Investment real estate Commercial 23,920,037 90% Residential development 805,787 3% 24,725,824 93%
Notes payable decreased 24% in 2003 compared to 2002. At December 31, 2002, UTG had $ 2,995,275 in notes payable. During 2003, the Company repaid $ 705,499 of its debt through operating cash flows and dividends received from its subsidiary UG. At December 31, 2003, UTG had $ 2,289,776 in notes payable, all remaining debt is owed to two former Officers and Directors of the Company and their respective families as a result of an April 2001 stock purchase transaction. These notes bear interest at the fixed rate of 7% per annum (paid quarterly), with three remaining principal payments of approximately $ 763,000 due annually. The next principal payment due date was April of 2004. Subsequent to year-end 2003, the Company paid the remaining balance of these notes with a draw on its line of credit with Southwest Bank of St. Louis. The line of credit will bear interest at the rate of 0.25% in excess of the Southwest Bank of St. Louis' prime rate. Management believes overall sources of liquidity available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cash flows and payment of dividends from the Company's life subsidiary. The Company's long-term debt is discussed in more detail in Note 11 to the consolidated financial statements, which is incorporated herein by this reference.
UTG is a holding company that has no day-to-day operations of its own. Funds required to meet its expenses, generally costs associated with maintaining the Company in good standing with states in which it does business, are primarily provided by its subsidiaries. On a parent only basis, UTG's cash flow is dependent on management fees received from its subsidiary and earnings received on cash balances. On December 31, 2003, substantially all of the consolidated shareholders equity represents net assets of its subsidiary. The Company's insurance subsidiary has maintained adequate statutory capital and surplus and has not used surplus relief or financial reinsurance, which have come under scrutiny by many state insurance departments. The payment of cash dividends to shareholders is not legally restricted. However, the state insurance department regulates insurance company dividend payments where the company is domiciled. Following the merger of FCC with and into UTG (see note 15 to the consolidated financial statements) UG became a 100% owned subsidiary of UTG.
Benefits, claims and settlement expenses: Life 22,175,842 20,393,044 19,614,470 Reinsurance benefits and claims (3,194,541) (3,043,115) (2,349,102) Annuity 1,122,707 1,151,973 1,244,663 Dividends to policyholders 966,668 984,346 1,015,055 Commissions and amortization of deferred policy acquisition costs 311,939 785,861 1,262,974 Amortization of cost of insurance acquired 6,695,328 1,515,450 1,572,920 Operating expenses 7,566,780 5,876,456 6,485,691 Interest expense 162,179 263,441 326,499 --------------- ---------------- ---------------- 35,806,902 27,927,456 29,173,170 --------------- ---------------- ----------------
Net income (loss) $ (6,396,490) $ 1,338,795 $ 2,308,096 =============== ================ ================
Until 1984, the insurance company was taxed under the provisions of the Life Insurance Company Income Tax Act of 1959 as amended by the Tax Equity and Fiscal Responsibility Act of 1982. These laws were superseded by the Deficit Reduction Act of 1984. All of these laws are based primarily upon statutory results with certain special deductions and other items available only to life insurance companies. Under the provision of the pre-1984 life insurance company income tax regulations, a portion of "gain from operations" of a life insurance company was not subject to current taxation but was accumulated, for tax purposes, in a special tax memorandum account designated as "policyholders' surplus account". Federal income taxes will become payable on this account at the then current tax rate when and if distributions to shareholders, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income maintained in the "shareholders surplus account". At December 31, 2003, the balances of the shareholders' surplus account and the untaxed balance for UG were $ 23,239,772 and $ 4,363,821, respectively.
On November 20, 1998, FSF and affiliates acquired 929,904 shares of common stock of UTG from UTG and certain UTG shareholders. As consideration for the shares, FSF paid UTG $ 10,999,995 and certain shareholders of UTG $ 999,990 in cash. Included in the stock acquisition agreement is an earnings covenant whereby UTG warrants UTG and its subsidiaries and affiliates will have future earnings of at least $ 30,000,000 for a five-year period beginning January 1, 1998. Such earnings are computed based on statutory results excluding inter-company activities such as inter-company dividends plus realized and unrealized gains and losses on real estate, mortgage loans and unaffiliated common stocks. At the end of the covenant period, an adjustment is to be made equal to the difference between the then market value and statutory carrying value of real estate still owned that existed at the beginning of the covenant period. Should UTG not meet the covenant requirements, any shortfall will first be reduced by the actual average tax rate for UTG for the period, and then will be further reduced by one-half of the percentage, if any, representing UTG's ownership percentage of the insurance company subsidiaries. This result will then be reduced by $ 250,000. The remaining amount will be paid by UTG in the form of UTG common stock valued at $ 15.00 per share with a maximum number of shares to be issued of 500,000. However, there shall be no limit to the number of shares transferred to the extent that there are legal fees, settlements, damage payments or other losses as a result of certain legal action taken. The price and number of shares shall be adjusted for any applicable stock splits, stock dividends or other recapitalizations. For the five-year period starting January 1, 1998 and ending December 31, 2002, the Company had total earnings of $ 17,011,307 applicable to this covenant. Therefore, UTG did not meet the earnings requirements stipulated, and during 2003, was required to issue 500,000 additional shares to FSF or its assigns.
On November 15, 2001, UTG was extended a $ 3,300,000 line of credit from the First National Bank of the Cumberlands located in Livingston, Tennessee. The First National Bank of the Cumberlands is owned by Millard V. Oakley, who at the time was a Director of UTG. The original line of credit expired one year from the date of issue and has been renewed annually for additional one-year terms. The line of credit is available for general business uses. The interest rate provided for in the agreement is variable and indexed to be the lowest of the U.S. prime rates as published in the money section of the Wall Street Journal, with any interest rate adjustments to be made monthly. During 2002, the Company borrowed a total of $ 1,600,000 under this line of credit and incurred interest expense of $ 17,419. All funds drawn were repaid prior to December 31, 2002. No borrowings were incurred during 2003.
Basic EPS Income available to common shareholders $ (6,396,490) 3,839,947 $ (1.67) =================
Unrealized holding gains during period $ 1,222,583 $ $ 794,679 (427,904) Less: reclassification adjustment for gains realized in net income (221,222) (340,341) 119,119 ---------------- ----------------- ---------------
During 2003, the Company determined the amount of reinsurance premiums paid to reinsurers was insufficient in the current year as well as prior years. In total, due premiums of $ 903,325 were owed the Company's reinsurers, of which $ 729,321 related to years prior to 2003. Accordingly, financial results from 2002 and 2001 have been restated to reflect the correction of the error. The following table summarizes the impact of this correction: