Property owned Amount % of Total -------------- ---------- ----------- Home Office $ 2,582,935 13%
Total investment real estate holdings represent approximately 5% of the total assets of the Company net of accumulated depreciation of $813,582 and $685,526 at year-end 1999 and 1998 respectively. The Company owns an office complex in Springfield, Illinois, which houses the primary insurance operations. The office buildings contain 57,000 square feet of office and warehouse space. The properties are carried at $2,582,935. 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 $156,217. The facilities occupied by the Company are adequate relative to the Company's present operations.
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.
On March 25, 1997, the Board of Directors of UTG and UII voted to recommend to the shareholders a merger of the two companies. Under the Plan of Merger, UTG would be the surviving entity with UTG issuing one share of its stock for each share held by UII shareholders.
A vote of the shareholders of UTG and UII regarding the proposed merger occurred on July 26, 1999, with shareholders of both companies approving the transaction. UTG issued 817,517 shares of its authorized but unissued common stock to former UII shareholders, exclusive 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 from United Trust Inc. to United Trust Group, Inc.
has been approximately 89.4% and 89.9%, respectively. Persistency is a measure of insurance in force retained in relation to the previous year.
New business production decreased significantly over the last two years. New business production decreased 33% or approximately $1,079,000 when comparing 1999 to 1998 and decreased 39% or approximately $2,063,000 when comparing 1998 to 1997. In recent years, the insurance industry as a whole has 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 the companies, and the resulting limitations, have made it challenging to compete in this area. In late 1999, A.M. Best Company, a leading insurance industry rating agency, increased its rating assigned to UG, the Company's largest insurance subsidiary, from a C++ to a B. This rating change should aid in the agents selling ability, although to what extent, is unknown.
With a continued decline in new business, costs associated with supporting new business, primarily salary costs, as a percentage of new business received continued to grow. In March of 1999, the Company determined it could no longer continue to support these fixed costs in light of the new business trend and no indication it would reverse any time soon. It was determined these fixed costs should be reduced to be commensurate with the level of new sales production activity currently being experienced. As such, in March of 1999, seven employees of the Company (approximately 8% of the total staff) were terminated due to lack of business activity.
The increase in investment income in 1998 is the result of a combination of factors. The Company changed banks during 1997, which provided an improvement in yield on cash balances. In late 1998, the Company again transferred most of its cash balances to another bank, First Southern National Bank, an affiliate of First Southern Funding, LLC. This transfer resulted in an increase in earning rates on cash balances of approximately one quarter of one percent (.25%) over those previously received. During 1998, the Company directed a greater percentage of its investing activity to mortgage loans. These new loans provide an investment yield approximately 3% higher or $110,000 more than can be obtained from quality fixed maturities currently available. During September and
October of 1998, the national prime rate declined three quarters of one percent (.75%). This decline reduced yields on investments available in the marketplace in which the Company invests primarily fixed maturities. The decline had an immediate impact on the earnings rates of the Company's cash and cash equivalents balances.
more detailed explanation of this event. Policyholder benefits were further impacted due to an increase in death benefit claims of $202,000 from 1998 results. The 1998 death claims were $1,036,000 less than 1997 and accounted for approximately 4% of the decrease from 1997. 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. 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.
Amortization of cost of insurance acquired decreased 17% in 1999 compared to 1998 and decreased 7% in 1998 compared to 1997. 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. The Company did not have any charge-offs during the periods covered by this report. Amortization of cost of insurance acquired is particularly sensitive to changes in 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 1999, 1998 and 1997 has been approximately 89.4%, 89.9% and 89.4%, respectively.
Operating expenses decreased 29% in 1999 compared to 1998 and increased 16% in 1998 compared to 1997. Included in operating expenses in 1998 is $2,534,317 from the release of discounts associated with the Company's notes payable. The Company's subordinated debt was issued at rates considered favorable to the Company at time of issue, therefore the notes were discounted to reflect an effective interest rate of 15%. With the payment of part of this debt in November 1998, the unamortized discount was written off. Management's plan to repay the remaining debt in a much shorter period of time from required repayment resulted in the determination to write off the entire remaining note discount. See information contained below in interest expense analysis for further details regarding debt retirement. Excluding the note discount write off, operating expenses decreased 12% in 1998 compared to 1997 attributable primarily to reduced salary and employee benefit costs in 1998, as a result of natural attrition. The decrease in operating expenses in 1999 is due in part, to a decrease in salaries from staff reduction. In most instances, the workload was absorbed into the remaining workforce. First year sales production has shown a declining trend in the last three years. The Company has tried a variety of solutions to bolster new sales production including additional training, home office assistance in providing leads on prospective clients and a review of current product offerings. First year production in the first quarter of 1999 resulted in cash received from new sales of only 54% of that received in first quarter 1998, or $560,000 less. With continued declining new business, costs associated with supporting new business, primarily salary costs, as a percentage of new business received continued to grow. In March of 1999, the Company determined it could no longer continue to support these fixed costs in light of the new business trend and no indication it would reverse any time soon. It was determined these fixed costs should be reduced to be commensurate with the level of new sales production activity currently being
The Company had a net gain (loss) of $1,075,909, $(679,492) and $(559,248) in 1999, 1998 and 1997 respectively. The Company continues to show steady improvement in its results. The additional capital received from FSF significantly enhanced the Company's financial position and improved earnings primarily through interest expense savings from debt retirement. The 1998 results included one time charges for a deferred policy acquisition costs impairment write down and the write off of the remaining discounts associated with notes payable. The Company continues to monitor and adjust those items within its control to continue the positive trend and anticipates continued profitability.
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
Fixed Maturities ---------------- Rating % of Portfolio - ------ ---------------------- 1999 1998 ---------- ---------- Investment Grade AAA 38% 38% AA 19% 18% A 35% 36% BBB 7% 7% Below investment grade 1% 1% ---------- ---------- 100% 100% ========== ==========
Investment real estate and real estate acquired in satisfaction of debt increased 62% in 1999 compared to 1998. 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. During 1998 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. Investment real estate holdings represent approximately 5% of the total assets of the Company. Total investment real estate is separated into three categories: Commercial 68%, Residential Development 23% and Foreclosed Properties 9%.
Deferred policy acquisition costs decreased 19% in 1999 compared to 1998. Deferred policy acquisition costs, which vary with, and are primarily related to producing new business, are referred to 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 in relation to the present value of expected gross profits from the contracts, discounted using the interest rate credited by the policy. The Company had $720,000 in policy acquisition costs deferred, $142,000 in interest accretion and $2,059,012 in amortization in 1999.
Cost of insurance acquired decreased 5% in 1999 compared to 1998. At December 31, 1999, cost of insurance acquired was $36,832,068 and amortization totaled $1,847,754 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 flows from the acquired policies. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits.
Deferred income taxes payable increased 26% in 1999 compared to 1998. The Company established a deferred tax liability of $1,796,596 or 19% of the total increase, from the acquisition of North Plaza on December 31, 1999. 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. Federal income taxes are discussed in more detail in Note 3 of the Consolidated Notes to the Financial Statements.
Notes payable decreased 38% in 1999 compared to 1998. Through the merger of UII in July 1999, the Company eliminated $1,364,100 of debt which was held by UII and assumed $902,300 of debt UII had outstanding. Additionally, during 1999, the Company repaid $3,149,369 of its debt. With the new capital and expectations of future growth, in 1998, management 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 Company's long-term debt is discussed in more detail in Note 11 of the Notes to the Financial Statements.
Total shareholders' equity increased 71% in 1999 compared to 1998. In July 1999, equity increased $10,451,455 from the issuance of 817,517 shares of authorized but unissued common stock in the merger of UII. On December 31, 1999, the Company issued 681,818 shares of common stock valued at $7,500,000 in the acquisition of North Plaza. Earnings during the year of $1,075,909, unrealized losses on investments held for sale of $(862,048) and purchases of treasury stock of $(149,955) also influenced total shareholders' equity.
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 6% and 8% as of December 31, 1999 and 1998, respectively. Fixed maturities as a percentage of total invested assets were 77% and 82% as of December 31, 1999 and 1998, respectively.
Cash provided by (used in) operating activities was $(627,939), $2,166,173 and $22,749 in 1999, 1998 and 1997, respectively. Reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows. The net cash provided by operating activities plus policyholder contract deposits less policyholder contract withdrawals equaled $2,325,435 in 1999, $5,244,388 in 1998 and $3,412,419 in 1997. Management utilizes this measurement of cash flows as an indicator of the performance of the Company's insurance operations.
At December 31, 1999, the Company had a total of $5,917,969 in long-term debt outstanding. 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 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. 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 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
At year-end 1999, the insurance companies had one ratio outside the normal range. The ratio is related to the decrease in premium income. The results fell outside the normal range because of the permanent premium reduction on certain of the Company's participating products in force commonly referred to as the initial contract
SFAS 133 entitled, Accounting for Derivative Instruments and Hedging Activities, was to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 137 was subsequently issued to defer the effective date, of SFAS 133, to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a specific type of exposure hedge. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. SFAS 133 did not affect the Company's financial position or results of operations, since the Company has no derivative or hedging type investments.
Additional Statements of Financial Accounting Standards have been issued, none of which have direct applicability to the Company.
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 computer operating environment was established with the system dates advanced to December of 1999. A parallel model office was established with all dates in the data advanced to December of 1999. Parallel model office processing was performed using dates from December of 1999 to January of 2001, to ensure all year 2000 processing errors are corrected. Testing was completed by the end of the first quarter of 1998. After testing was completed, periodic regression testing was performed to monitor continuing compliance. By addressing year 2000 compliance in a timely manner, compliance was achieved using existing staff and without significant impact on the Company operationally or financially. To date, no material "Year 2000" problems have occurred.
Independent Auditor's Report for the Years ended December 31, 1999, 1998, 1997................................33
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UNITED TRUST GROUP, INC. and subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1999, and Schedules II, IV and V as of December 31, 1999 and 1998, of UNITED TRUST GROUP, 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.
C. BUSINESS SEGMENTS - The Company has only one significant business segment - insurance.
D. BASIS OF PRESENTATION - The financial statements of United Trust Group, Inc., life insurance subsidiaries have been prepared in accordance with generally accepted accounting principles which differ from statutory accounting practices permitted by insurance regulatory authorities.
K. 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. The Company utilized 9% discount rate on approximately 25% of the business and 15% discount rate on approximately 75% of the business. 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 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.
2000 $ 5,085,000 $ 6,602,000 $ 1,517,000 2001 4,878,000 6,473,000 1,595,000 2002 4,674,000 6,204,000 1,530,000 2003 4,471,000 6,187,000 1,716,000 2004 4,237,000 6,155,000 1,918,000
T. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the 1999 presentation. Such reclassifications had no effect on previously reported net loss, total assets, or shareholders' equity.
At December 31, 1999, the Company had a total of $4,311,000 of investments, comprised of $3,197,000 in real estate, $1,048,000 in equity securities and $66,000 in other invested assets, which did not produce income during 1999.
Below investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. Debt securities classified as below-investment grade are those that receive a Standard & Poor's rating of BB or below.
Estimated Fixed Maturities Held for Sale Amortized Market December 31, 1999 Cost Value - ---------------------------------------- -------------- -------------- Due in one year or less $ 0 $ 0 Due after one year through five years 19,335,930 18,842,204 Due after five years through ten years 6,014,378 5,615,804 Due after ten years 154,212 154,496 Collateralized mortgage obligations 5,910,506 5,578,853 -------------- -------------- Total $ 31,415,026 $ 30,191,357 ============== ==============
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, the Company generally will not carry more than $125,000 individual life insurance on a single risk.
The Company has reinsured approximately $831 million, $924 million and $1.022 billion in face amount of life insurance risks with other insurers for 1999, 1997 and 1997, respectively. Reinsurance receivables for future policy benefits were $36,117,010 and $36,965,938 at December 31, 1999 and 1998, 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.
The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 1999, 1998 and 1997 was as follows:
ABE pays fees to FCC pursuant to a cost sharing and management fee agreement. FCC provides management services for ABE to carry on its business. The agreement requires ABE to pay a percentage of the actual expenses incurred by FCC based on certain activity indicators of ABE business to the business of all the insurance company subsidiaries plus a management fee based on a percentage of the actual expenses allocated to ABE. ABE paid fees of $392,005, $399,325 and $443,726 in 1999, 1998 and 1997, respectively under this agreement.
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 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". Amounts recorded by USA as deferred acquisition costs are no greater than what would have been recorded had all such expenses been directly incurred by USA. Also included are costs associated with the maintenance of existing policies that are charged as current period costs and included in "general expenses".
In 1985, UTG 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 UTG's common stock are granted at a fixed price of $.20 per share. Options for 42,438 shares have been granted and exercised. At the September 21, 1999 board meeting, the Directors of UTG voted to discontinue UTG's stock option plan, leaving options for 1,562 shares ungranted and
UII had a stock option plan, which was assumed by UTG through the merger with UII, under which certain directors, officers and employees may be issued options to purchase up to 31,500 shares of common stock at $13.07 per share. Options become exercisable at 25% annually beginning one year after date of grant and expire generally in five years. At December 31, 1999, options for 451 shares were exercisable. At the September 21, 1999 board meeting, the Directors of UTG voted to discontinue this stock option plan, leaving options for 20,576 shares ungranted and therefore ultimately forfeited.
A summary of the status of UTG's stock option plan for the periods ended December 31, 1999, 1998, and 1997 changes during the periods ending on those dates is presented below.
Number outstanding 105,000 Exercise price $17.50 Remaining contractual life 1 year
1, 1998. Such earnings are computed based on statutory results excluding intercompany activities such as intercompany 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, 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. The price and number of shares shall be adjusted for any applicable stock splits, stock dividends or other recapitalizations. At December 31, 1999, the Company had total earnings of $10,617,844 applicable to this covenant.
At the time of the stock acquisition above, UTG also granted, for nominal consideration, an irrevocable, exclusive option to FSF to purchase up to 1,450,000 shares of UTG common stock for a purchase price in cash equal to $15.00 per share, with such option to expire on July 1, 2001. UTG had a market price per share of $9.50 at the date of grant of the option. 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. UTG also caused three persons designated by FSF to be appointed, as part of the maximum of 11, to the Board of Directors of UTG.
Following the above transactions, and together with shares of UTG acquired in the market, FSF and affiliates became the largest shareholder of UTG. Through the shares acquired and options owned, FSF can ultimately own over 51% of UTG.
As of December 31, 1999, no options were exercised. At December 31, 1999, UTG common stock had a market value of $8.125 per share.
In July,1999, UTGL99 was liquidated and UII was merged into UTG. Simultaneously with the merger, and facilitated by the liquidation of the former UTGL99, the corporate name of UTG was changed from United Trust, Inc. to United Trust Group, Inc. ("UTG"). The merger transaction, and an anterior corresponding proposal to increase the number of authorized shares of UTG common stock from 3,500,000 to 7,000,000, received necessary shareholder approvals at a special meeting and vote held on July 26, 1999. UTG issued 817,517 shares of its authorized but unissued common stock to former UII shareholders in the merger. The shares issued were valued at $10,451,455.
On December 31, 1999, UTG and Jesse T. Correll entered into 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.
At December 31, 1999 and 1998, the Company had $5,917,969 and $9,529,138 in long-term debt outstanding, respectively. The debt is comprised of the following components:
The senior debt is through National City Bank (formerly 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 National City Bank from time to time as its "base lending rate." The base rate at December 31, 1999 was 8.50%. Interest is paid quarterly. During second quarter 1999 the Company prepaid a $75,000 principal payment. The remaining balance of $25,000 will be payable on or before the debt maturity date of May 8, 2005, and is being maintained to keep the Company's credit relationship with National City Bank in place.
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.
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 principal payments equal to 1/20th of the principal balance due with each interest installment beginning December 16, 1997. The aforementioned $840,000 note provides for a lump sum principal payment due June 16, 2002. During second quarter of 1999, the Company prepaid all of the outstanding 10-year notes, except the $840,000 note.
The original 20-year notes bear interest at the rate of 8 1/2% per annum on $2,747,109 and 8.75% per annum on $504,962 payable semi-annually with a lump sum principal payment due June 16, 2012. During 1999, the Company retired subordinated debt consisting of all of the 20-year notes with 8.75% interest rates and $929,940 of the 8.5% 20-year notes.
The convertible debentures were assumed from the July 1999, merger of UII into UTG. In early 1994, UII received $902,300 from the sale of Debentures. The Debentures were issued pursuant to an indenture between UII and National City Bank (formerly First of America Bank - Southeast Michigan, N.A.), as trustee. The Debentures are
general unsecured obligations of UII, subordinate in right of payment to any existing or future senior debt of UII. The Debentures are exchangeable and transferable, and were convertible at any time prior to March 31, 1999 into UII's Common Stock at a conversion price of $25.00 per share, subject to adjustment in certain events. The conversion right has now expired without any conversions taking place. The Debentures bear interest from March 31, 1994, payable quarterly, at a variable rate equal to one percentage point above the prime rate published in the Wall Street Journal from time to time. On or after March 31, 1999, the Debentures will be redeemable at UII's option, in whole or in part, at redemption prices declining from 103% of their principal amount. No sinking fund will be established to redeem Debentures. The Debentures will mature on March 31, 2004. The Debentures are not listed on any national securities exchange. During 1999, the Company paid a total of $226,500 of the debenture debt through voluntary retirements at par value.
2000 $ 0 2001 0 2002 840,000 2003 0 2004 675,800
On a cash basis, the Company paid $643,429, $1,851,386 and $1,800,110 in interest expense for the years 1999, 1998 and 1997, respectively. The Company paid $557,812, $15,805 and $57,277 in federal income tax for 1999, 1998 and 1997, respectively.
On December 31, 1999, UTG isssued 681,818 shares of authorized but unissued common stock to acquire 100% ownership of North Plaza of Somerset, Inc. ("North Plaza"). North Plaza 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.
As partial proceeds for the acquisition of common stock of UTG and UII during 1997, UTG 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.
A vote of the shareholders of UTG and UII regarding the proposed merger occurred on July 26, 1999, with shareholders of both companies approving the transaction. UTG issued 817,517 shares of its authorized but unissued common stock to former UII shareholders, exclusive 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.
Policy liabilities and accruals (74,427,627) Income taxes payable - current and deferred (2,140,155) Notes payable (3,865,344) Other liabilities (1,521,989) Minority interests (2,699,567) ------------------ Net purchase price $ 10,451,455 ==================