is no single event that caused this item to increase. Policy
claims vary from year to year and therefore, fluctuations in this
liability are to be expected and are not considered unusual by management.
Other policyholder funds decreased 7% in 1996 compared to 1995. The
decrease can be attributed to a decrease in premium deposit funds.
Premium deposit funds are funds deposited by the policyholder with the
insurance company to accumulate interest and pay future policy premiums.
The change in marketing from traditional insurance products to universal
life insurance products is the primary reason for the decrease. Universal
life insurance products do not have premium deposit funds. All premiums
received from universal life insurance policyholders are credited to
the life insurance policy and are reflected in future policy
benefits.
Dividend and endowment accumulations increased 10% in 1996 compared to
1995. The increase is attributed to the significant amount of
participating business the Company has in force. There are generally
four options a policyholder can select to pay policy dividends. Over
47% of all dividends paid were put on deposit to accumulate with
interest. Accordingly, management expects this liability to increase in
the future.
Income taxes payable and deferred income taxes payable decreased
significantly in 1996 compared to 1995. The primary reason for the
decrease in deferred income taxes is due to the coinsurance agreement with
FILIC. The change in deferred income taxes payable is attributable to
temporary differences between Generally Accepted Accounting Principles
("GAAP") and tax basis. Federal income taxes are discussed in more
detail in Note 3 of the Consolidated Notes to the Financial Statements.
50
Notes payable decreased approximately $1,873,000 in 1996 compared to
1995. On May 8, 1996, FCC refinanced its senior debt of $8,900,000.
The refinancing was completed through First of America Bank - NA. The
refinanced debt bears interest to a rate equal to the "base rate" plus
ninesixteenths of one percent. The Base rate is defined as the floating
daily, variable rate of interest determined and announced by First of
America Bank from time to time as its "base lending rate". The base rate
at issuance of the loan was 8.25%, and has remained unchanged through
March 1, 1997. 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, 1996, the Company prepaid
$500,000 of the May 8, 1997 principal payment. The Company's long term
debt is discussed in more detail in Note 11 of the Notes to the Financial
Statements.
(c) SHAREHOLDERS' EQUITY
Total shareholders' equity decreased 5% in 1996 compared to 1995. The
decrease in shareholders' equity is primarily due to the net loss of
$938,000 in 1996. The Company experienced $85,000 in unrealized
depreciation of equity securities and investments held for sale in 1996.
REGULATORY ENVIRONMENT
The Company's insurance subsidiaries are subject to government
regulation in each of the states in which they conduct business. Such
regulation is vested in state agencies having broad administrative
power dealing with all aspects of the insurance business, including the
power to: (i) grant and revoke licenses to transact business; (ii)
regulate and supervise trade practices and market conduct; (iii)
establish guaranty associations; (iv) license agents; (v) approve policy
forms; (vi) approve premium rates for some lines of business;
(vii) establish reserve requirements; (viii) prescribe the form and
content of required financial statements and reports; (ix) determine
the reasonableness and adequacy of statutory capital and surplus; and
(x) regulate the type and amount of permitted investments. Insurance
regulation is concerned primarily with the protection of policyholders.
The Company cannot predict the form of any future proposals or regulation.
The Company's insurance subsidiaries, USA, UG, APPL and ALIC are domiciled
in the states of Ohio, Ohio, West Virginia and Illinois, respectively.
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 are registered as controlled insurers in
those jurisdictions in which such registration is required.
Statutes vary from state to state but typically require periodic
disclosure concerning the corporation that controls the registered
insurers and all subsidiaries of such corporation. In addition, prior
notice to, or approval by, the state insurance commission of
material intercorporate transfers of assets, reinsurance agreements,
management agreements (see Note 9 of the Notes to the Financial
Statements), and payment of dividends (see Note 2 of the Notes to the
Financial Statements) in excess of specified amounts by the insurance
subsidiary within the holding company system are required.
The National Association of Insurance Commissioners ("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.
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.
51
At year end 1996, UG had two ratios outside the normal range. The
first ratio compared commission allowances with statutory capital and
surplus. The ratio was outside the norm due to the coinsurance
agreement with First International Life Insurance Company ("FILIC").
Additional information about the coinsurance agreement with FILIC can be
found in Note 7 of the Notes to the Consolidated Financial
Statements. Management does not believe that this ratio will be outside
the normal range in future periods.
The second ratio is related to the decrease in premium income. The
ratio fell outside the normal range the last two years. The decrease
in premium income is directly attributable to the change in
distribution systems and marketing strategy. The Company changed its
focus from primarily a broker agency distribution system to a captive
agent system and changed its marketing strategy from traditional
whole life insurance products to universal life insurance products.
Management is taking a long-term approach to its recent changes to
the marketing and distribution systems and believes these changes will
provide long-term benefits to the Company.
The Company receives funds from its insurance subsidiaries in the form of
management and cost sharing arrangements (See Note 9 of the
Consolidated Notes to the Financial Statements) and through
dividends. Annual dividends in excess of maximum amounts prescribed
by state statutes ("extraordinary dividends") may not be paid without
the prior approval of the insurance commissioner in which an insurance
subsidiary is domiciled. (See Note 2 of the Consolidated Notes to the
Financial Statements.)
The NAIC has adopted Risk-Based Capital ("RBC") requirements for
life/health insurance companies to evaluate 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 will be 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, 1996, each of the Company's insurance subsidiaries
has a Ratio that is in excess of 300% of the authorized control
level; accordingly the Company's subsidiaries meet the RBC
requirements.
The NAIC has recently released the Life Illustration Model Regulation.
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 which does not meet the various tests. The only implication
is the way in which the product is marketed to the consumer. A product
which does not pass the tests uses guaranteed assumptions rather than
current assumptions in presenting future product performance to the
consumer.
52
As states in which the Company does business adopt the regulation or
adopt a modified version of the regulation, the Company will be
required to comply with this new regulation. The Company may need
to modify existing products or sales methods.
The NAIC has proposed a new Model Investment Law that may affect the
statutory carrying values of certain investments; however, the final
outcome of that proposal is not certain, nor is it possible to predict
what impact the proposal will have on the Company or whether the proposal
will be adopted in the foreseeable future.
FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection
with the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which
have financial resources or ratings greater than those of the Company.
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. Management believes that the Company's ability to
compete is dependent upon, among other things, its ability to attract and
retain agents to market its insurance products and its ability to develop
competitive and profitable products.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF UTI FOR THE PEROID ENDED
SEPTEMBER 30, 1997
The purpose of this section is to discuss and analyze the Company's
financial condition, changes in financial condition and results
of operations, which reflect the performance of the Company. The
information in the consolidated financial statements and related notes
should be read in conjunction with this section.
LIQUIDITY AND CAPITAL RESOURCES
The Company and its consolidated subsidiaries have three principal
needs for cash - the insurance companies' contractual obligations
to policyholders, the payment of operating expenses and servicing of
its long-term debt. Cash and cash equivalents as a percentage of total
assets were 3.7% and 4.9% as of September 30, 1997, and December 31,
1996, respectively. Fixed maturities as a percentage of total invested
assets were 81% and 80% as of September 30, 1997 and December 31, 1996,
respectively.
Future policy benefits are primarily long-term in nature and therefore,
the Company's investments are predominantly in long term fixed
maturity investments such as bonds and mortgage loans which provide a
sufficient return to cover these obligations. Most of the insurance
company assets, other than policy loans, are invested in fixed
maturities and other investments, substantially all of which are
readily marketable. Although there is no present need or intent to
dispose of such investments, the life companies could liquidate portions
of their investments if such a need arose. The Company has the ability and
intent to hold these investments to maturity; consequently, the
Company's investment in long term fixed maturities is reported in the
financial statements at their amortized cost.
Many of the Company's products contain surrender charges and other
features which reward persistency and penalize the early withdrawal of
funds. With respect to such products, surrender charges are generally
sufficient to cover the Company's unamortized deferred policy
acquisition costs with respect to the policy being surrendered.
53
Consolidated operating activities of the Company produced cash flows of
($1,296,000) and $2,244,000 for the first nine months of 1997 and 1996,
respectively. The net cash (used in) or provided by operating
activities plus net policyholder contract deposits after the payment
of policyholder withdrawals, equaled $1,493,000 for the first nine months
of 1997 and $7,550,000 for the first nine months of 1996. Management uses
this measurement of cash flows as an indicator of the performance of the
Company's insurance operations, since reporting regulations require cash
inflows and outflows from universal life insurance products to be shown
as financing activities. Dollar volume of new business production
is down 40% when comparing the first nine months of 1997 to the first
nine months of 1996. New business production suffered in 1997 from a
combination of the uncertainty generated by the pending change of
control of the Company (See Note 6), and modifications to certain
products in the Company's life insurance portfolio. The modifications
to the products were necessary to meet new regulations adopted by
state insurance departments. The modifications to the products required
re-training of the Company's agency force.
Net cash used in investing activities was $5,902,000 and $3,508,000
for the first nine months of 1997 and 1996, respectively. The most
significant aspect of net cash used in investing activities, are
the fixed maturity transactions. Fixed maturities account for 71% and
84% of the total cost of investments acquired for the first nine months
of 1997 and 1996, respectively. The Company has not directed its
investable funds to so-called "junk bonds" or derivative investments.
Net cash provided by financing activities was $2,961,000 and $3,933,000
for the first nine months of 1997 and 1996, respectively.
Policyholder contract deposits decreased 19% for the first nine months of
1997 compared to the first nine months of 1996. The decrease is due to
the decline in new business production. Policyholder contract
withdrawals decreased 6% for the first nine months of 1997 compared to
the first nine months of 1996.
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinancing was completed through First of America Bank - Illinois NA
and is subject to a credit agreement. The refinanced debt bears
interest at a rate equal to the "base rate" plus nine-sixteenths
of one percent. The Base rate is defined as the floating daily,
variable rate of interest determined and announced by First of America
Bank from time to time as its "base lending rate." The base rate at
September 30, 1997 was 8.5%. Interest is paid quarterly and
principal payments of $1,000,000 are due in May of each year beginning
in 1997, with a final payment due May 8, 2005. The Company satisfied its
$1,000,000 principal obligation for 1997 by prepaying $500,000 on
November 8, 1996 and a payment of $500,000 on May 8, 1997. The next
scheduled principal payment is $1,000,000 due on May 8, 1998. On
November 8, 1997, the Company prepaid the May 1998 principal payment.
On July 31, 1997, United Trust Inc. issued convertible notes for cash in
the amount of $2,560,000 to seven individuals, all officers or employees
of United Trust Inc. The notes bear interest at a rate of 1% over
prime, with interest payments due quarterly and principal due upon
maturity of July 31, 2004. The conversion price of the notes are graded
from $12.50 per share for the first three years, increasing to $15.00 per
share for the next two years and increasing to $20.00 per share for the
last two years.
On a parent only basis, UTI's cash flow is dependent on revenues from
a management agreement with UII and its earnings received on invested
assets and cash balances. At September 30, 1997, substantially all of
the consolidated shareholders equity represents net assets of
its subsidiaries. Cash requirements of UTI primarily relate to the
payment of 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, the state insurance department regulates insurance company
dividend payments where the company is domiciled. UG's dividend
limitations are described below.
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, 1996, UG had a statutory gain from operations of
$8,006,000. At December 31, 1996, UG's statutory capital and surplus
amounted to $10,227,000. Extraordinary dividends (amounts in
excess of ordinary dividend limitations) require prior approval
of the insurance commissioner and are not restricted to a
specific calculation.
54
Management believes the overall sources of liquidity available will
be sufficient to satisfy its financial obligations.
RESULTS OF OPERATIONS
YEAR-TO-DATE 1997 COMPARED TO 1996:
(a) REVENUES
Premium income, net of reinsurance premium, decreased 9% when
comparing the first nine months of 1997 to the first nine months of
1996. The Company's primary product is the "Century 2000" universal life
insurance product. Universal life and interest sensitive life
insurance products contribute only the risk charge to premium income,
however traditional insurance products contribute all monies received
to premium income. Since the Company does not actively market
traditional life insurance products, it is expected that premium income
will continue to decrease in future periods as a result of expected
lapses of business in force.
Other considerations, net of reinsurance, increased approximately
1% compared to one year ago. Other considerations consist of
administrative charges on universal life and interest sensitive life
insurance products. The insurance in force relating to these types of
products continues to increase as marketing efforts focus on universal life
insurance products.
Net investment income decreased 5% when comparing the first nine months of
1997 to 1996. The decrease is the result of a smaller invested asset base
from one year ago. During the fourth quarter 1996, the Company
transferred approximately $22,000,000 in assets as part of a
coinsurance agreement with First International Life Insurance Company
("FILIC"). The Company has invested excess cash and financing
activities generated through sales of universal life insurance
products.
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, the
Company's primary product. The Company monitors investment yields,
and when necessary adjusts credited interest rates on its
insurance products to preserve targeted spreads. It is expected that
the monitoring of the interest spreads by management will provide the
necessary margin to adequately provide for associated costs on
insurance policies the Company has in force and will write in the future.
(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 4%
in the first nine months of 1997 compared to 1996. The decrease in
life benefits is attributed to a decrease in mortality. There is no
single event that caused mortality to decrease. Policy claims vary from
year to year and therefore, fluctuations in mortality are to be expected
and are not considered unusual by management. The Company experienced a
decline of 40% in dollar volume of new business production. This
decline results in less of an increase in reserves from new business as
compared to the previous year.
Amortization of cost of insurance acquired decreased $1,956,000 for
the first nine months of 1997 compared to 1996. The decrease is
attributed partially to the 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 a non-premium paying life insurance policy. Cost of
insurance acquired is amortized in relation to expected future profits,
including direct charge-offs for any excess of the unamortized asset over
the projected future profits. The Company did not have any charge-
offs during the periods covered by this report.
55
Operating expenses decreased 20% when comparing the first nine months
of 1997 to the first nine months of 1996. The decrease in operating
expenses is attributed to the settlement of certain litigation in the
fourth quarter of 1996. The Company incurred elevated legal fees in
the previous year due to the litigation. Operating expenses were
further reduced from a restructuring of the home office personnel completed
in late 1996.
(c) NET LOSS
The Company had a net loss of $376,000 for the first nine months of
1997 compared to $579,000 for the first nine months of 1996. The
improvement for the current period is primarily due to the decrease in
operating expenses.
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996:
(a) REVENUES
Premium income, net of reinsurance premium, decreased 11% when
comparing third quarter of 1997 to 1996. The Company's primary product is
the "Century 2000" universal life insurance product. Universal life
and interest sensitive life insurance products contribute only the risk
charge to premium income, however traditional insurance products
contribute all monies received to premium income. Since the Company does
not actively market traditional life insurance products, it is expected
that premium income will continue to decrease in future periods as a
result of expected lapses of business in force.
Other considerations, net of reinsurance, decreased slightly compared to
one year ago. Other considerations consist of administrative charges on
universal life and interest sensitive life insurance products. The
insurance in force relating to these types of products continues to
increase as marketing efforts focus on universal life insurance
products.
Net investment income decreased 9% when comparing third quarter of
1997 to 1996. The decrease is the result of a smaller invested asset
base from one year ago. During the fourth quarter 1996, the Company
transferred approximately $22,000,000 in assets as part of a
coinsurance agreement with First International Life Insurance Company
("FILIC").
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, the
Company's primary product. The Company monitors investment yields,
and when necessary adjusts credited interest rates on its insurance
products to preserve targeted spreads. It is expected that the
monitoring of the interest spreads by management will provide the
necessary margin to adequately provide for associated costs on
insurance policies the Company has in force and will write in the future.
(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 27%
in third quarter of 1997 compared to 1996. The decrease in life benefits
is due to the decrease in new business production. Mortality decreased
$363,000 in third quarter of 1997 compared to 1996. There is no single
event that caused mortality to decrease. Policy claims vary from year to
year and therefore, fluctuations in mortality are to be expected and are
not considered unusual by management.
56
Amortization of cost of insurance acquired decreased 39% for third quarter
of 1997 compared to 1996. The decrease is attributed partially to the
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 a non-premium
paying life insurance policy. Cost of insurance acquired is amortized
in relation to expected future profits, including direct charge-offs
for any excess of the unamortized asset over the projected future profits.
The Company did not have any charge-offs during the periods covered by
this report.
Operating expenses decreased 31% when comparing third quarter of
1997 to 1996. The decrease in operating expenses is attributed to the
settlement of certain litigation in the fourth quarter of 1996. The
Company incurred elevated legal fees in the previous year due to the
litigation. Operating expenses were further reduced from a restructuring
of the home office personnel completed in late 1996.
(c) NET LOSS
The Company had a net loss of $524,000 for third quarter of 1997 compared
to $893,000 for third quarter of 1996. The improvement is due to the
decrease in operating expenses.
FINANCIAL CONDITION
Shareholder's equity decreased 13% as of September 30, 1997 compared to
December 31, 1996. The decrease is due to the Company buying treasury
shares. Other changes to occur to the balance sheet is a decrease in cash
and cash equivalents and the corresponding increase in fixed maturities.
Future policy benefits increased as expected due to the aging in force
business.
The Company's insurance subsidiaries are regulated by insurance
statutes and regulations as to the type of investments that they are
permitted to make and the amount of funds that may be used for any one
type of investment. In light of these statutes and regulations and the
Company's business and investment strategy, the Company generally
seeks to invest in United States government and government agency
securities and corporate securities rated investment grade by
established nationally recognized rating organizations.
The liabilities are predominantly long term in nature and therefore,
the Company invests in long term fixed maturity investments, which are
reported in the financial statements at their amortized cost. The
Company has the ability and intent to hold these investments to maturity;
consequently, the Company does not expect to realize any significant loss
from these investments. The Company does not own any derivative
investments or "junk bonds". As of September 30, 1997, the carrying
value of fixed maturity securities in default as to principal or
interest was immaterial in the context of consolidated assets or
shareholders' equity. The Company has identified securities it may sell
and classified them as "investments held for sale". Investments held for
sale are carried at market, with changes in market value charged
directly to shareholders' equity.
FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection
with the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which
have financial resources or ratings greater than those of the Company.
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. Management believes that the Company's
ability to compete is dependent upon, among other things, its ability to
attract and retain agents to market its insurance products and its
ability to develop competitive and profitable products.
57
FEDERAL INCOME TAXES
Under current federal income tax laws, qualifying life insurance
companies are, subject to a phase out limitation, entitled to a "small
life insurance company" deduction. This deduction is set at 60% of the
life insurance company's tentative life insurance taxable income up to
$3,000,000. For tentative life insurance taxable income in excess of
$3,000,000, the amount of the deduction is equal to $1,800,000 (the
maximum amount allowed to be deducted) less 15% of the excess of such
income over $3,000,000. In general, the small life insurance company
deduction is computed by treating all life insurance companies that are
members of the same controlled group as one company, whether these
companies join in the filing of a consolidated return or file separate
returns. As a result, for the years 1994, 1995 and 1996, the effective
tax rate on life insurance companies generally ranged from
approximately 15% on companies with taxable income of $3,000,000 or
less to approximately 35% on companies with taxable income of
$15,000,000 or more.
Effective in 1984, the provisions of the federal income tax law
relating to the timing of the deduction for policy reserve increases were
amended. This change had the effect of increasing the portion of gain
from operations which is taxed currently.
The Tax Reform Act of 1986 effected major changes in the basic
structure of the federal income tax laws. The Act reduced the highest
general corporate tax rates. As a result, after giving effect to the
small life insurance company deduction, effective tax rates for life
insurance companies generally range from approximately 14% for
companies with taxable income of $3,000,000 or less to 35% for companies
with taxable income of $15,000,000 or more. The Act also created a new
alternative minimum tax on tax preference items of corporations (which
includes as a tax preference item 75% of the excess of adjusted
current earnings over alternative minimum taxable income).
UTI and its subsidiaries have net operating loss carry forwards for
federal income tax purposes totaling $1,493,000 for UTI, $2,135,000 for
FCC, and $3,832,000 for UG expiring as set forth in Note 3 of Notes to
Financial Statements of UTI.
CAPITALIZATION OF UTI AND UII
The following table sets forth the capitalizations on a GAAP basis of
UTI and UII as of September 30, 1997 and UTI's capitalization on a pro
forma combined basis at such date as if the proposed Merger had been
consummated on that date, accounting for the Merger as a purchase of UII
by UTI at a cost of $8,923,000. The pro forma combined capitalization
is based on the exchange ratio of one share of UTI Common Stock for
each share of UII Common Stock assumes that no stockholder dissents and
exercises his rights of appraisal. The table should be read in
conjunction with the financial statements and pro forma financial
statements and related notes of UTI and UII. (* inapplicable).
Outstanding at
September 30, 1997 ProForma
UTI UII Combined
Short-term debt 0 0 0
Long-term debt, less
current portion 22,567,000 902,000 23,469,000
Shareholders' equity:
Common Stock:
UTI, no par value
(.02 stated value) 33,000 * 51,000
UII, no par value
($.033 stated value) * 46,000 *
Paid-in Additional Capital 16,488,000 15,242,000 25,393,000
Unrealized Depreciation of
Investments
Held for Sale 139,000 98,000 139,000
Accumulated Deficit (952,000) (3,250,000) (952,000)
Total Shareholders' Equity 15,708,000 12,137,000 24,631,000
Total Capitalization $15,708,000 $12,137,000 $24,631,000
58
UTI AND UII
PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL INFORMATION - UNAUDITED
The September 30, 1997 pro forma financial information included in
this Proxy Statement is based on the exchange ratio of one share of UTI
Common Stock for each one share of UII Common Stock and assumes that no
stockholder dissents and exercises his rights of appraisal. The pro
forma balance sheet assumes the transactions took place as of the balance
sheet date and the pro forma statement of operations is prepared as if the
transactions took place as of January 1.
The pro forma financial information included in this Proxy Statement
is not intended to reflect results of operations or the financial
position that would have actually resulted had the Merger been
effective on the dates indicated. The information shown is not
necessarily indicative of the results of future operations. These
statements should be read in conjunction with the financial statements of
UTI and UII contained elsewhere herein.
59
UNITED TRUST, INC.
UNITED INCOME, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
as of September 30, 1997
(Unaudited)
UTI UII Merger
ASSETS September 30 September 30 Adjustments Pro Forma
Investments:
Fixed maturities at
amortized cost $185,691,622 $ 0 $ $185,691,622
Investments held for sale:
Fixed maturities,
at market 1,834,388 0 1,834,388
Equity securities,
at market 2,783,623 0 2,783,623
Mortgage loans on real
estate at amortized
cost 10,010,243 121,865 10,132,108
Investment real estate, at
cost, net of accumulated
depreciation 10,635,617 0 10,635,617
Real estate acquired in
satisfaction of debt,
at cost 3,856,946 0 3,856,946
Policy loans 14,211,585 0 14,211,585
Short term investments 425,458 0 425,458
229,449,482 121,865 0 229,571,347
Cash and cash
equivalents 13,089,285 654,097 13,743,382
Investment in affiliates 4,996,199 16,502,228(1)(2)(21,498,427) 0
Accrued investment income 4,094,360 12,308 4,106,668
Reinsurance receivables:
Future policy benefits 38,414,086 0 38,414,086
Policy claims and
other benefits 3,200,091 0 3,200,091
Other accounts and
notes receivable 1,032,444 864,100 1,896,544
Cost of insurance
acquired 42,254,048 0(4) (3,323,786) 38,930,262
Deferred policy
acquisition costs 10,897,379 0 10,897,379
Costs in excess of net
assets purchased, less
accumulated amortization 2,782,883 0 2,782,883
Other assets 1,443,155 56,957 1,500,112
Total assets $351,653,412 $ 18,211,555 $(24,822,213)$345,042,754
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy
benefits $249,367,949 $ 0 $ $249,367,949
Policy claims and
benefits payable 2,236,479 0 2,236,479
Other policyholder
funds 2,552,358 0 2,552,358
Dividend and endowment
accumulations 14,687,638 0 14,687,638
Income taxes payable:
Current 1,101 0 1,101
Deferred 13,473,857 0 13,473,857
Deferred gain on sale
of subsidiary 0 5,178,928(4) (5,178,928) 0
Notes payable 22,566,713 0 22,566,713
Convertible debentures 0 902,300 902,300
Indebtedness to (from)
affiliates, net 17 (6,630) (6,613)
Other liabilities 4,392,866 221 4,393,087
Total liabilities 309,278,978 6,074,819 (5,178,928) 310,174,869
Minority interests in
consolidated
subsidiaries 26,666,108 0(3) (16,429,280) 10,236,828
Shareholders' equity:
Common stock - no par value,
stated value $.02
per share. 32,695 45,934(5)(6) (27,364) 51,265
Additional paid-in
capital 16,488,376 15,242,365(5)(6) (6,338,204) 25,392,537
Unrealized depreciation
of investments held
for sale 138,936 98,203(5) (98,203) 138,936
Accumulated deficit (951,681) (3,249,766)(5) 3,249,766 (951,681)
Total shareholders'
equity 15,708,326 12,136,736 (3,214,005) 24,631,057
Total liabilities and
shareholders'
equity $351,653,412 $ 18,211,555 $(24,822,213)$345,042,754
60
UNITED TRUST, INC.
UNITED INCOME, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1997
(Unaudited)
UTI UII Merger
September 30 September 30 Adjustments Pro Forma
Revenues:
Premium income $ 23,360,291 $ 0 $ $ 23,360,291
Reinsurance
premium (3,511,544) 0 (3,511,544)
Other
considerations 2,677,994 0 2,677,994
Other considerations
paid to reinsurers (152,179) 0 (152,179)
Net investment
income 11,357,217 77,793(3) (61,648) 11,373,359
Realized investment
gains and
(losses), net (143,015) 0 (143,015)
Other income 602,893 865,341 (1)(2) (1,422,335) 45,899
34,191,657 943,134 (1,483,983) 33,650,805
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 18,242,132 0 18,242,132
Reinsurance benefits
and claims (1,447,716) 0 (1,447,716)
Annuity 1,178,807 0 1,178,807
Dividends to
policyholders 3,074,230 0 3,074,230
Commissions and amortization
of deferred acquisition
costs 2,747,329 0 2,747,329
Amortization of cost of
insurance acquired 1,724,294 0 1,724,294
Operating expenses 7,745,203 697,038(1)(2) (1,422,335) 7,019,906
Interest expense 1,316,892 63,725 (3) (61,648) 1,318,966
34,581,171 760,763 (1,483,983) 33,857,948
Loss before income taxes,
minority interest and
equity in loss
of investees (389,514) 182,371 0 (207,143)
Credit for income
taxes (285,126) 0 (285,126)
Minority interest in loss
(income) of consolidated
subsidiaries 297,943 0(6) (178,710 ) 119,227
Equity in earnings
of investees 1,094 (178,710)(4)(5) 177,616 0
Net income $ (375,603) $ 3,661 $ (1,094) $ (373,042)
Net income per
common share $ (0.21) $ 0.00 $ (0.14)
Weighted average
common shares
outstanding 1,819,398 1,392,022 2,747,882
61
UNITED TRUST, INC.
UNITED INCOME, INC .
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
Merger
UTI UII Adjustments Pro Forma
Revenues:
Premium income $ 32,386,635 $ 0 $ $ 32,386,635
Reinsurance premium (4,767,743) 0 (4,767,743)
Other
considerations 3,504,974 0 3,504,974
Other considerations paid
to reinsurers (179,408) 0 (179,408)
Net investment
income 15,868,447 92,532 (3) (79,433) 15,881,543
Realized investment
gains and (losses),
net (987,930) 2,599 (985,331)
Other income 1,151,395 1,695,816(1)(2) (2,636,548) 210,663
46,976,370 1,790,947 (2,715,981) 46,051,333
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 26,568,062 0 26,568,062
Reinsurance benefits
and claims (2,283,827) 0 (2,283,827)
Annuity 1,892,489 0 1,892,489
Dividends to
policyholders 4,149,308 0 4,149,308
Commissions and amortization
of deferred policy
acquisition costs 4,224,885 0 4,224,885
Amortization of cost of
insurance acquired 5,524,815 0 5,524,815
Operating expenses 11,994,464 1,330,264(1)(2) (2,636,548) 10,688,180
Interest expense 1,731,309 84,027 (3) (79,433) 1,735,900
53,801,505 1,414,291 (2,715,981) 52,499,812
Loss before income taxes,
minority interest and
equity in loss
of investees (6,825,135) 376,656 0 (6,448,479)
Credit for
income taxes 4,703,741 0 4,703,741
Minority interest in
loss of consolidated
subsidiaries 1,278,883 0 (6) (695,739) 583,138
Equity in loss
of investees (95,392) (695,739)(4)(5) 791,131 0
Net loss $ (937,903) $ (319,083) $ 95,392 $ (1,161,600)
Net loss per
common share $ (0.50) $ (0.23) $ (0.41)
Weighted average
common shares
outstanding 1,869,511 1,392,085 2,845,245
62
EXPLANATORY NOTES TO PRO FORMA FINANCIAL INFORMATION
Certain UII amounts have been reclassified to conform with the UTI
presentation. Such reclassifications had no effect on reported net
income or shareholders' equity.
A. The pro forma consolidated balance sheet reflects the following
adjustments:
1. Eliminate UII investment in UTG of $16,502,228
2. Eliminate UTI investment in UII of $4,996,199
3. Eliminate minority interest liability for UII ownership of UTG of
$16,429,280
4. Reclassify UII deferred gain to conform to UTI presentation for
consolidation
5. Eliminate UII equity accounts:
Common stock $ 9,934
Additional paid in capital $ 5,242,365
Unrealized depreciation of
investments held for sale $ 8,203
Accumulated deficit $(3,249,766)
6. To record the issuance of 928,484 shares of UTI common stock to the
shareholders of cost a cost of $8,922,731.
63
UTI/UII Pro-forma Merger
Income Statement Elimination Entries
09/30/97
C. The pro forma statement of operations for the nine months ended
September 30, 1997 reflects the following adjustments:
1. Eliminate management fee UII received from USA of $795,209
2. Eliminate management fee UII paid to UTI of $627,126
3. Eliminate UII interest income from notes receivable of affiliates
of $61,648
4. Eliminate UTI equity in earnings of UII of $1,094
5. Eliminate UII equity in earnings of UTG of $178,710
6. Eliminate minority interest in earnings of UTG established for UII
ownership of $178,710
64
UTI/UII Pro-forma Merger
Income Statement Elimination Entries
12/31/96
B. The pro forma statement of operations for the year ended
December 31, 1996 reflects the following adjustments:
1. Eliminate management fee UII receives from USA of $1,695,813
2. Eliminate management fee UTI receives from UII of $940,735
3. Eliminate intercompany interest expense of $79,433
4. Eliminate UTI equity in loss of UII of $95,392
5. Eliminate UII equity in loss of UTG of $695,739
6. Eliminate minority interest of loss of UTG established for UII
ownership of $695,739
65
MARKET FOR UTI'S COMMON STOCK AND RELATED SECURITY HOLDERS MATTERS
On June 18, 1990, UTI became a member of NASDAQ. Quotations began on that
date under the symbol UTIN. The following table shows the high and low bid
quotations for each quarterly period during the past two years, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
BID
PERIOD LOW HIGH
1996
First quarter 3/8 9/16
Second quarter 3/8 11/16
Third quarter 1/2 11/16
Fourth quarter 3/8 3/4
1995
First quarter 1/2 5/8
Second quarter 1/2 1
Third quarter 1/2 5/8
Fourth quarter 3/8 9/16
Current Market Makers are:
M. H. Meyerson and Company Carr Securities Corporation
30 Montgomery Street 17 Battery Place
Jersey City, NJ 07303 New York, NY 10004
Herzog, Heine, Geduld, Inc. Howe, Barnes Investments, Inc.
26 Broadway, 1st Floor 135 South LaSalle, Suite 1500
New York, NY 10004 Chicago, IL 60603
As of December 31, 1996, no cash dividends had been declared on the common
stock of UTI.
See Note 2 in the accompanying consolidated financial statements for
information regarding dividend restrictions.
Number of Common Shareholders as of March 3, 1997 is 5,689.
MARKET FOR UII'S COMMON STOCK AND RELATED SECURITY HOLDERS MATTERS
As of March 1, 1997, there was no established public trading market
for the Company's common stock. The Company's common stock is not listed
on any exchange
As of December 31, 1996, no cash dividends had been declared on the
common stock of UII.
See Note 7 in the accompanying financial statements for information
regarding dividend restrictions.
Number of Common Shareholders as of March 3, 1997 is 6,543.
66
BUSINESS OF UII
The Registrant and its affiliates (the "Company") operate principally in
the individual life insurance business. The primary business of the
Company has been the servicing of existing insurance business in force, the
solicitation of new insurance business, and the acquisition of other
companies in similar lines of business.
United Income, Inc. ("UII"), was incorporated on November 2, 1987, as an
Ohio corporation. Between March 1988 and August 1990, UII raised a total
of approximately $15,000,000 in an intrastate public offering in Ohio.
During 1990, UII formed a life insurance subsidiary and began selling life
insurance products.
On February 20, 1992, UII and its affiliate, UTI, formed a joint venture,
United Trust Group, Inc., ("UTG"). On June 16, 1992, UII contributed $7.6
million in cash and 100% of the common stock of its wholly owned life
insurance subsidiary. UTI contributed $2.7 million in cash, an $840,000
promissory note and 100% of the common stock of its wholly owned life
insurance subsidiary. After the contributions of cash, subsidiaries, and
the note, UII owns 47% and UTI owns 53% of UTG.
On June 16, 1992, UTG acquired 67% of the outstanding common stock of the
now dissolved Commonwealth Industries Corporation, ("CIC") for a purchase
price of $15,567,000. Following the acquisition, UTG controlled eleven
life insurance subsidiaries. The Company has taken several steps to
streamline and simplify the corporate structure following the acquisitions.
On December 28, 1992, Universal Guaranty Life Insurance Company ("UG")
was the surviving company of a merger with Roosevelt National Life
Insurance Company ("RNLIC"), United Trust Assurance Company ("UTAC"),
Cimarron Life Insurance Company ("CIM") and Home Security Life Insurance
Company ("HSLIC"). On June 30, 1993, Alliance Life Insurance Company
("ALLI"), a subsidiary of UG, was merged into UG.
On March 30, 1994, Farmers and Ranchers Life Insurance Company ("F&R")
was sold to an unrelated third party. F&R was a small life insurance
company which did not significantly contribute to the operations of the
group. F&R primarily represented a marketing opportunity. The Company
determined it would not be able to allocate the time and resources
necessary to properly develop the opportunity, due to continued focus and
emphasis on certain other agency forces of the Company.
On July 31, 1994, Investors Trust Assurance Company ("ITAC") was merged
into Abraham Lincoln Insurance Company ("ABE").
On August 15, 1995, the shareholders of CIC, ITI, and UGIC voted to
voluntarily liquidate each of the companies and distribute the assets to
the shareholders (consisting solely of common stock of their respective
subsidiary). As a result, the shareholders of the liquidated companies
became shareholders of FCC
PRODUCTS
The Company's portfolio consists of two universal life insurance
products. The primary universal life insurance product is referred to as
the "Century 2000". This product was introduced to the marketing force in
1993 and has become the cornerstone of current marketing. This product has
a minimum face amount of $25,000 and currently credits 6% interest with a
guaranteed rate of 4.5% in the first 20 years and 3% in years 21 and
greater. The policy values are subject to a $4.50 monthly policy fee, an
administrative load and a premium load of 6.5% in all years. The
administrative load and surrender charge are based on the issue age, sex
and rating class of the policy. A surrender charge is effective for the
first 14 policy years. In general, the surrender charge is very high in
the first couple of years and then declines to zero at the end of 14 years.
Policy loans are available at 7% interest in advance. The policy's
accumulated fund will be credited the guaranteed interest rate in relation
to the amount of the policy loan.
67
The second universal life product referred to as the "UL90A", has a
minimum face amount of $25,000. The administrative load is based on the
issue age, sex and rating class of the policy. Policy fees vary from $1
per month in the first year to $4 per month in the second and third years
and $3 per month each year thereafter. The UL90A currently credits 5.5%
interest with a 4.5% guaranteed interest rate. Partial withdrawals,
subject to a remaining minimum $500 cash surrender value and a $25 fee, are
allowed once a year after the first duration. Policy loans are available
at 7% interest in advance. The policy's accumulated fund will be credited
the guaranteed interest rate in relation to the amount of the policy loan.
Surrender charges are based on a percentage of target premium starting at
120% for years 1-5 then grading downward to zero in year 15. This policy
contains a guaranteed interest credit bonus for the long term policyholder.
From years 10 through 20, additional interest bonuses are earned with a
total in the twentieth year of 1.375%. The bonus is calculated from the
policy issue date and is contractually guaranteed.
The Company 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. Approximately 30% of the
insurance in force is participating business. The Company's average
persistency rate for its policies in force for 1996 and 1995 has been 87.9%
and 87.5%, respectively. The Company does not anticipate any material
fluctuations in these rates in the future that may result from competition.
The Company's actual experience for earned interest, persistency and
mortality vary from the assumptions applied to pricing and for determining
premiums. Accordingly, differences between the Company's actual experience
and those assumptions applied may impact the profitability of the Company.
The minimum interest spread between earned and credited rates is 1% on the
"Century 2000" universal life insurance product. The Company monitors
investment yields, and when necessary adjusts credited interest rates on
its insurance products to preserve targeted interest spreads. Credited
rates are reviewed and established by the Board of Directors of the
respective life insurance affiliates.
The premium rates are competitive with other insurers doing business in
the states in which the Company is marketing its products.
MARKETING
The Company markets its products through separate and distinct agency
forces. The Company has approximately 60 captive agents and 15 independent
agents who actively write new business. No individual sales agent
accounted for over 10% of the Company's premium volume in 1996. The
Company's sales agents do not have the power to bind the Company.
The change in marketing strategy from traditional life insurance products
to universal life insurance products had a significant impact on new
business production. As a result of the change in marketing strategy the
agency force went through a restructuring and retraining process.
Marketing is based on a referral network of community leaders and
shareholders of UII and UTI. Recruiting of agents is also based on the
same referral network.
New sales are marketed by UG and USA through their agency forces using
contemporary sales approaches with personal computer illustrations.
Current marketing efforts are primarily focused on the Midwest region.
Recruiting of agents is based on obtaining people with little or no
experience in the life insurance business. These recruits go through an
extensive internal training program.
USA is licensed in Illinois, Indiana and Ohio. During 1996, Ohio
accounted for 99% of USA's direct premiums collected.
ALIC is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1996, Illinois and Indiana accounted for 44% and 36%,
respectively of ALIC's direct premiums collected.
68
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 1996, West Virginia accounted for 95% of
APPL's direct premiums collected.
UG is licensed in Alabama, Arizona, Arkansas, Colorado, Delaware,
Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, Missouri,
Montana, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio,
Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin.
During 1996, Illinois and Ohio accounted for 33% and 15%, respectively, of
UG's direct premiums collected. No other states account for more than 7%
of UG's direct premiums collected.
UNDERWRITING
The underwriting procedures of the Company's insurance affiliates are
established by management. Insurance policies are issued by the Company
based upon underwriting practices established for each market in which the
Company operates. Most policies are individually underwritten.
Applications for insurance are reviewed to determine additional information
required to make an underwriting decision, which depends on the amount of
insurance applied for and the applicant's age and medical history.
Additional information may include inspection reports, medical
examinations, statements from doctors who have treated the applicant in the
past and, where indicated, special medical tests. After reviewing the
information collected, the Company either issues the policy as applied for
or with an extra premium charge because of unfavorable factors or rejects
the application. Substandard risks may be referred to reinsurers for full
or partial reinsurance of the substandard risk.
The Company's insurance affiliates require blood samples to be drawn with
individual insurance applications for coverage over $45,000 (age 46 and
above) or $95,000 (age 16-45). Blood samples are tested for a wide range
of chemical values and are screened for antibodies to the HIV virus.
Applications also contain questions permitted by law regarding the HIV
virus which must be answered by the proposed insureds.
RESERVES
The applicable insurance laws under which the Company's insurance
affiliates operate require that each insurance company report policy
reserves as liabilities to meet future obligations on the policies in
force. These reserves are the amounts which, with the additional premiums
to be received and interest thereon compounded annually at certain assumed
rates, are calculated in accordance with applicable law to be sufficient to
meet the various policy and contract obligations as they mature. These
laws specify that the reserves shall not be less than reserves calculated
using certain mortality tables and interest rates.
The liabilities for traditional life insurance and accident and health
insurance policy benefits are computed using a net level method. These
liabilities include assumptions as to investment yields, mortality,
withdrawals, and other assumptions based on the life insurance affiliates'
experience adjusted to reflect anticipated trends and to include provisions
for possible unfavorable deviations. The Company makes these assumptions
at the time the contract is issued or, in the case of contracts acquired by
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.
Benefit reserves for universal life insurance and interest sensitive life
insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges.
Policy benefits and claims that are charged to expense include benefit
claims in excess of related policy account balances. Interest crediting
rates for universal life and interest sensitive products range from 5.0% to
6.0% in each of the years 1996, 1995 and 1994.
69
REINSURANCE
As is customary in the insurance industry, the Company's 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 continently
liable with respect to ceded insurance should any reinsurer be unable to
meet the obligations assumed by it, however it is the practice of insurers
to reduce their financial statement liabilities to the extent that they
have been reinsured with other insurance companies. The Company sets a
limit on the amount of insurance retained on the life of any one person.
The Company will not retain more than $125,000, including accidental death
benefits, on any one life. At December 31, 1996, the Company had insurance
in force of $3.953 billion of which approximately $1.109 billion was ceded
to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The
Company believes the assuming companies are able to honor all contractual
commitments, based on the Company's periodic reviews of their financial
statements, insurance industry reports and reports filed with state
insurance departments.
The Company's insurance affiliate (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, an industry rating company, 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. The
agreement with FILIC accounts for approximately 66% of the reinsurance
receivables as of December 31, 1996.
As a result of the FILIC coinsurance agreement, effective September 30,
1996, UG received a reinsurance credit in the amount of $28,318,000 in
exchange for an equal amount of assets. UG also received $6,375,000 as a
commission allowance.
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.
In selecting a reinsurance company, the Company examines many factors
including:
1) Whether the reinsurer is licensed in the states in which
reinsurance coverage is being sought;
2) the solvency and stability of the company. One source utilized is
the rating given the reinsurer by the A.M. Best Company, an
insurance industry rating company. Another source is the
statutory annual statement of the reinsurer;
3) the history and reputation of the Company;
4) competitive pricing of reinsurance coverage. The Company generally
seeks quotes from several reinsurers when considering a new treaty.
70
INVESTMENTS
At December 31, 1996, substantially all of the assets of the Company
represent investments or receivables in affiliates. The Company does own
one mortgage loan as of December 31, 1996. 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.
GOVERNMENT REGULATION
The Company's insurance affiliates are subject to government regulation
in each of the states in which they conduct business. Such regulation is
vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including the power to: (i) grant and
revoke licenses to transact business; (ii) regulate and supervise trade
practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) approve premium rates for
some lines of business; (vii) establish reserve requirements; (viii)
prescribe the form and content of required financial statements and
reports; (ix) determine the reasonableness and adequacy of statutory
capital and surplus; and (x) regulate the type and amount of permitted
investments. Insurance regulation is concerned primarily with the
protection of policyholders. The Company cannot predict the form of any
future proposals or regulation. The Company's insurance affiliates, USA,
UG, APPL and ALIC are domiciled in the states of Ohio, Ohio, West Virginia
and Illinois, respectively.
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 are 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, and payment of dividends in excess of
specified amounts by the insurance affiliate within the holding company
system are required.
The National Association of Insurance Commissioners (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 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.
71
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 1996, UG had two ratios outside the normal range. The first
ratio compared commission allowances with statutory capital and surplus.
The ratio was outside the norm due to the reinsurance agreement with First
International Life Insurance Company ("FILIC"). Additional information
about the reinsurance agreement with FILIC can be found in the section
titled Reinsurance. Management does not believe that this ratio will be
outside the normal range in future periods.
The second ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last two years. The decrease in premium
income is directly attributable to the change in distribution systems and
marketing strategy. The Company changed its focus from primarily a broker
agency distribution system to a captive agent system and changed its
marketing strategy from traditional whole life insurance products to
universal life insurance products. Management is taking a long-term
approach to its recent changes to the marketing and distribution systems
and believes these changes will provide long-term benefits to the Company.
The NAIC has adopted Risk Based Capital ("RBC") rules, to evaluate the
adequacy of statutory capital and surplus in relation to a company's
investment and insurance risks. The RBC formula reflects the level of risk
of invested assets and the types of insurance products. The formula
classifies company risks into four categories:
1) Asset risk - the risk of loss of principal due to default
through creditor bankruptcy or decline in market value for assets
reported at market.
2) Pricing inadequacy - the risk of adverse mortality, morbidity,
and expense experience in relation to pricing assumptions.
3) Asset and liability mismatch - the risk of having to reinvest funds
when market yields fall below levels guaranteed to contract holders, and
the risk of having to sell assets when market yields are above the
levels at which the assets were purchased.
4) General risk - the risk of fraud, mismanagement, and other business
risks.
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 2.0*
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
* Or, 2.5 with negative trend.
72
At December 31, 1996, each of the Company's insurance affiliates has a
Ratio that is in excess of 300% of the authorized control level;
accordingly the Company's affiliates meet the RBC requirements.
The NAIC has recently released the Life Illustration Model Regulation.
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 which does not
meet the various tests. The only implication is the way in which the
product is marketed to the consumer. A product which does not pass the
tests uses guaranteed assumptions rather than current assumptions in
presenting future product performance to the consumer.
As states in which the Company does business adopt the regulation or
adopt a modified version of the regulation, the Company will be required to
comply with this new regulation. The Company may need to modify existing
products or sales methods.
The NAIC has proposed a new Model Investment Law that may affect the
statutory carrying values of certain investments; however, the final
outcome of that proposal is not certain, nor is it possible to predict what
impact the proposal will have or whether the proposal will be adopted in
the foreseeable future.
EMPLOYEES
UII has no employees of its own. There are approximately 100 persons
who are employed by the Company's affiliates.
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 $59,000 through the remaining
term of the lease. The rent expense will be approximately $35,000 for
1997. The lease contains no renewal or purchase option clause. The leased
space cannot be sublet without written approval of lessor. Rent expense
for 1996, 1995 and 1994 was approximately $61,000, $69,000 and $68,000,
respectively.
LEGAL PROCEEDINGS
The Company and its affiliates are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
liabilities. Management and its legal counsel are of the opinion that the
settlement of those actions will not have a material adverse effect on the
Company's financial position or results of operations.
BUSINESS OF UTI
The Registrant and its subsidiaries (the "Company") operate principally in
the individual life insurance business. The primary business of the
Company has been the servicing of existing insurance business in force, the
solicitation of new insurance business, and the acquisition of other
companies in similar lines of business.
United Trust, Inc., ("UTI") was incorporated December 14, 1984, as an
Illinois corporation. During the next two and a half years, UTI was
engaged in an intrastate public offering of its securities, raising over
$12,000,000 net of offering costs. In 1986, UTI formed a life insurance
subsidiary and by 1987 began selling life insurance products.
73
United Income, Inc. ("UII"), an affiliated company, was incorporated on
November 2, 1987, as an Ohio corporation. Between March 1988 and August
1990, UII raised a total of approximately $15,000,000 in an intrastate
public offering in Ohio. During 1990, UII formed a life insurance
subsidiary and began selling life insurance products.
UTI currently owns 30% of the outstanding common stock of UII and accounts
for its investment in UII using the equity method.
On February 20, 1992, UTI and UII, formed a joint venture, United Trust
Group, Inc., ("UTG"). On June 16, 1992, UTI contributed $2.7 million in
cash, an $840,000 promissory note and 100% of the common stock of its
wholly owned life insurance subsidiary. UII contributed $7.6 million in
cash and 100% of its life insurance subsidiary to UTG. After the
contributions of cash, subsidiaries, and the note, UII owns 47% and UTI
owns 53% of UTG.
On June 16, 1992, UTG acquired 67% of the outstanding common stock of the
now dissolved Commonwealth Industries Corporation, ("CIC") for a purchase
price of $15,567,000. Following the acquisition UTI controlled eleven life
insurance subsidiaries. The Company has taken several steps to streamline
and simplify the corporate structure following the acquisitions.
On December 28, 1992, Universal Guaranty Life Insurance Company ("UG") was
the surviving company of a merger with Roosevelt National Life Insurance
Company ("RNLIC"), United Trust Assurance Company ("UTAC"), Cimarron Life
Insurance Company ("CIM") and Home Security Life Insurance Company
("HSLIC"). On June 30, 1993, Alliance Life Insurance Company ("ALLI"), a
subsidiary of UG, was merged into UG.
On March 30, 1994, Farmers and Ranchers Life Insurance Company ("F&R") was
sold to an unrelated third party. F&R was a small life insurance company
which did not significantly contribute to the operations of the group. F&R
primarily represented a marketing opportunity. The Company determined it
would not be able to allocate the time and resources necessary to properly
develop the opportunity, due to continued focus and emphasis on certain
other agency forces of the Company.
On July 31, 1994, Investors Trust Assurance Company ("ITAC") was merged
into Abraham Lincoln Insurance Company ("ALIC").
On August 15, 1995, the shareholders of CIC, Investors Trust, Inc.,
("ITI"), and Universal Guaranty Investment Company, ("UGIC"), all
intermediate holding companies within the UTI group, voted to voluntarily
liquidate each of the companies and distribute the assets to the
shareholders (consisting solely of common stock of their respective
subsidiary). As a result, the shareholders of the liquidated companies
became shareholders of FCC. Following the liquidations, UTG owns 72% of
the outstanding common stock of FCC.
74
PRODUCTS
The Company's portfolio consists of two universal life insurance products.
The primary universal life insurance product is referred to as the "Century
2000". This product was introduced to the marketing force in 1993 and has
become the cornerstone of current marketing. This product has a minimum
face amount of $25,000 and currently credits 6% interest with a guaranteed
rate of 4.5% in the first 20 years and 3% in years 21 and greater.
The policy values are subject to a $4.50 monthly policy fee, an
administrative load and a premium load of 6.5% in all years. The
administrative load and surrender charge are based on the issue age, sex
and rating class of the policy. A surrender charge is effective for the
first 14 policy years. In general, the surrender charge is very high in
the first couple of years and then declines to zero at the end of 14
years. Policy loans are available at 7% interest in advance. The
policy's accumulated fund will be credited the guaranteed interest rate in
relation to the amount of the policy loan.
The second universal life product referred to as the "UL90A", has a minimum
face amount of $25,000. The administrative load is based on the issue age,
sex and rating class of the policy. Policy fees vary from $1 per month in
the first year to $4 per month in the second and third years and $3 per
month each year thereafter. The UL90A currently credits 5.5% interest with
a 4.5% guaranteed interest rate. Partial withdrawals, subject to a
remaining minimum $500 cash surrender value and a $25 fee, are allowed once
a year after the first duration. Policy loans are available at 7% interest
in advance. The policy's accumulated fund will be credited the guaranteed
interest rate in relation to the amount of the policy loan. Surrender
charges are based on a percentage of target premium starting at 120% for
years 1-5 then grading downward to zero in year 15. This policy contains a
guaranteed interest credit bonus for the long term policyholder. From
years 10 through 20, additional interest bonuses are earned with a total in
the twentieth year of 1.375%. The bonus is calculated from the policy
issue date and is contractually guaranteed.
The Company 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. Approximately 30% of the
insurance in force is participating business. The Company's average
persistency rate for its policies in force for 1996 and 1995 has been 87.9%
and 87.5%, respectively. The Company does not anticipate any material
fluctuations in these rates in the future that may result from competition.
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.
MARKETING
The Company markets its products through separate and distinct agency
forces. The Company has approximately 60 captive agents and 15 independent
agents who actively write new business. No individual sales agent
accounted for over 10% of the Company's premium volume in 1996. The
Company's sales agents do not have the power to bind the Company.
The change in marketing strategy from traditional life insurance products
to universal life insurance products had a significant impact on new
business production. As a result of the change in marketing strategy the
agency force went through a restructuring and retraining process.
Marketing is based on a referral network of community leaders and
shareholders of UII and UTI. Recruiting of agents is also based on the
same referral network.
75
New sales are marketed by UG and USA through their agency forces using
contemporary sales approaches with personal computer illustrations.
Current marketing efforts are primarily focused on the Midwest region.
Recruiting of agents is based on obtaining people with little or no
experience in the life insurance business. These recruits go through an
extensive internal training program.
USA is licensed in Illinois, Indiana and Ohio. During 1996, Ohio accounted
for 99% of USA's direct premiums collected.
ALIC is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1996, Illinois and Indiana accounted for 44% and 36%,
respectively of ALIC'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 1996, West Virginia accounted for 95% of
APPL's direct premiums collected.
UG is licensed in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma,
Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin.
During 1996, Illinois and Ohio accounted for 33% and 15%, respectively, of
UG's direct premiums collected. No other states account for more than 7%
of UG's direct premiums collected.
UNDERWRITING
The underwriting procedures of the Company's 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, 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 Company's 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.
76
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.
Benefit reserves for universal life insurance and interest sensitive life
insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges.
Policy benefits and claims that are charged to expense include benefit
claims in excess of related policy account balances. Interest crediting
rates for universal life and interest sensitive products range from 5.0% to
6.0% in each of the years 1996, 1995 and 1994.
REINSURANCE
As is customary in the insurance industry, the Company's insurance
subsidiaries cede insurance to other insurance companies under reinsurance
agreements. Reinsurance agreements are intended to limit a life insurer's
maximum loss on a large or unusually hazardous risk or to obtain a greater
diversification of risk. The ceding insurance company remains contingently
liable with respect to ceded insurance should any reinsurer be unable to
meet the obligations assumed by it, however it is the practice of insurers
to reduce their financial statement liabilities to the extent that they
have been reinsured with other insurance companies. The Company sets a
limit on the amount of insurance retained on the life of any one person.
The Company will not retain more than $125,000, including accidental death
benefits, on any one life. At December 31, 1996, the Company had insurance
in force of $3.953 billion of which approximately $1.109 billion was ceded
to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The
Company believes the assuming companies are able to honor all contractual
commitments, based on the Company's periodic reviews of their financial
statements, insurance industry reports and reports filed with state
insurance departments.
The Company's insurance subsidiary ("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, an industry rating company, 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. The
agreement with FILIC accounts for approximately 66% of the reinsurance
receivables as of December 31, 1996.
As a result of the FILIC coinsurance agreement, effective September 30,
1996, UG received a reinsurance credit in the amount of $28,318,000 in
exchange for an equal amount of assets. UG also received $6,375,000 as a
commission allowance.
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.
77
In selecting a reinsurance company, the Company examines many factors
including:
1) Whether the reinsurer is licensed in the states in which
reinsurance coverage is being sought;
2) the solvency and stability of the company. One source utilized is the
rating given the reinsurer by the A.M. Best Company, an insurance
industry rating company. Another source is the statutory
annual statement of the reinsurer;
3) the history and reputation of the Company;
4) competitive pricing of reinsurance coverage. The Company generally
seeks quotes from several reinsurers when considering a new treaty.
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long-duration reinsurance contracts on premiums
earned in 1996, 1995 and 1994 was as follows:
Shown in thousands
1996 1995 1994
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 32,387 $ 35,201 $ 38,063
Assumed 0 0 0
Ceded (4,768) (5,203) (5,659)
Net premiums $ 27,619 $ 29,998 $ 32,404
INVESTMENTS
The Company retains the services of a registered investment advisor to
assist the Company in managing its investment portfolio. The Company may
modify its present investment strategy at any time, provided its strategy
continues to be in compliance with the limitations of state insurance
department regulations.
Investment income represents a significant portion of the Company's total
income. Investments are subject to applicable state insurance laws and
regulations which limit the concentration of investments in any one
category or class and further limit the investment in any one issuer.
Generally, these limitations are imposed as a percentage of statutory
assets or percentage of statutory capital and surplus of each company.
The following table reflects net investment income by type of investment.
78
December 31,
1996 1995 1994
Fixed maturities and
fixed maturities
held for sale $ 13,326,312 $ 13,190,121 $ 12,185,941
Equity securities 88,661 52,445 3,999
Mortgage loans 1,047,461 1,257,189 1,423,474
Real estate 794,844 975,080 990,857
Policy loans 1,121,538 1,041,900 1,014,723
Short-term investments 515,346 505,637 444,135
Other 197,188 158,290 221,125
Total consolidated
investment income 17,091,350 17,180,662 16,284,254
Investment expenses (1,222,903) (1,724,438) (1,915,808)
Consolidated net
investment income $ 15,868,447 $ 15,456,224 $ 14,368,446
At December 31, 1996, the Company had a total of $6,025,000 of investments,
which did not produce income during 1996. These investments are comprised
of $5,325,000 in real estate including its home office property and
$700,000 in equity securities, which did not produce income during 1996.
The following table summarizes the Company's fixed maturities distribution
at December 31, 1996 and 1995 by ratings category as issued by Standard
and Poor's, a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
1996 1995
Investment Grade
AAA 30% 27%
AA 13% 14%
A 46% 48%
BBB 10% 11%
Below investment grade 1% 0%
100% 100%
The following table summarizes the Company's fixed maturities and fixed
maturities held for sale by major classification.
Carrying Value
1996 1995
U.S. government and government agencies $ 29,998,240 $ 29,492,006
States, municipalities and
political subdivisions 14,561,203 7,608,494
Collateralized mortgage obligations 13,246,780 15,428,596
Public utilities 51,941,647 59,254,524
Corporate 72,140,081 82,516,775
$ 181,887,951 $ 194,300,395
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The following table shows the composition and average maturity of the
Company's investment portfolio at December 31, 1996.
Carrying Average Average
Investments Value Maturity Yield
Fixed maturities and fixed
maturities held for sale $181,887,951 6 years 7.08%
Equity securities 1,794,405 not applicable 4.74%
Mortgage loans 11,022,792 11 years 8.41%
Investment real estate 14,390,436 not applicable 5.01%
Policy loans 14,438,120 not applicable 6.55%
Short-term investments 430,983 159 days 4.15%
Total Investments $223,964,687 7.21%
At December 31, 1996, fixed maturities and fixed maturities held for sale
have a market value of $183,776,000. Fixed maturities are carried at
amortized cost. Management has the ability and intent to hold these
securities until maturity. Fixed maturities held for sale are carried at
market.
The Company holds approximately $431,000 in short-term investments.
Management monitors its investment maturities and in their opinion is
sufficient to meet the Company's cash requirements. The following is a
summary of other investments maturing in one to five years. Fixed
maturities and mortgage loans of $13,362,000 and $1,039,000 respectively,
maturing in one year and $75,691,000 and $885,000, respectively, maturing
in two to five years.
The Company holds approximately $11,023,000 in mortgage loans which
represents 3% of the total assets. All mortgage loans are first position
loans. Before a new loan is issued, the applicant is subject to certain
criteria set forth by Company management to ensure quality control. These
criteria include, but are not limited to, a credit report, personal
financial information such as outstanding debt, sources of income, and
personal equity. Loans issued are limited to no more than 80% of the
appraised value of the property and must be first position against the
collateral.
The Company has $603,000 of mortgage loans, net of a $10,000 reserve
allowance, which are in default or in the process of foreclosure. These
loans represent approximately 5% of the total portfolio. The Company has
one loan of $63,900 which is under a repayment plan. Letters are sent to
each mortgagee when the loan becomes 30 days or more delinquent. Loans 90
days or more delinquent are placed on a non-performing status and
classified as delinquent loans. Reserves for loan losses are established
based on management's analysis of the loan balances compared to the
expected realizable value should foreclosure take place. Loans are placed
on a non-accrual status based on a quarterly analysis of the likelihood of
repayment. All delinquent and troubled loans held by the Company are loans
which were held in portfolios by acquired companies at the time of
acquisition. Management believes the current internal controls
surrounding, the mortgage loan selection process provide a quality
portfolio with minimal risk of foreclosure and/or negative financial
impact.
The Company has in place a monitoring system to provide management with
information regarding potential troubled loans. Management is provided
with a monthly listing of loans that are 30 days or more past due along
with a brief description of what steps are being taken to resolve the
delinquency. Quarterly, coinciding with external financial reporting, the
Company determines how each delinquent loan should be classified. All
loans 90 days or more past due are classified as delinquent. Each
delinquent loan is reviewed to determine the classification and status the
loan should be given. Interest accruals are analyzed based on the
likelihood of repayment. In no event will interest continue to accrue when
accrued interest along with the outstanding principal exceeds the net
realizable value of the property. The Company does not utilize a specified
number of days delinquent to cause an automatic non-accrual status.
80
The mortgage loan reserve is established and adjusted based on management's
quarterly analysis of the portfolio and any deterioration in value of the
underlying property which would reduce the net realizable value of the
property below its current carrying value.
In addition, the Company also monitors that current and adequate insurance
on the properties are being maintained. The Company requires proof of
insurance on each loan and further requires to be shown as a lienholder on
the policy so that any change in coverage status is reported to the
Company. Proof of payment of real estate taxes is another monitoring
technique utilized by the Company. Management believes a change in
insurance status or non-payment of real estate taxes are indicators that a
loan is potentially troubled. Correspondence with the mortgagee is
performed to determine the reasons for either of these events occurring.
The following table shows a distribution of mortgage loans by type.
Mortgage Loans Amount % of Total
FHA/VA $ 676,176 6%
Commercial 1,878,158 17%
Residential 8,468,458 77%
The following table shows a geographic distribution of the mortgage loan
portfolio and real estate held.
Mortgage Real
Loans Estate
Colorado 2% 0%
Illinois 12% 60%
Kansas 12% 0%
Louisiana 14% 12%
Mississippi 0% 16%
Missouri 2% 1%
North Carolina 6% 5%
Oklahoma 7% 1%
Virginia 4% 0%
West Virginia 37% 3%
Other 4% 2%
Total 100% 100%
The following table summarizes delinquent mortgage loan holdings.
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Delinquent
31 Days or More 1996 1995 1994
Non-accrual status $ 0 $ 0 $ 0
Other 613,000 628,000 911,000
Reserve on delinquent
loans (10,000) (10,000) (26,000)
Total Delinquent $ 603,000 $ 618,000 $ 885,000
Interest income forgone
(Delinquent loans) $ 29,000 $ 16,000 $ 4,000
In Process of Restructuring $ 0 $ 0 $ 0
Restructuring on other
than market terms 0 0 0
Other potential problem loans 0 0 0
Total Problem Loans $ 0 $ 0 $ 0
Interest income foregone
(Restructured loans) $ 0 $ 0 $ 0
See Item 2, Properties, for description of real estate holdings.
COMPETITION
The insurance business is a highly competitive industry and there are a
number of other companies, both stock and mutual, doing business in areas
where the Company operates. Many of these competing insurers are larger,
have more diversified lines of insurance coverage, have substantially
greater financial resources and have a greater number of agents. Other
significant competitive factors include policyholder benefits, service to
policyholders, and premium rates.
The insurance industry is a mature industry. In recent years, the industry
has experienced virtually no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products.
The products offered (see Products) are similar to those offered by other
major companies. The product features are regulated by the states and are
subject to extensive competition among major insurance organizations. The
Company believes a strong service commitment to policyholders, efficiency
and flexibility of operations, timely service to the agency force and the
expertise of its key executives help minimize the competitive pressures of
the insurance industry.
GOVERNMENT REGULATION
The Company's insurance subsidiaries are subject to government regulation
in each of the states in which they conduct business. Such regulation is
vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including the power to: (i) grant and
revoke licenses to transact business; (ii) regulate and supervise trade
practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) approve premium rates for
some lines of business; (vii) establish reserve requirements; (viii)
prescribe the form and content of required financial statements and
reports; (ix) determine the reasonableness and adequacy of statutory
capital and surplus; and (x) regulate the type and amount of permitted
investments. Insurance regulation is concerned primarily with the
protection of policyholders. The Company cannot predict the form of any
future proposals or regulation. The Company's insurance subsidiaries, USA,
UG, APPL and ALIC are domiciled in the states of Ohio, Ohio, West Virginia
and Illinois, respectively.
82
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 are registered as controlled insurers in those jurisdictions in which
such registration is required. Statutes vary from state to state but
typically require periodic disclosure concerning the corporation that
controls the registered insurers and all subsidiaries of such corporation.
In addition, prior notice to, or approval by, the state insurance
commission of material intercorporate transfers of assets, reinsurance
agreements, management agreements (see Note 9 to Notes to Financial
Statements), and payment of dividends (see Note 2 to Notes to Financial
Statements) in excess of specified amounts by the insurance subsidiary
within the holding company system are required.
The National Association of Insurance Commissioners ("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.
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 1996, UG had two ratios outside the normal range. The first
ratio compared commission allowances with statutory capital and surplus.
The ratio was outside the norm due to the coinsurance agreement with First
International Life Insurance Company ("FILIC"). Additional information
about the coinsurance agreement with FILIC can be found in the section
titled Reinsurance or in Note 7 of the Notes to the Consolidated Financial
Statements. Management does not believe that this ratio will be outside
the normal range in future periods.
The second ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last two years. The decrease in premium
income is directly attributable to the change in distribution systems and
marketing strategy. The Company changed its focus from primarily a broker
agency distribution system to a captive agent system and changed its
marketing strategy from traditional whole life insurance products to
universal life insurance products. Management is taking a long-term
approach to its recent changes to the marketing and distribution systems
and believes these changes will provide long-term benefits to the Company.
The NAIC has adopted Risk Based Capital ("RBC") rules to evaluate the
adequacy of statutory capital and surplus in relation to a company's
investment and insurance risks. The RBC formula reflects the level of risk
of invested assets and the types of insurance products. The formula
classifies company risks into four categories:
1) Asset risk - the risk of loss of principal due to default through
creditor bankruptcy or decline in market value for assets reported at
market.
2) Pricing inadequacy - the risk of adverse mortality, morbidity, and
expense experience in relation to pricing assumptions.
83
3) Asset and liability mismatch - the risk of having to reinvest funds when
market yields fall below levels guaranteed to contract holders, and the
risk of having to sell assets when market yields are above the levels
at which the assets were purchased.
4) General risk - the risk of fraud, mismanagement, and other business
risks.
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 2.0*
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1996, each of the Company's insurance subsidiaries has a
Ratio that is in excess of 300% of the authorized control level;
accordingly the Company's subsidiaries meet the RBC requirements.
The NAIC has recently released the Life Illustration Model Regulation.
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 which does not
meet the various tests. The only implication is the way in which the
product is marketed to the consumer. A product which does not pass the
tests uses guaranteed assumptions rather than current assumptions in
presenting future product performance to the consumer.
As states in which the Company does business adopt the regulation or adopt
a modified version of the regulation, the Company will be required to
comply with this new regulation. The Company may need to modify existing
products or sales methods.
The NAIC has proposed a new Model Investment Law that may affect the
statutory carrying values of certain investments; however, the final
outcome of that proposal is not certain, nor is it possible to predict what
impact the proposal will have or whether the proposal will be adopted in
the foreseeable future.
EMPLOYEES
There are approximately 100 persons who are employed by the Company and its
affiliates.
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ITEM 2. PROPERTIES
The following table shows the distribution of real estate by type.
Real Estate Amount % of Total
Home Office $ 2,885,908 20%
Commercial $ 2,397,475 17%
Residential development $ 5,260,107 36%
Foreclosed real estate $ 3,846,946 27%
Real estate holdings represent approximately 4% of the total assets of the
Company net of accumulated depreciation of $1,341,000 and $1,050,000 at
year end 1996 and 1995 respectively. The Company owns an office complex in
Springfield, Illinois, which houses the primary insurance operations. The
office buildings contain 57,000 square feet of office and warehouse space.
The properties are carried at approximately $2,688,000. In addition, an
insurance subsidiary owns a home office building in Huntington, West
Virginia. The building has 15,000 square feet and is carried at $198,000.
The facilities occupied by the Company are adequate relative to the
Company's present operations.
Commercial property consists primarily of former home office buildings of
acquired companies no longer used in the operations of the Company. These
properties are leased to various unaffiliated companies and organizations.
Residential development property is primarily located in Springfield,
Illinois, and entails several developments, each targeted for a different
segment of the population. These targets include a development primarily
for the first time home buyer, an upscale development for existing
homeowners looking for a larger home, and duplex condominiums for those who
desire maintenance free exteriors and surroundings. The Company's primary
focus is on the development and sale of lots, with an occasional home
construction to help stimulate interest.
Springfield is the State Capital of Illinois. The City's economy is
service oriented with the main employers being the State of Illinois, two
major area hospitals and two large insurance companies. This provides for
a very stable economy not as dramatically affected by economic conditions
in other parts of the United States.
Foreclosed property is carried at the unpaid loan principal balance plus
accrued interest on the loan and other costs associated with the
foreclosure process. The carrying value of foreclosed property does not
exceed management's estimate of net realizable value. Management's
estimate of net realizable value is based on significant internal real
estate experience, local market experience, independent appraisals and
evaluation of existing comparable property sales.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
liabilities. Management 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.
85
MANAGEMENT OF UTI
THE BOARD OF DIRECTORS
In the fiscal year ended December 31, 1996, the Board of Directors of
the Company met four times. All nominees for director attended at least
75% of all meetings of the Board except for William Cellini.
The Board of Directors has an Audit Committee consisting of Messrs.
Albin, Geary, McKee and Larson. The Audit Committee reviews and acts or
reports to the Board with respect to various auditing and accounting
matters, the scope of the audit procedures and the results thereof, the
internal accounting and control systems of the Company, the nature of
services performed for the Company and the fees to be paid to the
independent auditors, the performance of the Company's independent and
internal auditors and the accounting practices of the Company. The Audit
Committee also recommends to the full Board of Directors the auditors to be
appointed by the Board. The Audit Committee met once in 1996.
The Board of Directors has an Executive Committee consisting of
Messrs. Melville, Morrow and Ryherd. The Executive Committee has all the
powers and authority of the Board of Directors in the management of the
business and affairs of the Company, except those powers which, by law,
cannot be delegated by the Board of Directors. The Committee must report
to the Board of Directors regarding all actions taken by the Committee.
The Committee did not meet in 1996.
The Board of Directors has a Nominating Committee consisting of
Messrs. Cook, Lovell and Morrow. The Nominating Committee reviews,
evaluates and recommends directors, officers and nominees for the Board of
Directors. There is no formal mechanism by which shareholders of the
Company can recommend nominees for the Board of Directors, although any
recommendations by shareholders of the Company will be considered.
Shareholders desiring to make nominations to the Board of Directors should
submit their nominations in writing to the Chairman of the Board no later
than February 1st of the year in which the nomination is to be made. The
Committee did not meet in 1996.
The Stock Option Committee is composed of Messrs. Cellini, Dowell and
Ryherd. The Committee recommends to the Board of Directors the granting of
options to purchase shares of the Company's Common Stock to those persons
found to be eligible pursuant to the Stock Option criteria. The Committee
did not meet in 1996.
The compensation of the Company's executive officers is determined by
the full Board of Directors (see report on Executive Compensation).
DIRECTORS
NAME, AGE POSITION WITH THE COMPANY, BUSINESS EXPERIENCE AND
OTHER DIRECTORSHIPS
John S. Albin 69 Director of the Company since 1984; farmer in Douglas
and Edgar counties, Illinois, since 1951; Chairman
of the Board of Longview State Bank since 1978;
President of the Longview Capitol Corporation, a
bank holding company, since 1978; Chairman of First
National Bank of Ogden, Illinois, since 1987;
Chairman of the State Bank of Chrisman since 1988;
Director and Secretary of Illini Community Development
Corporation since 1990; Chairman of Parkland College
Board of Trustees since 1990; board member of the
Fisher National Bank, Fisher, Illinois, since 1993.
William F. Cellini,
62 Director of FCC and certain affiliate companies since
1984; Chairman of the Board of New Frontier
Development Group, Chicago, Illinois for more than the
past five years; Executive Director of Illinois
Asphalt Pavement Association.
86
Robert E. Cook 71 Director of the Company since 1984; President of
United Fidelity, Inc. since 1990; Chairman of
the Board of Directors of First Fidelity Mortgage
Company since 1991; President of Cook-Witter,
Inc., a governmental consulting and lobbying firm
with offices in Springfield, Illinois, from 1985
until 1990.
Larry R. Dowell 62 Director of the Company since 1984; cattleman and
farmer in Stronghurst, Henderson County, Illinois
since 1956; member of the Illinois Beef Association;
past Board and Executive Committee member of
Illinois Beef Council; Chairman of Henderson
County Board of Supervisors since 1992.
Donald G. Geary 73 Director of FCC and certain affiliate companies since
1984; industrial warehousing developer and founder of
Regal 8 Inns for more than the past five years.
Raymond L. Larson 62 Director of the Company since 1984; cattleman and
farmer since 1953; Director of the Bank of Sugar
Grove, Illinois since 1977; Board member of National
Livestock and Meat Board since 1983 and currently
Treasurer; Board member and past President of
Illinois Beef Council; member of National
Cattlemen's Association and Illinois Cattlemen's
Association.
Dale E. McKee 78 Director of the Company since 1984; pork producer
and farmer in Rio, Illinois, since 1947; President of
McKee and Flack, Inc., an Iowa corporation engaged
in farming since 1975; director of St. Mary's
Hospital of Galesburg since 1984.
James E. Melville President and Chief Operating Officer since July
51 1997; Chief Financial Officer of the Company since
March 1993; Senior Executive Vice President of the
Company since September 1992; President of certain
Affiliate Companies from May 1989 until September
1991; Chief Operating Officer of FCC from 1989
until September 1991; Chief Operating Officer of
certain Affiliate Companies from 1984 until
September 1991; Senior Executive Vice President of
certain Affiliate Companies from 1984 until
September 1989; Consultant to UTI and UTG from March
1992 through September 1992; President and Chief
Operating Officer of certain affiliate life
insurance companies and Senior Executive Vice President
of non-insurance Affiliate Companies since
September 1992.
Thomas F. Morrow 52 Director of certain affiliate companies since 1992
and Treasurer since 1993. Mr. Morrow has served as
Vice Chairman and Director of certain affiliate life
insurance companies since 1992 as well as having
held similar positions with other affiliate life
insurance companies from 1987 to 1992.
Larry E. Ryherd 57 Chairman of the Board of Directors and a Director of
the Company since 1984, CEO since 1991; Chairman of
the Board of UII since 1987, CEO since 1992 and
President since 1993; Chairman, CEO and Director
of UTG since 1992; President, CEO and Director of
certain affiliate companies since 1992. Mr. Ryherd
has served as Chairman of the Board, CEO, President
and COO of certain affiliate life insurance companies
since 1992 and 1993. He has also been a Director of
the National Alliance of Life Companies since 1992 and
is the 1994 Membership Committee Chairman; he is a
member of the American Council of Life Companies and
Advisory Board Member of its Forum 500 since 1992.
Paul D. Lovell, a Director of the Company resigned effective September 23,
1997. Mr. Lovell is retired.
87
EXECUTIVE OFFICERS OF THE COMPANY
More detailed information on the following officers of the Company appears
under "Election of Directors":
Larry E. Ryherd Chairman of the Board and Chief Executive Officer
James E. Melville President and Chief Operating Officer
Other officers of the company are set forth below:
NAME, AGE POSITION WITH THE COMPANY, BUSINESS EXPERIENCE AND
OTHER DIRECTORSHIPS
George E. Francis Executive Vice President since July 1997; Secretary
53 of the Company since February 1993; Director of
certain Affiliate Companies since October 1992; Senior
Vice President and Chief Administrative Officer of
certain Affiliate Companies since 1989; Secretary
of certain Affiliate Companies since March 1993;
Treasurer and Chief Financial Officer of certain
Affiliate Companies from 1984 until September 1992.
Theodore C. Miller Senior Vice President and Chief Financial Officer
35 since July 1997; Vice President and Treasurer since
October 1992; Vice President and Controller of certain
Affiliate Companies from 1984 to 1992.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION TABLE
The following table sets forth certain information regarding
compensation paid to or earned by the Company's Chief Executive Officer and
each of the three other most highly compensated Executive Officers of the
Company during each of the Company's last three fiscal years: Compensation
for services provided by the named executive officers to the Company and
its affiliates is paid by FCC as set forth in their employment agreements.
(See Employment Contracts).
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
Other Annual
Name and Compensation (2)
Principal Position Salary($) ($)
Larry E. Ryherd 1996 400,000 17,681
Chairman of the Board 1995 400,000 13,324
Chief Executive Officer 1994 400,000 7,909
Thomas F. Morrow 1996 (4) 300,000 21,405
President, Chief 1995 300,000 16,654
Operating Officer 1994 300,000 9,886
James E. Melville 1996 237,000 27,537
President, Chief 1995 237,000 38,206(3)
Operating Officer 1994 237,000 13,181
88
George E. Francis 1996 119,000 7,348
Executive Vice 1995 119,000 4,441
President, Secretary 1994 119,000 2,636
(1)Compensation deferred at the election of named officers is included in
this section.
(2)Other annual compensation consists of interest earned on deferred
compensation amounts pursuant to their employment agreements and the
Company's matching contribution to the First Commonwealth Corporation
Employee Savings Trust 401(k) Plan.
(3)Includes $16,000 for the value of personal perquisites owing Mr.
Melville.
(4)Mr. Thomas F. Morrow retired effective July 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
The following table summarizes for fiscal year ending, December 31,
1996, the number of shares subject to unexercised options and the value of
unexercised options of the Company's common stock held by the named
executive officers. The values shown were determined by multiplying the
applicable number of unexercised share options by the difference between
the per share market price on December 31, 1996 and the applicable per
share exercise price. There were no options granted to the named executive
officers during 1996.
Number of Number of Securities
Shares Underlying Unexercised
Acquired on Value Options/SARs Money at
Exercise(#) Realized($) FY-End(#)
Name Exercisable Unexercisable
Larry E. Ryherd - - 13,800 -
Thomas F. Morrow - - 17,200 -
James E. Melville 2,500 13,563 30,000 -
George E. Francis - - 4,600 -
Value of Unexercised
In the Options/SARs at
FY-End ($)
Larry E. Ryherd - -
Thomas F. Morrow - -
James E. Melville - -
George E. Francis - -
COMPENSATION OF DIRECTORS
The Company's standard arrangement for the compensation of directors
provide that each director shall receive an annual retainer of $2,400, plus
$300 for each meeting attended and reimbursement for reasonable travel
expenses. The Company's director compensation policy also provides that
directors who are employees or past employees of the Company do not receive
any compensation for their services as directors except for reimbursement
for reasonable travel expenses for attending each meeting.
EMPLOYMENT CONTRACTS
On July 31, 1997, Larry E. Ryherd entered into an employment agreement
with the Company and FCC. Formerly, Mr. Ryherd had served as Chairman of
the Board and Chief Executive Officer of the Company and its affiliates.
Pursuant to the agreement, Mr. Ryherd agreed to serve as President and
Chief Executive Officer of the Company and in addition, to serve in other
positions of the affiliated companies if appointed or elected. The
agreement provides for an annual salary of $400,000 as determined by the
Board of Directors. The term of the agreement is for a period of five
years. Mr. Ryherd has deferred portions of his income under a plan
entitling him to a deferred compensation payment on January 2, 2000 in the
amount of $240,000 which includes interest at the rate of approximately
8.5% per year. Additionally, Mr. Ryherd was granted an option to purchase
up to 13,800 of the Company's common stock at $17.50 per share. The option
is immediately exercisable and transferable. The option will expire
December 31, 2000.
89
The Company and FCC entered into an employment agreement dated July
31, 1997 with James E. Melville pursuant to which Mr. Melville is employed
as Senior Executive Vice President and in addition, to serve in other
positions of the affiliated companies if appointed or elected at an annual
salary of $237,000. 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 32,500
shares of the Company's common stock 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 $119,000.
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 Company's Common Stock at
$17.50 per share. The option is immediately exercisable and transferable.
This option will expire on December 31, 2000.
REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION
The compensation of the Company's executive officers is determined by
the full Board of Directors. The Board of Directors strongly believes that
the Company's executive officers directly impact the short-term and
long-term performance of the Company. With this belief and the
corresponding objective of making decisions that are in the best interest
of the Company's shareholders, the Board of Directors places significant
emphasis on the design and administration of the Company's executive
compensation plans.
EXECUTIVE COMPENSATION CONSIDERATIONS
The purpose of the Company's executive compensation plans is to ensure
that the compensation levels provided to the Company's executive officers
integrate with the Company's annual and long-term performance objectives,
to align the financial interests of the executive officers with the
interests of the Company's shareholders, to reward for superior financial
performance, and to assist the Company in attracting, retaining and
motivating executives with exceptional leadership abilities. Consistent
with this purpose, the Board of Directors establishes appropriate
compensation elements in each of the executive officers compensation plan
to include a base salary, annual bonus, stock options and deferred
compensation alternatives. Compensation levels are reviewed annually by
the Board of Directors relative to other life insurance companies and
companies of similar size in the financial industry ("comparable
companies"). Based upon analysis of total compensation paid by comparable
companies, total compensation paid to the Company's executive officers were
found to be within the same ranges. Accordingly, the Board of Directors
feels that the Company is maintaining a competitive position to retain the
talent necessary to meet the challenges in the life insurance industry.
90
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 changes
in the base salaries of the named executive officers.
STOCK OPTIONS. One of the Company's priorities is for the executive officers
to be significant shareholders so that the interest of the executives are
closely aligned with the interests of the Company's other shareholders.
The Board of Directors believes that this strategy motivates executives to
remain focused on the overall long-term performance of the Company.
Stock options are granted at the discretion of the Board of Directors
and are intended to be granted at levels within the competitive market
range of comparable companies. During 1993, each of the named
executive officers were granted options under their employment agreements
for the Company's Common Stock as described in the Employment Contracts
section. There were no options granted to the named executive officers
during the last three fiscal years.
DEFERRED COMPENSATION. A very significant component of overall Executive
Compensation Plans is found in the flexibility afforded to participating
officers in the receipt of their compensation. The availability, on a
voluntary basis, of the deferred compensation arrangements as described in
the Employment Contracts section may prove to be critical to certain
officers, depending upon their particular financial circumstance.
CHIEF EXECUTIVE OFFICER AND PRESIDENT
During 1996, the Company's most highly compensated executive officers were
Larry E. Ryherd, Chief Executive Officer, and Thomas F. Morrow, President
and Chief Operating Officer. In deciding Mr. Ryherd's and Mr. Morrow's
compensation, the Board of Directors did not affix specific weights or
values to the various factors considered in the executive compensation plan
elements. The Board of Directors considered the significant progress made
in 1994, 1995 and 1996 as it relates to the Company's growth through
acquisitions and marketing new business. The Board of Directors also
considered key decisions and actions taken to ensure the Company's long
term profitability such as the continued restructuring of the Company in
response to changes in the industry in order to remain competitive, and the
consolidation of operations to achieve cost savings. Mr. Ryherd's cash
compensation for 1996 was $400,000. Mr. Morrow's cash compensation for
1996 was $300,000. No stock options were granted to Mr. Ryherd or Mr.
Morrow during 1996 and neither exercised any stock options during the year.
Mr. Morrow retired effective July 31, 1997.
CONCLUSION
The Board of Directors believes the mix of structured employment
agreements with certain key executives, conservative market based salaries,
competitive cash incentives for short-term performance and the potential
for equity-based rewards for long term performance represents an
appropriate balance. This balanced Executive Compensation Plan provides a
competitive and motivational compensation package to the executive officer
team necessary to continue to produce the results the Company strives to
achieve. The Board of Directors also believes the Executive Compensation
Plan addresses both the interests of the shareholders and the executive
team.
BOARD OF DIRECTORS
John S. Albin Dale E. McKee
William F. Cellini James E. Melville
Robert E. Cook Thomas F. Morrow
Larry R. Dowell Larry E. Ryherd
Donald G. Geary
91
The foregoing Report on Executive Compensation shall not be deemed to
be incorporated by reference into any filing of the Company under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to
the extent that the Company specifically incorporates such information by
reference.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
United Trust, Inc. has a service agreement with its affiliate, UII (equity
investee), to perform services and provide personnel and facilities. The
services included in the agreement are claim processing, underwriting,
processing and servicing of policies, accounting services, agency services,
data processing and all other expenses necessary to carry on the business
of a life insurance company.
UII's service agreement states that USA is to pay UII monthly fees equal to
22% of the amount of collected first year premiums, 20% in second year and
6% of the renewal premiums in years three and after. UII's subcontract
agreement with UTI states that UII is to pay UTI monthly fees equal to 60%
of collected service fees from USA as stated above.
USA paid $1,568,000, $2,015,000 and $1,357,000 under their agreement with
UII for 1996, 1995 and 1994, respectively. UII paid $941,000, $1,209,000
and $814,000 under their agreement with UTI for 1996, 1995 and 1994,
respectively.
The agreements of the insurance companies have been approved by their
respective domiciliary insurance departments and it is Management's opinion
that where applicable, costs have been allocated fairly and such
allocations are based upon generally accepted accounting principles. The
costs paid by UTI for these services include costs related to the
production of new business which are deferred as policy acquisition costs
and charged off to the income statement through "Amortization of deferred
policy acquisition costs". Also included are costs associated with the
maintenance of existing policies which are charged as current period costs
and included in "general expenses".
POTENTIAL CONFLICTS OF INTEREST
Because of the existence of minority interest in certain holding
companies within the UTI holding company system potential conflicts of
interest may arise with respect to intracompany transactions. Such
transactions may include mergers and allocation of expenses among the
companies in the UTI holding company system.
UTI has taken a number of steps to reduce potential conflicts of interest
by increasing the commonality of ownership interest in the subsidiaries
(See "THE UTI HOLDING COMPANY SYSTEM"). One of the reasons for this Merger
is to increase the commonality of ownership among UTI and UII. (See
"Information REGARDING THE PROPOSED MERGER" - Reasons for the Merger).
92
DESCRIPTION OF UTI AND UII CAPITAL STOCK
UTI
UTI's Articles of Incorporation, as amended authorizes the issuance of
3,500,000 shares of Common Stock, no par value, and 150,000 shares of
Preferred Stock, par value $100 per share. As of January 5, 1998, there
were 1,655,200 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding. While shares of Preferred Stock may be issued
from time to time in the future, UTI has no current plans to issue any such
shares. The rights of holders of Common Stock may be materially limited or
qualified upon issuance of Preferred Stock, as described below under
"Preferred Stock."
DESCRIPTION OF COMMON STOCK
VOTING RIGHTS. All shares of Common Stock have equal voting rights, with
one vote per share, on all matters submitted to the shareholders for their
consideration. The shares of Common Stock do not have cumulative voting
rights.
DIVIDENDS. Subject to the prior rights of the holders of the Preferred
Stock, holders of Common Stock are entitled to receive dividends when and
if declared by the Board of Directors, out of funds of the Company legally
available therefrom.
OTHER. Holders of shares of Common Stock do not have any preemptive
rights or other rights to subscribe for additional shares, or any
conversion rights. Upon any liquidation, dissolution or winding up of the
affairs of the Company, holders of the Common Stock are entitled to share
ratably in the assets available for distribution to such shareholder after
the payment of all liabilities and after the liquidation preference of any
Preferred Stock outstanding at the time. There are no sinking fund
provisions applicable to the Common Stock. The outstanding shares of the
Company are fully paid and non-assessable. All shares of Common Stock
issuable upon the Merger will likewise be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR. UTI serves as its own registrar and
transfer agent for the Common Stock.
DESCRIPTION OF PREFERRED STOCK
The Board of Directors of UTI is authorized from time to time to issue
shares of Preferred Stock in one or more series having such preferences,
rights and privileges and subject to such qualifications, restrictions,
limitations and voting powers, if any, as the Board of Directors shall
determine at the time of issuance without the vote of holders of the Common
Stock. Such shares may be convertible into Common Stock, and may be
superior to the Common Stock in the payment of dividends, liquidation and
other rights, preferences and privileges.
LIQUIDATION
Upon liquidation, after payment of the liquidation preferences of any
outstanding Preferred Stock, the remaining net assets of UTI will be
distributed pro rata to the holders of the Common Stock, in cash or in
kind.
UII
UII Articles of incorporation, as amended authorizes the issuance of
2,310,001 shares of Common Stock, no par value, and 150,000 shares of
Preferred Stock, par value $100 per share. As of January 5, 1998, there
were 1,391,919 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding. The rights of holders of Common Stock may
be materially limited or qualified upon issuance of Preferred Stock, as
described below under "Preferred Stock."
93
DESCRIPTION OF COMMON STOCK
VOTING RIGHTS. All shares of Common Stock have equal voting rights, with
one vote per share, on all maters submitted to the shareholders for their
consideration. The shares of Common Stock do not have cumulative voting
rights.
DIVIDENDS. Subject to the prior rights of the holders of the Preferred
Stock, holders of Common Stock are entitled to receive dividends when and
if declared by the Board of Directors, out of funds of the Company legally
available therefrom.
OTHER. Holders of shares of Common Stock do not have any preemptive
rights or other rights to subscribe for additional shares, or any
conversion rights. Upon any liquidation, dissolution or winding up of the
affairs of the Company, holders of the Common Stock are entitled to share
ratably in the assets available for distribution to such shareholder after
the payment of all liabilities and after the liquidation preference of any
Preferred Stock outstanding at the time. There are no sinking fund
provisions applicable to the Common Stock. The outstanding shares of the
Company are fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR. UII serves as its own registrar and
transfer agent for the Common Stock.
DESCRIPTION OF PREFERRED STOCK
The Board of Directors of UII is authorized from time to time to issue
shares of Preferred Stock in one or more series having such preferences,
rights and privileges and subject to such qualifications, restrictions,
limitations and voting powers, if any, as the Board of Directors shall
determine at the time of issuance without the vote of holders of the Common
Stock. Such shares may be convertible into Common Stock, and may be
superior to the Common Stock in the payment of dividends, liquidation and
other rights, preferences and privileges.
LIQUIDATION
Upon liquidation, after payment of the liquidation preferences of any
outstanding Preferred Stock, the remaining net assets of UII will be
distributed pro rata to the holders of the Common Stock, in cash or in
kind.
94
PROPOSED INCREASE IN THE AUTHORIZED COMMON STOCK OF UTI
The Board of Directors of UTI has declared advisable and in the best
interests of UTI and its stockholders, and has recommended to the
stockholders, an amendment of Article Fourth of UTI's Articles of
Incorporation (the "Amendment") increasing UTI's authorized Common Stock
from 3,500,000 shares to 7,000,000 shares. Appendix D, to this Proxy
Statement contains the text of the Amendment. The following discussion of
the Amendment is qualified in its entirety by reference to the text of the
Amendment set forth in Appendix C.
At present, UTI's authorized capital stock consists of 3,500,000 shares
of Common Stock, no par value and 150,000 shares of Preferred Stock, par
value $100 per share. As of the record date there were no shares of the
Preferred Stock issued and outstanding. On that date there were 1,912,239
shares of Common Stock issued and outstanding with 257,039 shares being
held in UTI's treasury.
The proposed Amendment increases the number of authorized shares of
Common Stock from 3,500,000 shares to 7,000,000 shares. The Amendment has
no effect on the present authorization with respect to the Preferred Stock.
The purpose of the Amendment is to provide UTI with the flexibility to
engage in future transactions that UTI's Board of Directors may deem
necessary or desirable. For example, the increase in authorized shares of
Common Stock would allow UTI to declare and effectuate a stock dividend
without further shareholder action or to acquire another company by
exchanging shares of Common Stock of UTI for shares of the other company.
The Amendment would also enable UTI to grant options to purchase shares of
the authorized but unissued Common Stock to certain employees. Other than
the Proposed Merger, UTI has committed approximately 360,000 shares of
authorized but unissued Common Stock under current agreements.
The additional shares of authorized Common Stock resulting from the
Amendment would be identical in all respects to the existing Common Stock.
All outstanding Common Stock would continue to have one vote per share.
The authorized but currently unissued Preferred Stock would continue to be
issuable by the Board, from time to time, with the voting powers,
designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations, or restrictions, as
described at DESCRIPTION OF UTI AND UII CAPITAL STOCK - UTI -Preferred
Stock.
The Board is empowered to issue authorized shares of Common stock in
excess of those outstanding without further action by the stockholders,
unless such action is required by applicable law or regulatory agencies or
by the rules, if UTI shall choose to comply with such rules, of any stock
exchange on which UTI's securities may then be listed. Current
stockholders have no pre-emptive rights to subscribe to or to purchase any
securities of UTI of any kind or class. Additional shares might be issued
at such times and under such circumstances as to have a dilutive effect on
earnings per share and on the equity ownership of the present holders of
Common Stock. Such shares could also be used to make more difficult a
change in control of UTI. Under certain circumstances, the Board of
Directors of UTI could create impediments or frustrate persons seeking to
effect a takeover or otherwise gain control of UTI, by causing such shares
to be issued to a holder or holders who might side with the Board in
opposing a takeover bid that the Board determines is not in the best
interests of UTI and its stockholders. In addition, the existence of such
shares might have the effect of discouraging an attempt by another person
or entity to acquire control of UTI through the acquisition of a
substantial amount of Common Stock, since the issuance of such shares could
dilute the stock ownership of such person or entity.
The Board of Directors of UTI recommends to the stockholders of UTI that
they vote in favor of the Amendment. The affirmative vote of two thirds of
the outstanding shares of UTI Common Stock is required to approve the
proposal. Unless otherwise instructed, proxies will be voted in favor of
the proposal to adopt the Amendment. If approved, the Amendment will
become effective upon filing and recording as required by the Illinois
Business Corporation Act.
95
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,
1996 and for fiscal year ended December 31, 1995. In serving its primary
function as outside auditor for the Company, Kerber, Eck and Braeckel LLP
performed the following audit services: examination of annual consolidated
financial statements; assistance and consultation on reports filed with the
Securities and Exchange Commission and; assistance and consultation on
separate financial reports filed with the State insurance regulatory
authorities pursuant to certain statutory requirements. The Company does
not expect that a representative of Kerber, Eck and Braeckel LLP will be
present at the Annual Meeting of Shareholders of the Company. Kerber, Eck
and Braeckel LLP has been selected for fiscal year 1997.
OTHER MATTERS TO COME BEFORE THE MEETING
The management does not intend to bring any other business before the
meeting of the Company's shareholders and has no reason to believe that any
will be presented to the meeting. If, however, any other business should
properly be presented to the meeting, the proxies named in the enclosed
form of proxy will vote the proxies in accordance with their best
judgement.
96
INDEX TO FINANCIAL STATEMENTS
United Trust, Inc.
Annual Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995 99
Consolidated Statements of Operations Three Years
Ended December 31, 1996 100
Consolidated Statements of Shareholders' Equity Three Years
Ended December 31, 1996 101
Consolidated Statements of Cash Flows Three Years
Ended December 31, 1996 102
Notes to Financial Statements 103
Interim Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 134
Consolidated Statements of Operations Three months and Nine
Months Ended September 30, 1997 and 1996 135
Consolidated Statements of Cash Flows Nine Months
Ended September 30, 1997 and 1996 136
Notes to Consolidated Financial Statements 137
United Income, Inc.
Consolidated Balance Sheets as of December 31, 1996 and 1995 144
Consolidated Statements of Operations Three Years Ended
December 31, 1996 145
Consolidated Statements of Shareholders' Equity Three Years
Ended December 31, 1996 146
Consolidated Statements of Cash Flows Three Years Ended
December 31, 1996 147
Notes to Financial Statements 148
Interim Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 155
Consolidated Statements of Operations Three months and
Nine Months Ended September 30, 1997 and 1996 156
Consolidated Statements of Cash Flows Nine Months Ended
September 30, 1997 and 1996 157
Notes to Consolidated Financial Statements 158
97
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND SHAREHOLDERS
UNITED TRUST, INC.
We have audited the accompanying consolidated balance sheets of United
Trust, Inc. (an Illinois corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
United Trust, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1996, and Schedules
II, IV and V as of December 31, 1996 and 1995, of United Trust, Inc. and
subsidiaries and Schedules II, IV and V for each of the three years in the
period then ended. In our opinion, these schedules present fairly, in all
material respects, the information required to be set forth therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1997
98
UNITED TRUST, INC. CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
ASSETS
1996 1995
Investments:
Fixed maturities at amortized cost
(market $181,815,225 and $197,006,257) $ 179,926,785 $ 191,074,220
Investments held for sale:
Fixed maturities, at market
(cost $1,984,661 and $3,224,039) 1,961,166 3,226,175
Equity securities, at market
(cost $2,086,159 and $2,086,159) 1,794,405 1,946,481
Mortgage loans on real estate
at amortized cost 11,022,792 13,891,762
Investment real estate, at cost, net
of accumulated depreciation 10,543,490 11,978,575
Real estate acquired in satisfaction of debt,
at cost, net of accumulated depreciation 3,846,946 5,332,413
Policy loans 14,438,120 16,941,359
Short term investments 430,983 425,000
223,964,687 244,815,985
Cash and cash equivalents 17,326,235 12,528,025
Investment in affiliates 4,826,584 5,169,596
Accrued investment income 3,461,799 3,671,842
Reinsurance receivables:
Future policy benefits 38,745,013 13,540,413
Policy claims and other benefits 3,856,124 861,488
Other accounts and notes receivable 894,321 1,246,367
Cost of insurance acquired 43,917,280 55,816,934
Deferred policy acquisition costs 11,325,356 11,436,728
Cost in excess of net assets purchased,
net of accumulated amortization 5,496,808 5,661,462
Other assets 1,659,455 1,555,986
Total assets $ 355,473,662 $ 356,304,826
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 248,879,317 $ 243,044,963
Policy claims and benefits payable 3,193,806 3,110,378
Other policyholder funds 2,784,967 3,004,655
Dividend and endowment accumulations 13,913,676 12,636,949
Income taxes payable:
Current 70,663 215,944
Deferred 13,193,431 17,762,408
Notes payable 19,573,953 21,447,428
Indebtedness to (from) affiliates, net 31,837 (87,869)
Other liabilities 5,975,483 5,009,637
Total liabilities 307,617,133 306,144,493
Minority interests in
consolidated subsidiaries 29,842,672 31,138,077
Shareholders' equity:
Common stock - no par value, stated value
$.02 per share. Authorized 35,000,000
shares - 18,700,935 and 18,675,935 shares
issued after deducting treasury shares of
423,840 and 423,840 374,019 373,519
Additional paid-in capital 18,301,974 18,288,411
Unrealized depreciation of investments
held for sale (86,058) (1,499)
Retained earnings (accumulated deficit) (576,078) 361,825
Total shareholders' equity 18,013,857 19,022,256
Total liabilities and shareholders' equity $ 355,473,662 $ 356,304,826
See accompanying notes.
99
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996
1996 1995 1994
Revenues:
Premium income $ 32,386,635 $ 35,200,815 $38,063,186
Reinsurance premium (4,767,743) (5,202,690) (5,658,697)
Other considerations 3,504,974 3,280,823 2,969,131
Other considerations
paid to reinsurers (179,408) (180,412) (229,093)
Net investment income 15,868,447 15,456,224 14,368,446
Realized investment gains
and (losses), net (987,930) (124,235) (1,436,521)
Other income 1,151,395 1,438,559 1,130,176
46,976,370 49,869,084 49,206,628
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 26,568,062 26,680,217 27,479,315
Reinsurance benefits and claims (2,283,827) (2,850,228) (2,766,776)
Annuity 1,892,489 1,797,475 1,314,384
Dividends to policyholders 4,149,308 4,228,300 3,634,311
Commissions and amortization of
deferred policy acquisition costs 4,224,885 4,907,653 4,060,425
Amortization of cost of
insurance acquired 5,524,815 4,303,237 6,878,074
Amortization of agency force 0 396,852 382,006
Non-recurring write down of
value of agency force 0 8,296,974 0
Operating expenses 11,994,464 11,517,648 9,787,962
Interest expense 1,731,309 1,966,776 1,936,324
53,801,505 61,244,904 52,706,025
Loss before income taxes,
minority interest and equity
in loss of investees (6,825,135) (11,375,820) (3,499,397)
Credit for income taxes 4,703,741 4,571,028 1,965,084
Minority interest in loss
of consolidated subsidiaries 1,278,883 4,439,496 1,035,831
Equity in loss of investees (95,392) (635,949) (1,125,118)
Net loss $ (937,903) $ (3,001,245) $ (1,623,600)
Net loss per
common share $ (0.05) $ (0.16) $ (0.09)
Weighted average common
shares outstanding 18,695,113 18,668,510 18,664,830
See accompanying notes
100
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1996
1996 1995 1994
Common stock
Balance, beginning of year $ 373,519 $ 373,119 $ 373,297
Issued during year 500 400 0
Purchase treasury stock 0 0 (178)
Balance, end of year $ 374,019 $ 373,519 $ 373,119
Additional paid-in capital
Balance, beginning of year $ 18,288,411 $ 18,276,311 $18,066,119
Issued during year 13,563 12,100 0
Public offering of affiliate 0 0 277,559
Purchase treasury stock 0 0 (67,367)
Balance, end of year $ 18,301,974 $ 18,288,411 $18,276,311
Unrealized depreciation (appreciation) of
investments held for sale
Balance, beginning of year $ (1,499) $ (143,405) $ (23,624)
Change during year (84,559) 141,906 (119,781)
Balance, end of year $ (86,058) $ (1,499) $ (143,405)
Retained earnings (accumulated deficit)
Balance, beginning of year $ 361,825 $ 3,363,070 $ 4,986,670
Net loss (937,903) (3,001,245) (1,623,600)
Balance, end of year $ (576,078) $ 361,825 $ 3,363,070
Total shareholder's equity,
end of year $ 18,013,857 $19,022,256 $21,869,095
See accompanying notes.
101
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1996
1996 1995 1994
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (937,903) $ (3,001,245) $ (1,623,600)
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 899,445 803,696 1,173,981
Realized investment (gains)
losses, net 987,930 124,235 1,436,521
Policy acquisition costs deferred (1,276,000) (2,370,000) (4,939,000)
Amortization of deferred
policy acquisition costs 1,387,372 1,567,748 1,137,923
Amortization of cost of
insurance acquired 5,524,815 4,303,237 6,878,074
Amortization of value of
agency force 0 396,852 382,006
Non-recurring write down of
value of agency force 0 8,296,974 0
Amortization of costs in excess
of net assets purchased 185,279 423,192 297,676
Depreciation 390,357 720,605 510,459
Minority interest (1,278,883) (4,439,496) (1,035,831)
Equity in loss of investees 95,392 635,949 1,125,118
Change in accrued investment incom 210,043 (171,257) (543,476)
Change in reinsurance receivables 83,871 (482,275) (1,009,745)
Change in policy liabilities
and accruals 3,326,651 3,581,928 4,487,982
Charges for mortality and
administration of universal life
and annuity products (10,239,476) (9,757,354) (9,178,363)
Interest credited to account
balances 7,075,921 6,644,282 5,931,019
Change in income taxes payable (4,714,258) (4,595,571) (2,120,009)
Change in indebtedness (to) from
affiliates, 119,706 (20,004) 375,848
Change in other assets and
liabilities, net 944,824 (2,208,660) (1,142,055)
Net cash provided by
operating activities 2,785,086 452,836 2,144,528
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 1,152,736 619,612 250,000
Fixed maturities sold 18,736,612 0 0
Fixed maturities matured 20,787,782 16,265,140 23,894,954
Equity securities 8,990 104,260 49,557
Mortgage loans 3,364,427 2,252,423 4,029,630
Real estate 3,219,851 1,768,254 2,640,025
Policy loans 3,937,471 4,110,744 4,064,602
Short term 825,000 25,000 1,103,856
Total proceeds from investments
sold and matured 52,032,869 25,145,433 36,032,624
Cost of investments acquired:
Fixed maturities (29,365,111) (25,112,358) (52,768,480)
Equity securities 0 (1,000,000) (249,925)
Mortgage loans (503,113) (322,129) (5,611,967)
Real estate (841,793) (1,927,413) (3,321,599)
Policy loans (4,329,124) (4,713,471) (3,886,821)
Short term (830,983) (100,000) (650,000)
Total cost of investments acquired (35,870,124) (33,175,371) (66,488,792)
Cash of subsidiary at date of sale 0 0 (3,134,343)
Cash received in sale of subsidiary 0 0 4,995,804
Net cash provided by (used in)
investing activities 16,162,745 (8,029,938) (28,594,707)
Cash flows from financing activities:
Policyholder contract deposits 22,245,369 25,021,983 23,110,031
Policyholder contract withdrawals (15,433,644) (16,008,462) (14,893,221)
Net cash transferred from
coinsurance ceded (19,088,371) 0 0
Proceeds from notes payable 9,050,000 300,000 0
Payments of principal on
notes payable (10,923,475) (905,861) (2,305,687)
Purchase of treasury stock 0 0 (67,545)
Proceeds from issuance of
common stock 500 400 0
Net cash provided by (used in)
financing activities (14,149,621) 8,408,060 5,843,578
Net increase (decrease) in cash
and cash equivalent 4,798,210 830,958 (20,606,601)
Cash and cash equivalents
at beginning of year 12,528,025 11,697,067 32,303,668
Cash and cash equivalents
at end of year $ 17,326,235 $ 12,528,025 $ 11,697,067
See accompanying notes.
102
UNITED TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1996, the parent, significant majority-
owned subsidiaries and affiliates of United Trust, Inc. were as
depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1996
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 30% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 100% of Roosevelt Equity Corporation ("REC")
and 72% of First Commonwealth Corporation ("FCC"). 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").
103
A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying
consolidated financial statements follows.
B. NATURE OF OPERATIONS - United Trust, Inc. is an insurance holding
company that through its insurance subsidiaries sells individual
life insurance products. The Company's principal market is the
midwestern United States. The primary focus of the Company has
been the servicing of existing insurance business in force, the
solicitation of new life insurance products and the acquisition of
other companies in similar lines of business.
C. PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include the accounts of the Company and its majority-
owned subsidiaries. Investments in 20% to 50% owned affiliates in
which management has the ability to exercise significant
influence are included based on the equity method of accounting
and the Company's share of such affiliates' operating results
is reflected in Equity in loss of investees. Other
investments in affiliates are carried at cost. All significant
intercompany accounts and transactions have been eliminated.
D. BASIS OF PRESENTATION - The financial statements of United
Trust, Inc.'s life insurance subsidiaries have been prepared in
accordance with generally accepted accounting principles which
differ from statutory accounting practices permitted by insurance
regulatory authorities.
E. USE OF ESTIMATES - In preparing financial statements in conformity
with generally accepted accounting principles, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
F. INVESTMENTS - Investments are shown on the following bases:
Fixed maturities -- at cost, adjusted for amortization of premium or
discount and other-than-temporary market value declines. The
amortized cost of such investments differs from their market values;
however, the Company has the ability and intent to hold these
investments to maturity, at which time the full face value is
expected to be realized.
Investments held for sale -- at current market value, unrealized
appreciation or depreciation is charged directly to shareholders'
equity.
Mortgage loans on real estate -- at unpaid balances, adjusted
for amortization of premium or discount, less allowance for possible
losses.
Real estate -- at cost, less allowances for depreciation and any
impairment which would result in a carrying value below net
realizable value. Foreclosed real estate is adjusted for any
impairment at the foreclosure date. Accumulated depreciation on real
estate was $1,340,746 and $1,049,652 as of December 31, 1996 and
1995, 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.
104
G. RECOGNITION OF REVENUES AND RELATED EXPENSES - Premiums for
traditional life insurance products, which include those products
with fixed and guaranteed premiums and benefits, consist
principally of whole life insurance policies, limited-payment
life insurance policies, and certain annuities with life
contingencies are recognized as revenues when due. Accident and
health insurance premiums are recognized as revenue pro rata over the
terms of the policies. Benefits and related expenses associated with
the premiums earned are charged to expense proportionately over the
lives of the policies through a provision for future policy benefit
liabilities and through deferral and amortization of deferred policy
acquisition costs. For universal life and investment products,
generally there is no requirement for payment of premium other than
to maintain account values at a level sufficient to pay mortality and
expense charges. Consequently, premiums for universal life policies
and investment products are not reported as revenue, but as deposits.
Policy fee revenue for universal life policies and investment
products consists of charges for the cost of insurance, policy
administration, and surrenders assessed during the period. Expenses
include interest credited to policy account balances and benefit
claims incurred in excess of policy account balances.
H. DEFERRED POLICY ACQUISITION COSTS -Commissions and other costs of
acquiring life insurance products that vary with and are primarily
related to the production of new business have been deferred.
Traditional life insurance acquisition costs are being amortized
over the premium-paying period of the related policies using
assumptions consistent with those used in computing policy benefit
reserves.
For universal life insurance and interest sensitive life insurance
products, acquisition costs are being amortized generally in
proportion to the present value of expected gross profits from
surrender charges and investment, mortality, and expense margins.
Under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments," the Company makes
certain assumptions regarding the mortality, persistency,
expenses, and interest rates it expects to experience in future
periods. These assumptions are to be best estimates and are to be
periodically updated whenever actual experience and/or expectations
for the future change from initial assumptions. The amortization is
adjusted retrospectively when estimates of current or future gross
profits to be realized from a group of products are revised.
The following table summarizes deferred policy acquisition costs and
related data for the years shown.
105
1996 1995 1994
Deferred, beginning of year $ 11,437,000 $ 10,634,000 $ 7,160,000
Acquisition costs deferred:
Commissions, net of reinsurance of $0
$0 and $1,837,000 845,000 1,838,000 3,182,000
Marketing, salaries and
other expenses 431,000 532,000 1,757,000
Total 1,276,000 2,370,000 4,939,000
Interest accretion 408,000 338,000 181,000
Amortization charged to income (1,796,000) (1,905,000) (1,319,000)
Net amortization (1,388,000) (1,567,000) (1,138,000)
Deferred acquisition costs
disposed of at sale
of subsidiary 0 0 (327,000)
Change for the year (112,000) 803,000 3,474,000
Deferred, end of year $ 11,325,000 $ 11,437,000 $ 10,634,000
The following table reflects the components of the income statement
for the line item Commissions and amortization of deferred policy
acquisition costs:
1996 1995 1994
Net amortization of deferred
policy acquisition costs $ 1,388,000 $ 1,567,000 $ 1,138,000
Commissions 2,837,000 3,341,000 2,922,000
Total $ 4,225,000 $ 4,908,000 $ 4,060,000
Estimated net amortization expense of deferred policy acquisition
costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1997 $ 400,000 $ 1,600,000 $ 1,200,000
1998 400,000 1,500,000 1,100,000
1999 300,000 1,300,000 1,000,000
2000 300,000 1,200,000 900,000
2001 300,000 1,000,000 700,000
I. COST OF INSURANCE ACQUIRED - When an insurance company is acquired,
the Company assigns a portion of its cost to the right to receive
future cash flows from insurance contracts existing at the date of
the acquisition. The cost of policies purchased represents the
actuarially determined present value of the projected future cash
flows from the acquired policies. Cost of Insurance Acquired is
amortized with interest in relation to expected future profits,
including direct charge-offs for any excess of the unamortized asset
over the projected future profits. The interest rates utilized in
the amortization calculation are 9% on approximately 24% of the
balance and 15% on the remaining balance. The interest rates vary
due to differences in the blocks of business.
106
1996 1995 1994
Cost of insurance acquired,
beginning of year $ 55,817,000 $ 60,120,000 $ 68,995,000
Additions from acquisitions 0 0 0
Interest accretion 6,313,000 7,044,000 7,593,000
Amortization (11,838,000) (11,347,000) (14,471,000)
Net amortization (5,525,000) (4,303,000) (6,878,000)
Balance attributable to
coinsurance agreement (6,375,000) 0 0
Balance attributable to
subsidiary at date of sale 0 0 (1,379,000)
Balance attributable to down-
stream merger of subsidiary 0 0 (618,000)
Write-offs due to impairment 0 0 0
Cost of insurance acquired,
end of year $ 43,917,000 $ 55,817,000 $ 60,120,000
Estimated net amortization expense of cost of insurance acquired for
the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1997 $ 5,500,000 $ 9,200,000 $ 3,700,000
1998 5,100,000 8,200,000 3,100,000
1999 4,800,000 7,200,000 2,400,000
2000 4,600,000 6,700,000 2,100,000
2001 4,400,000 6,700,000 2,300,000
J. COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net
assets purchased is the excess of the amount paid to acquire a
company over the fair value of its net assets. Cost in excess of net
assets purchased are amortized over periods not exceeding forty years
using the straight-line method. Management reviews the valuation and
amortization of goodwill on an annual basis. As part of this review,
the Company estimates the value of and the estimated undiscounted
future cash flows expected to be generated by the related
subsidiaries to determine that no impairment has occurred.
Accumulated amortization of cost in excess of net assets purchased
was $1,265,146 and $1,079,867 as of December 31, 1996 and 1995,
respectively.
K. FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for
traditional life insurance and accident and health insurance policy
benefits are computed using a net level method. These liabilities
include assumptions as to investment yields, mortality, withdrawals,
and other assumptions based on the life insurance subsidiaries'
experience adjusted to reflect anticipated trends and to include
provisions for possible unfavorable deviations. The Company makes
these assumptions at the time the contract is issued or, in the case
of contracts acquired by purchase, at the purchase date. Benefit
reserves for traditional life insurance policies include certain
deferred profits on limited-payment policies that are being
recognized in income over the policy term. Policy benefit claims are
charged to expense in the period that the claims are incurred.
Current mortality rate assumptions are based on 1975-80 select and
ultimate tables. Withdrawal rate assumptions are based upon Linton B
or Linton C.
107
Benefit reserves for universal life insurance and interest sensitive
life insurance products are computed under a retrospective deposit
method and represent policy account balances before applicable
surrender charges. Policy benefits and claims that are charged to
expense include benefit claims in excess of related policy account
balances. Interest crediting rates for universal life and interest
sensitive products range from 5.0% to 6.0% in 1996, 1995 and 1994.
L. 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.
M. PARTICIPATING INSURANCE - Participating business represents 30%
and 34% of the ordinary life insurance in force at December 31, 1996
and 1995, respectively. Premium income from participating
business represents 52%, 55%, and 53% of total premiums for the
years ended December 31, 1996, 1995 and 1994, 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 which vary by state.
N. 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.
O. BUSINESS SEGMENTS - The Company operates principally in the
individual life insurance business.
P. EARNINGS PER SHARE - Earnings per share are based on the weighted
average number of common shares outstanding during the respective
period.
Q. 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.
R. RECLASSIFICATIONS - Certain prior year amounts have been
reclassified to conform with the 1996 presentation. SuchN
reclassifications had no effect on previously reported net income,
total assets, or shareholders' equity.
S. 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 premiums,
commissions, expense reimbursements, and reserves on reinsured
business are accounted for on a basis consistent with those used in
accounting for the original policies issued and the terms of the
reinsurance contracts. Expense reimbursements received in connection
with reinsurance ceded have been accounted for as a reduction of the
related policy acquisition costs or, to the extent such
reimbursements exceed the related acquisition costs, as revenue.
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; consequently, allowances are
established for amounts deemed uncollectible. The Company evaluates
the financial condition of its reinsurers and monitors concentrations
of credit risk arising from similar geographic regions, activities,
or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies.
108
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1996, substantially all of consolidated shareholders'
equity represents net assets of UTI's subsidiaries. The payment of cash
dividends to shareholders by UTI or UTG is not legally restricted. UG's
dividend limitations are described below.
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, 1996, UG had a statutory gain from operations of $8,006,000.
At December 31, 1996, UG's statutory capital and surplus amounted to
$10,227,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
3. FEDERAL 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. If any of the life companies pay
shareholder dividends in excess of "shareholders' surplus" they will be
required to pay taxes on income not taxed under the pre-1984 acts.
The following table summarizes the companies with this situation and the
maximum amount of income which has not been taxed in each.
Shareholders' Untaxed
Company Surplus Balance
ABE $ 5,242,000 $ 1,150,000
APPL 4,943,000 1,525,000
UG 24,038,000 4,364,000
USA 981,000 0
The payment of taxes on this income is not anticipated; and, accordingly,
no deferred taxes have been established.
The life insurance company subsidiaries file a consolidated federal income
tax return. The holding companies of the group file separate returns.
Life insurance company taxation is based primarily upon statutory results
with certain special deductions and other items available only to life
insurance companies. Income tax expense consists of the following
components:
1996 1995 1994
Current tax expense (credit) $ (148,000) $ 3,000 $ 51,000
Deferred tax expense (credit) (4,556,000) (4,574,000) (2,016,000)
$(4,704,000) $(4,571,000) $(1,965,000)
109
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
UTI UG FCC
2002 $ 0 $ 0 $ 527,000
2003 50,000 0 285,000
2004 826,000 0 283,000
2005 293,000 0 139,000
2006 213,000 2,109,000 33,000
2007 111,000 783,000 676,000
2008 0 940,000 4,000
2009 0 0 169,000
2010 0 0 19,000
TOTAL $1,493,000 $3,832,000 $2,135,000
The Company has established a deferred tax asset of $2,611,000 for its
operating loss carryforwards and has established an allowance of
$2,088,000.
The following table shows the reconciliation of net income to taxable
income of UTI:
1996 1995 1994
Net income (loss) $ (938,000) $ (3,001,000) $ (1,624,000)
Federal income tax
provision (credit) (60,000) 154,000 40,000
Loss (earnings)
of subsidiaries 715,000 2,613,000 341,000
Loss (earnings) of
investees 95,000 636,000 1,125,000
Write off of investment
in affiliate 315,000 10,000 212,000
Write off of note
receivable 211,000 0 0
Depreciation 1,000 3,000 4,000
Other 26,000 22,000 20,000
Taxable income (loss) $ 365,000 $ 437,000 $ 118,000
UTI has a net operating loss carryforward of $1,493,000 at December 31,
1996. UTI has averaged $270,000 in taxable income over the past four years
and must average taxable income of $136,000 per year to fully realize its
net operating loss carryforwards. UTI's operating loss carryforwards do
not begin to expire until 2003. Management believes future earnings of UTI
will be more than sufficient to fully utilize its net operating loss
carryforwards.
The provision or (credit) 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:
110
1996 1995 1994
Tax computed at standard
corporate rate $ (2,389,000) $ (3,982,000) $ (1,225,000)
Changes in taxes due to:
Cost in excess of net
assets purchased 65,000 61,000 104,000
Special insurance deductions 0 0 (24,000)
Benefit of prior losses (2,393,000) (602,000) (649,000)
Other 13,000 (48,000) (171,000)
Income tax expense (credit) $ (4,704,000) $ (4,571,000) $ (1,965,000)
The following table summarizes the major components which comprise the
deferred tax liability as reflected in the balance sheets:
1996 1995
Investments $ (122,251) $ (48,918)
Cost of insurance acquired 16,637,884 20,860,602
Other assets (187,747) 0
Deferred policy acquisition
costs 3,963,875 4,002,855
Agent balances (65,609) (71,625)
Furniture and equipment (37,683) (82,257)
Discount of notes 922,766 1,003,038
Management/consulting fees (733,867) (841,991)
Future policy benefits (5,906,087) (5,039,938)
Gain on sale of subsidiary 2,312,483 2,312,483
Net operating loss carryforward (522,392) (650,358)
Other liabilities (1,151,405) (818,484)
Federal tax DAC (1,916,536) (2,862,999)
Deferred tax liability $13,193,431 $ 17,762,408
111
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,
1996 1995 1994
Fixed maturities and fixed maturities
held for sale $13,326,312 $13,190,121 $12,185,941
Equity securities 88,661 52,445 3,999
Mortgage loans 1,047,461 1,257,189 1,423,474
Real estate 794,844 975,080 990,857
Policy loans 1,121,538 1,041,900 1,014,723
Short-term investments 515,346 505,637 444,135
Other 197,188 158,290 221,125
Total consolidated investment income 17,091,350 17,180,662 16,284,254
Investment expenses (1,222,903) (1,724,438) (1,915,808)
Consolidated net investment income $15,868,447 $15,456,224 $14,368,446
At December 31, 1996, the Company had a total of $6,025,000 of
investments, comprised of $5,325,000 in real estate including its home
office property and $700,000 in equity securities, which did not produce
income during 1996.
The following table summarizes the Company's fixed maturity holdings and
investments held for sale by major classifications:
Carrying Value
1996 1995
Investments held for sale:
Fixed maturities $ 1,961,166 $ 3,226,175
Equity securities 1,794,405 1,946,481
Fixed maturities:
U.S. Government, government agencies
and authorities 28,554,631 27,488,188
State, municipalities and
political subdivisions 14,421,735 6,785,476
Collateralized mortgage obligations 13,246,781 15,395,913
Public utilities 51,821,989 59,136,696
All other corporate bonds 71,881,649 82,267,947
$ 183,682,356 $ 196,246,876
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.
112
The following table summarizes by category securities held that are
below investment grade at amortized cost:
Below Investment
Grade Investments
1996 1995 1994
State, Municipalities and
Political Subdivisions $ 10,042 $ 0 $ 32,370
Public Utilities 117,609 116,879 168,869
Corporate 813,717 819,010 848,033
Total $ 941,368 $ 935,889 $1,049,272
113
B.INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in
securities including investments held for sale are as follows:
1996 Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $1,461,068 $ 0 $ 17,458 $ 1,443,609
States, municipalities and
political subdivisions 145,199 665 6,397 139,467
Collateralized mortgage
obligations 0 0 0 0
Public utilities 119,970 363 675 119,658
All other corporate bonds 258,424 4,222 4,215 258,432
1,984,661 5,250 28,745 1,961,166
Equity securities 2,086,159 37,000 328,754 1,794,405
Total $4,070,820 $ 42,250 $ 357,499 $ 3,755,571
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $28,554,631 $ 421,523 $ 136,410 $ 28,839,744
States, municipalities and
political subdivisions 14,421,735 318,682 28,084 14,712,333
Collateralized mortgage
Obligations 13,246,780 175,163 157,799 13,264,145
Public utilities 51,821,990 884,858 381,286 52,325,561
All other corporate bonds 71,881,649 1,240,230 448,437 72,673,442
Total $179,926,785 $3,040,456 $1,152,016 $181,815,225
114
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Value
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $ 2,001,860 $ 2,579 $ 621 $ 2,003,818
States, municipalities and
political subdivisions 812,454 14,313 3,749 823,018
Collateralized mortgage
Obligations 32,177 506 0 32,683
Public utilities 119,379 572 2,123 117,828
All other corporate bonds 258,169 337 9,678 248,828
3,224,039 18,307 16,171 3,226,175
Equity securities 2,086,159 80,721 220,399 1,946,481
Total $ 5,310,198 $ 99,028 $ 236,570 $ 5,172,656
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities$ 27,488,188 $ 841,786 $ 76,417 $28,253,557
States, municipalities and
political subdivisions6, 785,476 305,053 10,895 7,079,634
Collateralized mortgage
Obligations 15,395,913 295,344 67,472 15,623,785
Public utilities 59,136,696 2,279,509 134,091 61,282,114
All other corporate bonds 82,267,947 2,974,553 475,333 84,767,167
Total $191,074,220 $6,696,245 $764,208 $ 197,006,257
The amortized cost of debt securities at December 31, 1996, 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 for Sale Amortized
Due in one year or less $ 139,724
Due after one year through five years 1,569,804
Due after five years through ten years 115,183
Due after ten years 159,950
$ 1,984,661
Fixed Maturities Held to Maturity Amortized
Due in one year or less $ 13,222,084
Due after one year through five years 74,120,886
Due after five years through ten years 77,222,430
Due after ten years 15,361,385
$179,926,785
Proceeds from sales, calls and maturities of investments in debt securities
during 1996 were $40,677,000. Gross gains of $101,000 and gross losses of
$276,000 were realized on those sales, calls and maturities.
115
Proceeds from sales, calls and maturities of investments in debt securities
during 1995 were $16,885,000. Gross gains of $126,000 and gross losses of
$246,000 were realized on those sales, calls and maturities.
Proceeds from sales, calls and maturities of investments in debt securities
during 1994 were $24,145,000. Gross gains of $84,000 and gross losses of
$554,000 were realized on those sales, calls and maturities.
C.INVESTMENTS ON DEPOSIT - At December 31, 1996, investments carried at
approximately $18,016,000 were on deposit with various state insurance
departments.
D.INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES - The Company's
investment in United Income, Inc., a 30% owned affiliate, is carried at
an amount equal to the Company's share of the equity of United Income.
The Company's equity in United Income, Inc. includes the original
investment of $194,304, an increase of $4,359,749 resulting from a
public offering of stock and the Company's share of earnings and losses
since inception.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information
at December 31, 1996 and 1995, as required by Statement of Financial
Accounting Standards 107, Disclosure about Fair Value of Financial
Instruments ("SFAS 107"). Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in
that Statement and does not purport to represent the aggregate net fair
value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value:
(a) Cash and Cash equivalents
The carrying amount in the financial statements approximates fair value
because of the relatively short period of time between the origination of
the instruments and their expected realization.
(b) Fixed maturities and investments held for sale
Quoted market prices, if available, are used to determine the fair value.
If quoted market prices are not available, management estimates the fair
value based on the quoted market price of a financial instrument with
similar characteristics.
(c) Mortgage loans on real estate
An estimate of fair value is based on management's review of the portfolio
in relation to market prices of similar loans with similar credit ratings,
interest rates, and maturity dates. Management conservatively estimates
fair value of the portfolio is equal to the carrying value.
(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.
116
(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. All short-term instruments represent certificates of deposit
with various banks and all are protected under FDIC.
(g) Notes and accounts receivable and uncollected premiums
The Company holds a $840,000 note receivable for which the determination of
fair value is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Accounts
receivable and uncollected premiums are primarily insurance contract
related receivables which are determined based upon the underlying
insurance liabilities and added reinsurance amounts, and thus are excluded
for the purpose of fair value disclosure by paragraph 8(c) of SFAS 107.
(h) Notes payable
For borrowings under the senior loan agreement, which is subject to
floating rates of interest, carrying value is a reasonable estimate of fair
value. For subordinated borrowings fair value was determined based on the
borrowing rates currently available to the Company for loans with similar
terms and average maturities.
The estimated fair values of the Company's financial instruments required
to be valued by SFAS 107 are as follows as of December 31:
1996 1995
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Fixed maturities $179,926,785 $181,815,225 $191,074,220 $197,006,257
Fixed maturities
held for sale 1,961,166 1,961,166 3,226,175 3,226,175
Equity securities 1,794,405 1,794,405 1,946,481 1,946,481
Mortgage loans on
real estate 11,022,792 11,022,792 13,891,762 13,891,762
Policy loans 14,438,120 14,438,120 16,941,359 16,941,359
Short-term
investments 430,983 430,983 425,000 425,000
Investment in real
estate 10,543,490 10,543,490 11,978,575 11,978,575
Real estate
acquired in
satisfaction of debt 3,846,946 3,846,946 5,332,413 5,332,413
Notes receivable 840,066 783,310 840,066 775,399
Liabilities
Notes payable 19,573,953 18,937,055 21,447,428 20,747,991
117
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 be completed in 1997, will likely change prescribed statutory
accounting practices and may result in changes to the accounting practices
that insurance enterprises use to prepare their statutory financial
statements. UG's total statutory shareholders' equity was $10,227,000 and
$7,274,000 at December 31, 1996 and 1995, respectively. The Company's
insurance subsidiaries reported combined statutory gain from operations
(exclusive of intercompany dividends) was $10,692,000, $4,076,000 and
$3,071,000 for 1996, 1995 and 1994, respectively.
7. REINSURANCE
The Company assumes risks from, and reinsures certain parts of its risks
with other insurers under yearly renewable term and coinsurance agreements
which are accounted for by passing a portion of the risk to the reinsurer.
Generally, the reinsurer receives a proportionate part of the premiums less
commissions and is liable for a corresponding part of all benefit payments.
While the amount retained on an individual life will vary based upon age
and mortality prospects of the risk, the Company generally will not carry
more than $125,000 individual life insurance on a single risk.
The Company has reinsured approximately $1.109 billion, $1.088 billion and
$1.217 billion in face amount of life insurance risks with other insurers
for 1996, 1995 and 1994, respectively. Reinsurance receivables for future
policy benefits were $38,745,000 and $13,540,000 at December 31, 1996 and
1995, respectively, for estimated recoveries under reinsurance treaties.
Should any of the reinsurers be unable to meet its obligation at the time
of the claim, obligation to pay such claim would remain with the Company.
The Company's insurance subsidiary (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, an industry rating company, 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. The
agreement with FILIC accounts for approximately 66% of the reinsurance
receivables as of December 31, 1996.
As a result of the FILIC coinsurance agreement, effective September 30,
1996, UG received a reinsurance credit in the amount of $28,318,000 in
exchange for an equal amount of assets. UG also received $6,375,000 as a
commission allowance.
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.
118
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long-duration reinsurance contracts on premiums
earned in 1996, 1995 and 1994 was as follows:
Shown in thousands
1996 1995 1994
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 32,387 $ 35,201 $ 38,063
Assumed 0 0 0
Ceded (4,768) (5,203) (5,659)
Net premiums $ 27,619 $ 29,998 $ 32,404
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 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. Those mandatory assessments may be partially recovered
through a reduction in future premium taxes 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
United Trust, Inc. has a service agreement with its affiliate, UII (equity
investee), to perform services and provide personnel and facilities. The
services included in the agreement are claim processing, underwriting,
processing and servicing of policies, accounting services, agency services,
data processing and all other expenses necessary to carry on the business
of a life insurance company.
UII's service agreement states that USA is to pay UII monthly fees equal to
22% of the amount of collected first year premiums, 20% in second year and
6% of the renewal premiums in years three and after. UII's subcontract
agreement with UTI states that UII is to pay UTI monthly fees equal to 60%
of collected service fees from USA as stated above.
USA paid $1,568,000, $2,015,000 and $1,357,000 under their agreement with
UII for 1996, 1995 and 1994, respectively. UII paid $941,000, $1,209,000
and $814,000 under their agreement with UTI for 1996, 1995 and 1994,
respectively.
119
The agreements of the insurance companies have been approved by their
respective domiciliary insurance departments and it is Management's opinion
that where applicable, costs have been allocated fairly and such
allocations are based upon generally accepted accounting principles. The
costs paid by UTI for these services include costs related to the
production of new business which are deferred as policy acquisition costs
and charged off to the income statement through "Amortization of deferred
policy acquisition costs". Also included are costs associated with the
maintenance of existing policies which are charged as current period costs
and included in "general expenses".
10. CAPITAL STOCK TRANSACTIONS
A. PUBLIC OFFERING OF AFFILIATE STOCK
During 1991, an affiliated company, United Fidelity, Inc., ("UFI") began
a stock offering in the State of Illinois. UFI was offering 400,000
units, each unit consisting of one share of no par value common stock
and one share of Class A Preferred Stock, $15 par value per share, 9%
non-cumulative convertible. The units were being offered to the public
at $30 per unit. Due to large losses reported by UFI, the sale of stock
units to the public was stopped on June 2, 1994. The Board of Directors
of UFI voted to voluntarily terminate the offering on August 18, 1994.
The Company accounted for the investment in UFI using the equity method.
At December 31, 1994, the Company charged off its remaining investment
in UFI of $212,247. The Company determined any material recoverability
of its investment to be unlikely due to continuing losses and limited
capital of UFI. On May 26, 1995, pursuant to a plan of restructure of
UFI's subsidiary, First Fidelity Mortgage Company (FFMC), UTI
surrendered its common stock holdings of UFI for no value.
Additionally, as a part of the FFMC restructure, UTI invested $615,000
in preferred stock of FFMC, representing 100% of the outstanding
preferred stock of FFMC, and $10,000 in common stock of FFMC,
representing approximately 14% of the outstanding common stock. Due to
continued losses by FFMC, UTI realized losses of $315,000 and $10,000
from writedowns of their investment in FFMC at December 31, 1996 and
1995, respectively.
B. STOCK OPTION PLAN
In 1985, the Company initiated a nonqualified stock option plan for
employees, agents and directors of the Company under which options to
purchase up to 440,000 shares of the company's common stock are granted
at $.02 per share. Through December 31, 1996 options for 424,375 shares
were granted and exercised. Options for 15,625 shares remain available
for grant.
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, accounting for stock-based compensation. The
adoption of this standard did not have a material impact on the
Company's financial statements.
Following is a summary of stock option transactions for the three years
ended December 31, 1996:
1996 1995 1994
Option Shares exercised 25,000 20,000 0
Compensation expense charged
to operations $ 13,563 $ 12,100 $ 0
Approximate percent of market value
at which options were granted 3.6% 3.2% 0%
120
C. 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. An officer or agent received an
immediately exercisable option to purchase 23,000 shares of UTI common
stock at $1.75 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 1,050,000 options were granted in 1993
under this plan. As of December 31, 1996 no options were exercised. At
December 31, 1996 and 1995, the Company held a liability of $1,268,000
and $1,167,000, respectively, relating to this plan.
11. NOTES PAYABLE
At December 31, 1996, the Company has $19,574,000 in long term debt
outstanding. The debt is comprised of the following components:
1996 1995
Senior debt $ 8,400,000 $10,400,000
Subordinated 10 yr. notes 6,209,000 6,209,000
Subordinated 20 yr. notes 3,815,000 3,815,000
Other notes payable 1,150,000 1,000,000
Encumbrance on real estate 0 23,000
$19,574,000 $21,447,000
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinancing was completed through First of America Bank - NA and is subject
to a credit agreement. The refinanced debt bears interest to a rate equal
to the "base rate" plus nine-sixteenths of one percent. The Base rate is
defined as the floating daily, variable rate of interest determined and
announced by First of America Bank from time to time as its "base lending
rate". The base rate at issuance of the loan was 8.25%, and has remained
unchanged through March 1, 1997. 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, 1996, the Company prepaid
$500,000 of the May 8, 1997 principal payment.
The credit agreement contains certain covenants with which the Company must
comply. The 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 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
current and in compliance with all of the terms on all of its outstanding
debt and does not foresee any problem in maintaining compliance in the
future.
121
United Income, Inc. ("UII") and First Fidelity Mortgage Company through an
assignment from United Trust, Inc. owned a participating interest of
$700,000 and $300,000 respectively of the senior debt. At the date of the
refinance, these obligations were converted from participations of senior
debt to promissory notes. These notes bear 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 subordinated debt was incurred June 16, 1992 as a part of an
acquisition. 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 June 16, 1997, with a final
payment due June 16, 2002. During 1995, the Company refinanced $300,695 of
10 year notes to 20 year notes bearing interest at the rate of 8.75%. The
repayment terms of these notes are similar to the original 20 year notes.
The 20 year notes bear interest at the rate of 8 1/2% per annum, payable
semi-annually beginning December 16, 1992, with a lump sum principal
payment due June 16, 2012. The Company's subordinated debt consists of
$4,495,000 and $3,532,000 of ten year and twenty year notes, respectively,
owed to current officers and directors of the Company or its affiliates.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1997 $ 1,037,000
1998 1,537,000
1999 1,687,000
2000 1,537,000
2001 1,537,000
12. OTHER CASH FLOW DISCLOSURE
The Company recognized an increase in its paid-in capital of $0, $0 and
$277,559 for the years 1996, 1995 and 1994 respectively, from its equity
investment in UFI from the offering price per share of UFI exceeding UTI's
carrying amount per share.
On a cash basis, the Company paid $1,700,973, $1,934,326 and $1,937,123 in
interest expense for the years 1996, 1995 and 1994, respectively. The
Company paid $17,634, $25,821 and $190 in federal income tax for 1996, 1995
and 1994, respectively.
The Company's insurance subsidiary ("UG") entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
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.
122
13. NON-RECURRING WRITE DOWN OF VALUE OF AGENCY FORCE ACQUIRED
The Company recognized a non-recurring write down of $8,297,000 on its
value of agency force acquired for the year ended December 31, 1995. The
write down released $2,904,000 of the deferred tax liability and $3,327,000
was attributed to minority interest in loss of consolidated subsidiaries.
In addition, equity loss of investees was negatively impacted by $542,000.
The effect of this write down resulted in an increase in the net loss of
$2,608,000. This write down is directly related to the Company's change in
distribution systems. Due to the broker agency force not meeting
management's expectations and lack of production, the Company has changed
its focus from a primarily broker agency distribution system to a captive
agent system. With the change in focus, most of the broker agents were
terminated and therefore, management re-evaluated the value of the agency
force carried on the balance sheet. For purposes of the write-down, the
broker agency force has no future expected cash flows and therefore
warranted a write-off of the value. The write down is reported as a
separate line item "non-recurring write down of value of agency force
acquired" and the release of the deferred tax liability is reported in the
credit for income taxes payable in the Statement of Operations. In
addition, the impact to minority interest in loss of consolidated
subsidiaries and equity loss of investees is in the Statement of
Operations.
14. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions which at
times may exceed federally insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
15. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On September 23, 1996, UTI and UII entered into a stock purchase agreement
with LaSalle Group, Inc., a Delaware corporation ("LaSalle"), whereby
LaSalle will acquire 12,000,000 shares of authorized but unissued shares of
UTI for $1.00 per share and 10,000,000 shares of authorized but unissued
shares of UII for $0.70 per share. Additionally, LaSalle intends,
contemporaneously with the closing of the above transaction, to purchase in
privately negotiated transactions additional shares of UTI and UII so that
LaSalle will own not less than 51% of the outstanding common stock of UTI
and indirectly control 51% of UII.
The agreement requires and is pending approval of the Commissioner of
Insurance of the State of Ohio, Illinois and West Virginia, (the states of
domicile of the insurance subsidiaries). It is anticipated the transaction
will be completed during the second quarter of 1997.
123
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1996
1st 2nd 3rd 4th
Premium income and
other considerations, net $ 8,481,511 $ 8,514,175 $ 7,348,199 $ 6,600,573
Net investment income 3,973,349 3,890,127 4,038,831 3,966,140
Total revenues 12,870,140 12,455,875 11,636,614 10,013,741
Policy benefits including
Dividends 6,528,760 7,083,803 8,378,710 8,334,759
Commissions and
Amortization of DAC 1,161,850 924,174 703,196 1,435,665
Operating expenses 3,447,329 2,851,752 3,422,654 2,272,729
Operating income (71,615) (137,198) (2,346,452) (4,269,870)
Net income (loss) 304,737 9,038 (892,761) (358,917)
Net income (loss) per
Share 0.02 0.00 (0.05) (0.02)
1995
1st 2nd 3rd 4th
Premium income and
other considerations, net $ 9,445,222 $ 8,765,804 $ 7,868,803 $ 7,018,707
Net investment income 3,850,161 3,843,518 3,747,069 4,015,476
Total revenues 13,694,471 12,933,370 11,829,921 11,411,322
Policy benefits including
Dividends 8,097,830 9,113,933 5,978,795 6,665,206
Commissions and
Amortization of DAC 1,556,526 1,960,458 1,350,662 40,007
Operating expenses 3,204,217 2,492,689 2,232,938 3,587,804
Operating income (495,966) (1,939,361) 120,393 (9,060,886)
Net income (loss) 179,044 (689,602) 198,464 (2,689,151)
Net income (loss) per
Share 0.01 (0.04) 0.01 (0.14)
1994
1st 2nd 3rd 4th
Premium income and
other considerations, net $ 9,042,475 $10,011,855 $ 7,913,497 $ 8,176,700
Net investment income 3,366,995 3,556,633 3,633,334 3,811,484
Total revenues 12,245,881 14,052,428 10,900,385 12,007,934
Policy benefits including
Dividends 6,927,743 7,496,765 7,483,568 7,753,158
Commissions and
Amortization of DAC 1,685,682 4,099,100 3,086,901 2,448,822
Operating expenses 2,366,726 1,898,048 2,328,443 3,194,745
Operating income 801,718 67,387 (2,477,301) (1,891,201)
Net income (loss) (404,022) (117,149) (515,134) (587,295)
Net income (loss) per Share (0.02) (0.01) (0.03) (0.03)
124
UNITED TRUST, INC. Schedule I
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1996
Column A Column B Column C Column D
Amount at
Which Shown
in Balance
Cost Value Sheet
Fixed maturities:
United States Goverment and
government agencies and
authorities $ 28,554,631 $ 28,839,743 $ 28,554,631
State, municipalities, and political
subdivisions 14,421,735 14,712,334 14,421,735
Collateralized mortgage
obligations 13,246,780 13,264,145 13,246,780
Public utilities 51,821,990 52,325,561 51,821,990
All other corporate bonds 71,881,649 72,673,442 71,881,649
Total fixed maturities 179,926,785 $ 181,815,225 179,926,785
Investments held for sale: Fixed maturities:
United States Goverment and
government agencies and
authorities 1,461,068 $ 1,443,609 1,443,609
State, municipalities, and political
subdivisions 145,199 139,467 139,467
Public utilities 119,970 119,658 119,658
All other corporate bonds 258,424 258,432 258,432
1,984,661 $ 1,961,166 1,961,166
Equity securities:
Public utilities 82,073 $ 56,053 56,053
All other corporate securities 2,004,086 1,738,352 1,738,352
2,086,159 $ 1,794,405 1,794,405
Mortgage loans on real estate 11,022,792 11,022,792
Investment real estate 10,543,490 10,543,090
Real estate acquired in
satisfaction of debt 3,846,946 3,846,946
Policy loans 14,438,120 14,438,120
Short term investments 430,983 430,983
Total investments $ 224,279,936 $ 223,964,687
125
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRAN Schedule II
NOTES TO CONDENSED FINANCIAL INFORMATION
(a) The condensed financial information should be read in conjunction with
the consolidated financial statements and notes of United Trust, Inc.
and Consolidated Subsidiaries.
126
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1996 and 1995 Schedule II
1996 1995
ASSETS
Investment in affiliates $ 19,475,431 $ 20,494,198
Cash and cash equivalents 422,446 503,357
Notes receivable from affiliate 265,900 15,900
Indebtedness from (to) affiliates, net 30,247 (74,519)
Accrued interest income 2,051 16,273
Other assets 262,927 572,716
Total assets $ 20,459,002 $ 21,527,925
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable to affiliate $ 840,000 $ 840,000
Deferred income taxes 1,602,345 1,662,869
Other liabilities 2,800 2,800
Total liabilities 2,445,145 2,505,669
Shareholders' equity:
Common stock 374,019 373,519
Additional paid-in capital 18,301,974 18,288,411
Unrealized depreciation of
investments held for sale
of affiliates (86,058) (1,499)
Retained earnings (accumulated deficit) (576,078) 361,825
Total shareholders' equity 18,013,857 19,022,256
Total liabilities and
shareholders' equity $ 20,459,002 $ 21,527,925
127
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996 Schedule II
1996 1995 1994
Revenues:
Management fees from affiliates $ 940,734 $ 1,209,196 $ 835,284
Other income from affiliates 115,235 113,869 130,437
Interest income from affiliates 21,264 13,583 65,560
Interest income 29,340 21,678 53,509
Realized investment losses (207,051) 0 0
Loss from write down of investee (315,000) (10,000) (212,247)
584,522 1,348,326 872,543
Expenses:
Management fee to affiliate 575,000 800,000 850,000
Interest expense to affiliates 63,000 63,000 63,175
Operating expenses 133,897 83,312 76,271
771,897 946,312 989,446
Operating income (loss) (187,375) 402,014 (116,903)
Credit (provision) for income taxes 59,780 (153,764) (40,123)
Equity in loss of investees (95,392) (635,949) (1,125,118)
Equity in loss of subsidiaries (714,916) (2,613,546) (341,456)
Net loss $ (937,903) $(3,001,245) $(1,623,600)
128
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1996 Schedule II
1996 1995 1994
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (937,903) $(3,001,245) $(1,623,600)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Equity in loss of subsidiaries 714,916 2,613,546 341,456
Equity in loss of investees 95,392 635,949 1,125,118
Compensation expense through
stock option 13,563 12,100 0
Change in accrued interest income 14,222 2,260 29,424
Depreciation 18,366 26,412 44,246
Realized investment losses 207,051 0 0
Loss from writedown of investee 315,000 10,000 212,247
Change in deferred income taxes (60,524) 153,764 40,123
Change in indebtedness
(to) from affiliates, net (104,766) (23,027) 217,242
Change in other assets and liabilities (728) (274,167) 75,737
Net cash provided by operating activities 274,589 155,592 461,993
Cash flows from investing activities:
Purchase of stock of affiliates 0 (325,000) (1,350,410)
Change in notes receivable
from affiliate (250,000) 300,000 175,000
Capital contribution to affiliate (106,000) (53,000) 0
Net cash used in investing activities (356,000) (78,000) (1,175,410)
Cash flows from financing activities:
Purchase of treasury stock 0 0 (67,545)
Proceeds from issuance of common stock 500 400 0
Net cash provided by (used in)
financing activities 50 400 (67,545)
Net increase (decrease) in cash
and cash equivalents (80,911) 77,992 (780,962)
Cash and cash equivalents at
beginning of year 503,357 425,365 1,206,327
Cash and cash equivalents
at end of year $ 422,446 $ 503,357 $ 425,365
129
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1996 and the year ended December 31, 1996 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
Life insurance
in force $3,952,958,000 $1,108,534,000 $1,271,766,000 $4,116,190,000 30.9%
Premiums:
Life
insurance $ 31,983,728 $ 4,572,958 $ 0 $ 27,410,770 0.0%
Accident and health
insurance 258,377 50,255 0 208,122 0.0%
$ 32,242,105 $ 4,623,213 $ 0 $ 27,618,892 0.0%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
130
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1995 and the year ended December 31, 1995 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
Life insurance
in force $4,207,695,000 $1,087,774,000 $1,039,517,000 $4,159,438,000 25.0%
Premiums:
Life
insurance $ 34,952,367 $ 5,149,939 $ 0 $ 29,802,428 0.0%
Accident and health
insurance 248,448 52,751 0 195,697 0.0%
$ 35,200,815 $ 5,202,690 $ 0 $ 29,998,125 0.0%
* All assumed business represents the Company's participation in the
Servicemens' Group Life Insurance Program (SGLI).
131
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1994 and the year ended December 31, 1994 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
Life insurance
in force $4,543,746,000 $1,217,119,000 $1,077,413,000 $4,404,040,000 24.5%
Life
insurance $ 37,800,871 $ 5,597,512 $ 0 $ 32,203,359 0.0%
Accident and health
insurance 262,315 61,185 0 201,130 0.0%
$ 38,063,186 $ 5,658,697 $ 0 $ 32,404,489 0.0%
* All assumed business represents the Company's participation in the
Servicemens' Group Life Insurance Program (SGLI).
132
UNITED TRUST, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1995 and 1994 Schedule V
Balance at Additions Balances
Beginning Charges at End
Description Of Period and Expenses Deductions of Period
December 31, 1996
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
Accumulated depreciation on
property and equipment and
EDP conversion cost 619,817 99,263 0 719,080
Accumulated amortization of
costs in excess of net
assets purchased 1,079,867 185,279 0 1,265,146
Accumulated depreciation
on real estate 1,049,652 291,094 0 1,340,746
Total $2,759,336 $ 575,636 $ 0 $3,334,972
December 31, 1995
Allowance for doubtful accounts -
mortgage loans $ 26,000 $ 0 $ 16,000 $ 10,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 949,608 420,209 750,000 619,817
Accumulated amortization of
costs in excess of net
assets purchased 656,675 423,192 0 1,079,867
Accumulated depreciation on
real estate 802,476 300,396 53,220 1,049,652
Total $2,434,759 $1,143,797 $ 819,220 $2,759,336
December 31, 1994
Allowance for doubtful accounts -
mortgage loans $ 300,000 $ 0 $ 274,000 $ 26,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 740,292 209,316 0 949,608
Accumulated amortization of
costs in excess of net
assets purchased 426,999 297,676 68,000 656,675
Accumulated depreciation on
real estate 501,333 301,143 0 802,476
Total $1,968,624 $ 808,135 $ 342,000 $2,434,759
133
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Restated
September 30, December 31,
ASSETS 1997 1996
Investments:
Fixed maturities at amortized cost
(market $188,585,275 and $181,815,225) $ 185,691,622 $ 179,926,785
Investments held for sale:
Fixed maturities, at market
(cost $1,836,015 and $1,984,661) 1,834,388 1,961,166
Equity securities, at market
(cost $2,741,632 and $2,086,159) 2,783,623 1,794,405
Mortgage loans on real estate at amortized cost 10,010,243 11,022,792
Investment real estate, at cost, net
of accumulated depreciation 10,635,617 10,543,490
Real estate acquired in satisfaction of debt,
at cost,net of accumulated depreciation 3,856,946 3,846,946
Policy loans 14,211,585 14,438,120
Short term investments 425,458 430,983
229,449,482 223,964,687
Cash and cash equivalents 13,089,285 17,326,235
Investment in affiliates 4,996,199 4,826,584
Accrued investment income 4,094,360 3,461,799
Reinsurance receivables:
Future policy benefits 38,414,086 38,745,013
Policy claims and other benefits 3,200,091 3,856,124
Other accounts and notes receivable 1,032,444 894,321
Cost of insurance acquired 42,254,048 43,917,280
Deferred policy acquisition costs 10,897,379 11,325,356
Costs in excess of net assets purchased,
net of accumulated amortization 2,782,883 5,496,808
Other assets 1,443,155 1,659,455
Total assets $ 351,653,412 $ 355,473,662
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 249,367,949 $ 248,879,317
Policy claims and benefits payable 2,236,479 3,193,806
Other policyholder funds 2,552,358 2,784,967
Dividend and endowment accumulations 14,687,638 13,913,676
Income taxes payable:
Current 1,101 70,663
Deferred 13,473,857 13,193,431
Notes payable 22,566,713 19,573,953
Indebtedness to affiliates, net 17 31,837
Other liabilities 4,392,866 5,975,483
Total liabilities 309,278,978 307,617,133
Minority interests in
consolidated subsidiaries 26,666,108 29,842,672
Shareholders' equity:
Common stock - no par value, stated value
$.02 per share Authorized 3,500,000 shares -
1,634,779 and 1,870,093 shares issued
after deducting treasury shares of 277,460
and 42,384 32,695 37,402
Additional paid-in capital 16,488,376 18,638,591
Unrealized appreciation (depreciation)
of investments held for sale 138,936 (86,058)
Accumulated deficit (951,681) (576,078)
Total shareholders' equity 15,708,326 18,013,857
Total liabilities and
shareholders' equity $ 351,653,412 $ 355,473,662
134
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
Revenues:
Premium income $ 7,217,037 $ 7,836,950 $ 23,360,291 $ 25,514,821
Reinsurance premium (1,384,230) (1,303,035) (3,511,544) (3,666,681)
Other considerations 862,654 866,137 2,677,994 2,628,275
Other considerations
paid to reinsurers (56,067) (51,853) (152,179) (132,530)
Net investment income 3,686,861 4,038,831 11,357,217 11,902,307
Realized investment gains
and(losses), net (114,436) (37,858) (143,015) (320,805)
Other income 142,314 287,442 602,893 1,037,242
10,354,133 11,636,614 34,191,657 36,962,629
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 5,615,588 8,319,522 18,242,132 19,541,163
Reinsurance benefits
and claims (481,468) (1,294,964) (1,447,716) (2,071,008)
Annuity 411,395 398,034 1,178,807 1,286,981
Dividends to
policyholders 922,224 956,118 3,074,230 3,234,137
Commissions and amortization
of deferred policy
acquisition costs 1,083,006 703,196 2,747,329 2,789,220
Amortization of cost of
insurance acquired 612,007 996,672 1,724,294 3,680,224
Operating expenses 2,378,618 3,422,654 7,745,203 9,721,735
Interest expense 492,258 481,834 1,316,892 1,335,442
11,033,628 13,983,066 34,581,171 39,517,894
Loss before income taxes, minority
interest and equity in earnings
(loss) of investees 679,495) (2,346,452) (389,514) (2,555,265)
Credit (provision) for
income taxes (157,919) 317,751 (285,126) 990,411
Minority interest in loss of
consolidated subsidiaries 353,893 1,310,454 297,943 1,074,797
Equity in earnings (loss)
of investees (40,920) (174,514) 1,094 (88,929)
Net loss $ (524,441) $ (892,761) $ (375,603) $ (578,986)
Net loss per
common share $ (0.30) $ (0.48) $ (0.21) $ (0.31)
Weighted average common
shares outstanding 1,719,806 1,870,093 1,819,398 1,869,315
135
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
September 30, September 30,
1997 1996
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (375,603) $ (578,986)
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 505,440 703,110
Realized investment (gains) losses, net 143,015 320,805
Policy acquisition costs deferred (557,000) (1,477,000)
Amortization of deferred policy acquisition costs 984,977 1,940,471
Amortization of cost of insurance acquired 1,724,294 3,680,224
Amortization of costs in excess of net
assets purchased 116,250 124,405
Depreciation 333,653 392,018
Minority interest (297,943) (1,074,797)
Equity in loss (earnings) of investees (1,094) 88,929
Change in accrued investment income (632,561) (673,945)
Change in reinsurance receivables 986,960 46,135
Change in policy liabilities and accruals (153,240) 2,454,616
Charges for mortality and administration of
universal life and annuity products (7,996,086) (7,681,478)
Interest credited to account balances 5,432,922 5,423,499
Change in income taxes payable 210,864 (1,013,116)
Change in indebtedness (to) from affiliates, net (31,820) (99,141)
Change in other assets and liabilities, net (1,688,706) (331,586)
Net cash provided by (used in)
operating activities (1,295,678) 2,244,163
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 0 704,583
Fixed maturities sold 0 0
Fixed maturities matured 8,186,791 19,168,548
Equity securities 105,261 8,990
Mortgage loans 1,146,863 1,858,246
Real estate 510,806 2,886,187
Policy loans 3,799,553 2,985,381
Short term 410,000 400,000
Total proceeds from investments
sold and matured 14,159,274 28,011,935
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (14,301,690) (26,559,403)
Equity securities (710,387) 0
Mortgage loans (134,314) (488,188)
Real estate (937,268) (837,866)
Policy loans (3,573,018) (3,334,865)
Short term (404,475) (300,000)
Total cost of investments acquired (20,061,152) (31,520,322)
Net cash used in investing activities (5,901,878) (3,508,387)
Cash flows from financing activities:
Policyholder contract deposits 14,069,987 17,339,900
Policyholder contract withdrawals (11,280,925) (12,033,894)
Payment for fractional shares from
reverse stock split (2,381) 0
Payment for fractional shares from
reverse stock split of subsidiary (535,851) 0
Purchase of treasury stock (926,599) 0
Purchase of additional shares of equity investee (165,374) 0
Proceeds from issuance of notes payable 2,560,000 400,000
Payments of principal on notes payable (758,251) (1,773,475)
Net cash provided by financing activities 2,960,606 3,932,531
Net increase (decrease) in cash
and cash equivalents (4,236,950) 2,668,307
Cash and cash equivalents at beginning of period 17,326,235 12,528,025
Cash and cash equivalents at end of period $ 13,089,285 $ 15,196,332
136
UNITED TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
United Trust Inc. ("UTI") and its consolidated subsidiaries ("Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission. Although the Company believes the disclosures are adequate to
make the information presented not be misleading, it is suggested that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto presented in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1996.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary
for a fair presentation of the results of operations for the periods
presented. Operating results for interim periods are not necessarily
indicative of operating results to be expected for the year or of the
Company's future financial condition.
At September 30, 1997, the parent, significant subsidiaries and affiliates
of United Trust Inc. were as depicted on the following organizational
chart.
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 33.3% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79.4% 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 83.9% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
137
2. FIXED MATURITIES
As of September 30, 1997, fixed maturities and fixed maturities held for
sale represented 82% of total invested assets. As prescribed by the
various state insurance department statutes and regulations, the insurance
companies' investment portfolio is required to be invested primarily in
investment grade securities to provide ample protection for policyholders.
The Company does not invest in so-called "junk bonds" or derivative
investments. The liabilities of the insurance companies are predominantly
long term in nature and therefore, the companies invest primarily in long
term fixed maturity investments. The Company has analyzed its fixed
maturity portfolio and reclassified those securities expected to be sold
prior to maturity as investments held for sale. The investments held for
sale are carried at market. Management has the intent and ability to hold
its fixed maturity portfolio to maturity and as such carries these
securities at amortized cost. As of September 30, 1997, the carrying value
of fixed maturity securities in default as to principal or interest was
immaterial in the context of consolidated assets or shareholders' equity.
3. MORTGAGE LOANS AND REAL ESTATE
The Company holds approximately $10,010,000 in mortgage loans and
$14,493,000 in real estate holdings, including real estate acquired in
satisfaction of debt, which represent 4% and 6% of total invested assets of
the Company, respectively. All mortgage loans held by the Company are
first position loans. The Company has $343,000 in mortgage loans net of a
$10,000 reserve allowance, which are in default or in the process of
foreclosure representing approximately 3% of the total portfolio.
Letters are sent to each mortgagee when the loan becomes 30 or more day's
delinquent. Loans 90 days or more delinquent are placed on a non
performing status and classified as delinquent loans. Reserves for loan
losses on delinquent loans are established based on management's analysis
of the loan balances and what is believed to be the realizable value of the
property should foreclosure take place. Loans are placed on a non-accrual
status based on a quarterly case by case analysis of the likelihood of
repayment.
The following tables show the distribution of mortgage loans and real
estate by type.
Mortgage loans Amount % of Total
FHA/VA $ 295,499 3%
Commercial $ 1,594,734 16%
Residential $ 8,120,010 81%
Real Estate Amount % of Total
Home Office $ 2,944,138 20%
Commercial $ 2,279,630 16%
Residential development $ 5,042,643 37%
Foreclosed real estate $ 3,856,945 27%
138
4. NOTES PAYABLE
At September 30, 1997, the Company has $22,567,000 in notes payable. Notes
payable is comprised of the following components:
Senior debt $ 7,900,000
Subordinated 10 yr. Notes 5,731,000
Subordinated 20 yr. Notes 4,035,000
Convertible notes 2,560,000
Other notes payable 2,341,000
$22,567,000
The senior debt is through First of America Bank - Illinois NA and is
subject to a credit agreement. The debt bears interest at a rate equal to
the "base rate" plus nine-sixteenths of one percent. The Base rate is
defined as the floating daily, variable rate of interest determined and
announced by First of America Bank from time to time as its "base lending
rate." The base rate at September 30, 1997 was 8.5%. Interest is paid
quarterly. Principal payments of $1,000,000 are due in May of each year
beginning in 1997, with a final payment due May 8, 2005. On November 8,
1997, the Company prepaid the May 1998 principal payment.
The credit agreement contains certain covenants with which the Company must
comply. These covenants contain provisions common to a loan of this type
and include such items as; a minimum consolidated net worth of FCC to be no
less than 400% of the outstanding balance of the debt; Statutory capital
and surplus of Universal Guaranty Life Insurance Company be maintained at
no less than $6,500,000; an earnings covenant requiring the sum of the pre
tax earnings of Universal Guaranty Life Insurance Company and its
subsidiaries (based on Statutory Accounting Practices) and the after-tax
earnings plus non-cash charges of FCC (based on parent only GAAP practices)
shall not be less than two hundred percent (200%) of the Company's interest
expense on all of its debt service. The Company is in compliance with all
of the covenants of the agreement and does not foresee any problem in
maintaining compliance in the future.
United Income, Inc. holds a promissory note receivable of $700,000 due from
FCC. This 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 $150,000 from an affiliate 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 subordinated debt was incurred June 16, 1992 as a part of an
acquisition. The 10-year notes bear interest at the rate of 7 1/2% per
annum, payable semi-annually beginning December 16, 1992. These notes
except for one $840,000 note, provide for principal payments equal to
1/20th of the principal balance due with each interest installment
beginning December 16, 1997, with a final payment due June 16, 2002. The
$840,000 note provides for a lump sum principal payment due June 16, 2002.
In June 1997, the Company refinanced $204,267 of its subordinated 10-year
notes to subordinated 20-year notes bearing interest at the rate of 8.75%.
The repayment terms of these notes are the same as the original
subordinated 20 year notes. The 20-year notes bear interest at the rate of
8 1/2% per annum on $3,530,000 and 8.75% per annum on $505,000, payable
semi-annually with a lump sum principal payment due June 16, 2012.
On July 31, 1997, United Trust Inc. issued convertible notes for cash in
the amount of $2,560,000 to seven individuals, all officers or employees of
United Trust Inc. The notes bear interest at a rate of 1% over prime, with
interest payments due quarterly and principal due upon maturity of July 31,
2004. The conversion price of the notes are graded from $12.50 per share
for the first three years, increasing to $15.00 per share for the next two
years and increasing to $20.00 per share for the last two years.
As partial proceeds in the acquisition of common stock from certain
officers and directors in the third quarter of 1997, the Company issued
unsecured promissory notes. These notes bear interest at 1% over prime
with interest payments due quarterly. Principal comes due at varying times
with $150,000 maturing on January 31, 1999, $1,655,000 maturing on July 31,
2005 and one note of $70,000 requiring annual principal reductions of
$10,000 until maturity on September 23, 2004. The interest rates were
deemed favorable to UTI and as a result, the Company has discounted the
notes to reflect a 15% effective rate of interest for financial statement
purposes. The notes have a total face maturity value of $1,875,000 and a
discounted value at September 30, 1997 of $1,491,000.
139
Scheduled principal reductions on the Company's debt for the next five
years are as follows:
Year Amount
1997 $ 0
1998 1,527,000
1999 1,827,000
2000 1,527,000
2001 1,527,000
5. 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 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. Those mandatory assessments may be partially recovered
through reduction in future premium taxes 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.
6. TERMINATION OF AGREEMENT REGARDING PENDING CHANGE IN CONTROL OF UNITED
TRUST, INC.
On April 14, 1997, United Trust, Inc. and United Income, Inc. formally
terminated their stock purchase agreement contract with LaSalle Group, Inc.
("LaSalle"), whereby LaSalle was to acquire certain authorized but unissued
shares of UTI and UII and additional outstanding shares in privately
negotiated transactions so that LaSalle would own not less than 51% of the
outstanding common stock of UTI and indirectly control 51% of UII.
LaSalle had not performed its obligations under the terms of the contract,
and the Company felt it should be free to negotiate with other interested
parties in becoming an equity partner.
140
7. REVERSE STOCK SPLIT
On May 13, 1997, the Company effected a 1 for 10 reverse stock split.
Fractional shares received a cash payment on the basis of $1.00 for each
old share. The reverse split was completed to enable the Company to meet
new NASDAQ requirements regarding market value of stock to remain listed on
the NASDAQ market and to increase the market value per share to a level
where more brokers will look at the Company and its stock. Prior period
numbers have been restated to give effect of the reverse split.
8. REVERSE STOCK SPLIT OF FCC
On May 13, 1997, FCC effected a 1 for 400 reverse stock split. Fractional
shares received a cash payment on the basis of $.25 for each old share.
The Company maintained a significant number of shareholder accounts with
less than $100 of market value of stock. The reverse stock split enabled
these smaller shareholders to receive cash for their shares without
incurring broker costs and will save the Company administrative costs
associated with maintaining these accounts.
9. RELATED PARTY TRANSACTIONS
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
were a party to the convertible notes.
Approximately $1,048,000 of the cash was used to acquire stock holdings of
United Trust Inc. and United Income, Inc. of a retiring executive officer
of the Company and to acquire a portion of the United Trust Inc. holdings
of Larry E. Ryherd and his family. The remaining cash received will be
used by the Company to provide additional operating liquidity and for
future acquisitions of life insurance companies.
On July 31, 1997, the Company acquired a total of 126,921 shares of United
Trust Inc. common stock and 47,250 shares of United Income, Inc. common
stock from Thomas F. Morrow and his family. Mr. Morrow simultaneously
retired as an executive officer of the Company. Mr. Morrow will remain as
a member of the Board of Directors. In exchange for his stock, Mr. Morrow
and his family received approximately $348,000 in cash, promissory notes
valued at $140,000 due in eighteen months, and promissory notes valued at
$1,030,000 due January 31, 2005. These notes bear interest at a rate of 1%
over prime, with interest due quarterly and principal due upon maturity.
The notes do not contain any conversion privileges.
Additionally, on July 31, 1997, the Company acquired a total of 97,499
shares of United Trust Inc. common stock from Larry E. Ryherd and his
family. Mr. Ryherd and his family received approximately $700,000 in cash
and a promissory note valued at $251,000 due January 31, 2005. The
acquisition of approximately 16% of Mr. Ryherd's stock holdings in United
Trust Inc. was completed as a prerequisite to the convertible notes placed
by other management personnel to reduce the total holdings of Mr. Ryherd
and his family in the Company to make the stock more attractive to the
investment community. Following the transaction, Mr. Ryherd and his family
own approximately 31% of the outstanding common stock of United Trust Inc.
On September 23, 1997, the Company acquired 10,056 shares of UTI common
stock from Paul Lovell, a director, for $35,000 and a promissory note
valued at $61,000 due September 23, 2004. The note bears interest at a
rate of 1% over prime, with interest due quarterly and principal reductions
of $10,000 annually until maturity. Simultaneous with the stock purchase,
Mr. Lovell resigned his position on the UTI board.
141
10. OTHER CASH FLOW DISCLOSURE
As partial proceeds for the acquisition of common stock of UTI and UII, the
Company issued promissory notes of $140,000 due in eighteen months, $61,000
due in seven years and $1,281,000 due in seven and one-half years. See
note 9.
142
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND SHAREHOLDERS
UNITED INCOME, INC.
We have audited the accompanying consolidated balance sheets of United
Income, Inc. (an Ohio corporation) and subsidiaries as of December 31, 1996
and 1995, and the related statements of operations, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
United Income, Inc. as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1997
143
UNITED INCOME, INC.
BALANCE SHEET
As of December 31, 1996 and 1995
ASSETS
1996 1995
Cash and cash equivalents $ 439,676 $ 364,370
Mortgage loans 122,853 182,206
Notes receivable from affiliate 864,100 714,100
Accrued interest income 11,784 7,040
Property and equipment (net of accumulated
depreciation $92,140 and $102,208) 2,578 12,058
Investment in affiliates 11,324,947 11,985,958
Receivable from (Indebtedness to) affiliate 31,837 (87,869)
Other assets (net of accumulated
amortization $146,011 and $108,995) 83,274 120,290
Total assets $ 12,881,049 $ 13,298,153
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 1,273 40,722
Total liabilities 903,573 943,022
Shareholders' equity:
Common stock - no par value, stated value
$0.033 per share. 33,000,000 shares
authorized, 22,424,572 issued in 1996,
and 22,423,572 issued in 1995 740,010 739,977
Additional paid-in capital 14,634,122 14,633,455
Unrealized depreciation of investments
held for sale of affiliate (59,508) (236)
Accumulated deficit (3,253,427) (2,934,344)
12,061,197 12,438,852
Common stock in treasury, at cost
(2,537,000 shares) (83,721) (83,721)
Total shareholders' equity 11,977,476 12,355,131
Total liabilities and
shareholders' equity $ 12,881,049 $ 13,298,153
See accompanying notes.
144
UNITED INCOME, INC.
STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996
1996 1995 1994
Revenues:
Interest income $ 13,099 $ 16,516 $ 26,520
Interest income from affiliates 79,433 71,646 71,811
Service agreement income
from affiliates 1,567,891 2,015,325 1,392,141
Other income from affiliates 127,922 129,627 171,682
Realized investment gains 2,599 905 0
Other income 3 130 5,192
1,790,947 2,234,149 1,667,346
Expenses:
Management fee to affiliate 1,240,735 1,809,195 1,210,284
Operating expenses 89,529 78,505 358,074
Interest expense 84,027 88,538 58,630
1,414,291 1,976,238 1,626,988
Income before provision for income taxes
and equity in loss of investees 376,656 257,911 40,358
Provision for income taxes 0 0 0
Equity in loss of investees (695,739) (2,405,813) (384,395)
Net loss $ (319,083) $(2,147,902) $ (344,037)
Net loss per
common share $ (0.02) $ (0.11) $ (0.02)
Weighted average common
shares outstanding 19,886,920 19,886,572 $19,838,931
See accompanying notes.
145
UNITED INCOME, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1996
1996 1995 1994
Common stock
Balance, beginning of year $ 739,977 $ 739,977 $ 738,047
Exercise of stock options 33 0 1,930
Balance, end of year $ 740,010 $ 739,977 $ 739,977
Additional paid-in capital
Balance, beginning of year $ 14,633,455 $ 14,633,455 $ 14,541,786
Exercise of stock options 667 0 91,669
Balance, end of year $ 14,634,122 $ 14,633,455 $ 14,633,455
Unrealized appreciation (depreciation) of
investments held for sale of affiliate
Balance, beginning of year $ (236) $ (99,907) $ (16,435)
Change during year (59,272) 99,671 (83,472)
Balance, end of year $ (59,508) $ (236) $ (99,907)
Accumulated deficit
Balance, beginning of year $ (2,934,344) $ (786,442) $ 442,405)
Net loss (319,083) (2,147,902) (344,037)
Balance, end of year $ (3,253,427) $ (2,934,344) $ (786,442)
Treasury stock $ (83,721) $ (83,721) $ (83,721)
Total shareholders' equity,
end of year $ 11,977,476 $ 12,355,131 $ 14,403,362
See accompanying notes.
146
UNITED INCOME, INC.
STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1996
1996 1995 1994
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (319,083) $(2,147,902) $ (344,037)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 45,331 52,169 53,642
Gain on payoff of mortgage loan (2,599) 0 0
Accretion of discount on
mortgage loans (481) (1,591) 0
Compensation expense through
stock option 667 0 91,227
Equity in loss of investees 695,739 2,405,813 384,395
Changes in assets and liabilities:
Change in accrued interest
income (4,744) (1,713) 1,181
Change in indebtedness of
affiliates (119,706) 25,598 (105,249)
Change in deposits and
other assets 0 0 (85,471)
Change in other liabilities (39,449) (5,469) 31,559
Net cash provided by
operating activities 255,675 326,905 27,247
Cash flows from investing activities:
Change in notes receivable
from affiliate (150,000) 0 300,000
Purchase of investments in
affiliates 0 (26,091) (1,050,651)
Capital contribution to investee (94,000) (47,000) 0
Sale of investments in affiliates 0 1,810 0
Payments of principal on
mortgage loans 62,434 4,480 0
Purchase of mortgage loan 0 (126,000) (60,000)
Proceeds from sale of
property and equipment 1,164 0 0
Net cash used in investing
activities (180,402) (192,801) (810,651)
Cash flows from financing activities:
Proceeds from sale of debentures 0 0 902,300
Proceeds from sale of common stock 33 0 2,371
Net cash provided by financing
activities 33 0 904,671
Net increase in cash and
cash equivalents 75,306 134,104 121,267
Cash and cash equivalents at
beginning of year 364,370 230,266 108,999
Cash and cash equivalents at
end of year $ 439,676 $ 364,370 $ 230,266
See accompanying notes.
147
UNITED INCOME, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1996, the affiliates of United Income,
Inc. were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1996
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 30% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 72% 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").
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows.
B. NATURE OF OPERATIONS - United Income, Inc. ("UII"), referred to as
the ("Company"), was incorporated November 2, 1987, and
commenced its activities January 20, 1988. UII is an insurance
holding company that through its insurance affiliates sells
individual life insurance products. UII is an affiliate of UTI,
an Illinois insurance holding company. UTI owns 29.7% of UII.
C. MORTGAGE LOANS - at unpaid balances, adjusted for amortization
premium or discount, less allowance for possible losses.
Realized gains and losses on sales of mortgage loans are recognized in
net income on a specific identification basis.
D. PROPERTY AND EQUIPMENT - Property and equipment is recorded at
cost. Depreciation is provided using both straight-line and
accelerated methods. Accumulated depreciation was $92,140 in 1996 and
$102,208 in 1995. Depreciation expense for the years ended December
1996, 1995, and 1994 was $8,315, $11,265, and $17,080 respectively.
E. CASH AND CASH EQUIVALENTS - The Company considers certificates
of deposit and other short-term investment instruments with an
original purchased maturity of three months or less as cash equivalents.
F. EARNINGS PER SHARE - Earnings per share are based upon the
weighted average number of common shares outstanding during the
respective period.
G. OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
H. RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform with the current year presentation. Such reclassifications
had no effect on previously reported net income, total assets,
or shareholders' equity.
2. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument required to be valued by SFAS
107 for which it is practicable to estimate that value:
(a) Mortgage loans
Mortgage loans are carried at the unpaid principal balances net of
unamortized purchase discounts. Yields on these loans exceed current
mortgage loan rates in the market. Therefore, management believes the
market value of these loans is at least equal to carrying value.
(b) Notes receivable from affiliate
For notes receivable from affiliate, which is subject to a floating rate
of interest, carrying value is a reasonable estimate of fair value.
149
(c) Convertible debentures
For the convertible debentures, which are subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
3. RELATED PARTY TRANSACTIONS
Effective November 8, 1989, United Security Assurance Company ("USA")
entered into a service agreement with its then direct parent, UII, for
certain administrative services. The Company recognized service agreement
income of $1,568,000, $2,015,000 and $1,392,000 in 1996, 1995 and 1994,
respectively.
Effective September 1, 1990, the Company entered into a service agreement
with United Trust, Inc. (UTI) for certain administrative services. Through
its personnel, UTI performs such services as may be mutually agreed upon
between the parties. In compensation for its services, the Company pays
UTI a contractually established fee. The Company incurred expenses of
approximately $941,000, $1,209,000 and $835,000 during 1996, 1995 and 1994,
respectively, pursuant to the terms of the service agreement with UTI. In
addition, the Company incurred $300,000, $600,000 and $375,000 during 1996,
1995 and 1994, respectively, as reimbursement for services performed on its
behalf by FCC.
At December 31, 1996, the Company owns a $864,000 note receivable from
affiliate. In December 1993, the Company acquired $1,000,000 of FCC, an
affiliate, senior debt from outside third parties. The notes carry
interest at a rate of 1% above prime. Interest is received quarterly.
During 1994, the Company sold $300,000 of the debt to UTI for cash.
4. STOCK OPTION PLANS
The Company has a stock option plan under which certain directors,
officers and employees may be issued options to purchase up to 450,000
shares of common stock at $.915 per share. Options become exercisable at
25% annually beginning one year after date of grant and expire generally in
five years. In November 1992, 149,100 option shares were granted. At
December 31, 1996, options for 155,550 shares were exercisable and options
for 293,950 shares were available for grant. No options were exercised
during 1996.
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 600,000
options at an exercise price of $.033 per share. The options generally
expire five years from the date of grant. Options for 146,000 shares of
common stock were granted in 1991, options for 19,000 shares were granted
in 1993 and options for 4,300 shares were granted in 1995. A total of
166,000 option shares have been exercised as of December 31, 1996. At
December 31, 1996, 3,300 options have been granted and are exercisable.
Options for 1,000 and 0 shares were exercised during 1996 and 1995,
respectively.
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, accounting for stock-based compensation. The adoption
of this standard did not have a material impact on the Company's financial
statements.
150
5. FEDERAL INCOME TAXES
The Company has net operating loss carryforwards for federal income tax
purposes expiring as follows:
UII
2006 $ 319,000
2007 532,000
TOTAL $ 851,000
The Company has established a deferred tax asset of $298,000 for its
operating loss carryforwards and has established an allowance of $298,000
against this asset. The Company has no other deferred tax components which
would be reflected in the consolidated 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:
1996 1995 1994
Income tax at statutory rate of
35% of income before income taxes $ 132,000 $ 90,000 $ 14,000
Dividends received deduction 0 0 (3,000)
Amortization of start up costs 0 0 (11,000)
Utilization of net operating loss
carryforward (134,000) (92,000) 0
Depreciation 2,000 2,000 0
Provision for income taxes $ 0 $ 0 $ 0
151
6. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for the Company's
50% or less owned affiliate:
December 31, December 31,
ASSETS 1996 1995
Total investments $ 223,964,687 $ 244,815,985
Cash and cash equivalents 16,903,789 12,024,668
Cost of insurance acquired 41,362,973 59,601,720
Other assets 72,768,173 38,831,261
Total assets $ 354,999,622 $ 355,273,634
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 268,771,766 $ 261,796,945
Notes payable 19,839,853 21,463,328
Deferred taxes 11,591,086 16,100,283
Other liabilities 6,335,866 5,315,613
Total liabilities 306,538,571 304,676,169
Minority interests in
consolidated subsidiaries 13,332,034 13,881,640
Shareholders' equity
Common stock no par value
Authorized 10,000 shares - 100 issued 45,926,705 45,726,705
Unrealized depreciation of
investment in stocks (126,612) (501)
Accumulated deficit (10,671,076) (9,010,379)
Total shareholders' equity 35,129,017 36,715,825
Total liabilities and
shareholders' equity $ 354,999,622 $ 355,273,634
1996 1995 1994
Premiums, net of reinsurance $ 27,618,892 $ 29,998,125 $ 32,404,489
Net investment income 15,902,107 15,497,547 14,325,243
Other 2,955,112 3,101,648 1,678,268
46,476,111 48,597,320 48,408,000
Benefits, claims and
settlement expenses 30,326,032 29,855,764 29,661,234
Other expenses 22,953,093 30,725,908 22,379,433
53,279,125 60,581,672 52,040,667
Loss before income tax and
minority interest (6,803,014) (11,984,352) (3,632,667)
Income tax credit (provision) 4,643,961 4,724,792 2,005,207
Minority interest in loss of
consolidated subsidiaries 498,356 1,938,684 511,178
Net loss $ (1,660,697) $ (5,320,876) $ (1,116,282)
152
7. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1996, substantially all of consolidated shareholders'
equity represents investment in affiliates. The payment of cash dividends
to shareholders by UII and UTG is not legally restricted. UG's dividend
limitations are described below.
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, 1996, UG had a statutory gain from operations of $8,006,000.
At December 31, 1996, UG statutory capital and surplus amounted to
$10,227,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
8. CONVERTIBLE DEBENTURES
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and
First of America Bank - Southeast Michigan, N.A., as trustee. The
Debentures are general unsecured obligations of UII, subordinate in right
of payment to any existing or future senior debt of UII. The Debentures
are exchangeable and transferable, and are convertible at any time prior to
March 31, 1999 into UII's Common Stock at a conversion price of $1.75 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. PENDING CHANGE IN CONTROL OF UNITED INCOME, INC.
On September 23, 1996, UII and UTI entered into a stock purchase
agreement with LaSalle Group, Inc., a Delaware corporation ("LaSalle"),
whereby LaSalle will acquire 12,000,000 shares of authorized but unissued
shares of UTI for $1.00 per share and 10,000,000 shares of authorized but
unissued shares of UII for $0.70 per share. Additionally, LaSalle intends,
contemporaneously with the closing of the above transaction, to purchase in
privately negotiated transactions additional shares of UTI and UII so that
LaSalle will own not less than 51% of the outstanding common stock of UTI
and indirectly control 51% of UII.
The agreement requires and is pending approval of the Commissioner of
Insurance of the State of Ohio, Illinois and West Virginia, (the states of
domicile of the insurance affiliates). It is anticipated the transaction
will be completed during the second quarter of 1997.
153
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1996
1st 2nd 3rd 4th
Net investment income $ 3,673 $ 3,793 $ 2,893 $ 2,740
Interest income/affil. 18,078 20,717 20,249 20,389
Service agreement income 536,604 459,454 406,952 164,881
Total revenues 583,627 535,094 456,715 215,511
Management fee 421,963 425,672 294,170 98,930
Operating expenses 51,804 14,514 12,045 11,166
Interest expense 21,430 20,865 20,866 20,866
Operating income 88,430 74,043 129,634 84,549
Net income (loss) 235,469 50,795 (583,728) (21,619)
Net income (loss) per share 0.17 0.04 (0.42) 0.02
1995
1st 2nd 3rd 4th
Net investment income $ 1,431 $ 7,283 $ 4,064 $ 3,738
Interest income/affil. 22,111 13,830 17,778 17,927
Service agreement income 505,118 529,411 494,867 485,929
Total revenues 570,284 587,002 540,031 536,832
Management fee 437,041 483,677 452,935 435,542
Operating expenses 46,264 23,951 12,243 (3,953)
Interest expense 21,485 22,676 22,384 21,993
Operating income 65,494 56,698 52,469 83,250
Net income (loss) 137,752 (530,781) 132,804 (1,887,677)
Net income (loss) per share 0.10 (0.38) 0.10 (1.36)
1994
1st 2nd 3rd 4th
Net investment income $ 3,567 $ 16,569 $ 4,901 $ 1,483
Investment income/affil. 17,994 19,890 17,574 16,353
Service agreement income 313,531 369,475 330,001 379,134
Total revenues 371,022 463,826 415,056 417,442
Management fee 288,119 321,685 295,999 304,481
Operating expenses 75,334 65,305 108,768 108,667
Interest expense 1,281 35,282 2,314 19,753
Operating income (loss) 6,288 41,554 7,975 (15,459)
Net income (loss) 280,796 (73,133) (393,095) (158,605)
Net income (loss) per share 0.20 (0.05) (0.28) (0.11)
154
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED INCOME, INC.
Balance Sheet
Restated
September 30, December 31,
1997 1996
ASSETS
Cash and cash equivalents $ 654,097 $ 439,676
Mortgage loan 121,865 122,853
Notes receivable from affiliate 864,100 864,100
Accrued interest income 12,308 11,784
Property and equipment (net of accumulated
depreciation $93,273 and $92,140) 1,445 2,578
Investment in affiliates 11,323,300 11,324,947
Receivable from (indebtedness to)
affiliate, net 6,630 31,837
Other assets (net of accumulated
amortization $129,556 and $101,794) 55,512 83,274
Total assets $ 13,039,257 $ 12,881,049
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 221 1,273
Total liabilities 902,521 903,573
Shareholders' equity:
Common stock - no par value, stated value
$.033 per share. Authorized 2,310,001 shares -
1,391,919 and 1,392,130 shares issued after
deducting treasury shares of 177,590
and 177,590 45,934 45,940
Additional paid-in capital 15,242,365 15,244,471
Unrealized appreciation (depreciation)
of investments held for sale of affiliate 98,203 (59,508)
Accumulated deficit (3,249,766) (3,253,427)
Total shareholders' equity 12,136,736 11,977,476
Total liabilities and
shareholders' equity $ 13,039,257 $ 12,881,049
155
UNITED INCOME, INC.
Statement of Operations
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
Revenues:
Interest income $ 10,806 $ 2,893 $ 16,145 $ 10,359
Interest income
from affiliates 21,521 20,249 61,648 59,044
Service agreement income
from affiliates 213,518 406,952 795,209 1,403,010
Realized investment
gains 0 2,599 0 2,599
Other income from
affiliates 20,971 24,022 70,132 100,424
266,816 456,715 943,134 1,575,436
Expenses:
Management fee to
affiliate 153,111 294,170 627,126 1,141,805
Operating expenses 9,912 12,045 69,912 78,363
Interest expense 21,429 20,866 63,725 63,161
184,452 327,081 760,763 1,283,329
Income before provision for
income taxes and equity
income of investees 82,364 129,634 182,371 292,107
Provision for income
taxes 0 0 0 0
Equity in loss of
investees (219,216) (713,362) (178,710) 589,571)
Net income (loss) $ (136,852) $ (583,728) $ 3,661 $ (297,464)
Net income (loss)
per common share $ (0.10) $ (0.42) $ 0.00 $ (0.21)
Weighted average common
shares outstanding 1,391,919 1,392,130 1,392,022 1,392,130
156
UNITED INCOME, INC.
Statement of Cash Flows
September 30, September 30,
1997 1996
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ 3,661 $ (297,464)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 28,895 34,285
Gain on payoff of mortgage loan 0 (2,599)
Accretion of discount on mortgage loan (200) (415)
Equity in loss of investees 178,710 589,571
Changes in assets and liabilities:
Change in accrued interest income (524) (4,984)
Change in indebtedness of affiliates 25,207 (99,141)
Change in other liabilities (1,051) (40,110)
Net cash provided by operating activities 234,698 179,143
Cash flows from investing activities:
Capital contribution to investee 0 (47,000)
Purchase of investments in affiliates (19,353) 0
Issuance of notes receivable from affiliate 0 (150,000)
Payments received on mortgage loans 1,188 62,053
Proceeds from sale of property and equipment 0 1,165
Net cash used in investing activities (18,165) (133,782)
Cash flows from financing activities:
Proceeds from sale of common stock 0 700
Payment for fractional shares from
reverse stock split (2,112) 0
Net cash provided by (used in)
financing activities (2,112) 700
Net increase (decrease) in cash and
cash equivalents 214,421 46,061
Cash and cash equivalents at beginning of period 439,676 364,370
Cash and cash equivalents at end of period $ 654,097 $ 410,431
157
UNITED INCOME, INC.
Notes to Financial Statements
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared by United Income,
Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the Company believes the
disclosures are adequate to make the information presented not be
misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and the notes thereto presented
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1996.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary
for a fair presentation of the results of operations for the periods
presented. Operating results for interim periods are not necessarily
indicative of operating results to be expected for the year or of the
Company's future financial condition.
At September 30, 1997, the affiliates of United Income, Inc., were as
depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 33.3% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79.4% 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 83.9% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
158
2. 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. At September 30, 1997, options for 10,850 shares were
exercisable and options for 20,576 shares were available for grant. No
options have been exercised during 1997.
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. A total of 11,620 option shares
have been granted and exercised as of September 30, 1997. At September 30,
1997, 231 options have been granted and are exercisable. No options have
been exercised during 1997.
3. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which 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 judgements against the insurer, including material amounts
of punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed insurance
companies. Although 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. Those mandatory assessments may be partially recovered
through a reduction in future premium taxes 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 affiliates are named as defendants in a number of legal
actions arising primarily from claims made under insurance policies. These
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.
4. TERMINATION OF AGREEMENT REGARDING PENDING CHANGE IN CONTROL OF UNITED
INCOME, INC.
On April 14, 1997, United Trust, Inc. and United Income, Inc. formally
terminated their stock purchase agreement contract with LaSalle Group, Inc.
("LaSalle"), whereby LaSalle was to acquire certain authorized but unissued
shares of UTI and UII and additional outstanding shares in privately
negotiated transactions so that LaSalle would own not less than 51% of the
outstanding common stock of UTI and indirectly control 51% of UII.
LaSalle had not performed its obligations under the terms of the contract,
and the Company felt it should be free to negotiate with other interested
parties in becoming an equity partner.
159
5. REVERSE STOCK SPLIT
On May 13, 1997, the Company 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 split.
160
6. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for the Company's
47% owned affiliate:
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
ASSETS September 30, December 31,
1997 1996
Total investment $ 229,449,482 $ 223,964,687
Cash and cash equivalents 11,073,530 16,903,789
Reinsurance receivables 41,614,177 42,601,137
Cost of insurance acquired 45,772,916 47,536,812
Deferred policy acquisition costs 10,897,379 11,325,356
Other assets 10,351,202 12,667,841
Total assets $ 349,158,686 $ 354,999,622
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 268,844,424 $ 268,771,766
Notes payable 19,081,603 19,839,853
Deferred income taxes 11,472,715 11,591,086
Other liabilities 4,567,201 6,335,866
Total liabilities 303,965,943 306,538,571
Minority interests in consolidated subsidiaries 10,236,828 13,332,034
Shareholders' equity:
Common stock no par value.
Authorized 10,000 shares - 100 shares issued 45,926,705 45,926,705
Unrealized appreciation (depreciation)
of investments held for sale 208,944 (126,612)
Accumulated deficit (11,179,734) (10,671,076)
Total shareholders' equity 34,955,915 35,129,017
Total liabilities and
shareholders' equity $ 349,158,686 $ 354,999,622
161
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Premium and other
considerations $ 6,639,394 $ 7,348,199 $ 22,374,562 $ 24,343,885
Net investment income 3,691,584 4,002,258 11,390,978 11,907,152
Other (114,869) (19,174) (79,666) (217,985)
10,216,109 11,331,283 33,685,874 36,033,052
Benefits, claims and settlement
Expenses 6,467,739 8,378,710 21,047,453 21,991,273
Commissions, DAC, and cost
of insurance acquired
amortizations 1,727,317 1,734,048 4,572,287 6,600,518
Operating and interest
expenses 2,778,435 3,685,600 8,747,337 10,374,795
10,973,491 13,798,358 34,367,077 38,966,586
Net income (loss) before
income taxes and
minority interest (757,382) (2,467,075) (681,203) (2,933,534)
Credit (provision) for
income taxes 131,893 327,798 113,671 1,122,683
Minority interest in
(income) loss of
consolidated subsidiaries 113,045 575,460 58,874 422,069
Net income (loss) $ (512,444) $ (1,563,817) $ (508,658) $ (1,083,240)
162
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") dated December
1, 1997, by and between United Income, Inc., an Ohio corporation ("UII"),
and United Trust, Inc., an Illinois corporation ("UTI").
WITNESSETH:
UTI and UII have reached an agreement to combine their companies
through a merger (the "Merger") of UII into UTI. UTI and UII jointly own
100% of the outstanding capital stock of United Trust Group, Inc., an
Illinois corporation ("UTG"). Simultaneously at closing, UTG shall be
liquidated and UTI's name will be changed to United Trust Group, Inc. UTI
and UII now wish to enter into a definitive agreement setting forth the
terms and conditions of the Merger.
Accordingly, in consideration of the foregoing and of the covenants,
agreements, representations and warranties hereinafter contained, UTI and
UII hereby agree as follows:
1.REPRESENTATIONS AND WARRANTIES OF UTI. UTI hereby represents and
warrants to UII as follows:
1.1 Organization and Standing. UTI is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Illinois and has full corporate power to carry on its business
as it is now being conducted and to own or hold under lease the
properties and assets it now owns or holds under lease. Copies of the
certificate of incorporation and bylaws of UTI have been delivered to
UII, and such copies are complete and correct and in full force and
effect on the date hereof.
1.2 Capitalization. UTI's entire authorized capital stock consists
of 3,500,000 shares of Common Stock, no par value and 150,000 shares of
Preferred Stock, par value $100 per share. As of November 24, 1997,
there were 1,655,200 shares of Common Stock outstanding and no shares
of Preferred Stock outstanding.
1.3 Financial Statements. UTI has delivered to UII copies of
UTI's audited consolidated financial
statements for the fiscal years ended December 31, 1995, 1996 and
unaudited financial statements for the nine month periods ended
September 30, 1996 and September 30, 1997. These financial
statements have been prepared in accordance with generally accepted
accounting principles consistently followed throughout the periods
covered by such statements (except as may be stated in the notes to
such statements), and present fairly the consolidated financial
position and consolidated results of operations of UTI and its
subsidiaries at the dates of and for the periods covered thereby. UTI
also has delivered to UII copies of UTI's Form 10-K's, Form 10-Q's, Form
8K's and proxy statements filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of
1934 (the "Exchange Act") in respect of or during the three years
ended December 31, 1996 and thereafter through the date hereof. All
such reports were filed in a timely manner and complied in all
material respects with the applicable requirements of the Exchange
Act and the rules and regulations promulgated thereunder.
1.4 Absence of Certain Changes, Events or Conditions.
Since September 30, 1997, there has not been any change in UTI's
consolidated financial position, results of operations, assets,
liabilities, net worth or business, other than as described in a
schedule heretofore delivered to UII referring to this Section 1.4
and changes in the ordinary course of business which have not been
materially adverse.
1.5 Litigation, etc. Except as described in a schedule
heretofore delivered to UII referring to this Section 1.5, there is
no pending litigation or other claim or matter against or relating
toUTI, its properties or business, or the transactions
contemplated by this Agreement, which, under Statement No. 5 of the
Financial Accounting Standards Board, would require disclosure in
footnotes to, or accrual in, the consolidated financial statements of
UTI.
163
1.6 Information for Proxy Statement. The information and
data provided and to be provided by UTI for use in the Registration
Statement and the Proxy Statement referred to in Section 5, when such
Registration Statement becomes effective and at the time of mailing of
the Prospectus and Proxy Statement included therein to UTI and
UII stockholders pursuant to Section 5, will not contain any untrue
statement of a material fact and will not omit to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading.
1.7 No Conflict With Other Documents. Neither the execution
and delivery of this Agreement nor the carrying out of the
transactions contemplated hereby will result in any material violation,
termination or modification of, or conflict with, any terms of any
material contract or other instrument to which UTI is a party, or
of any material judgment, decree or order applicable to UTI.
1.8 Authority. The execution, delivery and performance of
this Agreement by UTI have been authorized by its Board of Directors,
and this Agreement is a valid, legally binding and enforceable
obligation of UTI subject to the discretion of a court of equity and
subject to bankruptcy insolvency and similar laws affecting the rights
of creditors generally.
1.9 Validity of Common Stock to Be Issued. Subject to the
approval by the stockholders of UTI, the shares of UTI Common Stock to
be issued by UTI in connection with the Merger have been duly
authorized by UTI's board of directors for issue and will, when
issued and delivered as provided in this Agreement, be duly and
validly issued, fully paid and non-assessable.
2. REPRESENTATIONS AND WARRANTIES OF UII. UII hereby represents and
warrants to UTI as follows:
2.1 Organization and Standing. UII is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Ohio, and has full corporate power to carry on its business as
it is now being conducted and to own or hold under lease the properties
and assets it now owns or holds under lease. UII has delivered to UTI a
true and complete schedule referring to Section 2.1 and listing all of
its (i) corporate officers ("Officers"), (ii) members of the board of
directors ("Directors") and (iii) subsidiaries of which 20% or more of
the common stock is directly or indirectly owned by UII.
2.2 Capitalization. UII's entire authorized capital stock consists
of 2,310,001 shares of Common Stock, no par value and 150,000 shares of
Preferred Stock, par value $100 per share. As of November 24, 1997,
there were 1,391,919 shares of Common Stock outstanding and no shares
of Preferred Stock outstanding.
2.3 Financial Statements. UII has delivered to UTI copies of the
following: UII's audited consolidated financial statements for the
fiscal years ended December 31, 1994, 1995 and 1996 and unaudited
financial statements for the nine month periods ended September 30, 1996
and September 30, 1997. These financial statements have been prepared
in accordance with generally accepted accounting principles
consistently followed throughout the periods covered by such statements
(except as may be stated in the explanatory notes to such statements),
and, at the dates of and for the periods covered thereby, present fairly
the consolidated financial position and results of operations of UII and
its subsidiaries. UII also has delivered to UTI copies of UII's Form 10
K's, Form 10-Q's, Form 8-K's and proxy statements filed with the
Securities and Exchange Commission pursuant to the Exchange Act in
respect of or during the three years ended December 31, 1996 and
thereafter through the date hereof. All such reports were filed in a
timely manner and complied in all material respects with the applicable
requirements of the Exchange Act and the rules and regulations
promulgated thereunder.
164
2.4 No Undisclosed Liabilities. Except as and to the extent
reflected or reserved against in the consolidated balance sheets
included within UII's financial statements referred to in Section 2.3,
at the date of such statements UII had no material liabilities or
obligations (whether accrued, absolute or contingent), of the character
which, under generally accepted accounting principles, should be shown,
disclosed or indicated in a balance sheet or explanatory notes or
information supplementary thereto, including, without limitation, any
liabilities resulting from failure to comply with any law or any
federal, state or local tax liabilities due or to become due whether (a)
incurred in respect of or measured by income for any period prior to the
close of business on such dates, or (b) arising out of transactions
entered into, or any state of facts existing, prior thereto.
2.5 Absence of Certain Changes, Events or Conditions. Since
December 31, 1996, there has not been any change in UII's financial
position, results of operations, assets, liabilities, net worth or
business, other than as described in a schedule heretofore delivered to
UTI referring to this Section 2.5 and changes in the ordinary course of
business which have not been materially adverse.
2.6 Litigation, etc. Except as described on a schedule heretofore
delivered to UTI and referring to this Section 2.6, there is no
litigation, proceeding or governmental investigation pending or
threatened, and, so far as is known to UII, there is no such
litigation, proceeding or governmental investigation which is probable
of assertion in the reasonable opinion of UII's officers, against or
relating to UII, its properties or business, or the transactions
contemplated by this Agreement. UII is not subject to any order of
any court, regulatory commission, board or administrative body entered
in any proceeding to which they are a party or of which they have
knowledge.
2.7 Compliance. UII has all licensed, permits, approvals and other
authorizations, and have made all filings and registrations, necessary
in order to enable them to conduct their businesses in all material
respects. UII has heretofore delivered a schedule to UTI referring to
this Section 2.7 which fairly and accurately summarizes or lists all
licenses, permits, approvals, authorizations and regulatory matters
relating to UII.
UII has complied with all applicable laws, regulations and
ordinances to the extent material to their businesses. The schedule
referred to in this Section 2.7 fairly and accurately describes all
instances, known to the Officers or Directors of UII, in which UII is
not currently in compliance with any applicable law, regulation or
ordinance.
2.8 Information for Proxy Statement. The information and data
provided and to be provided by UII for use in the Registration Statement
and the Proxy Statement referred to in Section 5, when such
Registration Statement becomes effective and at the time of mailing of
the Prospectus and Proxy Statement included therein to UTI and UII
stockholders, will not contain any untrue statement of a material fact
and will not omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
2.9 No Conflict With Other Documents. Except as described in a
schedule heretofore delivered to UTI and referring to this Section 2.9,
neither the execution and delivery of this Agreement nor the
carrying out of the transactions contemplated hereby will result
in any violation, termination or modification of, or be in conflict
with, any term of any contract or other instrument to which UII is a
party, or of any judgment, decree or order applicable to UII, or
result in the creation of any lien, charge or encumbrance upon any of
the properties or assets of UII.
2.10 Authority. The execution, delivery and performance of this
Agreement by UII have been authorized by its Board of Directors, and
this Agreement is a valid, legally binding and enforceable obligation of
UII subject to the discretion of a court of equity and subject to
bankruptcy, insolvency and similar laws affecting the rights
ofcreditors generally.
165
2.11 Contracts. Except as shown on a schedule delivered to UTI and
referring to this Section 2.11, UII is not a party to or subject to: (a)
any employment contract with any officer, consultant, director or
employee; (b) any plan or contract or arrangement providing for bonuses,
pensions, options, deferred compensation, retirement payments, profit
sharing, or the like; (c) any contract or agreement with any labor
union; (d) any lease of real or personal property with a remaining term
in excess of one year (except for normal office equipment); (e) any
instrument creating a lien or evidencing or related to indebtedness for
borrowed money; (f) any contract containing covenants not to enter into or
consummate the transactions contemplated hereby or which will be
terminated or modified by the carrying out of such transactions; or (g)
any other contract or agreement with a value exceeding $25,000 not of
the type covered by any of the other specific items of this Section
2.11. Each of the instruments described in such schedule is valid and
in full force and effect, and a true and complete copy thereof has
heretofore been delivered to UTI. UII is not in default, or alleged to
be in default, under any agreement, instrument or obligation to which it
is a party or by which it is bound, in any material respect, nor, in the
reasonable opinion of UII's Officers, is any such agreement, instrument
or obligation unduly burdensome. Except as shown on such schedule, the
consummation of the Merger and the transactions contemplated by this
Agreement will not cause a default under any such agreement or provide
any right of termination to any party thereto other than UII. No party
with whom UII has an agreement which is of any material importance to
UII is in default thereunder in any material respect. Except as set
forth in the schedule referred to in this Section 2.11, since September
30, 1997 UII has not taken any action which would have violated Section
4.1 had this Agreement been dated September 30, 1997.
2.12 Tax Matters. The provisions made for taxes on the December
31, 1996 and September 30, 1997 consolidated balance sheets referred to
in Section 2.3 are sufficient for the payment of all unpaid taxes of the
entities included therein, whether or not disputed. The United States
federal income tax returns of UII have been audited by the Internal
Revenue Service (or are no longer subject to audit) for all years to and
including December 31, 1993. Except as described on a schedule
heretofore delivered to UTI and referring to this Section 2.12, with
respect to UII, there are no proposed additional taxes, interest or
penalties with respect to any year examined or not yet examined, and
except as set forth in said schedule none of such entities has entered
into any agreements extending the statute of limitations with respect to
any federal or state taxes. UII has provided to UTI true and complete
copies of the federal and state income tax returns of UII for the three
years ended December 31, 1996, together with true and complete copies of
all reports of any taxing authority relating to examinations thereof
which have been delivered to UII.
2.13 Title to Properties; Absence of Liens and Encumbrances, etc.
UII has good and marketable title to all their properties and assets,
real and personal (including those reflected in the consolidated balance
sheets contained in the financial statements referred to in Section 2.3,
except as sold or otherwise disposed of in the ordinary course of
business from the date thereof), in each case free and clear of all
liens and encumbrances, except those shown in such financial statements,
the lien of current taxes not yet in default or payable and such
imperfections of title, easements and encumbrances, if any, as are not
substantial in character, amount or extent, and do not materially
detract from the value, or interfere with the present or currently
planned business use, of the properties subject thereto or affected
thereby, or impair business operations.
3. COVENANTS OF UTI. UTI covenants to UII that, except as
otherwise consented to in writing by UII after the date of this Agreement:
3.1 Authorized Stock Increase and Reservation. UTI will
solicit and will use its best efforts to cause its stockholders to
increase the authorized Common Stock of UTI from 3,500,000
shares to 7,000,000 shares. If such increase is obtained, UTI
will keep available a sufficient number of shares of UTI
Common Stock for issuance and delivery to the stockholders of
UII between the date hereof and the closing of the transactions
contemplated by this Agreement.
3.2 Consents. UTI will take all necessary corporate or
other action, and use its best efforts to obtain all consents and
approvals, required for consummation of the transactions
contemplated by this Agreement.
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3.3 Meeting of Stockholders. UTI will duly call and
convene a meeting of its stockholders to act upon the Merger, the
increase in authorized Common Stock of UTI and the other
transactions contemplated by this Agreement as soon as practicable,
and the Board of Directors of UTI will recommend a favorable vote
thereon. UTI will solicit the proxies of its stockholders to vote
on the transactions contemplated by this Agreement.
3.4 Conditions to be Satisfied. UTI will use its best
efforts to cause all of the conditions described in Sections 7
and 8 of this Agreement to be satisfied and to cause the officers
and directors to UTI to cooperate to that end.
4. COVENANTS OF UII. UII covenants to UTI that, except as otherwise
consented to in writing by UTI after the date of this Agreement:
4.1 Conduct of Business. After the date of this Agreement,
with respect to UII (a) its business will be conducted only in the
ordinary course; (b) it will not enter into or amend any employment
contract with any officer, consultant, or employee; (c) there shall
be no change in any of its pension, retirement or similar benefits
nor any increase in salaries of any of its executive officers except
for ordinary increases in accordance with UII's established
practice; (d) it shall not incur any liability for borrowed money,
encumber any of its assets or enter into any agreement relating to
the incurrence of additional debt (other than in connection with
purchases or leases of equipment which would not have been required
to be listed on the schedule provided under Section 2.11 or short
term bank credit, entered into in the ordinary course of operations);
(e) it will use its best efforts to preserve its business
organization intact, to keep available the service of its officers
and employees and to preserve the good will of its independent
agents; (f) no change shall be made in its charter documents or
bylaws; (g) no change shall be made in the number of shares or
terms of its authorized, issued or outstanding capital stock and, it
shall not enter into any options, calls, contracts or commitments
of any character relating to any issued or unissued capital
stock; and (h) no dividend or other distribution or payment shall
be declared or paid in respect of the UII Common Stock or the UII
Preferred Stock.
4.2 Information. UII will give to UTI and UTI's
officers, accountants, counsel and other representatives reasonable
access, during normal business hours throughout the period prior to
the closing of the transactions contemplated by this Agreement, to
the properties, books, contracts, commitments and records of UII.
UII will furnish to UTI during such period all such information
concerning UII and its business and properties as UTI may reasonably
request.
4.3 Meeting of Stockholders. UII will duly call and
convene a meeting of its stockholders to act upon the transactions
contemplated by this Agreement as soon as practicable, and the Board
of Directors of UII will recommend a favorable vote thereon. UII
will solicit the proxies of its stockholders to vote on the
transactions contemplated by this Agreement.
4.4 Consents. UII will take all necessary corporate or
other action and use its best efforts to obtain all consents and
approvals required for consummation of the transactions
contemplated by this Agreement.
4.5 Conditions To Be Satisfied. UII will use its best
efforts to cause all of the conditions described in Articles 7
and 8 of this Agreement to be satisfied and to cause the Officers
and Directors of UII to cooperate to that end.
5. S-4 REGISTRATION STATEMENT AND PROXY STATEMENT. As promptly as
practical, each of UTI and UII will file proxy materials under the Exchange
Act, and UTI will file a registration statement on Form S-4 under the
Securities Act of 1933, with the Securities and Exchange Commission, to
permit the solicitation of proxies under the Exchange Act and the offering
and delivery of shares of UTI Common Stock to the stockholders of UII in
connection with the Merger. Each of UTI and UII will exert its best
efforts to cause such registration statement to become effective as soon as
practicable, and UTI and UII agree to cooperate in such efforts. The
registration statement and the proxy statement in the form in which they
exist when the proxy statement is actually first mailed to the stockholders
of UTI and UII are herein referred to as the "Registration Statement" and
the "Proxy Statement". Upon the effectiveness of the Registration
Statement, each of UTI and UII will cause the Proxy Statement to be
delivered to its stockholders entitled to vote on the Merger at least 20
days prior to the date of the meeting of its stockholders that is called to
act upon the Merger in accordance with applicable law.
167
6. MERGER OF UII AND UTI. Subject to the terms and conditions of this
Agreement, UTI and UII agree to effect the following transactions at the
Closing (as defined in Section 6.10):
6.1 Conditions. UTI and UII will each deliver to the
other reasonably appropriate evidence of the satisfaction of the
conditions, contained in Sections 7 and 8, to their
respective obligations hereunder.
6.2 Increase in Authorized UTI Common Stock. The
certificate of incorporation of UTI shall have been amended to
increase the number of authorized
shares of UTI Common Stock from 3,500,000 to 7,000,000.
6.3 Merger. At the time of Closing UII will be merged with
and into UTI (the "Merger") pursuant to the provisions and with the
effect provided in the Illinois Business Corporation Act and the
Ohio General Corporation Law, and in the Agreement of Merger,
including without limitation the liquidation of UTG and the
assumption by UTI of all liabilities and obligations of UII. The
Agreement of Merger shall be filed with the Secretary of State of
each Illinois and Ohio on the date of Closing. UTI will be the
surviving corporation in the Merger and its corporate name will be
changed to United Trust Group, Inc. ("UTG").
6.4 Conversion of Shares. The manner and basis of converting
the UII Common Stock into shares of UTG Common Stock are as follows.
Each (one) share of UII Common Stock issued and outstanding
immediately prior to the Merger (excluding shares held by UII as
treasury stock, if any, which shares shall be cancelled and
extinguished), and all rights in respect thereof, shall by virtue
of the Merger, without any action by the holder thereof, be
converted into one share of UTG Common Stock (subject to
adjustment for any stock split, reverse stock split and stock
dividend with respect to UTI Common Stock from the date hereof to the
Closing). From and after the Closing, each certificate converted
pursuant to this Section 6.3 which theretofore represented shares of
UII Common Stock shall evidence ownership of shares of UTG Common
Stock on the basis herein above set forth, and the conversion shall
be complete and effective at the effective time of the Merger.
6.5 Surrender of Certificates. As soon as practicable after
the Closing of the Merger, UTI will mail to each UII shareholder
a form letter of transmittal and instructions for surrendering
certificates representing their share of UII Common Stock and for
receiving shares of UTG Common Stock pursuant to the Merger.
6.6 Procedure. UTI shall have the right to make rules,
not inconsistent with the terms of this Agreement, governing any
of the foregoing procedures contemplated by this Section 6.
6.7 UII Transfer Books Closed and Stock Delisted. On the
date of the Closing, the stock transfer books of UII shall be deemed
closed, and no transfer of shares of UII shall be made thereafter.
UII shall notify the National Association of Securities Dealers, and
each transfer agent and registrar for the shares of UII capital
stock, at least 10 calendar days before the anticipated date of the
Closing, that no transfer of shares will be made after that date.
In anticipation of the date of Closing, UII shall do all such
things necessary to cause its shares to be delisted from the
NASDAQ System simultaneously with the date of Closing.
6.8 Closing. The closing (the "Closing") of the
transactions contemplated by this Agreement shall take place at the
executive offices of UII beginning at 2:00 p.m. on the first
business day following the day upon which the UTI and UII
stockholders meetings to approve the Merger were held, or at such
other time and place as may be agreed upon by UTI and UII;
provided, that if all of the conditions specified in this Agreement
have not been satisfied or waived as of such date, the Closing
shall be postponed until two business days following the
satisfaction or waiver of all of the conditions of this Agreement.
In accordance with Section 13, this Agreement may be terminated
at the election of either party if Closing does not occur on or
before December 31, 1998.
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7. CONDITIONS TO UTI'S OBLIGATIONS. Unless waived by UTI in writing
at its sole discretion, all obligations of UTI under this Agreement are
subject to the fulfillment, prior to or at the Closing, of each of the
following conditions:
7.1 Representations, Warranties and Covenants. The
representations and warranties of UII contained in Section 2 of this
Agreement shall be true at and as of the date of the Closing and,
except as otherwise clearly contemplated hereby, shall be deemed
made again at and as of such date and be true as so made again;
UII shall have performed all obligations and complied with all
covenants required by this Agreement to be performed or complied
with by it prior to the Closing. UTI shall have received from UII a
certificate or certificates in such reasonable detail as UTI may
reasonably request, signed by the President or a Vice President of
UII and dated the date of Closing, to the effect stated in this
Section 7.1 and with respect to the fulfillment of the conditions
set forth in Sections 7.2 through 7.7.
7.2 Approval of Stockholders. The transactions shall have
been duly approved by (i) a favorable vote of the holders of at
least two thirds of the issued and outstanding shares of each of the
UTI Common Stock entitled to vote thereon, and (ii) a favorable vote
of the holders of a majority of the issued and outstanding UII Common
Stock entitled to vote thereon.
7.3 Approvals of Governmental Authorities. All
governmental approvals necessary to consummate the transactions
contemplated by this Agreement shall have been received.
7.4 Accuracy of Prospectus and Proxy Statement. On and as of
the dates of the meetings of stockholders of UTI and UII at which
action is to be taken on the transactions contemplated hereby, the
Proxy Statement and the Registration Statement shall contain no
statement which, at the time and in light of the circumstances under
which it is made, is false or misleading with respect to any
material fact, or which omits to state any material fact necessary in
order to make the statements made therein not misleading.
7.5 No Adverse Proceedings or Events. No suit, action or
other proceedings against UTI or UII or their officers and directors
shall be pending before any court or governmental agency in which it
will be, or it is, sought to restrain or prohibit or to obtain
damages or other relief in connection with this Agreement
or the transactions contemplated hereby.
7.6 Consents and Actions; Contracts. All requisite consents
of any third parties and other actions which UII has covenanted to use
its best efforts to obtain and take under Section 4.4 hereof
shall have been obtained and completed.
7.7 Increase in Authorized UTI Common Stock. The
certificate of incorporation of UTI shall have been amended to
increase the number of authorized shares of UTI Common Stock from
3,500,000 to 7,000,000 and its corporate name changed to United
Trust Group, Inc.
8. CONDITIONS TO UII'S OBLIGATIONS. Unless waived by UII in writing
at its sole discretion, all obligations of UII under this Agreement are
subject to the fulfillment, prior to or at the Closing, of each of the
following conditions:
8.1 Representations, Warranties and Covenants. The
representations and warranties of UTI contained in Section 1 shall be
true at and as of the date of the Closing and, except as otherwise
clearly contemplated hereby, shall be deemed made again at and as of
such date and be true as so made again; UTI shall have performed
all obligations and complied with all covenants required by this
Agreement to be performed or complied with by it on or prior to
the Closing; and UII shall have received from UTI a
certificate or certificates in such reasonable detail as UII may
reasonably request, signed by the President or a Vice President of
UTI and dated the date of Closing, to the effect stated in this
Section 8.1 and with respect to the fulfillment of the conditions
set forth in Sections 8.2 through 8.7.
169
8.2 Approval of Stockholders. The transactions
contemplated by this Agreement shall have been duly approved by (i)
a favorable vote of the holders of at least two-thirds of the issued
and outstanding shares of UTI Common Stock entitled to vote thereon,
and (ii) a favorable vote of the holders of a majority of the issued
and outstanding shares of UII Common Stock entitled to vote thereon.
8.3 Approvals of Governmental Authorities. All
governmental approvals necessary to consummate the transactions
contemplated by this Agreement shall have been received.
8.4 Accuracy of Prospectus and Proxy Statement. On and as of
the dates of the meetings of stockholders of UTI and UII at which
action is to be taken on the transactions contemplated hereby, the
Proxy Statement and the Registration Statement shall contain no
statement which, at the time and in light of the circumstances under
which it is made, is false or misleading with respect to any
material fact, or which omits to state any material fact necessary in
order to make the statements made therein not misleading.
8.5 No Adverse Proceedings or Events. No suit, action or
other proceeding against UTI or UII or their officers and directors,
or the consummation of the transactions contemplated by this
Agreement, shall have been instituted and resulted in the entry of
a court order (which has not been subsequently dismissed,
terminated or vacated) enjoining, either temporarily or permanently,
the consummation of the transactions contemplated by this Agreement.
8.6 Consents and Actions. All requisite consents of any
third parties or other actions which UTI has covenanted to use
its best efforts to obtain and take under Section 3.2 shall have
been obtained and completed.
8.7 Increase in Authorized UTI Common Stock. The
certificate of incorporation of UTI shall have been amended to
increase the number of authorized shares of UTI Common Stock from
3,500,000 to 7,000,000.
9. BROKERS AND ADVISORS. Each of UTI and UII represents and warrants
to the other that the transactions contemplated by this Agreement have been
negotiated directly between them and their respective counsel, without the
intervention of any person which might give rise to a valid claim against
any of them for a brokerage commission, finder's fee, counseling or
advisory fee, or like payment, and each agrees to indemnify the other
against any such liability.
10. UPDATING OF CERTAIN CONDITIONS. The requirement for the
continuing accuracy of the representations and warranties set forth in
Section 7.1 and 8.1 shall be subject to the following provisions. Each of
UTI and UII will promptly furnish to the other any information which,
either before or after the time of the mailing of the Proxy Statement and
Prospectus included in the Registration Statement, shall be necessary in
order to make the representations and warranties in Section 1.6 and 2.8
true as of the time of the meetings of the UTI and UII stockholders, the
Closing and any earlier date subsequent to the mailing of the Proxy
Statement. In the event that any such information would or might, in the
absence of any other action, cause the non-fulfillment of the conditions of
this Agreement due to a possible material adverse change or otherwise, a
determination shall be made by the Board of Directors of UTI in the case of
information pertaining to UII and by the Board of Directors of UII in the
case of information pertaining to UTI whether or not to continue the
transaction; and, if the transaction is continued, UTI and UII shall each
take such action as may be necessary to amend or supplement the Proxy
Statement and Registration Statement. If action is taken to continue the
transaction and so to amend or supplement the Proxy Statement or
Registration Statement, the supplemental or amended information included
therein shall be deemed to modify the requirements for the continuing
accuracy of any previous information, and shall be deemed part of the Proxy
Statement and Registration Statement.
170
11. EXPENSES. Each party to this Agreement shall pay all of its
expenses relating hereto, including fees and disbursements of its counsel,
accountants and financial advisors, whether or not the transactions
hereunder are consummated. Expenses of printing this Agreement, the Proxy
Statement and Registration Statement and any other documents used in the
transactions contemplated hereunder shall be divided equally between UTI
and UII. The fee for registration under the Securities Act of 1933 of the
shares of UTI Common Stock to be issued upon conversion of shares of UII
capital stock shall be paid by UTI.
12. NOTICES. All notices, requests, demands and other communications
under or in connection with this Agreement shall be in writing, and, shall
be addressed to each company's principal executive offices as shown on the
cover page of the most recent SEC report delivered by such company pursuant
to Section 1.3 or 2.3 of this Agreement, as the case may be.
All such notices, requests, demands or communication shall be mailed
postage prepaid, first class mail, or delivered personally, and shall be
sufficient and effective when delivered to or received at the address so
specified. Any party may change the address at which it is to receive
notice by like written notice to the other.
13. AMENDMENTS AND TERMINATION. UTI and UII by mutual consent of
their respective Boards of Directors or authorized committees or officers
may amend this Agreement in such manner as may be agreed upon only by a
written instrument executed by UTI and UII, whether before or after the
meetings of the stockholders of UTI and UII, at which action upon the
transactions contemplated hereby is to be taken; provided, however, that
after the requisite approval of the stockholders has been obtained, neither
UTI nor UII shall consent to any amendment or modification which would
change the provisions with respect to the transactions contemplated by this
Agreement in any manner which would materially and adversely affect the
rights of UTI's or UII's stockholders. UTI and UII, by mutual consent of
their Boards of Directors, may terminate this Agreement at any time prior
to the Closing and, unless otherwise specifically provided in such consent,
any such termination shall be without liability on the part of UTI or UII
except as provided in Section 11.
UTI or UII may at its election terminate this Agreement and the Merger
in the event that any condition for it to close has not been met or waived
by it in its sole discretion, or if for any reason the Merger shall not
have become effective on or before December 31, 1998.
Any Such termination shall be without liability to UTI or UII except
as provided in Section 11 and except to the extent that such termination
was caused by the knowing or intentional material breach of covenants,
representations, or warranties contained in this Agreement.
14. ENTIRE AGREEMENT. This Agreement (including the exhibits hereto
and the lists, schedules and documents delivered pursuant hereto, which are
a part hereof) is intended by the parties to and does constitute the entire
agreement of the parties with respect to the transactions contemplated by
this Agreement. This Agreement supersedes any and all prior
understandings, written or oral, between the parties, and this Agreement
may not be amended, modified, waived, discharged or terminated orally, but
only by an instrument in writing signed by an authorized executive officer
of the party against which enforcement of the amendment, modification,
waiver, discharge or termination is sought.
15. GENERAL. The paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. This Agreement may be executed
simultaneously in counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and assigns, but nothing
herein, express or implied, is intended to or shall confer any rights,
remedies or benefits upon any person other than the parties hereto. This
Agreement may not be assigned by any party hereto. It is understood,
recognized, and agreed that the validity of this Agreement and the
enforceability of any provision hereof, whether before or after the
Closing, are subject to bankruptcy and insolvency laws affecting the rights
of creditors generally.
171
16. SURVIVAL. The respective representations, certifications and
warranties of the parties hereto, including those made in or resulting from
any certificates, instruments or other documents delivered pursuant to this
Agreement, shall expire with and be terminated and extinguished by the
Closing hereunder, and thereafter no party hereto shall be under any
liability whatsoever with respect to any such representation, certification
or warranty, it being intended that the sole remedy of any party for a
breach of any such representation, certification or warranty shall be to
elect not to proceed with the Closing hereunder if such breach has resulted
in a condition to such party's obligations hereunder not being satisfied.
The foregoing shall not be applicable to any knowing or intentional breach
of this Agreement or to any knowing or intentional misrepresentation,
certification or warranty, as to each of which, all legal remedies of the
party adversely affected may be enforced and shall survive the Closing
hereunder.
IN WITNESS WHEREOF, each of the parties hereto has caused this
agreement to be duly executed by its undersigned officer thereunto duly
authorized on the date first above written.
ATTEST: UNITED TRUST, INC.
George E. Francis Larry E. Ryherd
George E. Francis By:
Secretary Larry E. Ryherd,
Chief Executive Officer
[CORPORATE SEAL]
ATTEST: UNITED INCOME, INC.
George E. Francis James E. Melville
George E. Francis By:
Secretary James E. Melville
President
[CORPORATE SEAL]
172
Exhibit A
To Agreement and Plan
Of Reorganization
AGREEMENT AND ARTICLES OF MERGER
Merging UNITED INCOME, INC.
a corporation of the State of Ohio
With and Into
UNITED TRUST INC.
a corporation of the State of Illinois
Agreement and Articles of Merger, dated March 2, 1998, by and between
United Trust, Inc., an Illinois corporation ("UTI"), and United Income,
Inc., an Ohio corporation ("UII"), said corporations being together
hereinafter sometimes referred to as the "constituent Corporations".
Whereas, UTI is a corporation duly organized and existing under the
laws of the State of Illinois and has authorized capital stock of 3,500,000
shares of Common Stock, no par value, of which 1,912,239 shares are issued
and outstanding with 257,039 shares being held in the treasury and 150,000
shares of Preferred Stock, par value $100 per share of which no shares are
outstanding.
Whereas, UII is a corporation duly organized and existing under the
laws of the State of Ohio and has authorized capital stock of 2,310,001
shares of Common Stock, no par value, of which 1,569,509 shares are issued
and outstanding with 177,590 shares being held in the treasury and 150,000
shares of Preferred Stock, par value $100 per share of which no shares are
outstanding.
Whereas, the Board of Directors of each of the Constituent
Corporations has adopted resolutions declaring advisable and to the best
interests of the Constituent Corporations and their respective stockholders
that UII be merged with and into UTI, and that simultaneously UTI will
change its name to United Trust Group, Inc. (the "Surviving Corporation"),
under and pursuant to the Illinois Business Corporation Act and the Ohio
General Corporation Law, and on the terms and conditions herein contained
(the "Merger").
ARTICLE I
1.1 UTI and UII agree to effect the Merger of UII with and into UTI.
UTI and UII jointly own 100% of the outstanding capital stock of United
Trust Group, Inc., an Illinois corporation ("UTG"). At the time of Merger
UTI and UII agree to dissolve UTG. UTI will change its name to UTG and
shall be the Surviving Corporation and shall continue to be governed by the
laws of the State of Illinois. The name of the Surviving Corporation shall
be "United Trust Group, Inc". The terms and conditions of the Merger and
the manner of carrying the same into effect are as set forth in this
Agreement and Articles of Merger (hereinafter referred to as this
"Agreement").
1.2 The Certificate of Incorporation of UTI, as in effect
immediately prior to the Effective Date, until further amended, shall be
and constitute the Certificate of Incorporation of the Surviving
Corporation, and an amendment to said Certificate of Incorporation
shall be effected as a result of the Merger to reflect its name change
to United Trust Group, Inc.
1.3 The Bylaws of UTI, as in effect immediately prior to the
Effective Date, until further amended, shall be and constitute the
Bylaws of the Surviving Corporation.
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1.4 The Board of Directors of UTI shall not be changed as a result of
the Merger.
1.5 The officers of UTI shall not be changed as a result of the
Merger.
ARTICLE II
2.1 The existence of UII shall cease on the Effective Date of
the Merger, and the existence of UTI shall continue unaffected and
unimpaired by the Merger. On the Effective Date of the Merger, in
addition to the general powers of corporations, UTI shall enjoy the
rights, franchises and privileges possessed by each of the Constituent
Corporations, subject to the restrictions, liabilities, duties and
provisions of a corporation organized under the Illinois Business
Corporation Act; and all the rights, privileges, franchises and interest
of each of the Constituent Corporation, and all the property, real,
personal and mixed, and all the debts due on whatever account to either
of them, as well as all stock subscriptions, securities and other things
in action belonging to either of them, shall be taken and deemed to be
transferred to and vested in the Surviving Corporation, without
further act or deed; and all claims, demands, property and every interest
shall be the property of the Surviving Corporation as they were of the
Constituent Corporations, and the title to all real estate, taken by
deed or otherwise vested in any of the Constituent Corporation, shall
not be deemed to revert or deemed to be in any way impaired by
reason of the Merger, but shall be vested in the Surviving Corporation;
provided, however, that rights of creditors and all liens upon any property
of any of the Constituent Corporations shall not in any manner be impaired,
nor shall any liability or obligation due or to become due, or any claim or
demand for any cause existing against any such corporation be released or
impaired by such Merger; but the Surviving Corporation shall be deemed
to have assumed and shall be liable for liabilities and obligations
of either of the Constituent Corporations, in the same manner as if the
Surviving Corporations, in the same manner as if the Surviving Corporation
had itself incurred such liabilities or obligations.
2.2 The Surviving Corporation may be served with process in the
State of Ohio in any proceeding therein for enforcement of any obligation
of UII as well as for enforcement of any obligation UII or the
Surviving Corporation arising from the Merger, and the Surviving
Corporation does hereby irrevocably appoint the Secretary of State of
Ohio as its agent to accept service of process in any such suit or other
proceeding. The address to which a copy of such process shall be mailed to
said agent is c/o United Trust Group, Inc., 5250 South Sixth Street
Road, Springfield, Illinois 62703, until UTG shall have hereafter
designated in writing to the said agent a different address for such
purpose. Service of such process may be made by personally delivering
to and leaving with said agent duplicate copies of such process, one of
which copies the agent shall forthwith send by registered mail to UTG at
the above address.
2.3 The Surviving Corporation will promptly pay to
dissenting stockholders of UII the amount, if any, to which they are
entitled under the relevant provisions of the Ohio General Corporation
Law.
2.4 Subject to the terms and conditions herein provided,
this Agreement shall be certified, executed and acknowledged to comply
with applicable filing and recording requirements of the Illinois
Business Corporation Act and the Ohio General Corporation Law on the
closing date referred to in Section 6.8 of that certain Agreement
and Plan of Reorganization, dated December 1, 1997, between the
Constituent Corporations (the "Acquisition Agreement"), (the date
of such certification, execution and acknowledgment being herein referred
to as the "Closing Date"). On the Closing Date or as soon thereafter as
practicable, a certified Agreement and Articles of Merger incorporating
this Agreement shall be filed pursuant to Illinois Business Corporation
Act and the Ohio General Corporation Law with the Secretary of State of
Illinois and Ohio, respectively, and a certified copy thereof shall be
recorded in the Office of the Recorder of the appropriate county or
counties in Illinois and Ohio, respectively. This Agreement shall become
effective in the State of Illinois at the close of business on the
day on which such filing is completed, and shall become effective in
the State of Ohio upon the issuance by the Secretary of State of Ohio
of a Certificate of Merger (the latter of which dates is herein referred
to as the "Effective Date").
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ARTICLE III
3.1 The manner of converting or exchanging the shares of UII into
shares of UTI shall be as hereinafter set forth in this Article III.
3.2 Each share of UTI Common Stock issued and outstanding
immediately prior to the Effective Date shall continue to be an issued and
outstanding share of UTI, fully paid and non-assessable.
3.3 Each share of UII Common Stock issued and outstanding
immediately prior to the Effective Date (excluding shares of UII Common
Stock held by UII as treasury stock, which shares shall be cancelled and
extinguished at the Effective Date) and all rights in respect thereof
shall, upon the Effective Date, by virtue of the Merger and without any
action on the part of the holder thereof, be exchanged for and converted
into one share of UTI Common Stock.
3.4 Each share of UTI Common Stock issued pursuant to this Article
III shall be fully paid and non-assessable. From and after the Effective
Date, each certificate which theretofore represented shares of UII Common
Stock shall evidence ownership of shares of the UTI Common Stock on the
basis hereinabove set forth, and the exchange and conversion shall be
complete and effective on the Effective Date without regard to the date or
dates on which outstanding UII Common Stock shall be cancelled.
3.5 On the Effective Date, UTI will deliver to the Exchange
Agent certificates representing the number of shares of UTI Common Stock
that will be required for delivery to the stockholders of UII pursuant to
the Merger, and will take such further action as may be necessary in order
that certificates for shares of the UTI Common Stock may be delivered to
the stockholders of UII. Dividends or other distributions payable after
the Effective Date to holder of record in respect of such shares of the
UTI Common Stock issued in exchange for UII Common Stock shall not be paid
to holders thereof until certificates evidencing the UII Common Stock
are surrendered for exchange as aforesaid.
ARTICLE IV
4.1 The obligations of UTI and UII to effect the Merger shall be
subject to all of the terms and conditions of the Acquisition Agreement.
4.2 This Agreement may be terminated or amended prior to the
Effective Date in the manner and upon the conditions set forth in the
Acquisition Agreement.
4.3 This Agreement may be executed in any number of counterparts,
each of which shall be deemed and original but all of which together
shall constitute but one instrument.
IN WITNESS WHEREOF, each of the Constituent Corporations has caused
this Agreement to be duly executed by its duly authorized officer,
attested to by its Secretary and its corporate seal, all as of the date
first above written.
UNITED TRUST, INC.
ATTEST:
George E. Francis Larry E. Ryherd
George E. Francis Larry E. Ryherd
Secretary Chief Executive Officer
[CORPORATE SEAL]
175
UNITED INCOME, INC.
ATTEST:
George E. Francis James E. Melville
George E. Francis James E. Melville
Secretary President
[CORPORATE SEAL]
176
THE UNDERSIGNED, Chief Executive Officer of United Trust Inc.
who executed on behalf of said corporation the foregoing Agreement and
Articles of Merger, of which this Certificate is made a part, hereby
acknowledges, in the name of and on behalf of said corporation, the
foregoing Agreement and Articles of Merger to be the corporate act of
said corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material
respects, under the penalties of perjury.
Larry E. Ryherd
Larry E. Ryherd
Chief Executive Officer
THE UNDERSIGNED, President of United Income, Inc. who executed on
behalf of said corporation the foregoing Agreement and articles of Merger,
of which this Certificate is made a part, hereby acknowledges, in the name
of and on behalf of said corporation, the foregoing Agreement and articles
of Merger to be the corporate act of said corporation and further certifies
that, to the best of his knowledge, information and belief, the matters and
facts set forth therein with respect to the approval thereof are true in
all material respects, under the penalties of perjury.
James E. Melville
James E. Melville
President
177
UNITED INCOME, INC.
Secretary's Certificate
I, George E. Francis, Secretary of United Income, Inc., an Ohio
corporation ("UII"), do hereby certify, in accordance with the provisions
of the Ohio General Corporation Law, that the foregoing Agreement and
Articles of Merger, having been duly authorized and adopted by the Board of
Directors of UII and signed under its corporate seal by officers of UII
thereunto duly authorized, was duly approved and adopted by the
Stockholders of UII on the 2nd day of March, 1998 at a Special Meeting of
the shareholders of UII, that at the time of said meeting UII had
outstanding 1,391,919 shares of its common stock, and no other shares of
capital stock; that at said meeting ______ shares of UII common stock were
voted in favor of, and ______ shares of UII common stock were voted against,
the plan of merger.
Witness my hand and the seal of UII this 2nd day of March, 1998.
George E. Francis
George E. Francis,
Secretary
[CORPORATE SEAL]
178
UNITED TRUST, INC.
Secretary's Certificate
I, George E. Francis, Secretary of United Trust, Inc., an Illinois
corporation ("UTI"), do hereby certify, in accordance with the provisions
of the Illinois Business Corporation Act, that the foregoing Agreement and
Articles of Merger, having been duly authorized and adopted by the Board of
Directors of UTI and signed under its corporate seal by officers of UTI
thereunto duly authorized, was duly approved and adopted by the
Stockholders of UTI on the 2nd day of March, 1998 at a Special Meeting of
the shareholders of UTI, that at the time of said meeting UTI had
outstanding 1,655,200 shares of its Common Stock, and no other shares of
capital stock; that at said meeting ______ shares of UTI Common Stock were
voted in favor of, and _____ shares of UTI Common Stock were voted against,
the plan of the Agreement of Merger.
Witness my hand and the seal of UTI this 2nd day of March, 1998.
George E. Francis
George E. Francis,
Secretary
[CORPORATE SEAL]
179
CERTIFICATE OF EXECUTION
The foregoing Agreement of Merger, having been duly entered into
and signed by United Trust Inc., an Illinois corporation ("UTI") and
United Income, Inc., an Ohio corporation ("UII"), and having been duly
adopted by the stockholders of UTI and the stockholders of UII, all in
accordance with the provisions of the Illinois Business Corporation Act
and the Ohio General Corporation Law; the Chief Executive Officer of UTI
and the Senior Executive Vice President of UII do now hereby re-execute
said Agreement of Merger under the respective corporate seals of UTI and
UII, attested by the respective secretaries of UTI and UII, by authority of
and as the act, deed and agreement of UTI and UII, respectively, on this
2nd day of March, 1998.
UNITED TRUST, INC.
ATTEST:
George E. Francis Larry E. Ryherd
George E. Francis Larry E. Ryherd
Secretary Chief Executive Officer
[CORPORATE SEAL]
UNITED INCOME, INC.
ATTEST:
George E. Francis James E. Melville
George E. Francis James E. Melville
Secretary President
[CORPORATE SEAL]
180
APPENDIX B
Sections 1701.84 and 1701.85
Ohio General Corporation Law
RIGHTS OF DISSENTING STOCKHOLDERS OF
UNITED INCOME, INC.
1701.84 Persons entitled to relief as dissenting shareholders.
The following are entitled to relief as dissenting shareholders under
section 1701.85 of the Revised Code;
(A) Shareholders of a domestic corporation that is being merged or
consolidated into a surviving or new entity, domestic or foreign, pursuant
to section 1701.78, 1701.781 [1701.78.1], 1701.79, 1701.791 [1701.79.1], or
1701.801 [1701.80.1] of the Revised Code;
(B) In the case of a merger into a domestic corporation, shareholders
of the surviving corporation who under section 1071.78 or 1701.781
[1701.78.1] of the Revised Code are entitled to vote on the adoption of an
agreement of merger, but only as to the shares so entitling them to vote;
(C) Shareholders, other than the parent corporation, of a domestic
subsidiary corporation that is being merged into the domestic or foreign
parent corporation pursuant to section 1701.80 of the Revised Code;
(D) In the case of a combination or a majority share acquisition,
shareholders of the acquiring corporation who under section 1701.83 of the
Revised Code are entitled to vote on such transaction, but only as to the
shares so entitling them to vote;
(E) Shareholders of a domestic subsidiary corporation into which one
or more domestic or foreign corporations are being merged pursuant to
section 1701.801 [1701.80.1] of the Revised Code.
(F) Dissenting shareholder's demand for fair cash value of shares.
1701.85 Dissenting shareholder's demand for fair cash value of shares.
(A)(1) A shareholder of a domestic corporation is entitled to relief
as a dissenting shareholder in respect to the proposals described in
sections 1701.74, 1701.76, and 1701.84 of the Revised Code, only in
compliance with this section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder
of the shares of the corporation as to which he seeks relief as of the date
fixed for the determination of shareholders entitled to notice of a meeting
of the shareholders at which the proposal is to be submitted, and such
shares shall not have been voted in favor of the proposal. Not later than
ten days after the date on which the vote on the proposal was taken at the
meeting of the shareholders, the dissenting shareholder shall deliver to
the corporation a written demand for payment to him of the fair cash value
of the shares as to which he seeks relief, which demand shall state his
address, the number and class of such shares, and the amount claimed by him
as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C)
of section 1701.84 of the Revised Code in the case of a merger pursuant to
section 1701.80 of the Revised Code and a dissenting shareholder entitled
to relief under division (E) of section 1701.84 of the Revised Code in the
case of a merger pursuant to section 1701.801 [1701.80.1] of the Revised
Code shall be a record holder of the shares of the corporation as to which
he seeks relief as of the date on which the agreement of merger was adopted
by the directors of that corporation. Within twenty days after he has been
sent the notice provided in section 1701.80 or 1701.801 [1701.80.1] of the
Revised Code, the dissenting shareholder shall deliver to the corporation a
written demand for payment with the same information as that provided for
in division (A)(2) of this section.
181
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or
the new entity, whether the demand is served before, on, or after the
effective date of the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates
representing the shares as to which he seeks relief, the dissenting
shareholder, within fifteen days from the date of the sending of such
request, shall deliver to the corporation the certificates requested so
that the corporation may forthwith endorse on them a legend to the effect
that demand for the fair cash value of such shares has been made. The
corporation promptly shall return such endorsed certificates to the
dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the
option of the corporation, exercised by written notice sent to the
dissenting shareholder within twenty days after the lapse of the fifteen
day period, unless a court for good cause shown otherwise directs. If
shares represented by a certificate on which such a legend has been
endorsed are transferred, each new certificate issued for them shall bear a
similar legend, together with the name of the original dissenting holder of
such shares. Upon receiving a demand for payment from a dissenting
shareholder who is the record holder of uncertificated securities, the
corporation shall make an appropriate notation of the demand for payment in
its shareholder records. If uncertificated shares for which payment has
been demanded are to be transferred, any new certificate issued for the
shares shall bear the legend required for certificated securities as
provided in this paragraph. A transferee of the shares so endorsed, or of
uncertificated securities where such notation has been made, acquires only
such rights in the corporation as the original dissenting holder of such
shares had immediately after the service of a demand for payment of the
fair cash value of the shares. A request under this paragraph by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to
an agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the
surviving or new entity, within three months after the service of the
demand by the dissenting shareholder, may file a complaint in the court of
common pleas of the county in which the principal office of the corporation
that issued the shares is located or was located when the proposal was
adopted by the shareholders of the corporation, or, if the proposal was not
required to be submitted to the shareholders, was approved by the
directors. Other dissenting shareholders, within that three-month period,
may join as plaintiffs or may be joined as defendants in any such
proceeding, and any two or more such proceedings may be consolidated. The
complaint shall contain a brief statement of the facts, including the vote
and the facts entitling the dissenting shareholder to the relief demanded.
No answer to such a complaint is required. Upon the filing of such a
complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of
the complaint and a notice of the filing and of the date for hearing be
given to the respondent or defendant in the manner in which summons is
required to be served or substituted service is required to be made in
other cases. On the day fixed for the hearing on the complaint or any
adjournment of it, the court shall determine from the complaint and from
such evidence as is submitted by either party whether the dissenting
shareholder is entitled to be paid the fair cash value of any shares and,
if so, the number and class of such shares. If the court finds that the
dissenting shareholder is so entitled, the court may appoint one or more
persons as appraisers to receive evidence and to recommend a decision on
the amount of the fair cash value. The appraisers have such power and
authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and
shall render judgment against the corporation for the payment of it, with
interest at such rate and from such date as the court considers equitable.
The costs of the proceeding, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as
the court considers equitable. The proceeding is a special proceeding and
final orders in it may be vacated, modified, or reversed on appeal pursuant
to the Rules of Appellate Procedure and, to the extent not in conflict with
those rules, Chapter 2505, of the Revised Code. If, during the pendency of
any proceeding instituted under this section, a suit or proceeding is or
has been instituted to enjoin or otherwise to prevent the carrying out of
the action as to which the shareholder has dissented, the proceeding
instituted under this section shall be stayed until the final determination
of the other suit or proceeding. Unless any provision in division (D) of
this section is applicable, the fair cash value of the shares that is
agreed upon by the parties or fixed under this section shall be paid within
thirty days after the date of final determination of such value under this
division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a
holder of uncertificated securities entitled to such payment. In the case
of holders of shares represented by certificates, payment shall be made
only upon and simultaneously with the surrender to the corporation of the
certificates representing the shares for which the payment is made.
182
(C) If the proposal was required to be submitted to the shareholder of
the corporation, fair cash value as to those shareholders shall be
determined as of the day prior to the day on which the vote by the
shareholders was taken and, in the case of a merger pursuant to section
1701.80 or 1701.801 [1701.80.1] of the Revised Code, fair cash value as to
shareholders of a constituent subsidiary corporation shall be determined as
of the day before the adoption of the agreement of merger by the directors
of the particular subsidiary corporation. The fair cash value of a share
for the purposes of this section is the amount that a willing seller who is
under no compulsion to sell would be willing to accept and that a willing
buyer who is under no compulsion to purchase would be willing to pay, but
in no event shall the fair cash value of a share exceed the amount
specified in the demand of the particular shareholder. In computing such
fair cash value, any appreciation or depreciation in market value resulting
from the proposal submitted to the directors or to the shareholders shall
be excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief,
and the right and obligation of the corporation to purchase such shares and
to pay the fair cash value of them terminates if any of the following
applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind
their adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent
of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder
nor the corporation has filed or joined in a complaint under division (B)
of this section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the
corporation shall be taken by the general partners of a surviving or new
partnership or the comparable representatives of any other surviving or new
entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it
or the purchase of the shares by the corporation, all other rights accruing
from such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid
in money upon shares of such class or any dividend, distribution, or
interest is paid in money upon any securities issued in extinguishment of
or in substitution for such shares, an amount equal to the dividend,
distribution, or interest which, except for the suspension, would have been
payable upon such shares or securities, shall be paid to the holder of
record as a credit upon the fair cash value of the shares. If the right to
receive fair cash value is terminated other than by the purchase of the
183
shares by the corporation, all rights of the holder shall be restored and
all distributions which, except for the suspension, would have been made
shall be made to the holder of record of the shares at the time of
termination.
184
APPENDIX C
Section 5/11.65 and 5/11.70
Illinois Business Corporation Act
RIGHTS OF DISSENTING STOCKHOLDERS OF
UNITED TRUST, INC.
5/11.65 RIGHT TO DISSENT. - (a) A shareholder of a corporation is
entitled to dissent from, and obtain payment for his or her shares in the
event of any of the following corporate actions:
(1) consummation of a plan of merger of consolidation or a plan of
share exchange to which the corporation is a party if (i) shareholder
authorization is required for the merger or consolidation or the share
exchange by Section 11.20 or the articles of incorporation or (ii) the
corporation is a subsidiary that is merged with its parent or another
subsidiary under Section 11.30;
(2) consummation of a sale, lease or exchange of all, or substantially
all, of the property and assets of the corporation other than in the usual
and regular course of business;
(3) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(i) alters or abolishes a preferential right of such shares;
(ii) alters or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of
such shares;
(iii) in the case of a corporation incorporated prior to January 1,
1982, limits or eliminates cumulative voting rights with respect to such
shares; or
(4) any other corporate action taken pursuant to a shareholder vote if
the articles of incorporation, by-laws, or a resolution of the board of
directors provide that shareholders are entitled to dissent and obtain
payment for their shares in accordance with the procedures set forth in
Section 11.70 or as may be otherwise provided in the articles, by-laws or
resolution.
(b) A shareholder entitled to dissent and obtain payment for his or
her shares under this Section may not challenge the corporate action
creating his or her entitlement unless the action is fraudulent with
respect to the shareholder or the corporation or constitutes a breach of a
fiduciary duty owed to the shareholder.
(c) A record owner of shares may assert dissenters' rights as to fewer
than all the shares recorded in such person's name only if such person
dissents with respect to all shares beneficially owned by any one person
and notifies the corporation in writing of the name and address of each
person on whose behalf the record owner asserts dissenters' rights. The
rights of a partial dissenter are determined as if the shares as to which
dissent is made and the other shares recorded in the names of different
shareholders. A beneficial owner of shares who is not the record owner may
assert dissenters' rights as to shares held on such person's behalf only if
the beneficial owner submits to the corporation the record owner's written
consent to the dissent before or at the same time the beneficial owner
asserts dissenters' rights.
5/11.70 PROCEDURE TO DISSENT. - (a) If the corporate action giving
rise to the right to dissent is to be approved at a meeting of
shareholders, the notice of meeting shall inform the shareholders of their
right to dissent and the procedure to dissent. If, prior to the meeting,
the corporation furnishes to the shareholders material information with
respect to the transaction that will objectively enable a shareholder to
vote on the transaction and to determine whether or not to exercise
dissenters' rights, a shareholder may assert dissenters' rights only if the
shareholder delivers to the corporation before the vote is taken a written
demand for payment for his or her shares if the proposed action is
consummated, and the shareholder does not vote in favor of the proposed
action.
185
(b) If the corporate action giving rise to the right to dissent is not
to be approved at a meeting of shareholders, the notice to shareholders
describing the action taken under Section 11.30 or Section 7.10 shall
inform the shareholders of their right to dissent and the procedure to
dissent. If, prior to or concurrently with the notice, the corporation
furnishes to the shareholders material information with respect to the
transaction that will objectively enable a shareholder to determine whether
or not to exercise dissenters' rights, a shareholder may assert dissenter's
rights only if he or she delivers to the corporation within 30 days from
the date of mailing the notice a written demand for payment for his or her
shares.
(c) Within 10 days after the date on which the corporate action giving
rise to the right to dissent is effective or 30 days after the shareholder
delivers to the corporation the written demand for payment, whichever is
later, the corporation shall send each shareholder who has delivered a
written demand for payment a statement setting forth the opinion of the
corporation as to the estimated fair value of the shares, the corporation's
latest balance sheet as of the end of a fiscal year ending not earlier than
16 months before the delivery of the statement, together with the statement
of income for that year and the latest available interim financial
statements, and either a commitment to pay for the shares of the dissenting
shareholder at the estimated fair value thereof upon transmittal to the
corporation of the certificate or certificates, or other evidence of
ownership, with respect to the shares, or instructions to the dissenting
shareholder to sell his or her shares within 10 days after delivery of the
corporation's statement to the shareholder. The corporation may instruct
the shareholder to sell only if there is a public market for the shares at
which the shares may be readily sold. If the shareholder does not sell
within that 10 day period after being so instructed by the corporation, for
purposes of this Section the shareholder shall be deemed to have sold his
or her shares at the average closing price of the shares, if listed on a
national exchange, or the average of the bid and asked price with respect
to the shares quoted by a principal market maker, if not listed on a
national exchange, during that 10 day period.
(d) A shareholder who makes written demand for payment under this
Section retains all other rights of a shareholder until those rights are
cancelled or modified by the consummation of the proposed corporate action.
Upon consummation of that action, the corporation shall pay to each
dissenter who transmits to the corporation the certificate of other
evidence of ownership of the shares the amount the corporation estimates to
be the fair value of the shares, plus accrued interest, accompanied by a
written explanation of how the interest was calculated.
(e) If the shareholder does not agree with the opinion of the
corporation as to the estimated fair value of the shares or the amount of
interest due, the shareholder, within 30 days from the delivery of the
corporation's statement value, shall notify the corporation in writing of
the shareholder's estimated fair value and amount of interest due and
demand payment for the difference between the shareholder's estimate of
fair value and interest due and the amount of the payment by the
corporation or the proceeds of sale by the shareholder, whichever is
applicable because of the procedure for which the corporation opted
pursuant to subsection (c).
(f) If, within 60 days from delivery to the corporation of the
shareholder notification of estimate of fair value of the shares and
interest due, the corporation and the dissenting shareholder have not
agreed in writing upon the fair value of the shares and interest due, the
corporation shall either pay the difference in value demanded by the
shareholder, with interest or file a petition in the county in which either
the registered office or the principal office of the corporation is
located, requesting the court to determine the fair value of the shares and
interest due. The corporation shall make all dissenters, whether or not
residents of this State, whose demands remain unsettled parties to the
proceeding as an action against their shares and all parties shall be
served with a copy of the petition. Nonresidents may be served by
registered or certified mail or by publication as provided by law. Failure
of the corporation to commence an action pursuant to this Section shall not
limit or affect the right of the dissenting shareholders to otherwise
commence an action as permitted by law.
186
(g) The jurisdiction of the court in which the proceeding is commenced
under subsection (f) by a corporation is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the
power described in the order appointing them, or in any amendment to it.
(h) Each dissenter made a party to the proceeding is entitled to
judgment for the amount, if any, by which the court finds that fair value
of his or her shares, plus interest, exceeds the amount paid by the
corporation or the proceeds of sale by the shareholder, whichever amount is
applicable.
(i) The court, in a proceeding commenced under subsection (f), shall
determine all costs of the proceeding, including the reasonable
compensation and expenses of the appraisers, if any, appointed by the court
under subsection (g), but shall exclude the fees and expenses of counsel
and experts for the respective parties. If the fair value of the shares as
determined by the court materially exceeds the amount which the corporation
estimated to be the fair value of the shares or if no estimate was made in
accordance with subsection (c), then all or any part of the costs may be
assessed against the corporation. If the amount which any dissenter
estimated to be the fair value of the shares materially exceeds the fair
value of the shares as determined by the court, then all or any part of the
costs may be assessed against that dissenter. The court may also assess
the fees and expenses of counsel and experts for the respective parties, in
amounts the court finds equitable, as follows:
(1) Against the corporation and in favor of any or all dissenters if
the court finds that the corporation did not substantially comply with the
requirements or subsections (a), (b), (c), (d), or (f).
(2) Against either the corporation or a dissenter and in favor of any
other party if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this Section.
If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated and that the
fees for those services should not be assessed against the corporation, the
court may award to that counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who are benefited. Except as otherwise
provided in this Section, the practice, procedure, judgment and costs shall
be governed by the Code of Civil Procedure.
(j) As used in this Section:
(1) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the consummation of the corporate
action to which the dissenter objects excluding any appreciation or
depreciation in anticipation of the corporate action, unless exclusion
would be inequitable.
(2) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.
187
APPENDIX D
PROPOSED AMENDMENT TO
PARAGRAPH 1 OF ARTICLE FOURTH OF
ARTICLES OF INCORPORATION OF
UNITED TRUST, INC.
ARTICLE FOURTH
Paragraph 1: The aggregate number of shares which the corporation is
authorized to issue is 7,150,000 divided into two classes. The designation
of each class, the number of shares of each class, and the par value, if
any, of the shares of each class, or a statement that the shares of any
class are without par value, are as follows:
Par value per share or
Series Number of statement that shares are
Class (if any) shares without par value
Common None 7,000,000 Without par value
Preferred To be fixed 150,000 $100
By the Board
Of Directors
188
PART II
INFORMATION NOT REQUIRED IN
PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Illinois Business Corporation Act empowers the Registrant to
indemnify each officer and director of the Registrant against liabilities
and expenses incurred by reason of the fact that he or she is or was an
officer or director of the Registrant, or is or was serving as such at the
request of the Registrant with respect to another corporation, partnership,
joint venture, trust, or other enterprise. The Act also empowers the
Registrant to purchase and maintain insurance on behalf of any such officer
or director of the Registrant against liability asserted against or
incurred by him or her in any such capacity, whether or not the Registrant
would have power to indemnify such officer or direction against such
liability.
Article 1.1 of the Registrant's Bylaws provides, in effect, for the
indemnification by the Registrant of each director, officer, employee, or
agent of the Registrant to the full extent permitted by the Illinois
Business Corporation Act.
Item 21. Exhibits and Financial Statements Schedules
A list of exhibits and financial statement schedules included as part
of this Registration Statement is set forth in the list that immediately
precedes such exhibits and schedules and is hereby incorporated herein by
reference.
Item 22. Undertakings
(1) The undersigned registrant undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt
of such request, and to send the incorporated documents by first class mail
or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(2) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to any provision of the
Registrant's By-Laws, Directors' and Officers' Liability Insurance Policy,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(4) The undersigned registrant hereby undertakes that prior to any
public reoffering of the securities registered hereunder through use a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may
be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
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(5) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (4) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the registration statement
relating to the securities offered therein and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Springfield, State of Illinois, on
UNITED TRUST, INC.
By /s/ Larry E. Ryherd
Larry E. Ryherd
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
/s/ John S. Albin
John S. Albin, Director
/s/ William F. Cellini
William F. Cellini, Director
/s/ Robert E. Cook
Robert E. Cook, Director
/s/ Larry R. Dowell
Larry R. Dowell, Director
/s/ Donald G. Geary
Donald G. Geary, Director
/s/ Raymond L. Larson
Raymond L. Larson, Director
/s/ Dale E. McKee
Dale E. McKee, Director
/s/ Thomas F. Morrow
Thomas F. Morrow, Director
/s/ Larry E. Ryherd
Larry E. Ryherd, Chairman of the Board,
Chief Executive Officer and Director
/s/ James E. Melville
James E. Melville, Chief Operating Officer,
President, and Director
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