SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number 0-16867
UNITED TRUST, INC.
(Exact name of registrant as specified in its charter)
5250 SOUTH SIXTH STREET
P.O. BOX 5147
SPRINGFIELD, IL 62705
(Address of principal executive offices, including zip code)
ILLINOIS 37-1172848
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (217) 241-6300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No []
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ].
The aggregate market value of voting stock (Common Stock) held by
nonaffiliates of the registrant as of March 13, 1998, was $7,876,568.
At March 13, 1998, the Registrant had outstanding 1,654,850 shares of
Common Stock, stated value $.02 per share.
DOCUMENTS INCORPORATED BY REFERENCE: None
Page 1 of 87
PART 1
ITEM1. BUSINESS
United Trust, Inc. (the "Registrant") was incorporated in 1984, under the
laws of the State of Illinois to serve as an insurance holding company.
At December 31, 1997, significant majority-owned subsidiariesand
affiliates of the Registrant were as depicted on the following
organizational chart:
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns
100% of Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of
United Security Assurance Company ("USA"). USA owns 84% of Appalachian
Life Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln
Insurance Company ("ABE").
2
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, United Trust Assurance Company ("UTAC"), and by 1987 began
selling life insurance products.
United Income, Inc. ("UII"), an affiliated company, was incorporated on
November 2, 1987, as an Ohio corporation. Between March and August
1990, UII raised a total of approximately $15,000,000 in an intrastate
public offering in Ohio.
During 1990, UII formed a life insurance subsidiary, United Security
Assurance (USA), and began selling life insurance products.
UTI currently owns 41% of the outstanding common stock of UII and accounts
for its investment in UII using the equity method.
On February 20, 1992, UTI and UII, formed a joint venture, United Trust
Group, Inc., ("UTG"). On June 16, 1992, UTI contributed $2.7 million in
cash, an $840,000 promissory note and 100% of the common stock of its
wholly owned life insurance subsidiary, (UTAC). UII contributed $7.6
million in cash and 100% of its life insurance subsidiary, (USA), to UTG.
After the contributions of cash, subsidiaries, and the note, UII owns 47%
and UTI owns 53% of UTG.
On June 16, 1992, UTG acquired 67% of the outstanding common stock of the
now dissolved Commonwealth Industries Corporation, ("CIC") for a purchase
price of $15,567,000. Following the acquisition UTI controlled eleven
life insurance subsidiaries. The Company has taken several steps to
streamline and simplify the corporate structure followingthe
acquisitions.
On December 28, 1992, Universal Guaranty Life Insurance Company ("UG") was
the surviving company of a merger with Roosevelt National Life Insurance
Company ("RNLIC"), United Trust Assurance Company ("UTAC"), Cimarron Life
Insurance Company ("CIM") and Home Security Life Insurance Company
("HSLIC"). On June 30, 1993, Alliance Life Insurance Company ("ALLI"), a
subsidiary of UG, was merged into UG.
On July 31, 1994, Investors Trust Assurance Company ("ITAC") was merged
into Abraham Lincoln Insurance Company ("ABE").
On August 15, 1995, the shareholders of CIC, 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.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders. Neither UTI nor UII have
any other significant holdings or business dealings. The Board of
Directors of each company thus concluded a merger of the two companies
would be in the best interests of the shareholders. The merger will result
incertaincost savings, primarily related to costs associated with
maintaining a corporation in good standing in the states in whichit
transacts business. A vote of the shareholders of UTI and UII regarding
the proposed merger is anticipated to occur sometime during the third
quarter of 1998.
3
The holding companies within the group, UTI, UII UTG and FCC, are all life
insurance holding companies. These companies became members of the same
affiliated group through a history of acquisitions in which life
insurance companies were involved. The focus of the holding companies is
the acquisition of other companies in similar lines of business and
management of the insurance subsidiaries. The companies have no activities
outside the life insurance focus.
The insurance companies of the group, UG, USA, APPL and ABE, all operate in
the individual life insurance business. The primary focus of these
companies has been the servicing of existing insurance business in force
and the solicitation of new insurance business.
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
Under the terms of the letter of intent Mr. Correll will buy 2,000,000
authorized but unissued shares of UTI common stock for $15.00 per share and
will also buy 389,715 shares of UTI common stock, representing stock of UTI
and UII, that UTI purchased during the last eight months in private
transactions at the average price UTI paid for such stock, plus interest,
orapproximately $10.00 per share. Mr. Correll also will purchase 66,667
shares of UTI common stock and $2,560,000 of face amount of convertible
bonds (which are due and payable on any change in control of UTI) in
private transactions, primarily from officers of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase
agreement; completion of due diligence by Mr. Correll; the receipt of
regulatory and other approvals;and the satisfaction of certain
conditions. The transaction is not expected to be completed before June
30, 1998, and there can be no assurance that the transaction will be
completed.
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 premium
load is an expense charge which is collected through a percentage charge to
each premium dollar paid by the policyholder. 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 $25fee, are allowed once a year after the first duration. Policy
loansare available at 7% interest in advance. Thepolicy'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 totalin the
twentieth year of 1.375%. The bonus is calculated from the policy
issue date and is contractually guaranteed.
The Company's actual experience for earned interest, persistency and
mortality vary from the assumptions applied to pricing andfor
determining premiums. Accordingly, differences between the Company's
actualexperience and those assumptions applied may impactthe
profitability of the Company. The minimum interest spread between earned
and
4
credited rates is 1% on the "Century 2000" universallife insurance
product. TheCompany monitors investment yields, and when necessary
adjusts credited interest rates on its insurance products to preserve
targeted interest spreads. Credited rates are reviewed and established
by the Board of Directors of the respective life insurance subsidiaries.
The premium rates are competitive with other insurers doing business
in the states in which the Company is marketing its products.
The Company markets other products, none of which is significant to
operations. The Company has a variety of policies in force different from
those which are currently being marketed. Universal life and interest
sensitive whole life business account for approximately 46% of the
insurance in force. Approximately 29% of the insurance in force is
participating business. The Company's average persistency rate for its
policiesin force for 1997 and 1996 has been 89.4% and 87.9%,
respectively. The Company does not anticipate any material fluctuations in
these rates in the future that may result from competition.
Interest-sensitive life insurance products have characteristics similar
to annuities with respect to the crediting of a current rate of interest
at or above a guaranteed minimum rate and the use of surrender charges
to discourage premature withdrawal of cashvalues. Universal life
insurance policies also involve variable premium charges against the
policyholder's account balancefor the cost of insuranceand
administrative expenses. Interest-sensitive whole life products
generally have fixed premiums. Interest-sensitive life insurance
products are designed with a combination of front-end loads, periodic
variable charges, and back-end loads or surrender charges. Traditional
life insurance products have premiums and benefits predetermined at
issue; the premiums are set at levels that are designed to exceed
expected policyholder benefits and Company expenses. Participating
business is traditional life insurance with the added feature of an
annual return of a portion of the premium paid by the policyholder
through a policyholder dividend. This dividend is setannually by the
Board of Directors of each insurance company and is completely
discretionary.
MARKETING
The Companymarkets its products through separate and distinct agency
forces. The Company has approximately 45 captive agents who actively
write new business, and 15 independent agents who primarily service their
existing customers. No individual sales agent accounted for over 10% of
the Company's premium volume in 1997. The Company's sales agents do not
have the power to bind the Company.
Marketing is based on referral network of community leadersand
shareholders of UII and UTI. Recruiting of sales agents is also based on
the same referral network. The industry has experienced a downward trend
in thetotal number of agents who sell insuranceproducts, and
competition for the top sales producers has intensified. As this
trend appears to continue, the recruiting focus of the Company has
been on introducing quality individuals to the insurance industry
through an extensive internal training program. The Company feels this
approachis conducive to the mutual success of our new recruitsand
the Companyas these recruits market our products in a professional,
company structured manner.
New sales are marketed by UG and USA through their agency forces using
contemporarysales approaches with personal computer illustrations.
Current marketing efforts are primarily focused on the Midwest region.
USA is licensed in Illinois, Indiana and Ohio. During 1997, Ohio accounted
for 99% of USA's direct premiums collected.
ABE is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1997, Illinois and Indiana accounted for 46% and 32%,
respectively of ABE's direct premiums collected.
5
APPL is licensed in Alabama, Arizona, Arkansas, Colorado, Georgia,
Illinois, Indiana, Kansas, Kentucky, Louisiana, Missouri, Montana,
Nebraska, Ohio, Oklahoma, Pennsylvania, Tennessee, Utah, Virginia, West
Virginia and Wyoming. During 1997, West Virginia accounted for 95% of
APPL's direct premiums collected.
UG is licensed in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Massachusetts,Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Mexico, North Carolina, NorthDakota,
Ohio,Oklahoma, Oregon, Pennsylvania, Rhode Island, South
Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington,
West Virginia and Wisconsin. During 1997, Illinois accounted for 33%,
and Ohio accounted for 14% of direct premiums collected. No other state
accounted for more than 7% of direct premiums collected in 1997.
In 1997 $38,471,452 of total direct premium was written by USA, ABE, APPL
and UG. Ohio accounted for 35% Illinois accounted for 21%, andWest
Virginia accounted for 10% of total direct premiums collected.
New business production has decreased 15% from 1995 to 1996 and 43% from
1996 to 1997.Several factors have had a significant impact on new
business production. Over the last two years there has been the
possibility of a change in control of UTI. In September of 1996, an
agreement was reached effecting a change in control of UTI to an unrelated
party.The transaction did not materialize. At thiswriting
negotiations are progressing with a different unrelated party for change in
control of UTI. Please refer to note 17 in the Notes to the
Consolidated Financial Statements for additional information. The
possible changes in control, and the uncertainty surrounding each
potential event, have hurt the insurance Companies' ability to
attractand maintain sales agents. In addition, increased competition
for consumer dollars from other financial institutions,product
Illustration guideline changes by State Insurance Departments, and a
decrease in the total number of insurance sales agents in the industry,
have all had an impact, given the relatively small size of the Company.
Management recognizes the aforementioned challenges and is responding.
The potential change in control of the Company is progressing, bringing
the possibility for future growth, efforts are being made to
introduce additional products, and the recruitment ofquality
individuals for intensive sales training, are directed at reversing
current marketing trends.
UNDERWRITING
The underwriting procedures of the insurance subsidiaries are established
by management.Insurance policies are issued by the Company based upon
underwriting practices established for each market in which the
Company operates. Most policies are individually underwritten.
Applications for insurance are reviewed to determine additional information
required to make an underwriting decision, which depends on the amount of
insurance applied for and the applicant's age and medical history.
Additional information may include inspection reports,medical
examinations, and statements from doctors who have treated the applicant
inthe pastand, 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
46and 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.
6
RESERVES
The applicable insurance laws under which the insurance subsidiaries operate
require that each insurance company report policy reserves as liabilities to
meet future obligations on the policies in force.These reserves are the
amounts which, with the additional premiums to be received and interest there
on 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 lifeinsurance 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 incomeover the policy term. Policy
benefit claims are charged to expense in the period that the claims are
incurred. Current mortality rate assumptions are based on 1975-80 select and
ultimate tables. Withdrawal rate assumptions are based upon Linton B or
Linton C, which are industry standard actuarial tables for forecasting assumed
policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life
insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges.
Policy benefits and claims that are charged to expense include benefit
claims in excess of related policy account balances. Interest crediting
rates for universal life and interest sensitive products range from
5.0% to 6.0% in each of the years 1997, 1996 and 1995.
REINSURANCE
As is customary in the insurance industry, the 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
obtaina greaterdiversification of risk. The ceding insurance company
remains contingently liable withrespect to ceded insurance should any
reinsurer be unable to meet the obligations assumed by it, however it
is the practice of insurers to reduce their financial statement
liabilities to the extent that they have been reinsured with other
insurance companies. The Company sets a limit on the amount of insurance
retained on the life of any one person. The Company will not retain more
than $125,000, including accidental death benefits,on any one life. At
December 31, 1997, the Company had insurance in force of $3.692
billion of which approximately $1.022 billion was ceded to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The
Company believes the assuming companies are able to honor all contractual
commitments, based on the Company's periodic reviews of theirfinancial
statements, insurance industry reports and reports filed with state
insurance departments.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements were
effective December 1, 1993, and cover all new business of the Company. The
agreements are a yearly renewable term ("YRT") treaty where the Company
cedes amounts above its retention limit of $100,000 with a minimum
cession of $25,000.
One of the Company's insurance subsidiaries (UG) entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as
of September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best assigned FILIC a Financial Performance Rating (FPR) of 7
(Strong) on a scale of 1 to 9. A.M. Best assigned a Best's Rating of A++
(Superior) to The Guardian Life Insurance Company of America ("Guardian"),
parent of FILIC, based on the consolidated financial condition and
operating performance of the
7
company and its life/healthsubsidiaries. During 1997, FILIC changed
its name to Park AvenueLife Insurance Company ("PALIC"). The
agreement with PALIC accounts for approximately 65% of the reinsurance
receivables as of December 31, 1997.
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long-duration reinsurance contracts on premiums
earned in 1997, 1996 and 1995 was as follows:
Shown in thousands
1997 1996 1995
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 33,374 $ 35,891 $ 38,482
Assumed 0 0 0
Ceded (4,735) (4,947) (5,383)
Net premiums $28,639 $ 30,944 $ 33,099
INVESTMENTS
The Company retains the services of a registered investment advisor
to assist the Company inmanaging its investment portfolio. The
Company may modify its present investment strategy at any time,
providedits strategy continues tobe in compliance with the
limitations of state insurance department regulations.
Investment income representsa 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.
December 31,
1997 1996 1995
Fixed maturities and fixed
maturities held for sale $ 12,677,348 $ 13,326,312 $ 13,190,121
Equity securities 87,211 88,661 52,445
Mortgage loans 802,123 1,047,461 1,257,189
Real estate 745,502 794,844 975,080
Policy loans 976,064 1,121,538 1,041,900
Short-term investments 70,624 21,423 21,295
Other 696,486 691,111 642,632
Total consolidated investment
income 16,055,358 17,091,350 17,180,662
Investment expenses (1,198,061) (1,724,61) (1,724,438)
Consolidated net investment
income $ 14,857, 297 $ 15,868,447 $ 15,456,224
At December 31, 1997, the Company had a total of $5,797,000 of investments,
comprised of $3,848,000 in real estate and $1,949,000 in equity
securities, which did not produce income during 1997.
8
The following table summarizes the Company's fixed maturities
distribution at December 31, 1997 and 1996 by ratings category as issued by
Standard and Poor's, a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
1997 1996
Investment Grade
AAA 31% 30%
AA 14% 13%
A 46% 46%
BBB 9% 10%
Below investment grade 0% 1%
100% 100%
The following table summarizes the Company's fixed maturities and fixed
maturities held for sale by major classification.
Carrying Value
1997 1996
U.S. government and government agencies $ 29,701,879 $ 29,998,240
States, municipalities and political
subdivisions 22,814,301 14,561,203
Collateralized mortgage obligations 11,093,926 13,246,780
Public utilities 48,064,818 51,941,647
Corporate 70,964,039 72,140,081
$182,638,963 $181,887,951
The following table shows the composition and average maturity of the
Company's investment portfolio at December 31, 1997.
Carrying Average Average
Investments Value Maturity Yield
Fixed maturities and fixed
maturities held for sale $182,638,963 4 years 6.95%
Equity securities 3,001,744 not applicable 3.63%
Mortgage loans 9,469,444 10 years 7.82%
Investment real estate 11,485,276 not applicable 6.48%
Policy loans 14,207,189 not applicable 6.81%
Short-term investments 1,798,878 330 days 6.33%
Total Investments $222,601,494 7.24%
At December 31, 1997, fixed maturities and fixed maturities held for sale
have a combined market value of $186,451,198.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 $1,798,878 in short-term investments.
Management monitors its investment maturities and in their opinion is
sufficient to meet the Company's cash requirements. Fixed maturities
investments maturing in one year at amoritized cost total $15,107,100 and
fixed maturities in two to five years at amoritizedcost total
$120,382,870.
9
The Company holds approximately $9,469,444 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 $298,000 of mortgage loans, net of a $10,000 reserve
allowance, which are in default and in the process of foreclosure.
These loans represent approximately 3% of the total portfolio. The Company
has one loan of $3,404 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
andclassified 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
areplaced 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 troubledloans. 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.
The mortgage loan reserve is established and adjusted based on
management's quarterly analysis of theportfolio 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 nonpayment 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 $ 536,443 5%
Commercial 1,565,643 17%
Residential 7,367,358 78%
10
Thefollowing table shows a geographic distribution of the mortgage loan
portfolio and real estate held.
Mortgage Real
Loans Estate
New Mexico 3% 0%
Illinois 10% 55%
Kansas 13% 0%
Louisiana 15% 14%
Mississippi 0% 20%
Missouri 2% 1%
North Carolina 7% 6%
Oklahoma 5% 1%
Virginia 4% 0%
West Virginia 38% 2%
Other 3% 1%
Total 100% 100%
The following table summarizes delinquent mortgage loan holdings.
Delinquent
31 Days or More 1997 1996 1995
Non-accrual status $ 0 $ 0 $ 0
Other 308,000 613,000 628,000
Reserve on delinquent
loans (10,000) (10,000) (10,000)
Total Delinquent $ 298,000 $ 603,000 $ 618,000
Interest income
foregone
(Delinquent loans) $ 29,000 $ 29,000 $ 16,000
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.
11
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 factorsinclude policyholder
benefits, service to policyholders, and premium rates.
The insurance industry is a mature industry. In recent years, the
industry hasexperiencedvirtually no growth in life insurance
sales, though the aging population has increased the demandfor
retirement savings products. The products offered (see Products)are
similar to those offeredbyother 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 ofthe
insurance industry.
The industry has experienced a downward trend in the total number of
agents who sell insurance products, and competition for the top sales
producers has intensified.As this trend appears to continue,the
recruitingfocus of the Company has been on introducing quality
individuals to the insurance industry through an extensive internal
training program. The Company feels this approach is conducive to the
mutual success of our new recruits and the Company as these recruits
market our products in a professional, company structured manner.
GOVERNMENT REGULATION
The Company's insurance subsidiaries are assessed contributions by life
and health guaranty associations in almost all states to indemnify
policyholders of failed companies. In several states the company may
reduce premium taxes paid to recover a portion of assessments paid to the
states' guaranty fund association. This right of "offset" may come
under review by the various states, and the company cannotpredict
whether and to what extent legislative initiatives may affect this
right to offset. Also, some state guaranty associations have adjusted the
basis by which they assess the cost of insolvencies to individual
companies. The company believes that its reserve for future guaranty
fund assessments is sufficient to provide for assessmentsrelated to
known insolvencies. This reserve is based upon management's current
expectation of the availability of this right of offset, known
insolvencies and state guaranty fund assessment bases. However, changes
in the basis whereby assessments are charged to individual companies and
changes in the availability of the right to offset assessmentsagainst
premium tax payments could materially affect the company's results.
Currently, the Company's insurance subsidiaries are subject to
government regulation in each of the states in which they conduct business.
Such regulation is vested in state agencies having broad administrative
power dealingwith 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 formand
content of required financial statements and reports;(ix) determine
the reasonableness and adequacy of statutory capital andsurplus; 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 ofany futureproposals or
regulation. The Company's insurance subsidiaries, USA, UG, APPL and ABE
are domiciled in the states of Ohio, Ohio, WestVirginiaand
Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners ("NAIC"). The NAIC is an association whose membership
consists of the insurance commissioners or their designees of the various
states. The NAIC has no direct regulatory authority over insurance
companies, however its primary purpose is to provide a more
consistent method of regulation and reporting from state to state. This
is accomplished through the issuance of model regulations, which can be
adopted by individual states unmodified, modified to meet the state's own
needs or requirements, or dismissed entirely.
12
Most statesalso have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled
byother corporations licensed to transact business within their
respective jurisdictions. The insurance subsidiaries are subject to such
legislation and registered as controlled insurers in those jurisdictions
in which such registration is required. Statutes vary from state to state
but typically require periodic disclosure concerning the corporation that
controls the registered insurers and all subsidiaries of such corporation.
In addition, prior notice to, or approval by, the state insurance commission
ofmaterial intercorporate transfersof assets, reinsurance
agreements, management agreements (see Note 9 of the Notes to the
Consolidated Financial Statements), and payment of dividends (see Note 2 of
the Notes to the Consolidated Financial Statements) in excessof
specified amounts by the insurance subsidiary within the holding company
system are required.
Each year the NAIC calculates financial ratio results (commonly referred
toas IRIS ratios) for each company. These ratios compare various
financial information pertaining to the statutory balance sheetand
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.
Atyearend 1997, the insurance companies had one ratio outside the
normal range. The ratio is related to the decrease in premium
income. The ratio fell outside the normal range the last three years.
The cause for the decrease in premium income is related to the possible
change in control of UTI over the last two years to two different
parties. At year end 1996 it was announced that UTI was to be acquired
by an unrelated party, but the sale did not materialize. At this writing
negotiationsare progressing with a different unrelated party for the
change in control of UTI. Please refer to the Notes to the Consolidated
Financial Statements for additional information. The possible changes
incontrolover the last two yearshave hurtthe insurance
companies' ability to recruit new agents. The active agents were
apprehensive due to uncertainties in relation to the change incontrol
ofUTI. In recent years, the industry experienced a declinein
the total number of agents selling insurance products and therefore
competition has increased for quality agents. Accordingly, new business
production decreased significantly over the last two years.
A life insurance company's statutory capital is computed accordingto
rules prescribed by the National Association of Insurance Commissioners
("NAIC"), as modified by the insurance company's state ofdomicile.
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 maysecure additional statutory capital through
various sources, such as internally generated statutory earnings or
equity contributions by the Company from funds generated through debt
or equity offerings.
The NAIC's risk-based capital requirements require insurance companies
to calculate and report information under a risk-based capital formula.
The risk-based capital formula measures the adequacyofstatutory
capital and surplus in relationto investmentand
insurance risks such as asset quality, mortality and morbidity, asset
and liability matching and other business factors.The RBC formula is
used by state insurance regulators as an earlywarningtool to
identify, for the purpose of initiating regulatoryaction,
insurance companiesthat potentially are inadequately capitalized.
Inaddition, the formula defines new minimumcapitalstandards
that will supplement the current system of low fixed minimum capital
and surplus requirementson a state-by-statebasis. Regulatory
compliance is determined by a ratio of the insurancecompany'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.
13
The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1997, each of the insurance subsidiaries has a Ratio
that is in excess of 3, which is 300% of the authorized control level;
accordingly the insurance subsidiaries meet the RBC requirements.
The NAIC, in conjunction with state regulators, has been reviewing
existing insurance laws and regulations. A committee of the NAIC
proposed changes inthe regulations governing insurance company
investments and holding company investments in subsidiariesand
affiliates which were adopted by the NAIC as model laws in 1996.The
Company does not presently anticipate any material adverse change in its
business as a result of these changes.
Legislative and regulatory initiatives regarding changesinthe
regulation of banks and other financial services businessesand
restructuring of the federal income tax system could, if adopted and
depending on the form they take, have an adverse impact on the company
by altering the competitive environment for its products. The outcome
and timing of any such changes cannot be anticipated at this time, but
the company will continue to monitor developments in order to respond
to any opportunities or increased competition that may occur.
The NAIC has recently released the Life Illustration Model
Regulation. Many states have adopted the regulation effective January
1, 1997.This regulation requires products which contain non-guaranteed
elements,such as universal life and interest sensitive life, to
comply with certain actuarially established tests. These tests are
intended to target future performance and profitability of a product
under various scenarios. The regulation does not prevent a company from
selling a product that does not meet the various tests. The only
implication is the way in which the product is marketed to the consumer. A
product that does not pass the tests uses guaranteed assumptions rather
than current assumptions in presenting future product performance to the
consumer.The Company conducts an ongoing thorough review of its sales
and marketing process and continues to emphasize its compliance efforts.
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rulesand
regulations. This project is not expected to be completed earlier
than1999. Specific recommendations have been set forth in papers issued
by the NAIC for industry review. The Company is monitoring the process,
but the potential impact of any changes in insurance accounting standards
is not yet known.
EMPLOYEES
There are approximately 90 persons who are employed by the Company
and its affiliates.
14
ITEM 2. PROPERTIES
The following tableshows a breakout of property, net of
accumulated depreciation, owned and occupied by the Company and the
distribution of real estate by type.
Property owned Amount % of Total
Home Office $ 2,815,241 20%
Investment real estate
Commercial $ 4,355,450 30%
Residential development $ 5,405,282 38%
Foreclosed real estate $ 1,724,544 12%
$11,485,276 80%
Grand total $14,300,517 100%
Total investment real estate holdings represent approximately 3% ofthe
total assets of the Company net of accumulated depreciation of
$539,366 and $442,373 at year end 1997 and 1996 respectively.The
Company owns an office complex in Springfield, Illinois, which houses the
primary insuranceoperations. The office buildings contain 57,000
squarefeet ofoffice and warehouse space. The properties are
carried at approximately $2,394,360. 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 $165,882.The
facilities occupied by the Company are adequate relative tothe
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 propertiesare 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.
Foreclosedproperty 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.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
None
15
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDERS MATTERS
On June 18, 1990, UTI became a member of NASDAQ. Quotations began on
that date under the symbol UTIN. The following table shows the high and
low bid quotations for each quarterly period during the past two years,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
BID
PERIOD LOW HIGH
1997
First quarter 3 3/4 5 5/8
Second quarter 4 5/8 5 1/4
Third quarter 9 1/4 9 1/2
Fourth quarter 8 8
BID
PERIOD LOW HIGH
1996
First quarter 3 3/4 5 5/8
Second quarter 3 3/4 6 7/8
Third quarter 5 6 7/8
Fourth quarter 3 3/4 7 1/2
On May 13, 1997, UTI effected a 1 for 10 reverse stock split.
Fractional shares received a cash payment on the basis of $1.00 for each
old share. The reverse split was completed to enable UTI to meet new
NASDAQ requirements regarding market value of stock to remain listed on
the NASDAQ market and to increase the market value per share to a level
where more brokers will look at UTI and its stock. Prior period numbers
have been restated to give effect of the reverse split.
CURRENT MARKET MAKERS ARE:
M. H. Meyerson and Company
30 Montgomery Street
Jersey City, NJ 07303
Herzog, Heine, Geduld, Inc.
26 Broadway, 1st Floor
New York, NY 10004
As of December 31, 1997, 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 13, 1998 is 5,444.
16
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1997 1996 1995 1994 1993
Premium income
net of
reinsurance $ 28,639 $ 30,944 $ 33,099 $ 35,145 $ 33,530
Total revenues $ 43,992 $ 46,976 $ 49,869 $ 49,207 $ 48,541
Net loss* $ (559) $ (938) $ (3,001) $ (1,624) $ (862)
Net loss per
share $ (0.32) $ (0.50) $ (1.61) $ (0.90) $ (0.50)
Total assets $349,300 $355,474 $356,305 $360,258 $375,755
Total long-term
debt $ 21,460 $ 19,574 $ 21,447 $ 22,053 $ 24,359
Dividends paid
per share NONE NONE NONE NONE NONE
*Includes equity earnings of investees.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's
consolidated results of operations, financial condition and liquidity and
capital resources. This analysis should be readin conjunction with the
consolidated financial statements and related notes which appear elsewhere
in this report. The Company reports financial results on a consolidated
basis. The consolidated financial statements include the accounts of UTI
and its subsidiaries at December 31, 1997.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
(A) REVENUES
Premiums and policy fee revenues, net of reinsurance premiums and policy
fees, decreased 7% when comparing 1997 to 1996. The Company
currently writes little new traditional business, consequently,
traditional premiums will decrease as the amount of traditional business
in-force decreases. Collected premiums on universal life and interest
sensitive products is not reflected in premiums and policy revenues
because Generally Accepted Accounting Procedures ("GAAP") requires that
premiumscollected on these types of products be treated as deposit
liabilities rather than revenue. Unless the Company acquires a block of
inforce business or marketing changes its focus totraditional
business, premium revenue will continue to decline.
Another cause for the decrease in premium revenues is relatedto the
potential change in control of UTI over the last two years to two
different parties. During September of 1996, it was announced that
control of UTI would pass to an unrelated party, butthe change in
control did not materialize. At this writing, negotiations are progressing
with a different unrelated party for the change in control of UTI. Please
refer to the Notes to the Consolidated FinancialStatements for
additional information. The possible changes and resulting uncertainties
have hurt the insurance companies' ability to recruit and maintain
sales agents.
New business production decreased significantly over the last two years.
New business production decreased 43% or $3,935,000 when comparing 1997 to
1996. In recent years, the insurance industry asawholehas
experienced a decline in the total number of agents who sell insurance
products, therefore competition has intensified for top producing sales
agents. The relatively small size of our companies, and the resulting
limitations, have made it challenging to compete in this area.
A positive impact on premium income is the improvement of
persistency. Persistency is a measure of insurance in force retained
in relation to the previous year. The Companies' average persistency
rate for all policies in force for 1997 and 1996 has been approximately
89.4% and 87.9%, respectively.
Net investment income decreased 6% when comparing 1997 to 1996. The
decrease relates to the decrease in invested assets from a coinsurance
agreement. The Company's insurance subsidiary UG entered into a
coinsurance agreement with First International Life InsuranceCompany
("FILIC"), an unrelated party, as of September 30, 1996. During 1997,
FILIC changed its name to Park Avenue Life Insurance Company ("PALIC").
Under the terms of the agreement, UG ceded to FILIC substantially all of
its paid-up life insurance policies. Paid-up life insurance generally
refers to non-premium paying life insurance policies. At closing of the
transaction, UG received a coinsurance credit of $28,318,000for policy
liabilities covered under the agreement. UG transferred assets equal to
the credit received. This transfer included policy loans of $2,855,000
associated with policies under the agreement and a net cash transfer of
$19,088,000, after deducting the ceding commission due UG of $6,375,000.
To provide the cash required to be transferred under the agreement, the
Company sold $18,737,000 of fixed maturity investments.
18
The overall investment yields for 1997, 1996 and 1995, are 7.24%, 7.29%
and 7.12%, respectively. Since 1995, investment yield improved due to
the fixed maturity investments. Cash generated from the sales of
universal life insurance products, has been invested primarily in our
fixed maturity portfolio.
The Company's investments are generally managed to match related insurance
and policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates
is 1% on the "Century 2000" universal life insurance product, which
currentlyis the Company's primary sales product. The Company monitors
investment yields, and when necessary adjusts credited interest rates on
its insurance products to preserve targeted interest spreads. It is
expectedthat monitoring of the interest spreads by management will
provide the necessary margin to adequately provide for associated
costs on the insurance policies the Company currently has in force and
will write in the future.
Realized investment losses were $279,000 and $988,000 in 1997 and 1996,
respectively. Approximately $522,000 of realized losses in 1996 are due to
the charge-off of two specific investments. The Company realized a loss
of $207,000 from a single loan and $315,000 from an investment in
First Fidelity Mortgage Company ("FFMC"). The charge-off of the loan
represented the entire loan balance at the time of the charge-off.
Additionally, the Company sold two foreclosed real estate properties
that resulted in approximately $357,000 in realized losses in 1996.The
Company had other gains and losses during the period that comprisedthe
remaining amount reported but were immaterial in nature on an
individual basis.
(B) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 11% in
1997 as compared to 1996. The decrease in premium revenues resulted
in lower benefit reserve increases in 1997. In addition, policyholder
benefits decreased due to a decrease in death benefit claims of $162,000.
In 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be
not insurable by Company standards. These nonstandard policies had a
face amount of $22,700,000 and represented 1/2 of 1% of the insurance
in-force in 1994. Management's initial analysis indicated that expected
death claims on the business in-force was adequate in relation to mortality
assumptions inherent in the calculation of statutory reserves. Nevertheless,
management determined it was in the best interest of the Company to
repurchase as many of the non-standard policies as possible. Through
December 31, 1996, the Company spent approximately $7,099,000 for the
settlement of non-standard policies and for the legal defense of
related litigation. In relation to settlement of non-standard policies the
Company incurred life benefit costs of $3,307,000, and $720,000 in
1996 and 1995, respectively. The Company incurred legal costs
of $906,000 and $687,000 in 1996 and 1995, respectively. All
policies associated with this issue have been settled as of December 31,
1996. Therefore, expense reductions for 1997 would follow.
Commissions and amortization of deferred policy acquisition costs decreased
14% in 1997 compared to 1996. The decrease is due primarily due to a
reduction in commissions paid. Commissions decreased 19%in 1997
compared to 1996. The decrease in commissions was due to the decline
in new business production. There is a direct relationship between
premium revenues and commission expense. First year premium production
decreased43% and first year commissions decreased 33% when comparing
1997to 1996. Amortization of deferred policy acquisition costs
decreased6% in 1997 compared to 1996. Management would expect
commissions and amortization of deferred policy acquisition costs to
decrease in the future if premium revenues continue to decline.
19
Amortization of cost of insurance acquired decreased 57% in 1997 compared
to 1996. Cost of insurance acquired is amortized in relation to
expected future profits, including direct charge-offs for any excess of the
unamortized asset over the projected future profits. The Company did not
have any charge-offs during the periods covered by this report.The
decreasein amortization duringthe current period is a normal
fluctuation due to the expected future profits. Amortizationof
costofinsurance acquired is particularly sensitive to changes in
persistency of certain blocks of insurance in-force.The
improvement of persistency during the year had a positive impact on
amortization of cost of insurance acquired. Persistency is a measure
of insurance in force retained in relation to the previous year. The
Company's average persistency rate for all policies in force for 1997 and
1996 has been approximately 89.4% and 87.9%, respectively.
Operating expenses decreased 23% in 1997 compared to 1996. The decrease
in operating expenses is directly related to settlement of certain
litigation in December of 1996. The Company incurred legal costs of $0,
$906,000 and $687,000 in 1997, 1996 and 1995, respectively in relation to
the settlement of the non-standard insurance policies.
Interestexpense increased 5% in 1997 compared to 1996. Since December
31, 1996,notes payable increased approximately $1,886,000.
Average outstanding indebtedness was $20,517,000 with an average cost
of 8.9% in 1997 compared to average outstanding indebtedness of
20,510,000 with an average cost of 8.5% in1996. The increase in
outstanding indebtedness was due to the issuance of convertible notes to
seven individuals, all officers or employees of UTI. In March 1997, the
baseinterest rate for most of the notes payable increased a quarter
of a point.The base rate is defined as the floating daily, variable
rateofinterest determined and announced by First of America Bank.
Please referto Note 12 "Notes Payable" in the Consolidated
Notes to the Financial Statements for more information.
(C)NET LOSS
The Company had a net loss of $559,000 in 1997 compared to a net loss of
$938,000 in 1996. The improvement is directly related to the decrease in
life benefits and operating expenses primarily associated with the 1996
settlement and other related costs of the non-standard life insurance
policies.
1996 COMPARED TO 1995
(A)REVENUES
Premium and policy fee revenues, net of reinsurance premium, decreased
7% whencomparing 1996 to 1995.The decrease in premium income is
primarily attributed to a 15% decrease in new business production. 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 based on consumer demand.
In addition, 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 nonrecurring write down of the value of agency
force asset in 1995, see discussion of amortization of agency force
for further details.). The change in distribution systems effectively
reduced the total number of agents representing and producing business
for the Company. Broker agents sell insurance and related products
for several companies. Captive agents sell for only one company.
A positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained
in relationto the previous year. The Companies' average
persistency rate for all policies in force for 1996 and 1995 has been
approximately 87.9% and 87.3%, respectively.
20
Net investment income increased 3% when comparing 1996 to1995. The
overallinvestment yields for 1996 and 1995 are 7.29% and 7.12%,
respectively. The improvement in investment yield is primarily
attributed to fixed maturity investments. Cash generated fromthe
sales of universal life insurance products, has been invested primarily in
our fixed investment portfolio.
The Company's investments are generally managed to match related insurance
and policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread.The minimum interest spread between earned and credited rates
is 1% on the "Century 2000" universal life insurance product, which
currently is the Company's primary sales product. The Company monitors
investment yields, and when necessary adjusts credited interest rates on
its insurance products to preserve targeted interest spreads. It is
expected that monitoring of the interest spreads by management will
providethenecessary margin to adequately provide for associated
costs on the insurance policies the Company currently has in force and
will write in the future.
Realized investment losses were $988,000 and $124,000 in 1996 and 1995,
respectively. Approximately $522,000 of realized losses in 1996 are due to
the charge-off of two specific investments. The Company realized a
loss of $207,000 from a single loan and $315,000 from an investment
in First Fidelity Mortgage Company ("FFMC"). The charge-off of the loan
represented the entire loan balance at the time of the charge-off.
Additionally, the Company sold two foreclosed real estate properties
that resulted in approximately $357,000 in realized losses in 1996. The
Company had other gains and losses during the period that comprised the
remaining amount reported but were immaterial in nature on an
individual basis.
(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 nonstandard policieshad a
face amount of $22,700,000 and represented1/2 of 1% of the insurance
in-force in 1994. Management's initial analysis indicated that expected
death claims on the business in-force was adequate in relation to
mortality assumptions inherent in the calculation of statutory reserves.
Nevertheless, management determined it was in the best interest of the
Company to repurchase as many of the non-standard policies as possible.
Through December 31, 1996, the Company spent approximately $7,099,000 for
the settlement of non-standard policies and for the legal defense of
related litigation. In relation to settlement of non-standard policies
the Company incurred life benefits of $3,307,000 and $720,000 in 1996
and 1995, respectively. The Company incurred legal costs of $906,000 and
$687,000 in 1996 and 1995, respectively. All the policies associated
with this issue have been settled as of December 31, 1996. The Company has
approximately $3,742,000 of insurance inforce and $1,871,000 of reserves
from the issuance of paid-up life insurance policies for settlement of
matters related to the original non-standard policies. Management believes
the reserves are adequate in relation to expected mortality on this block
of in-force.
Commissions and amortization of deferred policy acquisition costs decreased
14% in 1996 compared to 1995. The decrease is due to a decreasein
commissions expense. Commissions decreased 15% in 1996compared to
1995. The decrease in commissions was due to the decline innew
business production. There is a direct relationship betweenpremium
revenuesandcommission expenses. First year premium production
decreased15% andfirst year commissions decreased 32% when
comparing1996 to1995. Amortization of deferred policy acquisition
costs decreased 12% in 1996 compared to 1995. Management expects
commissionsand amortization of deferred policy acquisition costs to
decrease in the future if premium revenues continue to decline.
21
Amortization of cost of insurance acquired increased 25% in 1996 compared
to1995. 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
increaseinamortization during thecurrent 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 Companychanged its focus from primarily a broker agency
distribution system to a captive agent system. Business produced by
the broker agency force inrecent years did notmeet 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 tore-
evaluateandwrite-off the value of the agency force carried onthe
balance sheet.
Operating expenses increased 4% in 1996 compared to 1995.The primary
factor that caused the increase in operating expensesis directly
relatedtoincreased legal costs and reserves establishedfor
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 and $687,000 in 1996 and 1995,
respectively in relation to the settlement of the non-standard insurance
policies.
Interest expense decreased 12% in 1996 compared to 1995. Since December
31, 1995, notes payable decreased approximately $1,873,000 that
has directly attributed to the decrease in interest expense during
1996. Interest expense was also reduced, as a result of the refinancing of
the senior debt under which the new interest rate is more favorable.
Please refer to Note 11 "Notes Payable" of the Consolidated Notes
to the Financial Statements for more information on this matter.
(C) NET LOSS
The Company had a net loss of $938,000 in 1996 compared to a net loss of
$3,001,000 in1995. 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.
FINANCIAL CONDITION
(A) ASSETS
Investments are the largest asset group of the Company. The Company's
insurance subsidiaries are regulated by insurance statutes and
regulations as to the type of investments that they are permitted to make
and the amount of funds that may be used for any one type of investment.
In light of these statutes and regulations, and the Company's business and
investment strategy, the Company generally seeks to invest in United
States government and government agency securities and corporate
securities rated investment grade by established nationally recognized
rating organizations.
The liabilities are predominantly long-termin nature and
therefore, the Company invests in long-term fixed maturity
investments that are reported in the financial statements at their
amortized cost. The Company has the ability and intent to hold these
investments to maturity; consequently, the Company does not expect to
realize any significant loss from these investments. The Company does
not own any derivative investments or "junk bonds". As of December 31,
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 changesin market
value charged directly to shareholders' equity.
22
The following table summarizes the Company's fixed maturities distribution
at December 31, 1997 and 1996 by ratings category as issued by
Standard and Poor's, a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
1997 1996
Investment Grade
AAA 31% 30%
AA 14% 13%
A 46% 46%
BBB 9% 10%
Below investment grade 0% 1%
100% 100%
Mortgage loans decreased 14% in 1997 as compared to 1996. The Company
isnot actively seeking new mortgage loans, and the decrease is due
toearly pay-offs from mortgagee's seeking refinancing at lower
interest rates. All mortgage loans held by theCompany are first
position loans. The Company has $298,227 in mortgage loans, net of a
$10,000 reserve allowance, which are in default and in the process of
foreclosure, this represents approximately 3% of the total portfolio.
Investment real estate and real estate acquired in satisfaction ofdebt
decreased slightly in 1997 compared to 1996.Investment real estate
holdings represent approximately 3% of the total assets of the Company.
Totalinvestment real estate is separated intothree categories:
Commercial 38%, Residential Development 47% and Foreclosed Properties 15%.
Policy loans decreased 2% in 1997 compared to 1996. Industry experience
for policy loans indicates few policy loans are ever repaid by the
policyholder other than through termination of the policy. Policy loans
are systematically reviewed to ensure that no individual policy loan
exceeds the underlying cash value of the policy.Policy loans will
generally increase due to new loans and interest compounding on existing
policy loans.
Deferred policy acquisition costs decreased 6% in 1997 compared to 1996.
Deferred policy acquisition costs, which vary with, and are primarily
related to producing new business, are referredto as ("DAC").DAC
consists primarily of commissions and certain costs of policy issuance and
underwriting, net of fees charged to the policy in excess of ultimate
fees charged. To the extent these costs are recoverable from future
profits, the Company defers these costs and amortizes them with interest
inrelation to the present value of expected gross profits from
the contracts,discounted using the interest ratecredited by the policy.
The Company had $586,000 in policy acquisition costs deferred, $425,000
in interest accretion and $1,735,636 in amortization in 1997.
The Company did not recognize any impairment during the period.
Cost of insurance acquired decreased 5% in 1997 compared to 1996. At
December 31, 1997, cost of insurance acquired was $41,523,000and
amortizationtotaled $2,394,000 for the year. When an insurance
company is acquired, the Company assigns a portion of its cost to the
right to receive future cash flows from insurance contracts existing at the
date of the acquisition. The cost of policies purchased represents the
actuarially determined present value of the projected future cash
flowsfromthe acquired policies. Cost of Insurance Acquired is
amortized with interest in relation to expected future profits, including
direct chargeoffs for any excess of the unamortized asset over the
projected future profits.
23
(B) LIABILITIES
Total liabilities increased slightly in 1997 compared to 1996. However,
future policy benefits which represented 81% of total liabilities at
December 31, 1997, decreased slightly in 1997.
Policy claims and benefits payable decreased 35% in 1997 compared to 1996.
Thereis no single event that caused this item to decrease. Policy
claims vary from year to year and therefore, fluctuations in this
liability are to be expected and arenot considered unusual by
management.
Other policyholder funds decreased 12% in 1997 compared to 1996. 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 futurepolicy
premiums. The change in marketing from traditional insurance products
touniversal life insurance products is the primary reason for the
decrease. Universal life insurance products do nothave 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 7% in 1997 compared
to 1996. The increase is attributed to the significant amount of
participating business the Company has in force. Over 47% of all
dividends paid were put on deposit with the Company to accumulate with
interest. Management expects this liability to increase in the future.
Income taxes payable and deferred income taxes payable increased 7% in
1997 compared to 1996. The change in deferred income taxes payableis
attributableto temporary differences between Generally Accepted
Accounting Principles ("GAAP") and tax basis accounting. Federal income
taxes are discussed in more detail in Note 3 of the Consolidated Notes to
the Financial Statements.
Notes payable increased approximately $1,886,000 in 1997 compared to 1996.
On July 31, 1997, United Trust Inc. issued convertible notes totaling
$2,560,000 to seven individuals, all officers or employees of United Trust
Inc. The notes bear interest at a rate of 1% over prime, with interest
paymentsdue quarterly and principal due upon maturity of July 31,
2004.The conversion price of the notes are graded from $12.50 per share
for the first three years, increasing to $15.00 per share for the next
two years and increasing to $20.00 per share for the last two years. As
of December 31, 1997, the notes were convertible into 204,800 shares of
UTI common stock with no conversion privileges having been exercised.
The Company's long-term debt is discussed in more detail in Note 12 of
the Notes to the Financial Statements.
(C) SHAREHOLDERS' EQUITY
Totalshareholders' equity decreased 15% in 1997 compared to 1996.
The decrease is attributable to the Company's acquisition of treasury
stock. As indicated in the notes payable paragraph above, on July 31,
1997 UTI issued convertible notes totaling $2,560,000. The notes were
issued to provide UTI with additional funds to be used for the following
purposes.
A portion of the proceeds in combination with debt instruments were used
to acquire approximately 16% of the Larry E. Ryherd and family stock
holdingsin UTI. This transaction reduced the largest shareholder's
stock holdings for the purpose of making UTI stock more attractive to the
investment community.
Additionally, a portion of the proceeds in combination with debt
instruments were used to acquire the stock holdings of Thomas F. Morrow
and family in UTI and UII. Simultaneous to this stock acquisition Mr.
Morrow retired as an executive officer of UTI. Mr. Morrow's retirement
will provide an annual cost savings to the Company in excess of debt
service on the new notes.
The remaining proceeds of approximately $1,500,000, of the original
$2,560,000, will be used to reduce the outstanding debt of the Company.
24
LIQUIDITY AND CAPITAL RESOURCES
The Company has three principal needs for cash - the insurance
companies' contractual obligations to policyholders, the payment of
operating expenses and the servicing of its long-term debt. Cash and cash
equivalents as a percentage of total assets were 5% as of December 31, 1997,
and 1996, respectively. Fixed maturities as a percentage of total
invested assets were 82% as of December 31, 1997 and 1996.
Future policy benefits are primarily long-term in nature and
therefore, the Company's investments are predominantly in longterm fixed
maturity investments such as bonds and mortgage loans which provide
sufficient return to cover these obligations. The Company has the
ability and intent to hold these investments to maturity; consequently,
the Company's investment in long-term fixed maturities is reported in the
financial statements at their amortized cost.
Many of the Company's products contain surrender charges and other
features which reward persistency and penalize the early withdrawal of
funds. With respect to such products, surrender charges are generally
sufficient to cover the Company's unamortized deferred policy acquisition
costs with respect to the policy being surrendered.
Cash provided by operating activities was $23,000, $3,140,000 and 486,000
in 1997, 1996 and 1995, respectively.The net cash provided by
operating activities plus net policyholder contract deposits after the
paymentof policyholder withdrawals equaled $3,412,000 in 1997,
$9,952,000 in 1996 and $9,499,000 in1995. Management utilizes this
measurementof cash flows as an indicator of the performance of
theCompany's insurance
operations, since reporting regulations require cash inflows and outflows
fromuniversal life insurance products to be shownas financing
activities when reporting on cash flows.
Cash provided by (used in) investing activities was ($2,989,000),
$15,808,000 and ($8,063,000), for 1997, 1996 and 1995, respectively.
The most significant aspect of cash provided by (used in) investing
activities are the fixed maturity transactions. Fixed maturities
account for 70%, 81% and 76% of the total cost of investments acquired
in 1997, 1996 and 1995, 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 $1,746,000,
($14,150,000) and $8,408,000 for 1997, 1996 and 1995, respectively.
The change between 1997 and 1996 is due to a coinsurance
agreement with FILIC 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 20% in 1997 compared to 1996,
and decreased 11% in 1996 when compared to 1995. Policyholder
contract withdrawals has decreased 6% in 1997 compared to 1996, and
decreased 4% in 1996 compared to 1995. The change inpolicyholder
contract withdrawals is not attributable to any one significant
event. Factorsthat influence policyholder contract withdrawals are
fluctuation of interest rates, competition and other economic factors.
At December 31, 1997, the Company had a total of $21,460,000 in long-term
debt outstanding. Long-term debt principal reductions are approximately
$1.5 million per year over the next several years. The senior debt is
through First of America Bank - NA and is subject to a credit agreement.
The debt bears interest to a rate equal to the "base rate" plus nine
sixteenths of one percent. The Base rate is definedasthe
floatingdaily, 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, when it increased to 8.5%. Interestis 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, 1997,the Company prepaid the $1,000,000 May 8,1998,
principal payment.
25
The subordinated debt was incurred June 16, 1992 as a part of the
acquisition ofthe nowdissolved Commonwealth Industries
Corporation, (CIC). The 10-year notes bear interest at the rate of 7 1/2%
per annum, payable semi-annually beginning December 16, 1992. These
notes, except for one $840,000 note, provide for principalpayments
equal to 1/20th of the principal balancedue with each interest
installment beginning December 16, 1997, with a final payment due June
16, 2002. The aforementioned $840,000 note provides for a lump sum
principal payment due June 16, 2002. Principal reductions of $516,500 per
year are required on the aforementioned notes.
As of December 31, 1997 the Company has a total $22,575,000 of cash and
cash equivalents, short-term investments and investments held for sale in
comparison to $21,460,000 of notes payable. UTI and FCC servicethis
debt through existing cash balances and management fees received from the
insurance subsidiaries. FCC is further able to service this debt
through dividends it may receive from UG.See note 2 in the notes to
theconsolidated financial statements for additional information
regarding dividends.
Since UTI is a holding company, funds required to meet its debt service
requirements and other expenses are primarily providedbyits
subsidiaries. On a parent only basis, UTI's cash flow is dependent on
revenues from a management agreement with UII and its earnings received
on invested assets and cash balances. At December31, 1997,
substantially all of the consolidated shareholders equity represents
net assets of its subsidiaries. Cash requirements of UTI primarily
relate to servicing its longterm debt.The Company's insurance
subsidiaries have maintained adequate statutory capital and surplus and
have not used surplus relief or financial reinsurance, which have come
under scrutiny by many state insurance departments. The payment of
cash dividends toshareholders is not legally restricted.However,
insurance company dividend payments are regulated by the state insurance
department where the company is domiciled. UTI is the ultimate parent of
UG through ownership of several intermediary holding companies. UG can
not pay a dividend directly to UTI due to the ownership structure. Please
refer to Note 1 of the Notes to the Consolidated Financial Statements.
UG's dividend limitations are described below without effect of the
ownership structure.
Ohio domiciledinsurance companiesrequire 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
capitaland surplus. For the year ended December 31, 1997, UG had a
statutory gain from operations of $1,779,000. At December 31, 1997, UG's
statutory capital and surplus amounted to $10,997,000. Extraordinary
dividends (amounts in excess of ordinary dividend limitations)
require prior approval of the insurance commissioner and are not
restricted to a specific calculation.
A life insurance company's statutory capital is computed accordingto
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
viewby, 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
varioussources, such as internally generated statutory earnings or
equity contributions by the Company from funds generated through debt
or equity offerings.
The NAIC's risk-based capital requirements require insurance companies
to calculate and report information under a risk-based capital formula.
The risk-based capital formula measures the adequacy of statutory
capitaland surplus in relationto investment and insurance risks
such as asset quality, mortality and morbidity, asset and liability
matching and other business factors. The RBC formula is used by state
insurance regulators as an early warning tool to identify, for the
purposeof initiating regulatory action, insurance companies
that potentially are inadequately capitalized. In addition, the
formuladefines 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 complianceis
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.
26
The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1997, each of the insurance subsidiaries has a Ratio
thatis in excess of 3, which is 300% of the authorized control level;
accordingly the insurance subsidiaries meet the RBC requirements.
The Company's insurance subsidiaries operate under the regulatory scrutiny
of the respective state insurance department where each companyis
licensed. The Company is not aware of any current recommendations by
these regulatory authorities which, if they were to be implemented,
would have a material effecton the Company's liquidity, capital
resources or operations.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
REGULATORY ENVIRONMENT
The Company's insurance subsidiaries are assessed contributions by life
and health guaranty associations in almost all states to indemnify
policyholders of failed companies.In several states the company may
reduce premium taxes paid to recover a portion of assessments paid to the
states' guaranty fund association. This right of "offset" may come
under review by the various states, and the company cannotpredict
whether and to what extent legislative initiatives may affect this
right to offset.Also, some state guaranty associations have adjusted the
basis by which they assess the cost of insolvencies to individual
companies. The Company believes that its reserve for future guaranty
fund assessments is sufficient to provide for assessments relatedto
known insolvencies. This reserve is based upon management's current
expectation ofthe availabilityof this right of offset, known
insolvencies and state guaranty fund assessment bases. However, changes
in the basis whereby assessments are charged to individual companies and
changes in the availability of the right tooffset assessmentsagainst
premium tax payments could materially affect the company's results.
Currently,the Company's insurance subsidiaries are subjectto
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
policyforms; (vi) approve premium rates for some lines of business;
(vii) establish reserve requirements; (viii) prescribe the formand
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 ABE
are domiciled in the states ofOhio, Ohio, WestVirginiaand
Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various
states, the federal governmentand the National Association of
Insurance Commissioners ("NAIC"). The NAIC is an association whose
membership consistsof the insurance ommissioners or
their designees of the various states. The NAIC has no direct
regulatory authority over insurance companies, however itsprimary
purpose is to provide a more consistent method of regulation and
reporting from state to state. Thisis accomplished through the issuance
of model regulations, which can be adopted
27
by individual states unmodified, modified to meet the state's own needs or
requirements, or dismissed entirely. Most states also have insurance
holding company statutes which require registrationand periodic
reporting by insurance companiescontrolled by other corporations
licensed totransact business within their respective jurisdictions.
The insurancesubsidiaries are subject to such legislationand
registered as controlled insurersin those jurisdictions in which
such registration is required. Statutes vary from state to statebut
typically require periodic disclosure, concerning the corporation, that
controls the registered insurers and all subsidiaries of such corporation.
In addition, prior notice to, or approval by, the state insurance commission
of material intercorporate transfers of assets, reinsurance agreements,
management agreements (see Note 9 in the notes to the consolidated
financial statements), and payment of dividends (see note 2 in the notes to
the consolidated financial statements) in excess of specified amounts by
the insurance subsidiary, within the holding company system, are required.
Each year the NAIC calculates financial ratio results (commonly referred
to as IRIS ratios) for each company. These ratios compare various
financial information pertaining to the statutory balancesheetand
incomestatement. The results are then compared to pre-established
normal ranges determined by the NAIC. Results outside the range typically
require explanation to the domiciliary insurance department.
At year-end 1997, the insurance companies had one ratio outside the
normalrange. The ratio is related to the decreasein premium
income. The ratio fell outside the normal range the last three years. A
primary cause for the decrease in premium revenues is related to the
potential change in control of UTI over the last two years to two
different parties. During September of 1996, it was announced that
control ofUTI would passto an unrelated party, but the transaction
did not materialize. At this writing, negotiations are progressing with
a different unrelated party for the change in control of UTI. . Please
refer to the Notes to the Consolidated Financial Statements for
additional information. The possible changes and resulting uncertainties
have hurt the insurance companies' ability to recruit and maintain sales
agents. The industry has experienced a downward trend in the total
number of agents who sell insurance products, and competition for the
top sales producers has intensified. As this trend appears to continue,
the recruiting focus of the Company has been on introducing quality
individuals to the insurance industry through an extensive internal
training program. The Company feels this approach is conducive to the
mutual success of our new recruits and the Company as these recruits market
our products in a professional, company structured manner.
The NAIC,in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC proposed changes in
the regulations governing insurance company investments and holding company
investments in subsidiaries and affiliates which were adopted by the NAIC as
model laws in 1996. The Company does not presently anticipate any material
adverse change in its business as a result of these changes.
Legislative and regulatory initiatives regarding changes in the regulation of
banks and other financial services businesses and restructuring of the federal
income tax system could, if adopted and depending on the form they take, have
an adverse impact on the Company by altering the competitive environment for
its products. The outcome and timing of any such changes cannot be anticipated
at this time, but the Company will continue to monitor developments in order
to respond to any opportunities or increased competition that may occur.
The NAIC adopted the Life Illustration Model Regulation. Many states
have adopted the regulation effective January 1, 1997. This regulation
requires products which contain non-guaranteed elements, such as universal
life and interest sensitive life, to comply with certain actuarially
established tests. These tests are intended to target future performance
and profitability of a product under various scenarios.The regulation
does not prevent a company from selling a product that does not meet the
various tests. The only implication is the way in which the product is
marketed to the consumer. A product that does not pass the tests uses
guaranteed assumptions rather than current assumptions in presenting
futureproduct performance to the consumer. The Company conducts an
ongoing thorough review of its sales and marketing processand
continues to emphasize its compliance efforts.
28
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and
regulations. This project is not expected to be completed earlier
than 1999. Specific recommendations have been set forth in papers issued
by the NAIC for industry review. The Company is monitoring the process,
but the potential impact of any changes in insurance accounting standards
is not yet known.
ACCOUNTING AND LEGAL DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued Statement
of Financial Accounting Standards (SFAS) No. 128 entitled Earnings
per share, which is effective for financial statements for fiscal years
beginning after December 15, 1997. SFAS No. 128 specifiesthe
computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held
common stock or potential common stock. The Statement's objective is to
simplify the computation of earnings per share, and to make the U.S.
standard for computing EPS more compatible with the EPS standards of other
countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS. Basic
EPS is calculated by dividing income available to commonstockholders
(i.e., net income or loss adjusted for preferred stock dividends) by
the weighted-average number of common shares outstanding. Thus, in the
most significant change in current practice, options, warrants,and
convertible securities are excluded from the basic EPS calculation.
Further, contingently issuable shares are included in basic EPS only if
all the necessary conditions for the issuance of such shares have been
satisfied by the end of the period.
Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Income available to common stockholders continues to be
adjusted for assumed conversion of all potentially
dilutive securities using the treasury stock method to calculatethe
dilutive effect of options and warrants. However,unlikethe
calculation of fully diluted EPS under previous opinions, a new
treasury stock method is applied using the average market price or the
ending market price. Further, prior opinion requirement to use the
modified treasury stock method when the number of options or warrants
outstanding is greater than 20% of the outstanding shares also has
been eliminated. SFAS 128 also includes certain shares thatare
contingently issuable; however, the test for inclusion under the new rules
is much more restrictive.
SFAS No. 128 requires companies reportingdiscontinued
operations, extraordinary items, or the cumulativeeffect of
accounting changes are to use income from operations as the control
number or benchmark to determine whether potential common sharesare
dilutive or antidilutive. Only dilutive securities are to be included in
the calculation of diluted EPS.
This statement was adopted for the 1997 Financial Statements. Forall
periods presented the Company reported a loss from continuing
operations so any potential issuance of common shares would havean
antidilutive effect on EPS. Consequently, the adoption of SFAS No. 128
did not have an impact on the Company's financial statement.
The FASB has issued SFAS No. 130 entitled Reporting Comprehensive Income
and SFAS No. 132 Employers' Disclosures about Pensions and Other
Postretirement Benefits. Both of the above statements are effectivefor
financial statements with fiscal years beginning after December 15, 1997.
SFAS No.130 defines how to report and display comprehensive income
and its components in a full set of financial statements. The purposeof
reporting comprehensive income is to report a measure of all changes
in equity of an enterprise that result from recognized transactions and
other economic events of the period other than transactions with owners
in their capacity as owners.
SFAS No.132 addresses disclosure requirements for postretirement
benefits.The statement does not change postretirement measurement
or recognition issues.
29
The Company will adopt both SFAS No. 130 and SFAS No. 132 for the 1998
financialstatements. Management does not expect either adoptionto
have a material impact on the Company's financial statements.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. In addition, the
Company does not believe that the regulatory initiatives currently under
consideration by various regulatory agencies will have a material adverse
impact on the Company. The Company is not aware of any material
pending orthreatened regulatory action with respect to the Company or
any ofits subsidiaries. The Company does not believe that any
insurance guaranty fund assessments will be materially different from
amounts already provided for in the financial statements.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results.This couldhave a significant effect on the Company's
business/financial systems as well as products and services, if not
corrected.
The Company established a project to address year 2000 processing concerns
in September of 1996. In 1997 the Company completed the review of the
Company'sinternally and externally developed software, and made
correctionsto all year 2000 non-compliant processing. The Company also
secured verification of current and future year 2000 compliance from all
major external software vendors. In December of 1997, a separate
computeroperating environment was established with the system dates
advancedto December of 1999. A parallel model office was established
with alldates in the data advanced to December of 1999. Parallel
model office processing is being performed using dates from December
of 1999 to January of 2001, to insure all year 2000 processing errors
have been corrected.Testing should be completed by the end of the
first quarter of 1998. After testing is completed, periodic regression
testing will be performed to monitor continuing compliance. By
addressing year 2000 compliance in a timely manner, compliance will be
achieved using existing staff and without significant impact on the
Company operationally or financially.
PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
tothe shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of
its stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any other
significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain
cost savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the third quarter of 1998.
30
SUBSEQUENT EVENT
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three
years. Under the terms of the letter of intent Mr. Correll will buy
2,000,000 authorized but unissued shares of UTI common stock for $15.00
per share and will also buy 389,715 shares of UTI common stock,
representing stock of UTI and UII, that UTI purchased during the last
eight months in private transactions at the average price UTI paid for
such stock, plus interest, or approximately $10.00 per share.Mr.
Correll also will purchase 66,667 shares of UTI common stock and
$2,560,000 of face amount of convertible bonds (which are due and payable
on any change in control of UTI) in private transactions, primarily from
officers of UTI. Upon completion of the transaction, Mr. Correll would
be the largest shareholder of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies.The
transaction is subject to negotiation of a definitive purchase
agreement; completion of due diligence by Mr. Correll; the receipt of
regulatory and other approvals; and the satisfaction of certain
conditions. The transaction is not expected to be completed before June
30, 1998, and there can be no assurance that the transaction will be
completed.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company
may differ materially from any such statement due to the following
important factors, among other risks and uncertainties inherent in the
company's business:
1. Prevailing interest rate levels which may affect the abilityof
the company to sell its products, the market value of the
company's investments and the lapse ratio of the company's policies,
notwithstanding product design features intended to enhance
persistency of the company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank
sales and underwriting of insurance products, which may affect the
competitive environment for the company's products.
4. Other factors affecting the performance of the company, including,
but not limited to, market conduct claims, insurance industry
insolvencies, stock market performance, and investment performance.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Listed below are the financial statements included in this Part of the
Annual Report on SEC Form 10-K:
Page No.
UNITED TRUST, INC. AND CONSOLIDATED SUBSIDIARIES
Independent Auditor's Report for the
Years ended December 31, 1997, 1996, 1995 33
Consolidated Balance Sheets 34
Consolidated Statements of Operations 35
Consolidated Statements of Shareholders' Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 38-62
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
32
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, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility
istoexpress 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, 1997 and 1996,
and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1997, and Schedules
II,IV and V as of December 31, 1997 and 1996, of United Trust, Inc.
and subsidiaries and Schedules II, IV and V for each of the three years
in the period then ended. In our opinion, these schedules present
fairly,in all material respects, the information required to be set
forth therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1998
33
UNITED TRUST, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1996
ASSETS
1997 1996
Investments:
Fixed maturities at amortized cost
(market $184,782,568 and $181,815,225) $ 180,970,333 $ 179,926,785
Investments held for sale:
Fixed maturities, at market
(cost $1,672,298 and $1,984,661) 1,668,630 1,961,166
Equity securities, at market
(cost $3,184,357 and $2,086,159) 3,001,744 1,794,405
Mortgage loans on real estate at
amortized cost 9,469,444 11,022,792
Investment real estate, at cost,
net of accumulated depreciation 9,760,732 9,779,984
Real estate acquired in satisfaction
of debt 1,724,544 1,724,544
Policy loans 14,207,189 14,438,120
Short-term investments 1,798,878 430,983
222,601,494 221,078,779
Cash and cash equivalents 16,105,933 17,326,235
Investment in affiliates 5,636,674 4,826,584
Accrued investment income 3,686,562 3,461,799
Reinsurance receivables:
Future policy benefits 37,814,106 38,745,013
Policy claims and other benefits 3,529,078 3,856,124
Other accounts and notes receivable 845,066 894,321
Cost of insurance acquired 41,522,888 43,917,280
Deferred policy acquisition costs 10,600,720 11,325,356
Cost in excess of net assets purchased,
net of accumulated amortization 2,777,089 5,496,808
Property and equipment, net of
accumulated depreciation 3,412,956 3,255,171
Other assets 767,258 1,290,192
TOTAL ASSETS $ 349,299,824 $ 355,473,662
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 248,805,695 $ 248,879,317
Policy claims and benefits payable 2,080,907 3,193,806
Other policyholder funds 2,445,469 2,784,967
Dividend and endowment accumulations 14,905,816 13,913,676
Income taxes payable:
Current 15,730 70,663
Deferred 14,174,260 13,193,431
Notes payable 21,460,223 19,573,953
Indebtedness to affiliates, net 18,475 31,837
Other liabilities 3,790,051 5,975,483
TOTAL LIABILITIES 307,696,626 307,617,133
Minority interests in consolidated
subsidiaries 26,246,580 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 32,696 37,402
Additional paid-in capital 16,488,375 18,638,591
Unrealized depreciation of investments held
for sale (29,127) (86,058)
Accumulated deficit (1,135,326) (576,078)
TOTAL SHAREHOLDERS'EQUITY 15,356,618 18,013,857
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 349,299,824 $ 355,473,662
See accompanying notes.
34
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1997
1997 1996 1995
Revenues:
Premiums and policy fees $ 33,373,950 $ 35,891,609 $ 38,481,638
Reinsurance premiums and
policy fees (4,734,705) (4,947,151) (5,383,102)
Net investment income 14,857,297 15,868,447 15,456,224
Realized investment gains
and (losses), net (279,096) (987,930) (124,235)
Other income 774,884 1,151,395 1,438,559
43,992,330 46,976,370 49,869,084
Benefits and other expenses:
Benefits, claims and settlement
expenses:
Life 23,644,252 26,568,062 26,680,217
Reinsurance benefits and
claims (2,078,982) (2,283,827) (2,850,228)
Annuity 1,560,828 1,892,489 1,797,475
Dividends to policyholders 3,929,073 4,149,308 4,228,300
Commissions and amortization
of deferred policy
acquisition costs 3,616,365 4,224,885 4,907,653
Amortization of cost of
insurance acquired 2,394,392 5,524,815 4,303,237
Amortization of agency force 0 0 396,852
Non-recurring write down of
value of agency force 0 0 8,296,974
Operating expenses 9,222,913 11,994,464 11,517,648
Interest expense 1,816,491 1,731,309 1,966,776
44,105,332 53,801,505 61,244,904
Loss before income taxes,
minority interest and equity
in loss of investees (113,002) (6,825,135) (11,375,820)
Income tax credit (expense) (986,229) 4,703,741 4,571,028
Minority interest in loss
of consolidated subsidiaries 563,699 1,278,883 4,439,496
Equity in loss of investees (23,716) (95,392) (635,949)
Net loss $ (559,248) $ (937,903) $ (3,001,245)
Net loss per
common share $ (0.32) $ (0.50) $ (1.61)
Average common
shares outstanding 1,772,870 1,869,511 1,866,851
See accompanying notes.
35
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1997
1997 1996 1995
Common stock
Balance, beginning of year $ 37,402 $ 37,352 $ 37,312
Issued during year 0 50 40
Stock retired from
purchase of fractional
shares of reverse stock split (7) 0 0
Purchase treasury stock (4,699) 0 0
Balance, end of year $ 32,696 $ 37,402 $ 37,352
Additional paid-in capital
Balance, beginning of year $ 18,638,591 $ 18,624,578 $ 18,612,118
Issued during year 0 14,013 12,460
Stock retired from purchase of
fractional shares of reverse
stock split (2,374) 0 0
Purchase treasury stock (2,147,842) 0 0
Balance, end of year $ 16,488,375 $ 18,638,591 $ 18,624,578
Unrealized appreciation (depreciation) of
investments held for sale
Balance, beginning of year $ (86,058) $ (1,499) $ (143,405)
Change during year 56,931 (84,559) 141,906
Balance, end of year $ (29,127) $ (86,058) $ (1,499)
Retained earnings
(accumulated deficit)
Balance, beginning of year $ (576,078) $ 361,825 $ 3,363,070
Net loss (559,248) (937,903) (3,001,245)
Balance, end of year $ (1,135,326) $ (576,078) $ 361,825
Total shareholders' equity,
end of year $ 15,356,618 $18,013,857 $ 19,022,256
See accompanying notes.
36
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1997
1997 1996 1995
Increase (decrease) in cash and
cash equivalents
Cash flows from operating activities:
Net loss $ (559,248) $ (937,903) $ (3,001,245)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities
net of changes in assets
and liabilities resulting
from the sales and
purchases of subsidiaries:
Amortization/accretion of
fixed maturities 670,185 899,445 803,696
Realized investment (gains)
losses, net 279,096 987,930 124,235
Policy acquisition costs
deferred (586,000) (1,276,000) (2,370,000)
Amortization of deferred
policy acquisition costs 1,310,636 1,387,372 1,567,748
Amortization of cost of
insurance acquired 2,394,392 5,524,815 4,303,237
Amortization of value of
agency force 0 0 396,852
Non-recurring write down of
value of agency force 0 0 8,296,974
Amortization of costs in excess
of net assets purchased 155,000 185,279 423,192
Depreciation 469,854 390,357 720,605
Minority interest (563,699) (1,278,883) (4,439,496)
Equity in loss of investees 23,716 95,392 635,949
Change in accrued investment
income (224,763) 210,043 (171,257)
Change in reinsurance
receivables 1,257,953 83,871 (482,275)
Change in policy liabilities
and accruals (547,081) 3,326,651 3,581,928
Charges for mortality and
administration of universal
life and annuity products (10,588,874) (10,239,476) (9,757,354)
Interest credited to account
balances 7,212,406 7,075,921 6,644,282
Change in income taxes payable 925,896 (4,714,258) (4,595,571)
Change in indebtedness (to)
from affiliates, net (13,362) 119,706 (20,004)
Change in other assets and
liabilities, net (1,593,358) 1,299,773 (2,175,839)
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVIITES 22,749 3,140,035 485,657
Cash flows from investing
activities:
Proceeds from investments sold
and matured:
Fixed maturities held for sale 290,660 1,219,036 619,612
Fixed maturities sold 0 18,736,612 0
Fixed maturities matured 21,488,265 20,721,482 16,265,140
Equity securities 76,302 8,990 104,260
Mortgage loans 1,794,518 3,364,427 2,252,423
Real estate 1,136,995 3,219,851 1,768,254
Policy loans 4,785,222 3,937,471 4,110,744
Short term 410,000 825,000 25,000
Total proceeds from investments
sold and matured 29,981,962 52,032,869 25,145,433
Cost of investments acquired:
Fixed maturities (23,220,172) (29,365,111) (25,112,358)
Equity securities (1,248,738) 0 ( 1,000,000)
Mortgage loans (245,234) (503,113) (322,129)
Real estate (1,444,980) (813,331) (1,902,609)
Policy loans (4,554,291) (4,329,124) (4,713,471)
Short term (1,726,035) (830,983) (100,000)
Total cost of investments
acquired (32,439,450) (35,841,662) (33,150,567)
Purchase of property and
equipment (531,528) (383,411) (57,625)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (2,989,016) 15,807,796 (8,062,759)
Cash flows from financing
activities:
Policyholder contract
deposits 17,905,246 22,245,369 25,021,983
Policyholder contract
withdrawals (14,515,576) (15,433,644) (16,008,462)
Net cash transferred from
coinsurance ceded 0 (19,088,371) 0
Proceeds from notes payable 2,560,000 9,050,000 300,000
Payments of principal on
notes payable (1,874,597) (10,923,475) (905,861)
Payment for fractional shares
from reverse stock split (2,381) 0 0
Payment for fractional shares
from reverse stock split
of subsidiary (534,251) 0 0
Purchase of stock of affiliates (865,877) 0 0
Purchase of treasury stock (926,599) 0 0
Proceeds from issuance of
common stock 0 500 400
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,745,965 (14,149,621) 8,408,060
Net increase (decrease) in cash
and cash equivalents (1,220,302) 4,798,210 830,958
Cash and cash equivalents at
beginning of year 17,326,235 12,528,025 11,697,067
Cash and cash equivalents at
end of year $ 16,105,933 $ 17,326,235 $ 12,528,025
See accompanying notes.
37
UNITED TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1997, the parent, significant
majority-owned subsidiaries and affiliates of United Trust, Inc.,
were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc.
("UII"). UII owns 47% of UTG. UTG owns 79% of First Commonwealth
Corporation ("FCC") and 100% of Roosevelt Equity Corporation ("REC").
FCC owns 100% of Universal Guaranty Life Insurance Company ("UG"). UG
owns 100% of United Security Assurance Company ("USA"). USA owns 84%
ofAppalachian Life Insurance Company ("APPL") and APPL owns 100% of
Abraham Lincoln Insurance Company ("ABE").
38
The Company's significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements are
summarized as follows.
B. NATURE OF OPERATIONS - United Trust, Inc. is an insurance holding
company, which sells individual life insurance products through its
subsidiaries. The Company's principal market is the
Midwestern United States. The 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 theability 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 statementsin conformity with
generally accepted accounting principles, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F. INVESTMENTS - Investments are shown on the following bases:
Fixed maturities -- at cost, adjusted for amortization of premium
or discount and other-than-temporary market value declines. The
amortized cost of such investments differs from their market values;
however, the Company has the ability and intent to hold these
investments to maturity, at which time the full face value is expected
to be realized.
Investments held for sale -- at current market value, unrealized
appreciation or depreciation is charged directly to shareholders'
equity.
Mortgage loans on real estate - at unpaid balances, adjusted for
amortization of premium or discount, less allowance for possible
losses.
Real estate - Investment real estate at cost, less allowances for
depreciation and,as appropriate, provisions for possible losses.
Foreclosed real estate is adjusted for any impairment at the
foreclosure date. Accumulated depreciation on investment real estate
was $539,366 and $442,373 as of December 31, 1997 and 1996,
respectively.
Policy loans -- at unpaid balances including accumulated interest
but not in excess of the cash surrender value.
Short-term investments -- at cost, which approximates current market
value.
Realized gains and losses on sales of investments are recognized in
netincome on the specific identification basis.
39
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 principallyof
whole life insurance policies, limited-payment life insurance
policies, and certain annuities with life contingencies are
recognized as revenues when due. Accident and health insurance
premiums are recognized as revenue pro rata over the terms of the
policies. Benefits and related expenses associated with the premiums
earned are charged to expense proportionately over the lives of the
policies through a provision for future policy benefit liabilities
and through deferral and amortization of deferred policy acquisition
costs. For universal life and investment products, generally there is
no requirement for payment of premium other than to maintain account
values at a level sufficient to pay mortality and expense charges.
Consequently, premiums for universal life policies and investment
products are not reported as revenue, but as deposits. Policy fee
revenue for universal life policies and investment products
consists of charges for the cost of insurance and policy administration
fees assessed during the period. Expenses include interest credited
to policy account balances and benefit claims incurred in excess of
policy account balances.
H. DEFERREDPOLICY ACQUISITION COSTS - Commissions and other costs of
acquiring life insurance products that vary with and are primarily
related to the production of new business have been deferred.
Traditional life insurance acquisition costs are being amortized
over the premium-paying period of the related policies using
assumptions consistent with those used in computing policy benefit
reserves.
For universal life insurance and interest sensitive life insurance
products, acquisition costs are being amortized generally in
proportion to the present value of expected gross profits from
surrender charges and investment, mortality, and expense margins.
Under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments," the Company makes certain
assumptions regarding the mortality, persistency, expenses, and
interest rates it expects to experience in future periods. These
assumptions are to be best estimates and are to be periodically
updated whenever actual experience and/or expectations for the future
change from initial assumptions. The amortization is adjusted
retrospectively when estimates of current or future gross profits
to be realized from a group of products are revised.
The following table summarizes deferred policy acquisition costs and
related data for the years shown.
1997 1996 1995
Deferred, beginning
of year $ 11,325,356 $ 11,436,728 $ 10,634,476
Acquisition costs
deferred:
Commissions 312,000 845,000 1,838,000
Other expenses 274,000 431,000 532,000
Total 586,000 1,276,000 2,370,000
Interest accretion 425,000 408,000 338,000
Amortization charged
to income (1,735,636) (1,795,372) (1,905,748)
Net amortization (1,310,636) (1,387,372) (1,567,748)
Change for the year (724,636) (111,372) 802,252
Deferred, end of year $ 10,600,720 $ 11,325,356 $ 11,436,728
40
The following table reflects the components of the income statement
for the line item Commissions and amortization of deferred policy
acquisition costs:
1997 1996 1995
Net amortization of deferred
policy acquisition costs $ 1,310,636 $ 1,387,372 $ 1,567,748
Commissions 2,305,729 2,837,513 3,339,905
Total $ 3,616,365 $ 4,224,885 $ 4,907,653
Estimated net amortization expense of deferred policy acquisition
costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1998 $ 403,000 $ 1,530,000 $ 1,127,000
1999 365,000 1,359,000 994,000
2000 330,000 1,211,000 881,000
2001 299,000 1,082,000 783,000
2002 270,000 969,000 699,000
I. COST OF INSURANCE ACQUIRED - When an insurance company is acquired,
the Company assigns a portion of its cost to the right to receive
future cash flows from insurance contracts existing at the date of
the acquisition. The cost of policies purchased represents the
actuarially determined present value of the projected future cash
flows from the acquired policies. Cost of Insurance Acquired is
amortized with interest in relation to expected future profits,
including direct charge-offsfor any excess of the
unamortized asset over the projected future profits. The interest
rates utilized in the amortization calculationare 9% on
approximately 24% of the balance and 15% on the remaining balance.
The interest rates vary due to differences in the blocks of
business. The amortization is adjusted retrospectively when estimates
of current or future gross profits to be realized from a group
of products are revised.
1997 1996 1995
Cost of insurance
acquired, beginning
of year $ 43,917,280 $ 55,816,934 $ 60,120,171
Interest accretion 5,962,644 6,312,931 7,044,239
Amortization (8,357,036) (11,837,746) (11,347,476)
Net amortization (2,394,392) (5,524,815) (4,303,237)
Balance attributable
to coinsurance
agreement 0 (6,374,839) 0
Cost of insurance
acquired, end of year$ 41,522,888 $ 43,917,280 $ 55,816,934
41
Estimated net amortization expense of cost of insurance acquired for
the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1998 $ 6,113,000 $ 8,261,000 $ 2,148 ,000
1999 5,787,000 7,271,000 1,484,000
2000 5,559,000 6,811,000 1,252,000
2001 5,367,000 6,828,000 1,461,000
2002 4,737,000 6,203,000 1,466,000
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. Costs in excess of net assets
purchased are amortized on the straight line basis over a 40-year
period. Management continually reviews the value of goodwill based
on estimates of future earnings. As part of this review, management
determines whether goodwill is fully recoverable from projected
undiscounted net cash flows from earnings of the subsidiaries
over the remaining amortization period. If management were to
determine that changes in such projected cash flows no longer supported
the recoverability of goodwill over the remaining amortization
period, the carrying value of goodwill would be reduced with a
corresponding charge to expense or by shortening the amortization
period (no such changes have occurred). Accumulated amortization
of cost in excess of net assets purchased was $1,420,146 and
$1,265,146 as of December 31, 1997 and 1996, respectively. A
reverse stock split of FCC in May of 1997 created negative
goodwill of $2,564,719. The credit to goodwill resulted from the
retirement of fractional shares. Please refer to Note 11 to the
Consolidated Financial Statements for additional information concerning
the reverse stock split.
K. PROPERTY AND EQUIPMENT - Company-occupied property, data processing
equipment and furniture and office equipment are stated at cost
less accumulated depreciation of $1,990,314 and $1,617,453 at
December 31, 1997 and 1996, respectively. Depreciation is computed
on a straight-line basis for financial reporting purposes using
estimated useful lives of three to 30 years. Depreciation
expense was $372,861 and $418,449 for the years ended December
31, 1997 and 1996, respectively.
L. FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for traditional
life insurance and accident and health insurance policy benefits
are computed using a net level method. These liabilities include
assumptionsas to investment yields, mortality, withdrawals, and
other assumptions based on the life insurance subsidiaries'
experience adjusted to reflect anticipated trends and to include
provisions for possible unfavorable deviations. The Company makes
these assumptions at the time the contract is issued or, in the case
of contracts acquired by purchase, at the purchase date. Benefit
reserves for traditional life insurance policies include certain
deferred profits on limited-payment policies that are being
recognized in income over the policy term. Policy benefit claims
are charged to expense in the period that the claims are incurred.
Current mortality rate assumptions are based on 1975-80 select and
ultimate tables. Withdrawal rate assumptions are based upon Linton
B or Linton C, which are industry standard actuarial tables for
forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive
life insurance products are computed under a retrospective deposit
method and represent policy account balances before applicable
surrender charges. Policy benefits and claims that are charged
to expense include benefit claims in excess of related policy account
balances. Interest crediting rates for universal life and
interest sensitive products range from 5.0% to 6.0% in 1997, 1996 and
1995.
M. POLICY AND CONTRACT CLAIMS - Policy and contract claims include
provisions for reported claims in process of settlement, valued in
accordance with the terms of the policies and contracts, as well as
provisions for claims incurred and unreported based on prior
experience of the Company.
42
N. PARTICIPATING INSURANCE - Participating business represents 29% and
30% of the ordinary life insurance in force at December 31,
1997 and 1996, respectively. Premium income from participating
business represents 50%, 52%, and 55% of total premiums for the
years ended December 31, 1997, 1996 and 1995, respectively. The
amount of dividends to be paid is determined annually by the
respective insurance subsidiary's Board of Directors.
Earnings allocable to participating policyholders are based on
legal requirements that vary by state.
O. INCOME TAXES - Income taxes are reported under Statement of
Financial Accounting Standards Number 109. Deferred income taxes
are recorded to reflect the tax consequences on future periods of
differences between the tax bases of assetsand liabilities and
their financial reporting amounts at the end of each such period.
P. BUSINESS SEGMENTS - The Company operates principally in the
individual life insurance business.
Q. EARNINGS PER SHARE - Earnings per share are based on the weighted
average number of common shares outstanding during eachyear,
retroactively adjusted to give effect to all stock splits. In
accordance with Statement of Financial Accounting Standards No.
128, the computation of diluted earnings per share is not shown
since the Company has a loss from continuing operations in each
period presented, and anyassumed conversion, exercise, or
contingent issuance of securities would have an antidilutive effect
on earnings per share.
R. CASH EQUIVALENTS - The Company considers certificates of deposit
and other short-term instruments with an original purchased
maturity of three months orless cash equivalents.
S. RECLASSIFICATIONS - Certain prior year amounts have been
reclassified toconform with the 1997 presentation. Such
reclassifications had no effect on previouslyreported net loss,
total assets, or shareholders' equity.
T. REINSURANCE - In the normal course of business, the Company
seeks to limit its exposure to loss on any single insured and to
recover a portion of benefits paid by ceding reinsurance toother
insurance enterprises or reinsurers under excess coverage and
coinsurance contracts. The Company retains a maximum of $125,000
of coverage per individual life.
Amounts paid or deemed to have been paid for reinsurance contracts
are recorded as reinsurance receivables. Reinsurance receivables
is recognizedin a manner consistent with the liabilities relating to
the underlying reinsured contracts. The cost of reinsurance
related to long-duration contracts is accounted for over the life of
the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1997, substantially all of consolidated shareholders'
equity represents net assets of UTI's subsidiaries. The payment of cash
dividends to shareholders is not legally restricted. However, insurance
company dividend payments are regulated by the state insurance department
where the company is domiciled. UTI is the ultimate parent of UG through
ownership of several intermediary holding companies. UG can not pay
a dividend directly to UTI due to the ownership structure. UG's dividend
limitations are described below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification
to the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,246.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,365. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
43
3. INCOME TAXES
Until 1984, the insurance companies were taxed under the provisions of the
Life Insurance Company Income Tax Act of 1959 as amended by the Tax
Equity and Fiscal Responsibility Act of 1982. These laws were
superseded by the Deficit Reduction Act of 1984. All of these laws are
based primarily upon statutory results with certain special deductions and
other items available only to life insurance companies. Under the
provision of the pre 1984 life insurance company income tax regulations,
a portion of "gain from operations" of a life insurance company was
not subject to current taxation but was accumulated, for tax purposes,
in aspecial tax memorandum account designated as "policyholders'
surplus account". Federal income taxes will become payable on this
account at the then current tax rate when and if distributions to
shareholders, other than stock dividends and other limited exceptions, are
made in excess of the accumulated previously taxed income maintained in
the "shareholders surplus account".
The following table summarizes the companies with this situation and the
maximum amount of income that has not been taxed in each.
Shareholder' Untaxed
Company Surplus Balance
ABE $ 5,237,958 $ 1,149,693
APPL 5,417,825 1,525,367
UG 27,760,313 4,363,821
USA 0 0
The payment of taxes on this income is not anticipated; and, accordingly, no
deferred taxes have been established.
The life insurance company subsidiaries file a consolidated federal
income tax return. The holding companies of the group file separate returns.
Lifeinsurance company taxation is based primarily upon statutory results
withcertain special deductions and other items available only to life
insurance companies. Income tax expense consists of the following
components:
1997 1996 1995
Current tax expense $ 5,400 $ (148,148) $ 2,641
Deferred tax expense
(credit) 980,829 (4,555,593) (4,573,669)
$ 986,229 $(4,703,741) $(4,571,028)
The Companies have net operating loss carryforwards for federal income
tax purposes expiring as follows:
UTI UG FCC
2004 $ 597,103 $ 0 $ 163,334
2005 292,656 0 138,765
2006 212,852 2,400,574 33,345
2007 110,758 782,452 676,067
2008 0 939,977 4,595
2009 0 0 168,800
2010 0 0 19,112
2012 0 2,970,692 0
TOTAL $1,213,369 $ 7,093,695 $ 1,204,018
44
The Company has established a deferred tax asset of $3,328,879 for its
operating loss carryforwards and has established an allowance of
$2,904,200.
The following table shows the reconciliation of net income to taxable
income of UTI:
1997 1996 1995
Net income (loss) $ (559,248) $ (937,903) $ (3,001,245)
Federal income
tax provision
(credit) 414,230 (59,780) 153,764
Loss of subsidiaries 356,422 714,916 2,613,546
Loss of investees 23,716 95,392 635,949
Write off of
investment in
affiliate 0 315,000 10,000
Write off of note
receivable 0 211,419 0
Depreciation 0 1,046 3,095
Other 44,059 25,528 22,091
Taxable income $ 279,179 $ 365,618 $ 437,200
UTI has a net operating loss carryforward of $1,213,369 at December
31, 1997. UTI has averaged $300,000 in taxable income over the past
four years and must average taxable income of $122,000 per year to
fully realize its net operating loss carryforwards. UTI's operating
loss carryforwards do not begin to expire until the year 2004.
Management believes future earnings of UTI will be sufficient to fully
utilize its net operating loss carryforwards.
The expense or (credit) for income differed from the amounts computed
by applying the applicable United State statutory rate of 35% to the
loss before income taxes asa result of the following differences:
1997 1996 1995
Tax computed at
statuatory rate $ (39,551) $ (2,388,797) $ (3,981,537)
Changes in taxes
due to:
Cost in excess
of net assets
purchased 54,250 64,848 60,594
Current year loss
for which no
benefit realized 1,039,742 0 0
Benefit of prior
losses (324,705) (2,393,395) (601,563)
Other 256,493 13,603 (48,522)
Income tax expense
(credit) $ 986,229 $ (4,703,741) $ (4,571,028)
45
The following table summarizes the major components that comprise the
deferred tax liability as reflected in the balance sheets:
1997 1996
Investments $ (228,027) $ (122,251)
Cost of insurance acquired 15,753,308 16,637,884
Other assets (72,468) (187,747)
Deferred policy acquisition cost 3,710,252 3,963,875
Agent balances (23,954) (65,609)
Property and equipment (19,818) (37,683)
Discount of notes 1,097,352 922,766
Management/consulting fees (573,182) (733,867)
Future policy benefits (4,421,038) (5,906,087)
Gain on sale of subsidary 2,312,483 2,312,483
Net operating loss carryforward (424,679) (522,392)
Other liabilities (756,482) (1,151,405)
Federal tax DAC (2,179,487) (1,916,536)
Deferred tax liability $14,174,260 $13,193,431
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A. NET INVESTMENT INCOME-The following table reflects net investment income
by type of investment:
December 31,
1997 1996 1995
Fixed maturities and
fixed maturities held
for sale $ 12,677,348 $ 13,326,312 $ 13,190,121
Equity securities 87,211 88,661 52,445
Mortgage loans 802,123 1,047,461 1,257,189
Real estate 745,502 794,844 975,080
Policy loans 976,064 1,121,538 1,041,900
Short-term investments 70,624 21,423 21,295
Other 696,486 691,111 642,632
Total consolidated investment
income 16,055,358 17,091,350 17,180,662
Investment expenses (1,198,061) (1,222,903) (1,724,438)
Consolidated net investment
income $ 14,857,297 $ 15,868,447 $ 15,456,224
At December 31, 1997, the Company had a total of $5,797,000 of investments,
comprised of $3,848,000 in real estate and $1,949,000 in equity securities,
which did not produce income during 1997.
46
The following table summarizes the Company's fixed maturity holdings and
investments held for sale by major classifications:
Carrying Value
1997 1996
Investments held for sale:
Fixed maturities $ 1,668,630 $ 1,961,166
Equity securities 3,001,744 1,794,405
Fixed maturities:
U.S. Government, government
agencies and authorities 28,259,322 8,554,631
State, municipalities and
political subdivisions 22,778,816 4,421,735
Collateralized mortgage
obligations 11,093,926 13,246,781
Public utilities 47,984,322 51,821,989
All other corporate bonds 70,853,947 71,891,649
$185,640,707 $183,692,356
By insurance statute, the majority of the Company's investment portfolio
is required to be invested in investment grade securities to
provide ample protection for policyholders. The Company does not
invest in so-called "junk bonds" or derivative investments.
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 conditionsthan investment
grade issuers. In addition, the trading market for these securities
is usually more limited than for investment grade debt securities.
Debt securities classified as below-investment grade are those that
receive a Standard & Poor's rating of BB or below.
The following table summarizes by category securities held
that are below investment grade at amortized cost:
Below Investment
Grade Investments 1997 1996 1995
State, Municipalities
and political
Subdivisions $ 0 $ 10,042 $ 0
Public Utilites 80,497 117,609 116,879
Corporate 656,784 813,717 819,010
Total $ 737,281 $ 941,368 $ 935,889
47
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in
securities including investments held for sale are as follows:
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
Investments Held for
Sale:
U.S. Government and
govt. agencies and
authorities $ 1,448,202 $ 0 $ (5,645) $ 1,442,557
States, municipalities
and political
subdivisions 35,000 485 0 35,485
Collateralized
mortgage obligations 0 0 0 0
Public utilities 80,169 328 0 80,496
All other corporate
bonds 108,927 1,164 0 110,092
1,672,298 1,977 (5,645) 1,668,630
Equity securities 3,184,357 176,508 (359,121) 3,001,744
Total $ 4,856,655 $ 178,485 $(364,766) $ 4,670,374
Held to Maturity
Securities:
U.S. Government
and govt. agencies
and authorities $ 28,259,322 $ 415,419 $ (51,771) $28,622,970
States,
municipalities
and political
subdivisions 22,778,816 672,676 (1,891) 23,449,601
Collateralized
mortgage
obligations 11,093,926 210,435 (96,714) 11,207,647
Public utilities 47,984,322 1,241,969 (84,754) 49,141,537
All other
corporate bonds 70,853,947 1,599,983 (93,117) 72,360,813
Total $ 180,970,333 $4,140,482 $(328,247) $184,782,568
48
Cost or Gross Gross Estimated
Amortized Unrealized Unrealied Market
1996 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 securites 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 utlities 51,821,990 884,858 (381,286) 52,325,561
All other
corporate bonds 71,881,649 1,240,230 (448,437) 72,673,442
Total $179,926,785 $ 3,040,456 $(1,152,016) $181,815,225
The amortized cost ofdebt securities at December 31, 1997, by
contractual maturity,are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
Fixed Maturities Held for Sale Amortized Market
December 31, 1997 Cost Value
Due in one year or less $ 83,927 $ 84,952
Due after one year through
five years 1,533,202 1,528,211
Due after five years through
ten years 55,169 55,467
Due after ten years 0 0
Collateralized mortgage obligations 0 0
Total $1,672,298 $1,668,630
49
Estimated
Fixed Maturities Held to Maturity Amortized Market
December 31, 1997 Cost Value
Due in one year or less $ 15,023,173 $ 15,003,728
Due after one year through
five years 118,849,668 120,857,201
Due after five years through
ten years 30,266,228 31,726,265
Due after ten years 5,737,338 5,987,726
Collateralized mortgage obligations 11,093,926 11,207,648
Total $ 180,970,333 $ 184,782,568
An analysis of sales, maturities and principal repayments of the Company's
fixed maturities portfolio for the years ended December 31, 1997, 1996 and
1995 is as follows:
Cost or Gross Gross Proceeds
Amortized Realized Realized From
Year ended December Cost Gains Losses Sale
December 31, 1997
Scheduled principal
repayments, calls and
tenders:
Held for sale $ 299,390 $ 931 $ (9,661) $ 290,660
Held to maturity 21,467,552 21,435 (722) 21,488,265
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
Total $21,766,942 $ 22,366 $(10,383) $21,778,925
Cost or Gross Gross Proceeds
Amortized Realized Realized From
Year ended December Cost Gains Losses Sale
December 31, 1996
Scheduled principal
repayments, calls and
tenders:
Held for sale $ 699,361 $ 6,035 $ (813) $ 704,583
Held to maturity 20,900,159 13,469 (192,146) 20,721,482
Sales:
Held for sale 517,111 0 (2,658) 514,453
Held to maturity 18,735,848 81,283 (80,519) 18,736,612
Total $40,852,479 $100,787 $(276,136) $40,677,130
50
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December Cost Gains Losses Sale
31, 1995
Scheduled principal
repayments, calls
and tenders:
Held for sale $ 621,461 $ 0 $ (1,849) $ 619,612
Held to maturity 16,383,921 125,740 (244,521) 6,265,140
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
Total $ 17,005,382 $ 125,740 $(246,370) $16,884,752
C. INVESTMENTS ON DEPOSIT - At December 31, 1997, investments carried
at approximately $17,801,000 were on deposit with various state
insurance departments.
D. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES - The Company's
investment in United Income, Inc., a 40% owned affiliate, is
carried at an amount equal to the Company's share of the equity of
United Income. The Company's equity in United Income, Inc. includes
the original investment of $194,304, an increase of $4,359,749
resulting from a public offering of stock and the Company's share
of earnings and losses since inception.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value
information at December 31, 1997 and 1996, as required by Statement
of Financial Accounting Standards 107, Disclosure about FairValueof
Financial Instruments ("SFAS 107"). Such information, which
pertains tothe Company's financial instruments, is based on the
requirementsset 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. Ifquoted market prices are not available, management
estimates the fair value based on the quoted market price of a financial
instrument with similar characteristics.
(c) Mortgage loans on real estate
The fair values of mortgage loans are estimated using discounted cash
flow analyses and interest rates being offered for similar loans to
borrowers with similar credit ratings.
51
(d) Investment real estate and real estate acquiredin
satisfaction of debt
An estimate of fair value is based on management's review of the
individual real estate holdings. Management utilizes sales of
surrounding properties, current market conditions and geographic
considerations. Management conservatively estimates the fair value of
the portfolio is equal to the carrying value.
(e) Policy loans
Itis not practicable to estimate the fair value of policy loans as they
have no stated maturity and their rates are set at a fixed spread to
related policy liability rates. Policy loans are carried at the
aggregate unpaid principal balances in the consolidated balance
sheets, and earn interest at rates ranging from 4% to 8%. Individual
policy liabilities in all cases equal or exceed outstanding policy loan
balances.
(f) Short-term investments
For short-term instruments, the carrying amount is a reasonable
estimate of fair value. Short-term instruments represent United States
Government Treasury Bills and certificates of deposit with various banks
that are protected under FDIC.
(g) Notes and accounts receivable and uncollected premiums
The Company holds a $840,066 note receivable forwhich the
determination of fair value is estimated by discountingthe 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 uponthe 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.
52
The estimated fair values of the Company's financial instruments required
to be valued by SFAS 107 are as follows as of December 31:
1997 1996
Estimated Estimated
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
Fixed
maturities
$180,970,333 $184,782,568 $179,926,785 $181,815,225
Fixed
maturities
held for
sale 1,668,630 1,668,630 1,961,166 1,961,166
Equity
securities 3,001,744 3,001,744 1,794,405 1,794,405
Mortgage
loans on
real estate 9,469,444 9,837,530 11,022,792 11,022,792
Policy loans 14,207,189 14,207,189 4,438,120 14,438,120
Short-term
investments 1,798,878 1,798,878 430,983 430,983
Investment in
real estate 9,760,732 9,760,732 9,779,984 9,779,984
Real estate
acquired in
satisfaction
of debt 1,724,544 1,724,544 1,724,544 1,724,544
Notes
receivable 840,066 784,831 840,066 783,310
Liabilities
Notes payable 21,460,223 20,925,184 19,573,953 18,937,055
6. STATUTORY EQUITY AND GAIN FROM OPERATIONS
The Company's insurance subsidiaries are domiciled in Ohio, Illinois
and WestVirginia 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 with
in a state, and may change in the future. The NAIC currently is in the
process of codifying statutory accounting practices, the result of
which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project, which has not yet
been completed, will likely change prescribed statutory accounting
practices and may result in changes to the accounting practices that
insurance enterprises use to prepare their statutory financial statements.
UG's total statutory shareholders' equity was $10,997,365 and $10,226,566 at
December 31, 1997 and 1996, respectively. The Company's insurance
subsidiaries reported combined statutory gain from operations
(exclusive of intercompany dividends) was $3,978,000, $10,692,000 and
$4,076,000 for 1997, 1996 and 1995, respectively.
7. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers to minimize its exposure to significant
losses from reinsurer insolvencies.
53
The Company assumes risks from, and reinsures certain parts of its
risks with other insurers under yearly renewable term and coinsurance
agreements that are accounted for by passing a portion of the risk
to the reinsurer. Generally, the reinsurer receives a proportionate
part of the premiums less commissions and is liable for a corresponding
part of all benefit payments. While the amount retained on an individual
life will vary based upon age and mortality prospects of the risk,
theCompany generally will not carry more than $125,000 individual
life insurance on a single risk.
The Company has reinsured approximately $1.022 billion, $1.109
billion and $1.088 billion in face amount of life insurance risks with
other insurers for 1997, 1996 and 1995, respectively. Reinsurance
receivables for future policy benefits were $37,814,106 and $38,745,093
at December 31, 1997 and 1996, respectively, for estimated recoveries
under reinsurance treaties. Should any reinsurer be unable to meet its
obligation at the time of a claim, obligation to pay such claim would remain
with the Company.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation,
("LIFE RE") for new business. BMA and LIFE RE each hold an "A+"
(Superior) rating from A.M. Best, an industry rating company. The reinsurance
agreements were effective December 1, 1993, and cover all new business of
the Company. The agreements are a yearly renewable term ("YRT") treaty
where the Company cedes amounts above its retention limit of $100,000
with a minimum cession of $25,000.
One of the Company's insurance subsidiaries (UG) entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best assigned FILIC a Financial Performance Rating (FPR) of 7
(Strong) on a scale of 1 to 9. A.M. Best assigned a Best's Rating of A++
(Superior) to The Guardian Life Insurance Company of America ("Guardian"),
parent of FILIC, based on the consolidated financial condition and
operating performance of the company and its life/health subsidiaries.
During 1997, FILIC changed its name to Park Avenue Life Insurance
Company ("PALIC"). The agreement with PALIC accounts for approximately
65% of the reinsurance receivables as of December 31, 1997.
The Companydoes not have any short-duration reinsurance
contracts. The effect of the Company's long-duration reinsurance contracts
on premiums earned in 1997, 1996 and 1995 was as follows:
Shown in thousands
1997 1996 1995
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 33,374 $ 35,891 $ 38,482
Assumed 0 0 0
Ceded (4,735) (4,947) (5,383)
Net premiums $ 28,639 $ 30,944 $ 33,099
8. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. Some of the lawsuits have resulted in the
award of substantial judgments against the insurer, including material
amounts of punitive damages. In some states, juries have substantial
discretion in awarding punitive damages in these circumstances.
Under the insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed
insurance companies. Although the Company cannot predict the amount
of anyfuture 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.
54
Mandatory assessments may be partially recovered through a reduction
in future premium tax in some states. The Company does not believe such
assessments will be materially different from amounts already provided
for in the financial statements.
The Company and its subsidiaries are named as defendants in a number of
legal actionsarising 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 has a service agreement with USA which states that USA is to pay UII
monthly fees equal to 22% of the amount of collected first year
premiums, 20% in second year and 6% of the renewal premiums in years
three and after. UII's subcontract agreement with UTI states that UII is
to pay UTI monthly fees equal to 60% of collected service fees from USA as
stated above.
USA paid $989,295, $1,567,891 and $2,015,325 under their agreement with
UII for 1997, 1996 and 1995, respectively. UII paid $593,577, $940,734 and
$1,209,195 under their agreement with UTI for 1997, 1996 and 1995,
respectively.
Respective domiciliary insurance departments have approved the agreements
of the insurance companies and it is Management's opinion that where
applicable, costs have been allocated fairly and such allocations
are based upon generally accepted accounting principles. The costs paid by
UTI for services include costs related to the production of new business,
which are deferred as policy acquisition costs and charged off to the
income statement through "Amortization of deferred policy acquisition
costs". Also included are costs associated with the maintenance of
existing policies that are charged as current period cost and included
in "general expenses".
On July 31, 1997, United Trust Inc. issued convertible notes for cash
received totaling $2,560,000 to seven individuals, all officers or
employees of United Trust Inc. The notes bear interest at a rate of
1% over prime, with interest payments due quarterly and principal due upon
maturity of July 31, 2004. The conversion price of the notes are graded
from $12.50 per share for the first three years, increasing to $15.00
per share for the next two years and increasing to $20.00 per share for
the last two years. Conditional upon the seven individuals placing
the funds with the Company were the acquisition by UTI of a portion of
the holdings of UTI owned by Larry E. Ryherd and his family and the
acquisition of common stock of UTI and UII held by Thomas F. Morrow and
his family and the simultaneous retirement of Mr. Morrow. Neither Mr.
Morrow nor Mr. Ryherd was a party to the convertible notes.
Approximately $1,048,000 of the cash received from the issuance of the
convertible notes was used to acquire stock holdings of United Trust Inc.
and United Income, Inc. of Mr. Morrow and to acquire a portion of the
United Trust Inc. holdings of Larry E. Ryherd and his family. The
remaining cash received will be used by the Company to provide additional
operating liquidity and for future acquisitions of life insurance
companies. On July 31, 1997, the Company acquired a total of 126,921
shares of United Trust Inc. common stock and 47,250 shares of United
Income, Inc. common stock from Thomas F. Morrow and his family. Mr.
Morrow simultaneously retired as an executive officer of the Company.
Mr. Morrow will remain as a member of the Board of Directors. In
exchange for his stock, Mr. Morrow and his family received approximately
$348,000 in cash, promissory notes valued at $140,000 due in eighteen
months, and promissory notes valued at $1,030,000 due January 31, 2005.
These notes bear interest at a rate of 1% over prime, with interest
due quarterly and principal due upon maturity. The notes do not
contain any conversion privileges. Additionally, on July 31, 1997,
the Company acquired atotal 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
55
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
convertiblenotes 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.
On July 31,1997, the Company entered into employment agreements with
eight individuals, all officers or employees of the Company. The
agreements have a term of three years, excepting the agreements
with Mr. Ryherd and Mr. Melville, which have five-year terms. The
agreements secure the services of these key individuals, providing
the Company a stable management environment and positioning for
future growth.
10. CAPITAL STOCK TRANSACTIONS
A. STOCK OPTION PLAN
In 1985, the Company initiated a nonqualified stock option plan
for employees, agents and directors of the Company under which
options to purchase up to 44,000 shares of UTI's common stock
are granted at a fixed price of $.20 per share. Through December
31, 1997 options for 42,438 shares were granted and exercised.
Options for 1,562 shares remain available for grant.
A summary of the status of the Company's stock option plan for
the three years ended December 31, 1997, and changes during the
years ending on those dates is presented below.:
1997 1996 1995
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 1,562 $0.20 4,062 $ 0.20 6,062 $0.20
Granted 0 0.00 0 0.00 0 0.00
Exercised 0 0.00 (2,500) 0.20 (2,000) 0.20
Forfeited 0 0.00 0 0.00 0 0.00
Outstanding at end
of year 1,562 $0.20 1,562 $ 0.20 4,062 $0.20
Options exercisable
at year end 1,562 $0.20 1,562 $ 0.20 4,062 $0.20
Fair value of
options granted
during the year $0.00 $ 5.43 $6.05
The following information applies to options outstanding at
December 31, 1997:
Number outstanding 1,562
Exercise price $0.20
Remaining contractual life Indefinite
B. DEFERRED COMPENSATION PLAN
UTI and FCC established a deferred compensation plan during 1993
pursuant to which an officer or agent of FCC, UTI or
affiliates of UTI, could defer a portion of their income over the next
two and one-half years in return for a deferred compensation payment
payable at the end of seven years in the amount equal to the total
income
56
deferred plus interest at a rate of approximately 8.5% per
annum and a stock option to purchase shares of common stock of UTI.
At the beginning of the deferral period an officer or agent
received an immediately exercisable option to purchase 2,300 shares
of UTI commonstock at $17.50 per share for each $25,000 ($10,000
per year for two and one-half years) of total income deferred. The
option expires on December 31, 2000. A total of 105,000 options
were granted in 1993 under this plan. As of December 31, 1997 no
options were exercised. At December 31, 1997 and 1996, the
Company held a liability of $1,376,384 and $1,267,598, respectively,
relating to this plan. At December 31, 1997, UTI common stock
had a bid price of $8.00 and an ask price of $9.00 per share.
The following information applies to deferred compensation plan
stock options outstanding at December 31, 1997:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 3 years
C. CONVERTIBLE NOTES
On July 31, 1997, United Trust Inc. issued convertible notes for cash
in the amount of $2,560,000 to seven individuals, all officers or
employees of United Trust Inc. The notes bear interest at a rate
of 1% over prime, with interest payments due quarterly and
principal due upon maturity of July 31, 2004. The conversion price
of the notes are graded from $12.50 per share for the first three
years, increasing to $15.00 per share for the next two years and
increasing to $20.00 per share for the last two years. As of December
31, 1997, the notes were convertible into 204,800 shares ofUTI
common stock with no conversion privileges havingbeen
exercised. At December 31, 1997, UTI common stock had a bid price of
$8.00 and an ask price of $9.00 per share.
D. REVERSE STOCK SPLIT
On May 13, 1997, UTI effected a 1 for 10 reverse stock split.
Fractional shares received a cash payment on the basis of $1.00 for
each old share. The reverse split was completed to enable UTI to
meet new NASDAQ requirements regarding market value of stock to
remain listed on the NASDAQ market and to increase the market value
per share to a level where more brokers will look at UTI and its
stock. Prior period numbers have been restated to give effect of the
reverse split.
11. REVERSE STOCK SPLIT OF FCC
On May 13, 1997, FCC effected a 1 for 400 reverse stock split.
Fractional shares received a cash payment on the basis of $.25 for
each old share. FCC maintained a significant number of shareholder
accounts with less than $100 of market value of stock. The reverse
stock split enabled these smaller shareholders to receive
cash for their shares without incurring broker costs and will save
the Company administrative costs associated with maintaining these
small accounts.
57
12. NOTES PAYABLE
At December 31, 1997 and 1996, the Company has $21,460,223
and $19,573,953 in long-term debt outstanding, respectively. The
debt is comprised of the following components:
1997 1996
Senior debt $ 6,900,000 $ 8,400,000
Subordinated 10 yr.
notes 5,746,774 6,209,293
Subordinated 20 yr.
notes 3,902,582 3,814,660
Convertible notes 2,560,000 0
Other notes payable 2,350,867 1,150,867
$21,460,223 $19,573,953
A. Senior debt
The senior debt is through First of America Bank - Illinois NA and
is subject to a credit agreement. The debt bears interest at a rate
equal to the "base rate" plus nine-sixteenths of one percent. The
Base rate is defined as the floating daily, variable rate of
interest determined and announced by First of America Bank from time
to time as its "base lending rate." The base rate at December 31,
1997 was 8.5%. Interest is paid quarterly. Principal payments of
$1,000,000 are due in May of each year beginning in 1997, with
a final payment due May 8, 2005. On November 8, 1997, the Company
prepaid the May 1998 principal payment.
The credit agreement contains certain covenants with which the
Company must comply. These covenants contain provisions common to
a loan of this type and include such items as; a minimum consolidated
net worth of FCC to be no less than 400% of the outstanding balance
of the debt; Statutory capital and surplus of Universal Guaranty Life
Insurance Company be maintained at no less than $6,500,000;
an earnings covenant requiring the sum of the pre-tax earnings
of Universal Guaranty Life Insurance Company and its subsidiaries
(based on Statutory Accounting Practices) and the after-tax earnings
plus non-cash charges of FCC (based on parent only GAAP practices)
shall not be less than two hundred percent (200%) of the Company's
interest expense on all of its debt service. The Company is in
compliance with all of the covenants of the agreement.
B. Subordinated debt
The subordinated debt was incurred June 16, 1992 as a part of
the acquisition of the now dissolved Commonwealth Industries
Corporation, (CIC). The 10-year notes bear interest at the rate of 7 1/2%
per annum, payable semi-annually beginning December 16, 1992. These
notes, except for one $840,000 note, provide for principalpayments
equal to 1/20th of the principal balancedue with each interest
installment beginning December 16, 1997, with a final payment due June
16, 2002. The aforementioned $840,000 note provides for a lump sum
principal payment due June 16, 2002. In June 1997, the Company
refinanced a $204,267 subordinated 10year note as a subordinated 20-year
note bearing interest at the rate of 8.75% per annum. The repayment
terms of the refinanced note are the same as the original subordinated
20 year notes. The original 20-year notes bear interest at the rate
of 81/2% per annum on $3,397,620 and 8.75% per annum on $504,962 (of
which the $204,267 note refinanced in the current year is included),
payable semi annually with a lump sum principal payment due June 16,
2012.
C. Convertible notes
On July 31, 1997, United Trust Inc. issued convertible notes for cash in
the amount of $2,560,000 to seven individuals, all officers
or employees of United Trust Inc. The notes bear interest at a
rate of 1% over prime, with interest payments due quarterly and
principal due upon maturity of July 31,2004. The conversion price of
the notes are graded from $12.50 per share for the first three years,
increasing to $15.00 per share for the next two years and increasing to
$20.00 per share for the last two years.
58
D. Other notes payable
United Income, Inc. holds two promissory notes receivable
totaling $850,000 due from FCC. Each note bears interest at the rate of
1% over prime as published in the Wall Street Journal, with interest
payments due quarterly. Principal of $150,000 is due upon the
maturity date of June 1, 1999, with the remaining principal payment
of $700,000 becoming due upon the maturity date of May 8, 2006.
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,
$1,654,507 maturing on July 31, 2005 and one note of $70,392
requiring annual principal reductions of $10,000 until maturity on
September 23, 2004. The interest rates were deemed favorabl e 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
$1,874,899 and a discounted value at December 31, 1997 of $1,500,867.
Scheduled principal reductions on the Company's debt for the next
five years is as follows:
Year Amount
1998 $526,504
1999 1,826,504
2000 1,526,504
2001 1,526,504
2002 4,690,758
13. OTHER CASH FLOW DISCLOSURES
On a cash basis, the Company paid $1,800,110, $1,700,973 and
$1,934,326 in interest expense for the years 1997, 1996 and
1995, respectively. The Company paid $57,277, $17,634 and $25,821
in federal income tax for 1997, 1996 and 1995, respectively.
As partial proceeds for the acquisition of common stock of UTI and UII
during 1997, UTI issued promissory notes of $140,000 due in
eighteen months, $61,000 due in seven years and $1,281,000 due in seven
and one-half years.
One of the Company's insurance subsidiaries ("UG") entered into
a coinsurance agreement with Park Avenue Life Insurance Company
("PALIC") at September 30, 1996. At closing of the transaction, UG
received a coinsurance credit of $28,318,000 for policy liabilities
covered under the agreement. UG transferred assets equal to the
credit received. This transfer included policy loans of $2,855,000
associated with policies under the agreement and a net cash transfer
of $19,088,000 after deducting the ceding commission due UG of
$6,375,000. To provide the cash required to be transferred under
the agreement, the Company sold $18,737,000 of fixed maturity
investments.
14. NON-RECURRING WRITE DOWN OF VALUE OF AGENCY FORCE ACQUIRED
During the year-ended December 31, 1995, the Company recognized a
non recurring write down of $8,297,000 on its value of agency
force acquired. The write down released $2,904,000 of the deferred
tax liability and $3,327,000 was attributed to minority interest in
loss of consolidated subsidiaries. In addition, equity loss of
investees was negatively impacted by $542,000. The effect of this
write down resulted in an increase in the net loss of $2,608,000.
This write down is directly related to the Company's change in
distribution systems. Due to the broker agency force not meeting
management's expectations and lack of production,the Company has
changed its focus from a primarily broker agency distribution system
to a captive agent system. With the change infocus,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
59
write-off of the value. The write down is reported as a separate
line item "non-recurring write down of value of agency force acquired"
and the release of the deferred tax liability is reported in the
credit for income taxes payable in the Statement of Operations.
In addition,the impact to minority interest in loss of consolidated
subsidiaries and equity loss of investees is in the Statement of
Operations.
15. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions that
at times may exceed federally insured limits. The Company has
not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash equivalents.
16. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued
Statement of Financial Accounting Standards (SFAS) No. 128 entitled
Earnings per share, which is effective for financial statements
for fiscal years beginning after December 15, 1997. SFAS No.
128 specifies the computation, presentation , and disclosure
requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. The Statement's objective
is to simplify the computation of earnings per share, and to
make the U.S. standard for computing EPS more compatible with the EPS
standards of other countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS.
Basic EPS is calculated by dividing income available to common
stockholders (i.e., net income or loss adjusted for preferred stock
dividends) by the weighted-average number of common shares outstanding.
Thus, in the most significant change in current practice, options,
warrants,and convertible securities are excluded from the basic EPS
calculation. Further, contingently issuable shares are included in
basic EPS only if all the necessary conditions for the issuance of
such shares have been satisfied by the end of the period.
Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Income available to common stockholders continues to
be adjusted for assumed conversion of all potentially dilutive
securities using the treasury stock method to calculate the
dilutive effect of options and warrants. However, unlike the calculation
of fully diluted EPS under previous opinions, a new treasury stock
method is applied using the average market price or the ending market
price. Further, prior opinion requirement to use the modified treasury
stock method when the number of options or warrants outstanding
is greater than 20% of the outstanding shares also has been
eliminated. SFAS 128 also includes certain shares that are contingently
issuable; however, the test for inclusion under the new rules is much
more restrictive.
SFAS No.128 requires companies reporting discontinued operations,
extraordinary items, or the cumulative effect of accounting changes are
to use income from operations as the control number or benchmark
to determine whether potential common shares are dilutive or anti-
dilutive.Only dilutive securities are to be included in the calculation
of diluted EPS.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the Company reported a lossfrom continuing
operations so any potential issuance of common shares would have an
antidilutive effect on EPS. Consequently, the adoption of SFAS No.
128 did not have an impact on the Company's financial statement.
The FASB has issued SFAS No. 130 entitled Reporting Comprehensive
Income and SFAS No. 132 Employers' Disclosures about Pensions
and Other Postretirement Benefits. Both of the above statements are
effective for financial statements with fiscal years beginning after
December 15, 1997.
60
SFAS No. 130 defines how to report and display comprehensive income
and its components in a full set of financial statements. The purpose
of reporting comprehensive income is to report a measure of all
changes in equity of an enterprise that result from recognized
transactions and other economic events of the period other than
transactions with owners in their capacity as owners.
SFAS No. 132 addresses disclosure requirements for postretirement
benefits. The statement does not change postretirement measurement
or recognition issues.
The Company will adopt both SFAS No. 130 and SFAS No. 132 for the
1998 financial statements. Management does not expect either adoption
to have a material impact on the Company's financial statements.
17. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On February 19, 1998, UTI signed a letter of intent with Jesse T.
Correll, whereby Mr. Correll will personally or in combination
with other individuals make an equity investment in UTI over a
period of three years. Under the terms of the letter of intent Mr.
Correll will buy 2,000,000 authorized but unissued shares of UTI
common stock for $15.00 per share and will also buy 389,715 shares
of UTI common stock, representing stock of UTI and UII, that UTI
purchased during the last eight months in private transactions at
the average price UTI paid for such stock,plus interest,or approximately
$10.00 per share. Mr. Correll also will purchase 66,667 shares
of UTI common stock and $2,560,000 of face amount of convertible
bonds (which are due and payable on any change in control of UTI)
in private transactions, primarily from officers of UTI.
UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies.
The transaction is subject to negotiation of a definitive purchase
agreement; completion of due diligence by Mr. Correll; the receipt
of regulatory and other approvals; and the satisfaction of certain
conditions. The transaction is not expected to be completed before
June 30, 1998, and there can be no assurance that the transaction will
be completed.
18. PROPOSED MERGER
On March 25, 1997, the Board of Directors of UTI and UII voted to
recommend to the shareholders a merger of the two companies. Under
the Plan of Merger, UTI would be the surviving entity with UTI issuing
one share of its stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company,
and UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have
any other significant holdings or business dealings. The Board of
Directors of each company thus concluded a merger of the two companies
would be in the best interests of the shareholders. The merger will
result in certain cost savings, primarily related to costs associated
with maintaining a corporation in good standing in the states in which
it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger
is anticipated to occur sometime during the third quarter of 1998.
61
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1997
1st 2nd 3rd 4th
Premium income
and other
considerations,
net $ 7,926,386 $ 7,808,782 $ 6,639,394 $ 6,264,683
Net investment
income 3,844,899 3,825,457 3,686,861 3,500,080
Total revenues 11,965,571 11,871,953 10,354,133 9,800,673
Policy benefits
including
dividens 7,718,015 6,861,699 6,467,739 6,007,718
Commissions and
amortization of
DAC 1,110,410 553,913 1,083,006 869,036
Operating expenses 2,589,176 2,777,409 2,378,618 1,477,710
Operating income
loss (393,242) 683,223 (679,495) 276,512
Net income (loss) 47,026 101,812 (524,441) (183,645)
Net income (loss)
per share 0.03 0.05 (0.28) (0.12)
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
(loss) (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 0.16 0.00 (0.48) (0.18)
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 9,113,931 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
(loss) (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 0.10 (0.37) 0.11 (1.45)
62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
THE BOARD OF DIRECTORS
In accordance with the laws of Illinois and the Certificate of
Incorporation and Bylaws of the Company, as amended, the Company is
managed by its executive officers under the direction of the Board of
Directors. The Board elects executive officers, evaluates their
performance, works with management in establishing business objectives
and considers other fundamental corporate matters, such as the issuance
of stock or other securities, the purchase or sale of a business
and other significant corporate business transactions. In the fiscal year
ended December 31, 1997, the Board met five times. All directors attended
at least 75% of all meetings of the board except for Messers. Albin and
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
1997.
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 1997.
The compensation of the Company's executive officers is determined by
the full Board of Directors (see report on Executive Compensation).
Under the Company's Certificate of Incorporation, the Board of Directors
may be comprised of between five and twenty-one directors. The
Board currently has a fixed number of directors at ten. Shareholders
elect Directors to serve for a period of one year at the Company's Annual
Shareholders' meeting.
The following information with respect to business experience of the
Board of Directors has been furnished by the respective directors or
obtained from the records of the Company.
DIRECTORS
NAME, AGE Position with the Company, Business Experience and
Other Directorships
John S. Albin 70 Director of the Company since 1984; farmer in
Douglas and Edgar counties, Illinois, since 1951;
Chairman of the Board of Longview State Bank since
1978; President of the Longview Capitol Corporation,
a bank holding company, since 1978; Chairman of
First National Bank of Ogden, Illinois, since 1987;
Chairman of the State Bank of Chrisman since 1988;
Director and Secretary of Illini Community
Development Corporationsince 1990; Chairman of
Parkland College Board of Trustees since 1990;
board member of the Fisher National Bank, Fisher,
Illinois, since 1993.
63
William F. Cellini 63 Director of FCC and certain affiliate companies
since 1984; Chairman of the Board of New Frontier
Development Group, Chicago, Illinois for more than
the past five years; Executive Director of Illinois
Asphalt Pavement Association.
Robert E. Cook 72 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 63 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 74 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 63 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 Livestockand 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 79 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 farmingsince 1975; director of St.Mary's
Hospital of Galesburg since 1984.
James E. Melville 52 President and Chief Operating Officer since July
1997; Chief Financial Officer of the Company since
1993,Senior Executive Vice President of the Company
since September 1992;President of certain Affiliate
Companies from May 1989 until September 1991;
Chief Operating Officer of FCC from 1989 until
September 1991; Chief Operating Officer of certain
Affiliate Companies from 1984 until September
1991; Senior Executive Vice President of certain
affiliate companies from 1984 until 1989;Consultant
to UTI and UTG from March 1992 through September
1992; President and Chief Operating Officer of
certain affiliate life insurance companies and
Senior Executive Vice President of non insurance
affiliate companies since 1992.
Thomas F. Morrow 53 Director of the Company since 1984; Director of
certain affiliate companies since 1992 and Treasurer
since 1993. Mr. Morrow has served as Vice
Chairman and Director of certain affiliate life
insurance companies since 1992 as well as having
held similar positions with other affiliate life
insurance companies from 1987 to 1992.
Larry E. Ryherd 58 Chairman of the Board of Directors and a Director
since 1984, CEO since 1991; Chairman of the Board
of UII since 1987, CEO since 1992 and President
since 1993; Chairman, CEO and Director of UTG
since 1992; 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.
64
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 POSISTION WITH THE COMPANY, BUSINESS EXPERIENCE AND OTHE
DIRECTORSHIPS
George E. Francis 53 Executive Vice President since July 1997;
Secretary of the Company since February 1993;
Director of certain Affiliate Companies since
October 1992; Senior Vice President and Chief
Administrative Officer of certain Affiliate
Companies since 1989; Secretary of certain
Affiliate Companies since March 1993; Treasurer
and Chief Financial Officer of certain Affiliate
Companies from 1984 until September 1992.
Theodore C. Miller 35 Senior Vice President and Chief Financial Officer
since July 1997; Vice President and Treasurer
since October 1992; Vice President and Controller
of certain Affiliate Companies from 1984 to 1992.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid to or earned by the Company's Chief Executive Officer and each of
the Executive Officers of the Company whose salary plus bonus exceeded
$100,000 during each of the Company's last three fiscal years:
Compensation for services provided by the named executive officers to the
Company and its affiliates is paid by FCC as set forth in their
employment agreements. (See Employment Contracts).
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
Other Annual
Name and Compensation (2)
Principal Position Salary($) $
Larry E. Ryherd 1997 400,000 18,863
Chairman of the Board 1996 400,000 17,681
Chief Executive Officer 1995 400,000 13,324
James E. Melville 1997 237,000 29,538
President, Chief 1996 237,000 27,537
Operating Officer 1995 237,000 38,206(3)
George E. Francis 1997 122,000 8,187
Executive Vice 1996 119,000 7,348
President, Secretary 1995 119,000 4,441
(1) Compensation deferred at the election of named officers is included
in this section.
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(2) Other annual compensation consists of interest earned on deferred
compensation amounts pursuant to their employment agreements and the
Company's matching contribution to the First Commonwealth Corporation
Employee Savings Trust 401(k) Plan.
(3)Includes $16,000 for the value of personal perquisites owing Mr.
Melville.
AGGREAGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
The following table summarizes for fiscal year ending, December 31, 1997,
the number of shares subject to unexercised options and the value of
unexercised options of the Common Stock of UTI held by the named
executive officers. Thevalues shown were determined by
multiplying the applicable number of unexercised share options by the
difference between the per share market price on December 31, 1997 and
the applicable per share exercise price. There were no options granted
to the named executive officers for the past three fiscal years.
Number of Shares Number of Securities Underlying Value of Unexercised In the
Acquired on Value Unexercised Options/SARs Options/SARs at
Exercise(#) Money Realized($) at FY-End ($)
Name Exercisable Unexercisable Exercisable Unexercisable
Larry E.
Ryherd - - 13,800 - - -
James E.
Melville - - 30,000 - - -
George E.
Francis - - 4,600 - - -
COMPENSATION OF DIRECTORS
The Company's standard arrangement for the compensation of directors
provide that each director shall receive anannual retainer of
$2,400, plus $300 for each meeting attended and reimbursement for
reasonable travel expenses. The Company's director compensation policy
also provides that directors who are employees of the Company do not
receive any compensation for their services as directors except for
reimbursement for reasonable travel expenses for attending each meeting.
EMPLOYMENT CONTRACTS
On July 31, 1997, Larry E. Ryherd entered into an employment agreement
with FCC. Formerly, Mr. Ryherd had served as Chairman of the Board and
Chief Executive Officer of the Company and its affiliates. Pursuant to the
agreement, Mr. Ryherd agreed to serve as Chairman of the Board and Chief
Executive Officer of the Company and in addition, to serve in other
positions of the affiliated companies if appointed or elected. The
agreement provides for an annual salary of $400,000 as determined by the
Board of Directors.The term of the agreement is for a period of five years.
Mr. Ryherd has deferred portions of his income under a plan entitling
him to a deferred compensation payment on January 2, 2000 in the amount
of $240,000 which includes interest at the rate of approximately
8.5% per year. Additionally, Mr. Ryherd was granted an option to
purchase up to 13,800 of the Common Stock of the Company at $17.50 per
share. The option is immediately exercisable and transferable. The option
will expire December 31, 2000.
66
FCC entered into an employment agreement dated July 31, 1997 with James E.
Melville pursuant to which Mr. Melville is employed as President and Chief
Operating Officer and in addition, to serve in other positions of the
affiliated companies if appointed or elected at an annual salary of
$238,200. The term of the agreement expires July 31, 2002.Mr.
Melville has deferred portions of his income under a plan entitling him
to adeferred compensation payment on January 2, 2000 of $400,000
which includes interest at the rate of approximately8.5% annually.
Additionally, Mr. Melville was granted an option to purchase up to 30,000
shares of the Common Stock of the Company at $17.50 per share.The
option is immediately exercisable and transferable. The option will expire
December 31, 2000.
FCC entered into an employment agreement with George E. Francis on July
31, 1997. Under the terms of the agreement, Mr. Francis is employedas
Executive Vice President of the Company at an annual salary of
$126,200. Mr. Francis also agreed to servein 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 planentitlinghim to a
deferred compensation payment on January 2, 2000 of $80,000 which
includes interest at the rate of approximately8.5%per year.
Additionally,Mr.Francis was granted an option to purchase up to
4,600 shares of the Common Stock of the Company at $17.50 per share.
The option is immediately exercisable and transferable.This option
will expire on December 31, 2000.
On July 31, 1997, the Company entered into a severance agreement with
Thomas F. Morrow, Director of the Company since 1984.Mr. Morrow had certain
expectations and understandings as to the length of time he would be
employed by the Company and desired to retire effective July 31, 1997.
Mr. Morrow has agreed to continue as director of the Company and
his duties as an executive officer ceased. The Company paid Mr.
Morrow six months' severance in a lump sum of $150,000. In lieu
of renewal commissions that Mr. Morrow was entitled to under prior
agreements, Mr. Morrow will be paid a monthly sum of $4,000 for a
period of 24 months commencing July 31, 1997. Thereafter, Morrow
will be paid a monthly sum of $3,000 for the next 24 month period
ending July 31, 2001. Prior to his retirement, Mr. Morrow deferred
portions of his income under a plan entitling himto a deferred
compensation payment on January 2, 2000 in the amount of $300,000 which
includes interest at the rate of approximately 8.5% annually.
Additionally, Mr. Morrow was granted an option to purchase up to 17,200 of
UTI Common Stock at $17.50 per share. The option is immediately
exercisable and transferable.The option will expire December 31, 2000.
Mr. Morrow also redeemed the Common Stock of the Company and UII held by
himself and his family. See "Related Party Transactions".
REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION
The compensation of 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
significantemphasis on the design and administration ofthe
Company's executive compensation plans.
EXECTIVE COMPENSATION PLAN ELEMENTS
BASE SALARY. The Board of Directors establishes base salaries each year
at a level intended to be within the competitive market range of
comparable companies. In addition to the competitive market range, many
factors are considered in determining base salaries, including the
responsibilities assumed by the executive, the scope of the executive's
position, experience, length of service, individual performance and
internal equity considerations. During the last three fiscal years,
there were no material changes in the base salaries of the named
executive officers.
67
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 theoverall long-term
performance of the Company. Stock options are granted at the discretion
ofthe Board of Directors and are intended to be granted at levels
within the competitive market range of comparable companies.During
1993, eachof the named executive officers were granted options under
their employment agreements for the Company's Common Stock as described
inthe 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 toparticipating
officers in the receipt of their compensation. The availability, on a
voluntary basis, of the deferred compensation arrangements as
described in the Employment Contracts section may prove to be
critical to certain officers, depending upon their particular financial
circumstance.
CHIEF EXECUTIVE OFFICER
Larry E. Ryherd has been Chairman of the Board and Chief Executive
Officer since 1984. The Board of Directors used the same compensation
plan elements described above for all executive officers to determine Mr.
Ryherd's 1997 compensation.
In setting both the cash-based and equity-based elements of Mr. Ryherd's
compensation, the Board of Directors made an overall assessment of Mr.
Ryherd's leadership in achieving the Company's long-term strategic and
business goals.
Mr. Ryherd's base salary reflects a consideration of both
competitive forces and the Company's performance. The Board of Directors
does not assign specific weights to these categories.
The Company surveys total cash compensation for chief executive officers
atthe same group of companies described under "Base Salary" above.
Based upon its survey, the Company then determines a median around
which it builds a competitive range of compensation for the CEO. As a
result of this review, the Board of Directors concluded that Mr. Ryherd's
base salary was in the low end of the competitive market, andhis
total direct compensation (including stock incentives) was competitive
for CEOs running companies comparable in size and complexity to the
Company.
The Board of Directors considered the Company's financial results as
compared to other companies within the industry, financial performance
for fiscal 1997 as compared to fiscal 1996, the Company's progress as
it relates to the Company's growth through acquisitions and
simplification of the organization, the fact that since the Company does
not have a Chief Marketing Officer, Mr. Ryherd assumes additional
responsibilities of the Chief Marketing Officer, and Mr. Ryherd's
salary history, performance ranking and total compensation history.
Through fiscal 1997, Mr. Ryherd's annual salary was $400,000, the amount
the Board of Directors set in January 1996. In July 1997, the Board of
Directors reviewed Mr. Ryherd's salary. Following a review of the above
factors, the Board of Directors decided to recognize Mr. Ryherd's
performance by placing a greater emphasis on long-term incentive
awards, and therefore retained Mr. Ryherd's base salary at $400,000.
68
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 acompetitive 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 Raymond L. Larson
William F. Cellini Dale E. McKee
Robert E. Cook James E. Melville
Larry R. Dowell Thomas F. Morrow
Donald G. Geary Larry E. Ryherd
James E. Melville
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
Company's Common Stock during the five fiscal years ended December 31,
1997, with the cumulative total return on the NASDAQ Composite Index
Performance and the NASDAQ Insurance Stock Index (1):
STOCK PERFORMANCE GRAPH
1997
Percent Change from Base
Year NASDAQ NASDAQ Insurance UTI
1992 100.00 100.00 100.00
1993 114.68 106.83 62.50
1994 111.93 100.49 25.00
1995 158.72 142.93 19.00
1996 194.95 162.93 31.50
1997 239.45 238.54 40.00
(1) The Company selected the NASDAQ Composite Index Performance as an
appropriate comparison because the Company's Common Stock is not
listed on any exchange but the Company's Common Stock is traded on
the NASDAQ Small Cap exchange under the sign "UTIN". Furthermore,
the Company selected the NASDAQ Insurance Stock Index as the second
comparison because there is no similar single "peer company"
in the NASDAQ system with which to compare stock performance
and the closest additional line-of-business index
69
which could be found was the NASDAQ Insurance Stock Index.
Trading activity in the Company's Common Stock is limited, which
may be due in part as a result of the Company's low profile, and
its reported operating losses. The Company has experienced a tremendous
growth rate over the period shown in the Return Chart with assets
growing from approximately $233 million in 1991 to approximately $333
million in 1997. The growth rate has been the result of
acquisitions of other companies and new insurance writings. The
Company has incurred costs of conversions and administrative
consolidations associated with the acquisitions which has contributed
to the operating losses. The Return Chart is not intended to forecast
or be indicative of possible future performance of the Company's
stock.
The foregoing graph shall not be deemed to be incorporated by reference
into any filing of the Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent thatthe
Company specifically incorporates such information by reference.
Compensation Committee Interlocks and Insider Participation
The following persons served as directors of the Company during 1997 and
were officers or employees of the Company or its subsidiaries during
1997: James E. Melville and Larry E. Ryherd. Accordingly, these
individuals have participated in decisions related to compensation of
executive officers of the Company and its subsidiaries.
During 1997, the following executive officers of the Company were also
members ofthe Board of Directors of UII, two ofwhose executive
officers served on the Board of Directors of the Company: Messrs.
Melville and Ryherd.
During 1997, Larry E. Ryherd and James E. Melville, executive officers
ofthe Company, were also members of the Board of Directors of FCC,
two of whose executive officers served on the Board of Directors of the
Company: Messrs. Melville and Ryherd.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL HOLDERS OF SECURITIES
The following tabulation sets forth the name and address of the entity
known to be the beneficial owners of more than 5% of the Company's Common
Stock and shows: (i) the total number of shares of Common Stock
beneficially owned by such person as of March 31, 1998 and the nature of
such ownership; and (ii) the percent of the issued and outstanding shares
of Common Stock so owned as of the same date.
Title Number of Shares Percent
Of Name and Address and Nature of of
Class of Beneficial Owner Beneficial Ownership Class
Common Larry E. Ryherd 562,431 33.8%
Stock no 12 Red Bud Lane
par value Springfield, IL 62707
(1) Larry E. Ryherd owns 230,621 shares of the Company's Common Stock in
his own name. Includes: (i) 150,050 shares of the Company's common
Stock in the name of Dorothy LouVae Ryherd, his wife; (ii) 150,000
shares of the Company'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 the Company'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 the Company's Common Stock
held in the name of Larry E. Ryherd as custodian for Charity Lynn Newby,
his niece; (v) 500 shares held in the name of Larry E. Ryherd as custodian
for Lesley Carol Newby, his niece; (vi) 2,000 shares held by Dorothy
LouVae Ryherd, his wife, as custodian for granddaughter; 160 shares held by
Larry E. Ryherd as custodian for granddaughter; and (vii) 13,800 shares
which may be acquired by Larry E. Ryherd upon the exercise of outstanding
stock options.
70
SECURITY OWNERSHIP OF MANAGEMENT
The following tabulation shows with respect to each of the directors
and nominees of the Company, with respect to the Company's chief
executive officer and each of the Company's executive officers whose
salary plus bonus exceeded $100,000 for fiscal 1997, and with respect
to all executive officers and directors of the Company as a group: (i)
the total number of shares of all classes of stock of the Company or
any of its parents or subsidiaries, beneficially owned as of March 31,
1998 and the nature of such ownership; and (ii) the percent of the
issued and outstanding shares of stock so owned as of the same date.
Title Directors, Named Executive Number of Shares Percent
of Officers, & All Directors & and Nature of of
Class Executive Officers as a Group Ownership Class
FCC's John S. Albin 0 *
Common William F. Cellini 0 *
Stock, $1.00 Robert E. Cook 0 *
par value Larry R. Dowell 0 *
George E. Francis 0 *
Donald G. Geary 225 *
Raymond L. Larson 0 *
Dale E. McKee 0 *
James E. Melville 544 (1) *
Thomas F. Morrow 0 *
Larry E. Ryherd 0 *
All directors and executive
officers 769 *
as a group (eleven in number)
UII's John S. Albin 0 *
Common William F. Cellini 0 *
Stock, no Robert E. Cook 4,025 *
par value Larry R. Dowell 0 *
George E. Francis 0 *
Donald G. Geary 0 *
Raymond L. Larson 0 *
Dale E. McKee 0 *
James E. Melville 0 *
Thomas F. Morrow 0 *
Larry E. Ryherd 47,250 (2)(9) 3.4%
All directors and executive
officers 51,275 3.7%
as a group (eleven in number)
Company's John S. Albin 10,503 (3) *
Common William F. Cellini 1,000 *
Stock, no Robert E. Cook 10,199 *
par value Larry R. Dowell 10,142 *
George E. Francis 4,600 (4) *
Donald G. Geary 1,200 *
Raymond L. Larson 4,400 (5) *
Dale E. McKee *
James E. Melville 52,500 (6) 3.2%
Thomas F. Morrow 40,555 (7) 2.4%
Larry E. Ryherd 562,431 (8) 33.8%
All directors and executive
officers 708,652 42.6%
as a group (eleven in number)
71
(1) James E. Melville owns 168 shares individually and 376 shares owned
jointly with his spouse.
(2) Includes 47,250 shares beneficially in trust for the three children of
Larry E.Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr,
Derek Scott Ryherd and Jarad John Ryherd.
(3) Includes 392 shares owned directly by Mr. Albin's spouse.
(4) Includes 4,600 shares which may be acquired upon exercise of
outstanding stock options.
(5) Includes 375 shares owned directly by Mr. Larson's spouse.
(6) James E. Melville owns 2,500 shares individually and 14,000 shares
jointly with his spouse. Includes: (i) 3,000 shares of UTI's Common
Stock which are held beneficially in trust for his daughter, namely
Bonnie J. Melville;(ii) 3,000 shares of UTI's Common Stock, 750 shares
of which are in the name of Matthew C. Hartman, his nephew; 750 shares
of which are in the name of Zachary T. Hartman, his nephew; 750 shares
of whichare in the name of Elizabeth A. Hartman, his niece; and 750
shares of which are in the name of Margaret M. Hartman, his niece; and
(iii) 30,000 shares which may be acquired by James E. Melville upon
exercise of outstanding stock options.
(7) Includes 17,200 shares which may be acquired upon exercise of
outstanding stock options.
(8) Includes 1,500 shares as custodian for grandchildren.
(9) In addition, Mr. Ryherd is a director and officer of UII. The Company
owns 565,766 shares of UII. Mr. Ryherd disclaims any beneficial
interest of the 565,766 shares of UII owned by the Company as the
Company's Board of directors controls the voting and investment
decisions regarding such shares.
* Less than 1%.
Except as indicated above, the foregoing persons hold sole voting and
investment power.
Directors and officers of the Company file periodic reports regarding
ownership of Company securities with the Securities and Exchange Commission
pursuant to Section 16(a) of the Securities Exchange Act of 1934 as
amended, and the rules promulgated thereunder.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTIONS
The Company 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 has a service agreement with USA which states that USA is to pay UII
monthly fees equal to 22% of the amount of collected first year
premiums, 20% in second year and 6% of the renewal premiums in years
three and after. UII's subcontract agreement with the Company states
that UII is to pay the Company monthly fees equal to 60% of collected
service fees from USA as stated above.
72
On January 1, 1993, the Company entered into an agreement with UG pursuant
to which the Company provides management services necessary for UG to
carry on its business. In addition to the UG agreement, the Company and
its affiliates have either directly or indirectly entered into
management and/or cost-sharing arrangements for the Company's
management services. The Company received net management fees of
$9,893,321, $9,927,000 and $10,464,000 under these arrangements in
1997, 1996 and 1995, respectively. UG paid $8,660,481, $9,626,559 and
$10,164,000 to the Company in 1997, 1996 and 1995, respectively.
USA paid $989,295, $1,567,891 and $2,015,325 under their agreement
with UII for 1997, 1996 and 1995, respectively. UII paid $593,577,
$940,734 and $1,209,195 under their agreement with the Company for 1997,
1996 and 1995, respectively.
Their respective domiciliary insurance departments have approved the
agreements of the insurance companies and it is Management's opinion that
where applicable, costs have been allocated fairly and such allocations
are based upon generally accepted accounting principles. The costs paid
by the Company 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
ofdeferred policy acquisition costs". Also included are costs
associated with the maintenance of existing policies that are charged
as current period costs and included in "general expenses".
On July 31, 1997, the Company issued convertible notes for cash received
totaling $2,560,000 to seven individuals, all officers or employees of
the Company. The notes bear interest at a rate of 1% over prime, with
interest payments due quarterly and principal due upon maturity of
July 31, 2004. The conversion price of the notes are graded from $12.50
per share for the first three years, increasing to $15.00 per share for
the next two years and increasing to $20.00 per share for the last two
years. Conditional upon the seven individuals placing the funds with the
Company were the acquisition of a portion of the holdings of the Company
owned byLarry E. Ryherd and his family and the acquisition of
common stock of the Company and UII held by Thomas F. Morrow and his
family and the simultaneous retirement of Mr. Morrow. Neither Mr. Morrow
nor Mr. Ryherd was a party to the convertible notes.
Approximately $1,048,000 of the cash received from the issuance ofthe
convertible notes was used to acquire stock holdings of the Company and
UII of Mr. Morrow and to acquire a portion of the Company's stock held by
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 of its own shares of common stock
and 47,250 shares of UII common stock from Thomas F. Morrow and his
family. Mr. Morrow simultaneously retired as an executive officer of the
Company. Mr. Morrow will remain as a member of the Board of Directors
of the Company. 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% overprime, 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 its
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 of the Company 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 to make the
stock more attractive to the investment community. Following the
transaction, Mr. Ryherd and his family own approximately31% of the
outstanding common stock of the Company.
PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On February 19, 1998, the Company signed a letter of intent with Jesse T.
Correll, whereby Mr. Correll will personally or in combination with
other individuals make an equity investment in UTI over a period of three
years. Under the terms of the letter of intent Mr. Correll will buy
2,000,000 authorized but unissued shares of common stock for $15.00 per
share and will also buy 389,715 shares of common stock, representing
common stock purchased during the last eight months in private
transactions at the average price paid forsuchstock, plus
interest, or approximately $10.00 per share. Mr. Correll also will
purchase 66,667 shares of common stock and $2,560,000 of face amount of
convertible bonds (which are due and payable on any change in control
of the Company) in private transactions.
73
The Company intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies.The transaction is subject to negotiation of a definitive
purchase agreement; completion of due diligence by Mr.Correll; the
receipt of regulatory and other approvals; and the satisfaction of
certain conditions. The transaction is not expected to be completed
before June 30, 1998, and there can be no assurance that the transaction
will be completed.
PROPOSED MERGER
On March 25, 1997, the Board of Directors of the Company and UII voted to
recommend to the shareholders a merger of the two companies. Under
the Plan of Merger, the Company would be the surviving entity issuing
one share of its stock for each share held by UII shareholders.
The Company owns 53% of United Trust Group, Inc., an insurance holding
company,and UII owns 47% of United Trust Group, Inc. Neither the
Company nor UII have any other significant holdings or business
dealings. The Board of Directors of each company thus concluded a merger
of the two companies would be in the best interests of the shareholders.
The merger will result in certain cost savings, primarily related to
costs associated with maintaining a corporation in good standing in the
states in which it transacts business.
A vote of the shareholders of the Company and UII regarding the proposed
merger is anticipated to occur sometime during the third quarter of 1998.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results.This could have a significant effect on the Company's
business/financial systems as well as products and services, if not
corrected.
The Company established a project to address year 2000 processing concerns
in September of 1996. In 1997 the Company completed the review of the
Company's internally and externally developed software, and made
corrections to all year 2000 non-compliant processing. The Company also
secured verification of current and future year 2000 compliance from all
major external software vendors. In December of 1997, a separate
computeroperating environment was established with the system dates
advancedto December of 1999. A parallel model office was established
with all datesin the data advanced to December of1999. Parallel
model office processing is being performed using dates from December
of1999 to January of 2001, to insure all year 2000 processing errors
have been corrected. Testing should be completed by the end of the
first quarter of 1998. After testing is completed, periodic regression
testing will beperformed to monitor continuing compliance. By
addressing year2000 compliance in a timely manner, compliance will be
achievedusing existing staff and without significant impact on the
Company operationally or financially.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Kerber, Eck and Braeckel LLP served as the Company's independent certified
public accounting firm for the fiscal year ended December 31, 1997 and for
fiscal year ended December 31, 1996. In serving its primary function as
outside auditor for the Company, Kerber, Eck and Braeckel LLP performed
the following audit services: examination of annual consolidated financial
statements;assistance and consultation on reports filed with the Securities
and Exchange Commission and; assistance and consultation on separate
financial reports filed with the State insurance regulatory authorities
pursuant to certain statutory requirements.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) Financial Statements:
See Item 8, Index to Financial Statements
(2) Financial Statement Schedules
Schedule I - Summary of Investments - other than invested in
related parties.
Schedule II - Condensed financial information of registrant
Schedule IV - Reinsurance
Schedule V - Valuation and qualifying accounts
NOTE: Schedules other than those listed above are omitted
because they are not required or the information is disclosed
in the financial statements or footnotes.
(b)Reports on Form 8-K filed during fourth quarter.
None
(c)Exhibits:
Index to Exhibits (See Pages 76 and 77).
75
INDEX TO EXHIBITS
Exhibit
Number
3(a) (1) Amended Articles of Incorporation for the
Company dated November 20, 1987.
3(b) (1) Amended Articles of Incorporation for the
Company dated December 6, 1991.
3(c) (1) Amended Articles of Incorporation for the
Company dated March 30, 1993.
3(d) (1) Code of By-Laws for the Company.
10(a) (2) Credit Agreement dated May 8, 1996 between First
of America Bank - Illinois, N.A., as lender and
First Commonwealth Corporation, as borrower.
10(b) (2) $8,900,000 Term Note of First Commonwealth
Corporation to First of America Bank - Illinois,
N.A. dated May 8, 1996.
10(c) (2) Coinsurance Agreement dated September 30, 1996
between Universal Guaranty Life Insurance Company
and First International Life Insurance Company,
including assumption reinsurance agreement exhibit and
amendments.
10(d) (1) Subcontract Agreement dated September 1, 1990 between
United Trust, Inc. and United Income, Inc.
10(e) (1) Service Agreement dated November 8, 1989 between
United Security Assurance Company and United Income, Inc.
10(f) (1) Management and Consultant Agreement dated as of
January 1, 1993 between First Commonwealth Corporation
and Universal Guaranty Life Insurance Company.
10(g) (1) Management Agreement dated December 20, 1981
between Commonwealth Industries Corporation, and Abraham
Lincoln Insurance Company.
10(h) (1) Reinsurance Agreement dated January 1, 1991
between Universal Guaranty Life Insurance Companyand Republic
Vanguard Life Insurance Company.
10(i) (1) Reinsurance Agreement dated July 1, 1992 between
United Security Assurance Company and Life Reassurance
Corporation of America.
76
INDEX TO EXHIBITS
Exhibit
Number
10(j) (1) United Trust, Inc. Stock Option Plan.
10(k) (1) Board Resolution adopting United Trust, Inc.'s
Officer Incentive Fund.
10(l) Employment Agreement dated as of July 31, 1997
between Larry E. Ryherd and FirstCommonwealth
Corporation
10(m) Employment Agreement dated as of July 31, 1997
between James E. Melville and FirstCommonwealth
Corporation
10(n) Employment Agreement dated as of July 31, 1997
between George E. Francis and FirstCommonwealth
Corporation. Agreements containing the sameterms and
conditions excepting title and current salary were also
entered into by Joseph H. Metzger, Brad M. Wilson,
Theodore C. Miller, Michael K. Borden and Patricia G. Fowler.
10(o) (1) Consulting Arrangement entered into June 15,
1987 between Robert E. Cook and United Trust, Inc.
10(p) (1) Agreement dated June 16, 1992 between JohnK.
Cantrell and First Commonwealth Corporation.
10(q) (1) Termination Agreement dated as of January 29,
1993 between Scott J. Engebritson and UnitedTrust, Inc.,
United Fidelity, Inc., United Income, Inc., FirstCommonwealth
Corporation and United Security Assurance Company.
10(r) (1) Stock Purchase Agreement dated February 20, 1992
between United Trust Group, Inc. and Sellers.
10(s) (1) Amendment No. One dated April 20, 1992 to the
Stock Purchase Agreement between the Sellers and United
Trust Group, Inc.
10(t) (1) Security Agreement dated June 16, 1992 between
United Trust Group, Inc. and the Sellers.
10(u) (1) Stock Purchase Agreement dated June 16, 1992
between United Trust Group, Inc. and FirstCommonwealth
Corporation
Footnote:
(1) Incorporated by reference from the Company'sAnnual Report
on Form 10-K, File No. 0-5392, as of December 31, 1993.
(2) Incorporated by reference from the Company'sAnnual Report
on Form 10-K, File No. 0-5392, as of December 31, 1996.
77
UNITED TRUST, INC.
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1997 SCHEDULE I
Column A Column B Column C Column D
Amount at
Which Shown
in Balance
Cost Value Sheet
Fixed maturities:
Bonds:
United States Government
and government agencies
and authorities $ 28,259,322 $ 28,622,970 $ 28,259,322
State, municipalities,
and political
subdivisions 22,778,816 23,449,601 22,778,816
Collateralized mortgage
obligations 11,093,926 11,207,647 11,093,926
Public utilities 47,984,322 49,141,537 47,984,322
All other corporate bonds 70,853,947 72,360,813 70,853,947
Total fixed maturities 180,970,333 $ 184,782,568 180,970,333
Investments held for sale:
Fixed maturities:
United States Government
and government agencies
and authorities 1,448,202 $ 1,442,557 1,442,557
State, municipalities,
and political
subdivisions 35,000 35,485 35,485
Public utilities 80,169 80,496 80,496
All other corporate bonds 108,927 110,092 110,092
1,672,298 $ 1,668,630 1,668,630
Equity securities:
Banks, trusts and insurance
companies 2,473,969 $ 2,167,368 2,167,368
All other corporate
securities 710,388 834,376 834,376
3,184,357 $ 3,001,744 3,001,744
Mortgage loans on real estate 9,469,444 9,469,444
Investment real estate 9,760,732 9,760,732
Real estate acquired in
satisfaction of debt 1,724,544 1,724,544
Policy loans 14,207,189 14,207,189
Short term investments 1,798,878 1,798,878
TOTAL INVESTMENTS $ 222,787,775 $ 222,601,494
78
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT 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.
79
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1997 and 1996 Schedule II
1997 1996
ASSETS
Investment in affiliates $ 19,974,098 $ 19,475,431
Cash and cash equivalents 342,294 422,446
Notes receivable from affiliate 1,682,245 265,900
Receivable from affiliates, net 31,502 30,247
Accrued interest income 21,334 2,051
Other assets 225,986 262,927
TOTAL ASSETS $ 22,277,459 $ 20,459,002
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 4,060,866 $ 0
Notes payable to affiliate 840,000 840,000
Deferred income taxes 2,016,575 1,602,345
Other liabilities 3,400 2,800
TOTAL LIABILITIES 6,920,841 2,445,145
Shareholders' equity:
Common stock 32,696 37,402
Additional paid-in capital 16,488,375 18,638,591
Unrealized depreciation of
investments held for sale
of affiliates (29,127) (86,058)
Accumulated deficit (1,135,326) (576,078)
TOTAL SHAREHOLDERS' EQUITY 15,356,618 18,013,857
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 22,277,459 $ 20,459,002
80
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1997 Schedule II
1997 1996 1995
Revenues:
Management fees from affiliates $ 593,577 $ 940,734 $ 1,209,196
Other income from affiliates 73,515 115,235 113,869
Interest income from affiliates 53,492 21,264 13,583
Interest income 37,620 29,340 21,678
Realized investment losses 0 (207,051) 0
Loss from write down of investee 0 (315,000) (10,000)
758,204 584,522 1,348,326
Expenses:
Management fee to affiliate 200,000 575,000 800,000
Interest expense 194,543 0 0
Interest expense to affiliates 63,000 63,000 63,000
Operating expenses 65,541 133,897 83,312
523,084 771,897 946,312
Operating income (loss) 235,120 (187,375) 402,014
Income tax credit (expense) (414,230) 59,780 (153,764)
Equity in loss of investees (23,716) (95,392) (635,949)
Equity in loss of subsidiaries (356,422) (714,916) (2,613,546)
Net loss $(559,248) $(937,903) $(3,001,245)
81
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1997 Schedule II
1997 1996 1995
Increase (decrease) in cash and
cash equivalents
Cash flows from operating
activities:
Net loss $ (559,248) $ (937,903) $ (3,001,245)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Equity in loss of
subsidiaries 356,422 714,916 2,613,546
Equity in loss of investees 23,716 95,392 635,949
Compensation expense through
stock option plan 0 13,563 12,100
Change in accrued interest income (19,283) 14,222 2,260
Depreciation 12,439 18,366 26,412
Realized investment losses 0 207,051 0
Loss from writedown of investee 0 315,000 10,000
Change in deferred income taxes 414,230 (60,524) 153,764
Change in indebtedness (to)
from affiliates, net (1,255) (104,766) (23,027)
Change in other assets
and liabilities 44,029 (728) (274,167)
NET CASH PROVIDED BY OPERATING
ACTIVITES 271,050 274,589 155,592
Cash flows from investing activities:
Purchase of stock of affiliates (865,877) 0 (325,000)
Change in notes receivable
from affiliate (1,116,345) (250,000) 300,000
Capital contribution
to affiliate 0 (106,000) (53,000)
NET CASH USED IN INVESTING
ACTIVITIESng activities (1,982,222) (356,000) (78,000)
Cash flows from financing
activities:
Purchase of treasury stock (926,599) 0 0
Proceeds from issuance
of notes payable 2,560,000 0 0
Payment for fractional shares
from reverse stock (2,381) 0 0
Proceeds from issuance
of common stock 0 500 400
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,631,020 500 400
Net increase (decrease) in
cash and cash equivalents (80,152) (80,911) 77,992
Cash and cash equivalents
at beginning of year 422,446 503,357 425,365
Cash and cash equivalents
at end of year $ 342,294 $ 422,446 $ 503,357
82
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1997 and the year ended December 31, 1997 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
Life
insurance
in force
$3,691,867,000 $1,022,458,000 $1,079,885,000 $3,749,294,000 28.8%
Premiums
and
policy
fees:
Life
insurance$ 33,133,414 $ 4,681,928 $ 0 $ 28,451,486 0.0%
Accident
and
health
insurance 240,536 52,777 0 187,759 0.0%
$ 33,373,950 $ 4,734,705 $ 0 $ 28,639,245 0.0%
* All assumed business represents the Company's participation in
the Servicemen's Group Life Insurance Program (SGLI).
83
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 $4,116,190,000 30.9%
Premiums
and
policy
fees:
Life
insurance$ 35,633,232 $ 4,896,896 $ 0 $ 30,736,33 60.0%
Accident
and
health
insurance 258,377 50,255 0 208,122 0.0%
$ 35,891,609 $ 4,947,151 $ 0 $ 30,944,458 0.0%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
84
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 $4,159,438,000 25.0%
Premiums
and
policy
fees:
Life
insurance$ 38,233,190 $ 5,330,351 $ 0 $ 32,902,839 0.0%
Accident
and
health
insurance 248,448 52,751 0 195,697 0.0%
$ 38,481,638 $ 5,383,102 $ 0 $ 33,098,536 0.0%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
85
UNITED TRUST, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, 1996 and 1995 Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
DECEMBER
31, 1997
Allowance
for
doubtful
accounts-
mortgage
loans $ 10,000 $ 0 $ 0 $ 10,000
DECEMBER
31, 1996
Allowance
for
doubtful
accounts-
mortgage
loans $ 10,000 $ 0 $ 0 $ 10,000
DECEMBER
31, 1995
Allowance
for
doubtful
accounts-
mortgage
loans $ 26,000 $ 0 $ 16,000 $ 10,000
86
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
UNITED TRUST, INC.
(Registrant)
/s/ John S. Albin March 24, 1998
John S. Albin, Director
/s/ William F. Cellini March 24, 1998
William F. Cellini, Director
/s/ Robert E. Cook March 24, 1998
Robert E. Cook, Director
/s/ Larry R. Dowell March 24, 1998
Larry R. Dowell, Director
/s/ Donald G. Geary March 24, 1998
Donald G. Geary, Director
/s/ Raymond L. Larson March 24, 1998
Raymond L. Larson, Director
/s/ Dale E. McKee March 24, 1998
Dale E. McKee, Director
/s/ Thomas F. Morrow March 24, 1998
Thomas F. Morrow, Director
/s/ Larry E. Ryherd March 24, 1998
Larry E. Ryherd, Chairman of the Board,
Chief Executive Officer and Director
/s/ James E. Melville March 24, 1998
James E. Melville, President, Chief
Operating Officer and Director
/s/ Theodore C. Miller March 24, 1998
Theodore C. Miller, Chief Financial
Officer
87