Investment real estate Commercial 11,591,283 59% Residential development 3,960,882 20% Foreclosed real estate 1,550,000 8% ------------- ---- 17,102,165 87% ----------
At December 31, 1999, UTG acquired 100% of the common stock of North Plaza in exchange for UTG common stock. North Plaza owns a shopping center in Somerset, Kentucky and approximately 23,000 acres of timberland in Kentucky. The timberland is harvested and in various stages of maturity. The Company expects to receive at least $500,000 per year in cash flows from the harvesting activity. At the time of acquisition, the properties were valued at $9,296,596. Other commercial properties owned are leased to various unaffiliated companies and organizations.
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 read in 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 UTG and its subsidiaries at December 31, 1999.
UTG owned 53% of UTGL99, an insurance holding company, and UII owned 47% of UTGL99. At the time the decision to merge was made, neither UTG nor UII had 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.
Premiums and policy fee revenues, net of reinsurance premiums and policy fees, decreased 18% when comparing 1999 to 1998 and 8% from 1998 to 1997. The Company currently writes little new traditional business, consequently, traditional premiums will decrease as the amount of traditional business in-force decreases. Collected premiums on universal life and interest sensitive products is not reflected in premiums and policy revenues because Generally Accepted Accounting Principles ("GAAP") requires that premiums collected on these types of products be treated as deposit liabilities rather than revenue. Unless the Company acquires a block of in-force business or marketing changes its focus to traditional business, premium revenue will continue to decline at a rate consistent with prior experience. The Companies' average persistency rate for all policies in force for 1999 and 1998
The Company's investments are generally managed to match related insurance and policyholder liabilities. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. The minimum interest spread between earned and credited rates is 1% on the "Century 2000" universal life insurance product, which currently is the Company's primary sales product. The Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads. It is expected that monitoring of the interest spreads by management will provide the necessary margin to adequately provide for associated costs on the insurance policies the Company currently has in force and will write in the future. At the September 1998 Board of Directors meeting, the Boards of the insurance subsidiaries lowered crediting rates one half percent on all products crediting 5.5% or more. The change affected approximately $60,000,000 of policy reserves and will result in interest crediting reductions of $300,000 per year. At the March 1999 Board of Directors meeting, the Boards of the insurance subsidiaries again lowered crediting rates one half percent on all products that could be lowered. The change will result in interest crediting reductions of approximately $600,000 per year. These adjustments were in response to continued declines in interest rates in the marketplace. Policy interest crediting rate changes become effective on an individual policy basis on the next policy anniversary. Therefore, it will take a full year from the time the change is determined for the full impact of such change to be realized.
Realized investment losses, net of realized gains, were $530,894, $1,119,156 and $279,096 in 1999, 1998 and 1997, respectively. During the last two years the Company re-evaluated its real estate holdings, especially those properties acquired through acquisitions of other companies and mortgage loan foreclosures, and determined it would be in the long term interest of the Company to dispose of certain of these parcels. Parcels targeted for sale were generally non-income or low income producing and located in parts of the country where management has little other reason to travel to. The disposal of these properties will free up management time to focus on the properties that have a more viable long-term benefit to the Company. Approximately 99% of the realized loss in 1999 is from two parcels of real estate. In June 1999, the Company sold its shopping center in Gulfport, MS realizing a loss on sale of $401,000. This property was originally acquired through the foreclosure of a mortgage loan. The property was income producing, but due to the distance from the Company's headquarters, was difficult to manage and required the use of an outside property manager. Given this circumstance and the eventual need for updates and improvements, the Company determined it was in its best long-term interest to sell the property. At year-end the Company wrote down another parcel of real estate $178,000 that it determined to attempt to sell during 2000. The write down was the result of Management's determination of the amount it would be willing to accept for the property. Approximately $440,000 of realized losses in 1998 is due to the sale of real estate. The Company reduced its non-income producing investments approximately $1,610,000 during 1998, as a result of these actions. The Company incurred losses of approximately $339,000 on the foreclosure of three mortgage loans during the second quarter of 1998. The foreclosed properties were sold before the end of 1998. As a result of these foreclosures, management reassessed its remaining mortgage loan portfolio and determined an allowance of $70,000 was appropriate to cover potential future losses in the portfolio. The Company realized a loss of approximately $88,000 on the investment in John Alden Financial Corporation common stock. Under the terms of an acquisition agreement beween Fortis, Inc. and John Alden all outstanding common shares of John Alden were acquired. The Company had other gains and losses during the periods that comprised the remaining amounts reported but were immaterial on an individual basis.
Benefits, claims and settlement expenses net of reinsurance benefits and claims, decreased 16% in 1999 as compared to 1998 and decreased 6% comparing 1998 to 1997. Two events occurred in 1999, which differ from 1998 experience. The decrease in premium revenues from normal policy terminations resulted in lower benefit reserve increases in each of the periods presented compared to the previous period. Approximately 8% of the current year decrease is from the premium reduction on certain participating policies resulting in a lower dividend to policyholders expense than in the previous year. See discussion above in premiums and policy fee revenues for a
Commissions and amortization of deferred policy acquisition costs decreased 55% in 1999 compared to 1998 and increased 78% in 1998 compared to 1997. At year-end 1998, the Company recorded an impairment write off of deferred policy acquisition costs of $2,983,000. The Company performs actuarial analysis of the recoverability of the asset based on current trends and known events compared to assumptions used in the establishment of the original asset. The impairment in 1998 was the result of declines in interest rates in the marketplace combined with lower than expected new policy writings left the Company with greater per policy costs as a result of fixed costs being spread over fewer policies.
experienced. As such, in March 1999 seven employees of the Company (approximately 8% of the total staff), were terminated due to lack of business activity. This action resulted in expense savings of approximately $275,000 per year.
Interest expense declined 71% from 1998 to 1999 and increased 21% in 1998 compared to 1997. In November 1998, UTG, received approximately $11,000,000 from the issuance of common stock to First Southern Funding and its affiliates. These funds were used to retire outside debt. On November 23, 1998, the Company paid a $6,300,000 principal payment on its senior debt, paid a $2,608,099 principal payment on its 10 year subordinated debt and retired $1,917,952 of other outside debt. With the early retirement of this debt, the Company realized a write-off of $341,852 in interest expense in 1998 from unamortized discounts associated with the debt. At December 31, 1998, there were no unamortized note discounts remaining on the balance sheet. With the new capital and expectations of future growth, in 1998, management has formulated a plan to repay the remaining outside debt within the next two years. At December 31, 1999, UTG had $5,917,969 in notes payable. Included in this balance is $2,560,000 of UTG convertible debt owned by First Southern, which, pursuant to an agreement, will be converted to equity by July 31, 2000. The Company believes the debt retirement can be accomplished in the timetable presented through dividends from the subsidiaries, namely dividends to FCC from UG and from expected operating cashflows.
The provision for income taxes reflected a significant change from the same period one year ago. This is the result of changes in the deferred tax liability. Deferred taxes are established to recognize future tax effects attributable to temporary differences between the financial statements and the tax return. As these differences are realized in the financial statement or tax return, the deferred income tax established on the difference is recognized in the financial statements as an income tax expense or credit. During 1999 and 1997, the insurance subsidiaries incurred a loss on their federal income tax return that was carried forward to future periods. A tax benefit was not incurred in the financial statements for the 1997 loss as a corresponding allowance was established against the deferred tax asset attributable to the tax loss carryforward. The Company did not establish an allowance against the 1999 tax loss as the Company's recent history demonstrates the loss will most likely be fully utilized before expiration. In 1998, the insurance company subsidiaries incurred taxable income for federal income tax purposes which was offset through utilization of federal tax loss carryforwards. Since these carryforwards had an allowance established against them for deferred tax purposes, no corresponding expense was incurred in the financial statements. Additionally, the Company incurred deferred tax credits of $2,050,709 in 1998 from the deferred policy acquisition costs impairment and the notes payable discounts write-offs.
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 and other high quality low risk investments.
The liabilities are predominantly long-term in 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, 1999, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets or shareholders' equity. The Company has identified securities it may sell and classified them as "investments held for sale". Investments held for sale are carried at market, with changes in market value charged directly to shareholders' equity. To provide additional flexibility and liquidity, the Company has categorized almost all fixed maturity investments acquired in 1999 as available for sale. It was determined it would be in the Company's best financial interest to classify these new purchases as available for sale to provide additional liquidity. All of the fixed maturity acquisitions in 1999 were U.S. government and government agency securities.
Total liabilities decreased 2% in 1999 compared to 1998. Policy liabilities and accruals, which represents approximately 92% of total liabilities, decreased slightly from the prior year. The decline is attributable to a shrinking policy base and declining new business production.
Cash provided by (used in) investing activities was $(4,928,225), $5,555,757 and $(2,989,016), for 1999, 1998 and 1997, respectively. The most significant aspect of cash provided by (used in) investing activities are the fixed maturity transactions. Fixed maturities account for 68%, 84% and 72% of the total cost of investments acquired in 1999, 1998 and 1997, respectively. The Company has not directed its investable funds to so-called "junk bonds" or derivative investments.
As of December 31, 1999 the Company has a total $55,614,984 of cash and cash equivalents, short-term investments and investments held for sale in comparison to $5,917,969 of notes payable. UTG and FCC service this 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 the consolidated financial statements for additional information regarding dividends.
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 its earnings received on invested assets (primarily notes receivable from FCC) and cash balances. At December 31, 1999, substantially all of the consolidated shareholders equity represents net assets of its subsidiaries and receivables from its subsidiaries. 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 to shareholders is not legally restricted. However, the state insurance department regulates insurance company dividend payments where the company is domiciled. UTG is the ultimate parent of UG through ownership of FCC. UG can not pay a dividend directly to UTG due to the ownership structure. However, if UG paid a dividend to its direct parent, FCC, and FCC paid a dividend equal to the amount it received, UTG would receive 80% of the original dividend paid by UG. 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 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, 1999, UG had a statutory gain from operations of $3,535,018. At December 31, 1999, UG's statutory capital and surplus amounted to $15,022,000. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. UG paid ordinary dividends of $3,266,000 to FCC during 1999.
The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The risk-based capital formula measures the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that will supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the insurance company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Insurance companies below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows: Ratio of Total Adjusted Capital to Authorized Control Level RBC Regulatory Event (Less Than or Equal to) ---------------- ---------------------------
material pending or threatened regulatory action with respect to the Company or any of its subsidiaries. The Company does not believe that any insurance guaranty fund assessments will be materially different from amounts already provided for in the financial statements.
and the presidents plan. The premium reduction, which took effect with the 1999 premium payment, was generally 20% with 35% used on initial contract plans of UG with original issue ages less than 56 years old. The dividends were also reduced, and the net effect to the policyholder was a slightly lower net premium. This action was taken by the Boards of UG and USA to ensure these policyholders will be protected in future periods from potential dividend reductions at least to the extent of the permanent premium reduction amount.
We have audited the accompanying consolidated balance sheets of UNITED TRUST GROUP, INC. (an Illinois corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
A. ORGANIZATION - At December 31, 1999, the parent, significant majority-owned subsidiaries and affiliates of UNITED TRUST GROUP, INC., were as depicted on the following organizational chart.
United Trust Group, Inc. ("UTG") is the ultimate controlling company. UTG owns 80% of First Commonwealth Corporation ("FCC"), 100% of Roosevelt Equity Corporation (REC) and 100% of North Plaza of Somerset Inc ("North Plaza"). FCC owns 100% of Universal Guaranty Life Insurance Company ("UG"). UG owns 86% of Appalachian Life Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance Company ("ABE").
B. NATURE OF OPERATIONS - United Trust Group, Inc., is an insurance holding company, which sells individual life insurance products through its subsidiaries. The Company's principal market is the Midwestern United States. The Company's dominant business is individual life insurance which includes the servicing of existing insurance business in force, the solicitation of new individual life insurance and the acquisition of other companies in the insurance business.
Real estate - Investment real estate at cost less allowance for depreciation and, as appropriate, provisions for possible losses. At year-end 1999, the Company wrote down a parcel of real estate $178,000 it determined to attempt to sell during 2000. The write down was the result of Management's determination of the amount it would be willing to accept for the property. Foreclosed real estate is adjusted for any impairment at the foreclosure date. Accumulated depreciation on investment real estate was $813,582 and $685,526 as of December 31, 1999 and 1998, respectively.
Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances. Interest crediting rates for universal life and interest sensitive products range from 4.5% to 5.5% in 1999 and 1998 and 5.0% to 6.0% in 1997.
2000 $ 124,000 $ 1,745,000 $ 1,621,000 2001 110,000 1,507,000 1,397,000 2002 98,000 1,290,000 1,192,000 2003 87,000 1,097,000 1,010,000 2004 77,000 919,000 842,000
M. COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net assets purchased is the excess of the amount paid to acquire a company over the fair value of its net assets. Costs in excess of net assets purchased are amortized on the straight-line basis over a 40-year period. Management continually reviews the value of goodwill based on estimates of future earnings. As part of this review, management determines whether goodwill is fully recoverable from projected undiscounted net cash flows from earnings of the subsidiaries over the remaining amortization period. If management were to determine that changes in such projected cash flows no longer supported the recoverability of goodwill over the remaining amortization period, the carrying value of goodwill would be reduced with a corresponding charge to expense (no such changes have occurred). Accumulated amortization of cost in excess of net assets purchased was $1,600,146 and $1,510,146 as of December 31, 1999 and 1998, respectively.
N. PROPERTY AND EQUIPMENT - Company-occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $2,319,216 and $1,939,501 at December 31, 1999 and 1998, 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 $379,715 and $372,861 for the years ended December 31, 1999 and 1998, respectively.
Q. TREASURY SHARES - The Company holds 47,507 and 28,000 shares of common stock as treasury shares with a cost basis of $499,955 and $350,000 at December 31, 1999 and 1998, respectively.
At December 31, 1999, substantially all of consolidated shareholders' equity represents net assets of UTG's subsidiaries. The payment of cash dividends to shareholders by UTG is not legally restricted. However, the state insurance department regulates insurance company dividend payments where the company is domiciled. UG's dividend limitations are described below.
Until 1984, the insurance companies were taxed under the provisions of the Life Insurance Company Income Tax Act of 1959 as amended by the Tax Equity and Fiscal Responsibility Act of 1982. These laws were superseded by the Deficit Reduction Act of 1984. All of these laws are based primarily upon statutory results with certain special deductions and other items available only to life insurance companies. Under the provision of the pre-1984 life insurance company income tax regulations, a portion of "gain from operations" of a life insurance company was not subject to current taxation but was accumulated, for tax purposes, in a special tax memorandum account designated as "policyholders' surplus account". Federal income taxes will become payable on this account at the then current tax rate when and if distributions to shareholders, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income maintained in the "shareholders surplus account".
UTG UG FCC ------------- ------------- --------------- 2005 $ 63,053 $ 0 $ 0 2006 212,852 0 0 2007 179,894 0 184,343 2008 0 0 4,595 2009 0 0 168,800 2010 0 0 19,112 2012 0 397,317 0 2019 0 3,869,664 0 ------------- ------------- --------------- TOTAL $ 455,799 $ 4,266,981 $ 376,850 ============= ============= ===============
The following table shows the reconciliation of net income to taxable income of UTG:
UTG has a net operating loss carryforward of $455,799 at December 31, 1999. UTG has averaged approximately $368,841 in taxable income over the past three years and must average taxable income of approximately $100,000 per year to fully realize its net operating loss carryforwards. UTG's operating loss carryforwards do not begin to expire until the year 2005. UG must average approximately $200,000 of taxable income per year to fully realize its net operating loss carryforward for which no allowance is established. Management believes future earnings of UTG and UG will be sufficient to fully utilize these net operating loss carryforwards.
A. NET INVESTMENT INCOME - The following table reflects net investment income by type of investment:
Below Investment Grade Investments 1999 1998 1997 - ------------------------------ -------------- ------------ ------------ Public Utilities $ 251,878 $ 970,311 $ 80,497 Corporate 276,649 47,281 656,784 ------------- ------------ ------------- Total $ 528,527 $ 1,017,592 $ 737,281 ============= ============ =============
Estimated Fixed Maturities Held to Maturity Amortized Market December 31, 1999 Cost Value - ----------------------------------------- -------------- -------------- Due in one year or less $ 19,204,261 $ 19,248,545 Due after one year through five years 77,160,894 76,756,898 Due after five years through ten years 37,642,780 36,063,606 Due after ten years 5,850,482 5,681,633 Collateralized mortgage obligations 4,892,694 4,924,337 -------------- -------------- Total $ 144,751,111 $ 142,675,019 ============== ==============
An analysis of sales, maturities and principal repayments of the Company's fixed maturities portfolio for the years ended December 31, 1999, 1998 and 1997 is as follows:
The Company's insurance subsidiaries are domiciled in Ohio, Illinois and West Virginia and prepare their statutory-based financial statements in accordance with accounting practices prescribed or permitted by the respective insurance department. These principles differ significantly from generally accepted accounting principles. "Prescribed" statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners ("NAIC"). "Permitted" statutory
accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, from company to company within a state, and may change in the future. The NAIC currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. Accordingly, that project, which has not yet been completed, will likely change prescribed statutory accounting practices and may result in changes to the accounting practices that insurance enterprises use to prepare their statutory financial statements. UG's total statutory shareholders' equity was $15,022,234 and $15,280,577 at December 31, 1999 and 1998, respectively. The Company's life insurance subsidiaries reported combined statutory operating income before taxes (exclusive of intercompany dividends) of $3,843,000, $5,485,000 and $2,067,000 for 1999, 1998 and 1997, respectively.
Under the insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies. Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer's financial strength. Mandatory assessments may be partially recovered through a reduction in future premium tax in some states. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements.
On January 1, 1993, FCC entered an agreement with UG pursuant to which FCC provides management services necessary for UG to carry on its business. UG paid $6,251,340, $8,018,141 and $8,660,481 to FCC in 1999, 1998 and 1997, respectively.
On December 31, 1999, UTG and Jesse T. Correll entered a transaction whereby Mr. Correll, in combination with other individuals, made an equity investment in UTG. Under the terms of the Stock Acquisition Agreement, the Correll group contributed their 100% ownership of North Plaza of Somerset, Inc. to UTG in exchange for 681,818 authorized but unissued shares of UTG common stock. The Board of Directors of UTG approved the transaction at their regular quarterly board meeting held on December 7, 1999. North Plaza of Somerset, Inc. owns a shopping center in Somerset, Kentucky and approximately 23,000 acres of timberland in Kentucky. North Plaza has no debt. The net assets have been valued at $7,500,000, which equates to $11.00 per share for the new shares issued.
On July 26, 1999, the shareholders of UTG and UII approved a merger transaction of the two companies. Prior to the merger, UTG owned 53% of UTGL99 (refers to the former United Trust Group, Inc., which was formed in February of 1992 and liquidated in July of 1999) an insurance holding company, and UII owned 47% of UTGL99. Additionally, UTG held an equity investment in UII. At the time the decision to merge was made, neither UTG nor UII had 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 by creating a larger more viable life insurance holding group with lower administrative costs, a simplified corporate structure, and more readily marketable securities. Following the merger approval, UTG issued 817,517 shares of its authorized but unissued common stock to former UII shareholders, net of any dissenter shareholders in the merger. Immediately
following the merger, UTGL99, which was then 100% owned by UTG, was liquidated and UTG changed its name to United Trust Group, Inc. ("UTG").
Approximately $1,048,000 of the cash received from the issuance of the convertible notes was used to acquire stock holdings of UTG and United Income, Inc. of Mr. Morrow and to acquire a portion of the UTG 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 UTG 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. In exchange for his stock, Mr. Morrow and his family received approximately $348,000 in cash, promissory notes valued at $140,000 due in eighteen months, and promissory notes valued at $1,030,000 due January 31, 2005. These notes bear interest at a rate of 1% over prime, with interest due quarterly and principal due upon maturity. The notes do not contain any conversion privileges. Additionally, on July 31, 1997, the Company acquired a total of 97,499 shares of UTG common stock from Larry E. Ryherd and his family. Mr. Ryherd and his family received approximately $700,000 in cash and a promissory note valued at $251,000 due January 31, 2005. The acquisition of approximately 16% of Mr. Ryherd's stock holdings in UTG was completed as a prerequisite to the convertible notes placed by other management personnel to reduce the total holdings of Mr. Ryherd and his family in the Company to make the stock more attractive to the investment community. Following the transaction, Mr. Ryherd and his family owned approximately 31% of the outstanding common stock of UTG. The market price of UTG common stock on July 31, 1997 was $6.00 per share. The stock acquired in the above transaction was from the largest two shareholders of UTG stock. There were no additional stated or unstated items or agreements relating to the stock purchase. The promissory notes to Mr. Morrow and his family and Mr. Ryherd and his family were paid in full on November 23, 1998.
On July 31,1997, the Company entered 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.
therefore ultimately forfeited. There were no stock options granted, exercised or exercisable through the years ended December 31, 1999, 1998, and 1997, respectively.
A summary of the status of UTG's stock option plan for the periods ended December 31, 1999, 1998 and 1997, and changes during the periods ending on those dates is presented below.
On January 15, 1991 UII adopted an additional nonqualified stock option plan, assumed by UTG through the UII merger, under which certain employees and sales personnel may be granted options. The plan provides for the granting of up to 42,000 options at an exercise price of $.47 per share. The options generally expire five years from the date of grant. A total of 11,620 option shares have been exercised through December 31, 1999, all prior to the merger. At December 31, 1999, 231 options have been granted and remain exercisable. At the September 21, 1999 board meeting, the Directors of UTG voted to discontinue this stock option plan, leaving options for 30,149 shares ungranted and therefore ultimately forfeited.
Number outstanding 231 Exercise price $ 0.47 Remaining contractual life 1/4 year
UTG and FCC established a deferred compensation plan during 1993 pursuant to which an officer or agent of FCC, or affiliates of UTG, could defer a portion of their income over the next two and one-half years in return for a deferred compensation payment payable at the end of seven years in the amount equal to the total income deferred plus interest at a rate of approximately 8.5% per annum, and a stock option to purchase shares of common stock of UTG. At the beginning of the deferral period an officer or agent received an immediately exercisable option to purchase 2,300 shares of UTG common stock at $17.50 per share for each $25,000 ($10,000 per year for two and one-half years) of total income deferred. The option expires on December 31, 2000. A total of 105,000 options were granted in 1993 under this plan. As of December 31, 1999 no options were exercised. At December 31, 1999, and December 31, 1998, the Company held a liability of $1,283,399 and $1,494,520, respectively, relating to this plan. At December 31, 1999, UTG common stock had a market price of $8.125 per share.
The following information applies to deferred compensation plan stock options outstanding at December 31,1999:
On July 31, 1997, UTG issued convertible notes for cash in the amount of $2,560,000 to seven individuals, all officers or employees of UTG. 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, 1999, the notes were convertible into 204,800 shares of UTG common stock with no conversion privileges having been exercised. At December 31, 1999, UTG common stock had a market price of $8.125 per share. On March 1, 1999, First Southern Bancorp, Inc., an affiliate of First Southern Funding, LLC, acquired all the outstanding UTG convertible notes from the original holders. Pursuant to an agreement, First Southern Bancorp, Inc. will convert the notes to common stock by July 31, 2000.
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
The following information applies to options outstanding at December 31, 1999:
Number outstanding 166,104 Exercise price $ 15.00 Remaining contractual life 1 1/2 years
In accordance with Statement of Financial Accounting Standards No. 128, the computation of diluted earnings per share is the same as basic earnings per share for the years ending December 31, 1998 and 1997, since the Company had a loss from continuing operations in each of these periods presented, and any assumed conversion, exercise, or contingent issuance of securities would have an antidilutive effect on earnings per share. There were no outstanding dilutive instruments during the aforementioned periods.
UTG had stock options outstanding at year end 1999, 1998, and 1997 for 451 shares of common stock at $13.07 per share, 105,000 shares of common stock at $17.50 per share that were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the common shares for each respective year presented. UTG had stock options for 231 shares of common stock at $.047 per share, which were included in the calculation of diluted earnings per share for UTG for the year ended December 31, 1999 only, since they were assumed by UTG in the 1999 merger of UII into UTG.
On July 31, 1997, UTG issued convertible notes for cash in the amount of $2,560,000 to seven individuals, all officers or employees of UTG. During the first three years the notes could be converted into 204,800 shares of common stock at $12.50 per share. The potential conversion of the notes was not included in the computation of diluted EPS for the years ended December 31, 1998 and 1997, respectively, because the exercise price was greater than the average market price of the common shares. In 1999, First Southern Bancorp, Inc., an affiliate of First Southern Funding, LLC, acquired all the outstanding UTG convertible notes from the original holders. Pursuant to an agreement, First Southern Bancorp, Inc. will convert the notes to common stock by July 31, 2000.
UTG had granted stock options to FSF of 1,450,000 which were outstanding as of year end 1998. The option shares under this option are to be reduced by two shares for each share of UTG common stock that FSF or its affiliates purchases from UTG shareholders in private or public transactions after the execution of the option agreement. The option is additionally limited to a maximum when combined with shares owned by FSF of 51% of the issued and outstanding shares of UTG after giving effect to any shares subject to the option. Due to purchases made by FSF during 1999 and the 51% limitation, the number of stock options has been reduced to 166,104 at $15.00 per share. These options were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the common shares for each respective year.
1999 1998 ------------- ------------- Senior debt $ 25,000 $ 100,000 Subordinated 10 yr. Notes 840,000 2,267,067 Subordinated 20 yr. Notes 1,817,169 3,252,071 Convertible notes 2,560,000 2,560,000 Convertible debentures 675,800 0 Other notes payable 0 1,350,000 ------------- ------------- $ 5,917,969 $ 9,529,138 ============= =============
On July 31, 1997, UTG issued convertible notes for cash in the amount of $2,560,000 to seven individuals, all officers or employees of UTG. The notes bear interest at a rate of 1% over prime, with interest payments due quarterly and principal due upon maturity of July 31, 2004. The conversion price of the notes are graded from $12.50 per share for the first three years, increasing to $15.00 per share for the next two years and increasing to $20.00 per share for the last two years. On March 1, 1999, First Southern Bancorp, Inc., an affiliate of First Southern Funding, LLC, acquired all the outstanding UTI convertible notes from the original holders. Pursuant to an agreement, First Southern Bancorp, Inc. will convert the notes to common stock by July 31, 2000.
UII held three promissory notes receivable totaling $1,350,000 due from FCC. Two of the notes, totaling $850,000, bear interest at the rate of 1% over prime as published in the Wall Street Journal, with interest payments due quarterly. Principal of $150,000 was due upon the maturity date of June 1, 1999 which has now been extended to a maturity date of June 30, 2002, with the remaining principal payment of $700,000 becoming due upon the maturity date of May 8, 2006. The third note in the amount of $500,000 bears interest at the rate of 7.5%, with interest payments due quarterly and principal due upon the maturity date of March 31, 2004. The three promissory notes held by UII became assets of UTG as a result of the merger of UII into UTG. These notes are now eliminated in consolidation pursuant to rules governing inter-company activities of consolidated entities.
Scheduled principal reductions on the Company's debt for the next five years is as follows:
15. MERGER of united trust GROUP, inc. and united income, inc.
UTG owned 53% of United Trust Group, Inc., ("UTGL99") an insurance holding company, and UII owned 47% of UTGL99. At the time the decision to merge was made, neither UTG nor UII had 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.
Investments $ 62,279,460 Cash and cash equivalents 4,830,171 Accrued investment income 1,029,741 Reinsurance receivables 11,291,237 Cost of insurance acquired 13,265,699 Costs in excess of net assets purchased 868,750 Property and equipment 868,652 Other assets 672,427 ------------------ Total assets 95,106,137