Total investment real estate holdings represent approximately 9% of the total assets of the Company, net of accumulated depreciation of $ 593,877 and $ 4,444,729 at year-end 2006 and 2005 respectively.
Residential development property is primarily located just outside Dallas, Texas and is a development of upscale summer and vacation homes and condominiums with a target market of the Dallas, Texas community. The project is projected to take five to seven years for complete build-out. The property contains additional amenities such as a marina, an equestrian center, hiking trails, a teen center and restaurant.
The purpose of this section is to discuss and analyze the Company's consolidated results of operations, financial condition and liquidity and capital resources for the three years ended December 31, 2006. This analysis should be read in conjunction with the consolidated financial statements and related notes, which appear elsewhere in this Form 10-K. The Company reports financial results on a consolidated basis. The consolidated financial statements include the accounts of UTG and its subsidiaries at December 31, 2006.
In December 2006, the Company completed an acquisition transaction whereby it acquired a controlling interest in Acap Corporation, which owns two life insurance subsidiaries. The acquisition resulted in an increase of approximately $90,000,000 in invested assets, $160,000,000 in total assets and 200,000 additional policies to administer. The acquisition had a material impact on many of the balance sheet line items. The income statement at year end 2006 is not materially impacted by the acquisition; however, 2007 results will be materially impacted by the operating results of the acquired entities. The administration of the acquired entities was moved to the Company’s current operating site in Springfield, Illinois during December 2006. The Company believes this acquisition is a good fit with its existing administration and operations. Significant expense savings are anticipated as a result of the combining of operations compared to costs of the two entities operating separately. These savings come through the advantage of economies of scale of the combined operations of the existing and acquired entities including a larger base over which to spread fixed costs. See note 15 for additional information relating to this acquisition.
The Company has considered the feasibility of a marketing opportunity with First Southern National Bank (FSNB) an affiliate of UTG’s largest shareholder, Chairman and CEO, Mr. Jesse T. Correll. Management has considered various products including annuity type products, mortgage protection products and existing insurance products, as potential products that could be marketed to banking customers. This marketing opportunity has potential and is believed to be a viable niche. This potential is in the very early states of consideration. Management will proceed cautiously and may even determine not to proceed. The introduction of new products is not expected to produce significant premium writings. The Company is looking at other types of products to compliment the existing offerings.
Net investment income decreased 1% when comparing 2006 to 2005 and increased 6% when comparing 2005 to 2004. The overall gross investment yields for 2006, 2005 and 2004, are 6.42%, 6.77% and 6.06%, respectively. During 2004, management began to lengthen the Company’s portfolio while maintaining a conservative investment philosophy. As such, following an analysis of current holdings during the first half of 2004, the Company liquidated approximately $ 64,444,000 of its bond portfolio in order to limit its interest rate and extension risk. In addition, there were $ 13,322,000 in bonds that matured or were called during the first nine months of 2004. The result of these transactions caused an excess of cash invested in short-term money market funds during the first nine months of 2004. Although this hurt investment earnings during 2004, the Company has not had to write off any investment losses due to excessive risk.
During 2005, the Company increased its investment in mortgage loans through its relationship with First Southern National Bank. The availability of these mortgage loan investments has offset the balance that would have been placed in fixed income securities. This has allowed the Company to obtain higher yields than available in the bond market, lengthen the overall portfolio average life and still maintain a conservative investment portfolio. During 2005, the Company issued $ 24,576,000 in new mortgage loans. These loans had an average loan to value rate of approximately 50% and an average yield of 6.87%. Also during 2005, the Company saw an improvement in the performance of it’s’ real estate investments over 2004. Gross income from the Company’s real estate holdings improved more than $ 2,138,000 in comparing 2005 to 2004. The improvement in real estate investment income is principally due to a higher occupancy lease rate resulting in increased earnings in Hampshire Plaza.
Realized investment gains, net of realized losses, were $ 11,446,279, $ 1,431,936 and $ (20,648) in 2006, 2005 and 2004, respectively. The net realized gains in 2006 are primarily comprised of a gain from the sale of investment real estate held by two 67% owned subsidiaries of the Company. The real estate was sold for the agreed upon total sales price of $ 25,500,000. The Company recognized a realized gain of approximately $ 7,768,000. In addition, the Company had net realized gains of approximately $3,819,000 from the disposal of certain equity securities.
On October 2, 2006, UG entered into an agreement for the sale of real estate currently owned for investment purposes consisting of a 107,602 square foot, four-story building and 6,897 square foot attached supporting services building, totaling 114,499 square feet, in Springfield, Illinois. The sale is expected to close by May 31, 2007 and is contingent upon buyer’s inspection period. Should the sale be consummated, the Company anticipates a realized gain, net of taxes, of approximately $ 2,100,000.
In recent periods, management focus has been placed on promoting and growing TPA services to unaffiliated life insurance companies. The Company receives monthly fees based on policy in force counts and certain other activity indicators, such as number of premium collections performed, or services performed. For the years ended 2006, 2005 and 2004, the Company received $ 1,811,151, $ 1,170,824 and $ 719,053 for this work, respectively. These TPA revenue fees are included in the line item “other income” on the Company’s consolidated statements of operations. No new TPA contracts were entered into during 2006, however, the Company intends to continue to pursue other TPA arrangements, through an alliance with Fiservto insurance companies seeking business process outsourcing solutions. Fiserv is responsible for the marketing and sales function for the alliance, as well as providing the data center operations. UTG staffs the administration effort. Management believes this alliance with Fiserv positions the Company to generate additional revenues by utilizing the Company’s current excess capacity and administrative services. Fiserv is a unit of Fiserv, Inc. (NASDAQ: FISV) which is an independent, full-service provider of integrated data processing and information management systems to the financial industry, headquartered in Brookfield, Wisconsin. Management believes this area is a growing market and the Company is well positioned to serve this market.
Benefits, claims and settlement expenses net of reinsurance benefits and claims, increased $ 2,209,034 from 2005 to 2006 and decreased $ 889,364 from 2004 to 2005. The significant fluctuation between the three years relates primarily to changes in the Company’s death claim experience from year to year. Death claims were approximately $ 1,247,000 more in 2006 as compared to 2005, and $1,339,000 less in 2005 as compared to 2004. There is no single event that caused the mortality variances. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by management.
Changes in policyholder reserves, or future policy benefits, also impact this line item. Reserves are calculated on an individual policy basis and generally increase over the life of the policy as a result of additional premium payments and acknowledgement of increased risk as the insured continues to age. Policy surrender benefits increased approximately $453,000 during 2006 compared to 2005 and decreased approximately$ 245,000 during the year 2005 compared to the same period in 2004. As discussed above, efforts continue to be made in policy retention through more personal contact with customers including telephone calls to discuss alternatives and reasons for a request to surrender their policy. The short-term impact of policy surrenders is negligible since a reserve for future policy benefits payable is held which is, at a minimum, equal to and generally greater than the cash surrender value of a policy. The benefit of fewer policy surrenders is primarily received over a longer time period through the retention of the Company’s asset base.
Net amortization of cost of insurance acquired increased 30% in 2006 compared to 2005 and increased 17% in 2005 compared to 2004. Cost of insurance acquired is established when an insurance company is acquired. The Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. Cost of insurance acquired is comprised of individual life insurance products including whole life, interest sensitive whole life and universal life insurance products. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates utilized in the amortization calculation are 9% on approximately 25% of the balance and 15% on the remaining balance. The interest rates vary due to risk analysis performed at the time of acquisition on the business acquired. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force. 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 2006, 2005 and 2004 has been approximately 95.9%, 95.8% and 94.6%, respectively. The Company monitors these projections to determine the adequacy of present values assigned to future cash flows. No impairments were recorded in any of the three periods reported. A significant portion of the remaining balance of this asset attributable to policies of UG, $7,703,722, will be amortized over the next three years. The impact of the decrease in amortization expense will have a positive impact on future earnings.
Interest expense increased in 2006 as a result of funds borrowed, of approximately $ 15,700,000, relating to the acquisition of Acap Corporation. Prior to the acquisition, the Company had no outstanding debt since the retirement of previous debt in 2004. The Company anticipates aggressively repaying the current debt. Interest expense declined 100% comparing 2005 to 2004. The Company repaid the remaining $ 2,289,776 in outside debt in 2004, through operating cash flows and dividends received from its subsidiary UG. At December 31, 2005 and 2004, UTG had no debt outstanding. During 2005, UG borrowed against its line of credit for a short period to provide additional operating liquidity. The line was repaid during 2005.
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 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 other high quality low risk investments. Some insurance companies have suffered significant losses in their investment portfolios in the last few years; however, because of the Company’s conservative investment philosophy the Company has avoided such significant losses.
Mortgage loan investments represent 7% and 12% of total assets of the Company at year-end 2006 and 2005, respectively. The Company’s mortgage loan investments result from opportunities available through FSNB, an affiliate of Mr. Jesse T. Correll. Mr. Correll is the CEO and Chairman of the Board of Directors of UTG, and directly and indirectly through affiliates, its largest shareholder. FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market. During 2006, 2005 and 2004 the Company issued approximately $ 5,359,000, $ 24,576,000 and $ 2,627,000 respectively, in new mortgage loans. These new loans were originated through FSNB and funded by the Company through participation agreements with FSNB. FSNB services all of the Company’s mortgage loans including the loans covered by these participation agreements. The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $ 93,288, $ 76,970 and $ 45,468 in servicing fees and $ 23,214, $ 112,109 and $ 0 in origination fees to FSNB during 2006, 2005 and 2004, respectively. The Company anticipates these opportunities to continue to be available and will pursue those investments that provide attractive yields.
At December 31, 2006, the Company has outstanding notes payable of $22,990,081. Approximately $15,000,000 of this debt is related to the acquisition of Acap Corporation and the remaining is attributable to borrowings of a subsidiary, Harbor Village Partners, relating to a real estate development project. At December 31, 2005, the Company had no outstanding notes payable. The Company has four lines of credit available for operating liquidity or acquisitions of additional lines of business. There are no outstanding balances on any of these lines of credit as of the balance sheet date. The Company's long-term debt is discussed in more detail in Note 11 to the consolidated financial statements.
The Company has three principal needs for cash - the insurance company’s contractual obligations to policyholders, the payment of operating expenses and servicing its outstanding debt. Cash and cash equivalents as a percentage of total assets were 2% and 4% as of December 31, 2006 and 2005, respectively. Fixed maturities as a percentage of total invested assets were 69% and 42% as of December 31, 2006 and 2005, respectively.
Cash used in operating activities was $ (1,875,494), $ (290,936) and $ (45,950) in 2006, 2005 and 2004, respectively. Reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows.
UTG, Inc. borrowed funds in order to complete the Acap Corporation acquisition from First Tennessee Bank National Association through execution of an $18,000,000 promissory note. At the time of closing on December 8, 2006, UTG, Inc. borrowed $15,700,278 on the promissory note. The remaining available balance can be drawn any time over the next twelve months and is anticipated to be utilized in the purchase of the stock put option shares of Acap Corporation as they may be presented to UTG, Inc. for purchase. To secure the note, UTG, Inc. has pledged 100% of the common stock of its subsidiary, Universal Guaranty Life Insurance Company. The promissory note carries a variable rate of interest based on the 3 month LIBOR rate plus basis points. The initial rate was 7.15%. Interest is payable quarterly. Principal is payable annually beginning at the end of the second year in five installments of $3,600,000. The loan matures on December 7, 2012. During December 2006, UTG repaid $700,000 on the note, leaving a balance outstanding at December 31, 2006 of $15,000,278.
Currently, the insurance subsidiaries, are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including the power to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus; and (x) regulate the type and amount of permitted investments. Insurance regulation is concerned primarily with the protection of policyholders. The Company cannot predict the impact of any future proposals, regulations or market conduct investigations. UG is domiciled in the state of Ohio. AC and TI are both domiciled in the state of Texas.
At December 31, 2006, UG has a ratio that is in excess of 5, which is 500% of the authorized control level. AC and TI have ratios in excess of 8 and 6, which is 800% and 600% of the authorized control level, respectively. Accordingly, all three companies meet the RBC requirements.
The FASB also issued Statement No. 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140. The statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if possible. The statement permits, but does not require, the subsequent measurement of servicing assets and liabilities at fair value. The statement is effective for fiscal years beginning after September 15, 2006. The Company will account for all separately recognized servicing assets and servicing liabilities in accordance with the requirements of Statement No. 156, should this apply.
Registered Public Accounting Firm for the years ended December 31, 2006 and 2005............ 35
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit providesa reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of UTG, Inc. and subsidiaries for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
We have also audited Schedules IV and V as of December 31, 2004, of UTG, Inc. and subsidiaries and Schedules II, IV and V for the year then ended. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.
B. NATURE OF OPERATIONS - UTG, Inc., is an insurance holding company, which sells individual life insurance products through its insurance subsidiaries. The Company's principal market is the mid-western 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. Accumulated depreciation on investment real estate was $ 593,877 and $ 4,444,729 as of December 31, 2006 and 2005, respectively.
N. INCOME TAXES - Income taxes are reported under Statement of Financial Accounting Standards Number 109. Deferred income taxes are recorded to reflect the tax consequences on future periods of differences between the tax bases of assets and liabilities and their financial reporting amounts at the end of each such period.
R. PARTICIPATING INSURANCE - Participating business represents 8% and 19% of the ordinary life insurance in force at December 31, 2006 and 2005, respectively. Premium income from participating business represents 33%, 21%, and 22% of total premiums for the years ended December 31, 2006, 2005 and 2004, respectively. The amount of dividends to be paid is determined annually by the insurance subsidiary's Board of Directors. Earnings allocable to participating policyholders are based on legal requirements that vary by state.
U. IMPAIRMENT OF LONG LIVED ASSETS - The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. In the opinion of management, no such impairment existed at December 31, 2006.
At December 31, 2006, 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, AC and TI’s dividend limitations are described below.
Life insurance company taxation is based primarily upon statutory results with certain special deductions and other items available only to life insurance companies. Income tax expense (benefit) consists of the following components:
An analysis of sales, maturities and principal repayments of the Company's fixed maturities portfolio for the years ended December 31, 2006, 2005 and 2004 is as follows:
Annually, the Company completes an analysis of sales of securities held to maturity to further assess the issuer’s creditworthiness of fixed maturity holdings.
C. INVESTMENTS ON DEPOSIT - At December 31, 2006, investments carried at approximately $ 9,277,000 were on deposit with various state insurance departments.
The financial statements include various estimated fair value information at December 31, 2006 and 2005, as required by Statement of Financial Accounting Standards 107, Disclosure about Fair Value of Financial Instruments (SFAS 107). Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value of the Company.
The Company's insurance subsidiaries are domiciled in Ohio and Texas. The insurance subsidiaries prepare their statutory-based financial statements in accordance with accounting practices prescribed or permitted by the respective insurance department. These principles differ significantly from accounting principles generally accepted in the United States of America. "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. UG's total statutory shareholders' equity was approximately $ 31,210,000 and $ 25,646,000 at December 31, 2006 and 2005, respectively. UG reported a statutory operating income (loss) before taxes (exclusive of inter-company dividends) of approximately $ 5,162,000, $ 5,114,000 and $ (762,000) for 2006, 2005 and 2004, respectively. AC's total statutory shareholders' equity was approximately $ 8,943,000 at December 31, 2006. TI's total statutory shareholders' equity was approximately $ 2,762,000 December 31, 2006.
In addition to the above reinsurance agreements, the UG entered into reinsurance agreements with Optimum Re Insurance Company (Optimum) during 2004 to provide reinsurance on new products released for sale in 2004. The agreements are yearly renewable term (YRT) treaties where UG cedes amounts above its retention limit of $100,000 with a minimum cession of $25,000 as has been a practice for the last several years with its reinsurers. Also, effective January 1, 2005, Optimum became the reinsurer of 100% of the accidental death benefits (ADB) in force of UG. This coverage is renewable annually at the Company’s option. Optimum specializes in reinsurance agreements with small to mid-size carriers such as UG. Optimum currently holds an “A-” (Excellent) rating from A.M. Best.
UG entered into a coinsurance agreement with Park Avenue Life Insurance Company (PALIC) effective September 30, 1996. Under the terms of the agreement, UG ceded to PALIC substantially all of its then in-force paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. PALIC and its ultimate parent The Guardian Life Insurance Company of America (Guardian), currently holds an "A+" (Superior) rating from A.M. Best. The PALIC agreement accounts for approximately 67% of UG’s reinsurance reserve credit, as of December 31, 2006.
During 1998, American Capitol closed a coinsurance transaction with Universal Life Insurance Company (“Universal”). Pursuant to the coinsurance agreement, American Capitol coinsured 100% of the individual life insurance policies of Universal in force at January 1, 1998. At December 31, 2006, the Universal agreement has insurance in-force of approximately $ 15,768,000, with reserves being held on that amount of approximately $ 5,251,000.
The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 2006, 2005 and 2004 were as follows:
On June 10, 2002 UTG and Fiserv formed an alliance between their respective organizations to provide third party administration (TPA) services to insurance companies seeking business process outsourcing solutions. Fiserv will be responsible for the marketing and sales function for the alliance, as well as providing the operations processing service for the Company. The Company will staff the administration effort. Fiserv is a unit of Fiserv, Inc. (NASDAQ: FISV) which is an independent, full-service provider of integrated data processing and information management systems to the financial industry, headquartered in Brookfield, Wisconsin.
In June 2002, the Company entered into a five-year contract with Fiserv for services related to its purchase of the “ID3” software system. The contract was amended during 2006 for a five year period ended 2011. Under the contract, the Company is required to pay $ 8,333 per month in software maintenance costs and a per-policy charge in offsite data center costs, with a minimum of $ 14,000 per month, for a five-year period from the date of the agreement.
In December 2006, the Company entered into an agreement with the certain individual shareholders of Acap. This agreement allows the Company (through a put option arrangement) to buy up to 264 shares of common stock of Acap at any time between the date of the agreement and December 2007. The price of the share purchase was determined by a pre-set formula, which the Company believes approximates fair value, at the time such shares might be put.
On December 31, 2006, the Company entered into a 100% coinsurance agreement whereby the insurance subsidiaries, AC and TI, ceded all of their A&H business to an unaffiliated third party. As part of the agreement, AC and TI remain contingently liable for claims incurred prior to the effective date of the agreement, for a period of one year. At the end of the one year period, an accounting of these claims shall be produced. Any difference in the actual claims to the claim reserve liability transferred shall be refunded to / paid by AC and TI.
As part of the acquisition of Acap on December 8, 2006, UTG loaned $ 3,357,000 to Acap. Acap used the proceeds for the repayment of existing debt with an unaffiliated financial institution and to retire all of its outstanding preferred stock. The terms of the inter-company loan mirror the interest rate and repayment requirements of the debt with First Tennessee Bank National Association.
During June 2003, UG entered into a lease agreement with Bandyco, LLC, an affiliated entity, for a one-sixth interest in an aircraft. Bandyco, LLC is affiliated with Ward F. Correll, who is a director of the Company. The lease term is for a period of five years at a total cost of $ 523,831 per year. The Company is responsible for its share of annual non-operational costs, in addition to the operational costs as are billable for specific use. In addition, UG has a 27.5% interest in a second plane with Bandyco, LLC. The Company is responsible for its share of annual non-operational costs, in addition to the operational costs as are billable for specific use.
On January 1, 1993, UTG entered an agreement with UG pursuant to which UTG provided management services necessary for UG to carry on its business. UG paid $ 5,875,133, $ 5,054,918 and $ 5,625,451 to UTG in 2006, 2005 and 2004, respectively, under this arrangement.
UG from time to time acquires mortgage loans through participation agreements with FSNB. FSNB services UG's mortgage loans including those covered by the participation agreements. UG pays a .25% servicing fee on these loans and a one time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $ 93,288, $ 76,970 and $ 45,468 in servicing fees and $ 23,214, $ 112,109 and $ 0 in origination fees to FSNB during 2006, 2005 and 2004, respectively.
The Company reimbursed expenses incurred by Mr. Jesse T. Correll and Mr. Randall L. Attkisson relating to travel and other costs incurred on behalf of or relating to the Company. The Company paid $ 85,576, $ 68,318 and $ 50,098 in 2006, 2005 and 2004, respectively to First Southern Bancorp, Inc. in reimbursement of such costs. In addition, beginning in 2001, the Company began reimbursing FSBI a portion of salaries and pension costs for Mr. Correll and Mr. Attkisson. The reimbursement was approved by the UTG Board of Directors and totaled $ 173,863, $ 160,272 and $ 160,440 in 2006, 2005 and 2004, respectively, which included salaries and other benefits.
On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002, the shareholders of UTG approved, the UTG, Inc. Employee and Director Stock Purchase Plan. The plan’s purpose is to encourage ownership of UTG stock by eligible directors and employees of UTG and its subsidiaries by providing them with an opportunity to invest in shares of UTG common stock. The plan is administered by the Board of Directors of UTG. A total of 400,000 shares of common stock may be purchased under the plan, subject to appropriate adjustment for stock dividends, stock splits or similar recapitalizations resulting in a change in shares of UTG. The plan is not intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.
The original issue price of shares at the time this program began was established at $12.00 per share. Through March 1, 2007, UTG had 101,494 shares outstanding that were issued under this program. At December 31, 2006, shares under this program have a value of $14.29 per share pursuant to the above formula.
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, 2006, 2005 and 2004, since any assumed conversion, exercise, or contingent issuance of securities would have an anti-dilutive effect on earnings per share.
In addition to the above promissory note, First Tennessee Bank National Association also provided UTG. with a $ 5,000,000 revolving credit note. This note is for a one-year term and may be renewed by consent of both parties. The credit note is to provide operating liquidity for UTG, Inc. and replaces a previous line of credit provided by Southwest Bank. Interest bears the same terms as the above promissory note. The collateral held on the above note also secures this credit note. UTG, Inc. has no borrowings against this note at this time.
AC and TI each have a line of credit in place through Frost National Bank for $210,000 and $160,000, respectively. These lines have been in place since 2004. The lines are for one year terms, interest payable quarterly at a floating interest rate which is the Lender’s prime rate. Principal is due upon maturity. The lines are to provide additional short term operating liquidity to the two companies. At December 31, 2006, there are no outstanding balances on either of these lines of credit.
On October 1, 2005, a partnership investment of HVP was extended a $ 5,000,000 promissory note from First Southern National Bank. The note is due three-years from the date of issue. Borrowings under the note bear interest at the rate of one percent in excess of the prime rate as published in the Wall Street Journal. At December 31, 2006, the Company had $ 5,000,000 outstanding borrowings attributable to this note.
On a cash basis, the Company paid $ 1,469, $13, and $ 77,453 in interest expense for the years 2006, 2005 and 2004, respectively. The Company paid $ 503,214, $ 0, and $ 110,000 in federal income tax for 2006, 2005 and 2004, respectively.
At December 31, 2005, the Company acquired $ 283,173 in equity investments for which the cash had not yet been paid. The payable for these securities is included in the line item “Other liabilities” on the consolidated balance sheet.
The FASB also issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R). The statement requires that an employer that is a business entity and sponsors one or more single-employer defined benefit plans to recognize the funded status of a benefit plan, the component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as current costs, and disclose additional information in the notes regarding certain effects on net periodic benefit costs for the next fiscal year. The statement is effective for fiscal years ending after December 15, 2006. The adoption of Statement 158 does not currently affect the Company’s financial position or results of operations, since the Company does not have any defined benefit pension plans.
In addition, the Company entered into stock put option agreements under which certain individuals will have the opportunity to sell to UTG up to 264 shares of common stock of Acap during the period ending December 16, 2007. The purchase price for shares under the stock put option agreements will be the same as under the Agreement. In December 2006, eight shares under the stock put option agreements were presented and purchased by the Company.
In addition, the Company loaned Acap $ 3,357,000, which was required to retire certain indebtedness of Acap and to redeem all of Acap’s outstanding preferred stock at the closing of the Agreement.
Assuming the Company purchases all of the shares of Acap common stock that may be purchased under the stock put option agreements, the Company will have acquired 72.8% of the outstanding shares of common stock of Acap, and the total cost of the transaction to the Company (including the loan to Acap for the payment of Acap indebtedness and redemption of Acap preferred stock) was $24 million, which was paid in cash.
In 2006, 2005 and 2004, the Company established a deferred tax liability of $ 1,541,623, $ 2,970,111 and $ 3,555,787 respectively, for the unrealized gains based on the applicable United States statutory rate of 35%.