Investment real estate Commercial 16,039,771 82% Residential development 1,464,041 8% 17,503,812 90%
Commercial property mainly consists of North Plaza, which owns for investment purposes, a shopping center in Somerset, Kentucky, approximately 12,000 acres of timberland in Kentucky, and a 50% partnership interest in an additional 11,000 acres of Kentucky timberland. The timberland is harvested and in various stages of maturity. The property is carried at $9,212,082.
During the fourth quarter of 2001, UG purchased real estate for $6,333,336 from an outside third party through the formation of an LLC in which UG is a two-thirds owner. The other one-third partner is Millard V. Oakley, who is a Director of UTG. Hampshire Plaza, LLC consists of a twenty story, 254,000 square foot office tower, an attached 72,000 square foot retail plaza, and an attached parking garage with approximately 350 parking spaces located in Manchester, New Hampshire. The Company plans to invest approximately an additional $1,300,000 over the next few years in order to renovate and improve existing office space within the building. The intent of these improvements would be made in order to lease the office space in the near future. During the first half of 2002 a significant portion of existing office leases expired. Subsequent to year-end the Company obtained a new lease agreement whereby approximately 50% of the building would become leased. The addition of this substantial lease agreement will positively impact future cashflows on this investment. At December 31, 2002, the property was carried at $6,827,689.
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 in the past has been on the development and sale of lots, with an occasional home construction to help stimulate interest. During 2000, management determined it would be in the long term best interests of the Company to discontinue development and attempt to liquidate the remaining properties. At December 31, 2002, the Company had $1,464,041 in residential development property. In February 2003, the Company sold a significant portion of its residential development property known as Area A for approximately $732,000. At December 31, 2002, this property was carried at $450,000. Upon completion of the sale the Company realized a gain of approximately $211,000.
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, 2002.
New business production decreased steadily and significantly over the last several years. New business production in 2002 was approximately 10% of the production levels in 1998. The Company has not placed an emphasis on new business production in recent years. Costs associated with supporting new business can be significant. 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, has made it challenging to compete in this area. In early 1999, management determined it could no longer continue to support the costs of new business in light of the declining trend and no indication it would reverse itself. As such, at that time, existing agents were allowed to continue marketing Company products, but the Company significantly reduced home office support and discontinued sales leads to agents using existing inforce policies.
The overall investment yields for 2002, 2001 and 2000, are 5.65%, 6.39% and 6.88%, respectively.
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 Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads, ranging from 1% to 2%. At the March 2001 Board of Directors meeting, the Boards of the insurance subsidiaries lowered crediting rates one-half percent on all products that could be lowered. With this reduction, the vast majority of the Company's rate-adjustable products are now at their guaranteed minimum rates, and as such, cannot be lowered any further. At the March 2002 Board of Directors meeting, the Boards of the insurance subsidiaries lowered all remaining rate-adjustable products to their guaranteed minimum rates. The guaranteed minimum crediting rates on these products range from 3% to 5.5%. These adjustments were in response to the continued declines in interest rates in the marketplace described above. Policy interest crediting rate changes become effective on an individual policy basis on the next policy anniversary. If interest rates continue to decline, the Company won't be able to lower rates and both net investment income and net income will be impacted negatively.
Realized investment gains, net of realized losses, were $13,634, $436,840 and $(260,078) in 2002, 2001 and 2000, respectively. During 2002, the modest realized gain consisted primarily of real estate sales on residential development property the Company owned in Springfield, Illinois. During 2001, the Company sold the West Virginia properties including the former home office building of APPL, realizing a gain of $217,574. The Company also sold certain common stocks it had acquired in 2000 and 2001 realizing gains of $132,760.
During early 1999, 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. During 2000, real estate accounted for almost all of the realized gain and loss activity. By third quarter of 2000, the Company had sold the remaining real estate properties identified for disposal in prior years. The Company recorded net realized gains of $728,000 from these sales. By fourth quarter 2000, remaining real estate consisted of the North Plaza holdings and development real estate located in Springfield, Illinois. In December 2000, management studied its development properties, analyzing such issues as remaining time to fully develop without over saturation, historic sales trends, management time and resources to continue development and other alternatives such as modifying current plans or discontinuing entirely. Management determined it would be in the long term best interests of the Company to discontinue development and attempt to liquidate the remaining properties. As such, a realized loss of $913,000 was recorded in December 2000 to reduce the book value of these properties to the amount management determined it would accept net of selling costs to facilitate liquidation. During the fourth quarter of 2000, the Company recorded a $170,000 increase to the allowance maintained for potential mortgage loan losses.
On June 1, 2001, the Company began performing administrative work as a third party administrator ("TPA") for an unaffiliated life insurance company. The business being administered is a closed block with approximately 250,000 policies, a majority of which are paid up. The Company receives monthly fees based on policy in force counts and certain other activity indicators such as number of premium collections performed. During the year ended 2002 and 2001, the Company received $521,782, and $299,905 for this work, respectively. These TPA revenue fees are included in the line item "other income" on the Company's consolidated statements of operations. The Company intends to pursue other TPA arrangements, and in 2002 entered into an alliance with Fiserv Life Insurance Solutions (Fiserv LIS), to provide TPA services to insurance companies seeking business process outsourcing solutions. Fiserv LIS will be responsible for the marketing and sales function for the alliance, as well as providing the datacenter operations. UTG will staff the administration effort. Although still in its early stages, management believes this alliance with Fiserv LIS positions the Company to generate additional revenues by utilizing the Company's current excess capacity and administrative services. Fiserv LIS 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.
Commissions and amortization of deferred policy acquisition costs decreased 38% in 2002 compared to 2001 and decreased 40% in 2001 compared to 2000. The most significant factor in the continuing decrease is attributable to the Company paying fewer commissions, since the Company writes very little new business and renewal premiums on existing business continue to decline. Another factor of the decrease is attributable to normal amortization of the deferred policy acquisition costs asset. The Company reviews the recoverability of the asset based on current trends and known events compared to the assumptions used in the establishment of the original asset. No impairments were recorded in any of the three periods reported.
Amortization of cost of insurance acquired decreased 4% in 2002 compared to 2001 and decreased 1% in 2001 compared to 2000. 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 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 2002, 2001 and 2000 has been approximately 93.6%, 91.6%and 89.8%, respectively.
Operating expenses decreased 9% in 2002 compared to 2001 and decreased 36% in 2001 compared to 2000. During 2001, the Company transferred all remaining functions of its insurance subsidiary APPL from Huntington, West Virginia to the Springfield, Illinois location, and sold the West Virginia property. The closing of the Huntington office has resulted in an approximately $325,000 reduction to operating expenses in 2002. During the current year the Company changed health insurance coverage on its employees. This change reduced 2002 operating expenses approximately $75,000, while maintaining similar coverage amounts. Additional expense reductions have been made in the normal course of business, as the Company continually monitors expenditures looking for savings opportunities. The aforementioned expense reductions have been partially offset by increased operating costs of approximately $285,000 attributable to the Company's conversion of its existing business and TPA clients to "ID3", a software system owned by Fiserv LIS. Conversion costs to date include fees for initial licensing, consultation, and training.
Interest expense declined 19% comparing 2002 to 2001 and declined 13% comparing 2001 to 2000. The Company repaid $1,405,395, $1,302,495 and $1,540,800 in outside debt in 2002, 2001 and 2000 respectively, through operating cashflows and dividends received from its subsidiary UG. On July 31, 2000, $2,560,000 in convertible debt of UTG held by First Southern was converted to equity. In April 2001, the Company issued $3,885,996 in new debt to purchase common stock owned primarily by James E. Melville and Larry E. Ryherd, two former officers and directors of the Company and their respective families. These notes bear interest at the fixed rate of 7% per annum (paid quarterly) with payments of principal to be made in five equal installments, the first principal payment of which, in the amount of $777,199, was made on March 31, 2002. In December 2002 advance principal payments totaling $113,522 were made on these notes. Subsequent to year-end 2002 an additional advance principal payment was made on these notes in the amount of $705,499. In May and July of 2002, principal payments of $113,112 and $401,562, respectively were made, which paid off the remaining balance owed on the Company's subordinated debt. The subordinated debt was incurred June 16, 1992 as a part of the acquisition of the now dissolved Commonwealth Industries Corporation. At December 31, 2002, UTG had $2,995,275 in notes payable remaining, all of which were incurred in the aforementioned April 2001 stock purchase transaction with Mr. Ryherd and Mr. Melville. Principal payments of $763,259 are due annually over a three-year period ending in April of 2006 with the next principal payment due in April of 2004. The Company has agressively pursued the repayment of its existing debt in recent periods. Interest rates on existing debt are fixed. With the current interest rate environment, management believes it is in the Company's best long-term interest to reduce or eliminate its debt with any excess funds available to do so.
Management believes overall sources available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cashflows and payment of dividends from the Company's life subsidiaries.
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. Many insurance companies have suffered significant losses in their investment portfolios in the last couple of years, however, because of the Company's conservative investment philosophy our Company has so far largely avoided such significant losses. Management shortened the length of the Company's portfolio which hurt investment earnings in the short run, but the Company has not had to write off any losses in these turbulent economic times.
Cost of insurance acquired decreased 30% in 2002 compared to 2001. 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. In both 2002 and 2001 amortization decreased the asset by $1,572,920 each year. In 2002, the balance was reduced $8,409,722 as a result of the valuation adjustment attributable to the acquisition of the minority shareholder positions of FCC through its merger with and into UTG.
Total liabilities decreased 2% in 2002 compared to 2001. Policy liabilities and accruals, which represented 93% and 92% of total liabilities at year end 2002 and 2001, respectively, decreased slightly during the current year. The decline is attributable to a shrinking policy base and declining new business production.
Total shareholders' equity increased 8% in 2002 compared to 2001. This is primarily due to income during the year of $1,499,618, an increase in unrealized gains on investments in the current year of $1,289,740, and an increase in equity of $706,691 from an employee and director stock purchase plan which was approved and implemented in 2002.
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 8% and 5% as of December 31, 2002 and 2001, respectively. Fixed maturities as a percentage of total invested assets were 74% as of December 31, 2001 and 2000, respectively.
Cash provided by (used in) operating activities was $38,646, $1,365,047and $(2,155,491) in 2002, 2001 and 2000, 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 (used in) operating activities plus policyholder contract deposits less policyholder contract withdrawals equaled $2,370,411 in 2002, $3,384,557 in 2001 and $(393,571) in 2000. Management utilizes this measurement of cash flows as an indicator of the performance of the Company's insurance operations.
Cash provided by (used in) investing activities was $9,008,183, $138,994 and $(3,940,958), for 2002, 2001 and 2000, respectively. The most significant aspect of cash provided by (used in) investing activities are the fixed maturity transactions. Fixed maturities account for 80%, 81% and 42% of the total cost of investments acquired in 2002, 2001 and 2000, respectively. The decrease in fixed maturities acquired in 2000 resulted from a corresponding increase in the acquisition of mortgage loans that year.
Net cash provided by (used in) financing activities was $(473,692), $(1,091,769) and $133,721 for 2002, 2001 and 2000, respectively. The Company continues to pay down its outstanding debt. Such payments are included within this category. In addition, in 2001 the board of directors of the Company authorized a repurchase program of UTG's common stock and the purchase of stock is still pursued as it becomes available. In addition, in 2002 this category includes payments made to former FCC shareholders for shares they owned prior to the merger of FCC into UTG. Policyholder contract deposits decreased 9% in 2002 compared to 2001, and decreased 11% in 2001 when compared to 2000. The decrease in policyholder contract deposits relates to the decline in new business production experienced in the last few years by the Company. Policyholder contract withdrawals have decreased 15% in 2002 compared to 2001, and 15% in 2001 compared to 2000. The change in policyholder contract withdrawals is not attributable to any one significant event. Factors that influence policyholder contract withdrawals are fluctuation of interest rates, competition and other economic factors.
At December 31, 2002, UTG had $2,995,275 in notes payable, all remaining debt is owed to two former officers and directors of the Company and their respective families as a result of an April 2001 stock purchase transaction. These notes bear interest at the fixed rate of 7% per annum (paid quarterly), with three remaining principal payments of $763,259 due annually. The next principal payment due date is in April of 2004. Management believes overall sources available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cashflows and payment of dividends from the Company's life subsidiaries. In January 2003, UTG paid $705,499 on its notes payable completing the 2003 principal payments due.
On April 1, 2002, UTG was extended a $5,000,000 line of credit ("LOC") from an unaffiliated third party, Southwest Bank of St. Louis. The LOC will expire one-year from the date of issue. As collateral for any draws under the line of credit, the former FCC, which has now merged into UTG, pledged 100% of the common stock of its insurance subsidiary UG. Borrowings under the LOC will bear interest at the rate of 0.25% in excess of Southwest Bank of St. Louis' prime rate. At December 31, 2002, the Company had no outstanding borrowings attributable to this LOC. During 2002 the Company had total borrowings of $400,000 on this LOC which were all repaid during the year. Draws on this LOC were used to retire the remaining subordinated debt, as described in note 11 to the consolidated financial statements and incorporated herein by this reference.
In June 2002, the Company entered into a five-year contract with Fiserve LIS for services related to their purchase of the "ID3" software system. Under the contract, the Company is required to pay $12,000 per month in software maintenance costs and $5,000 per month in offsite data center costs for a five-year period from the date of the signing.
Management of the Company believes the completion of the aforementioned mergers will provide the Company with additional cost savings. These cost savings result from streamlining the Company's operations and organizational structure from three life insurance subsidiaries to one life insurance subsidiary, UG. Thus, the Company will further improve administrative efficiency.
UTG is a holding company that has no day-to-day operations of its own. Funds required to meet its expenses, generally costs associated with maintaining the company in good standing with states in which it does business, are primarily provided by its subsidiaries. On a parent only basis, UTG's cash flow is dependent on management fees received from its subsidiaries and earnings received on cash balances. On December 31, 2002, substantially all of the consolidated shareholders equity represents net assets of 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. Following the merger of FCC with and into UTG (see note 15 to the consolidated financial statements) UG became a 100% owned subsidiary of UTG. Following APPL's 100% coinsurance transaction with UG (see note 17 to the consolidated financial statements), ABE became a direct 100% owned subsidiary of UG.
ABE is an Illinois domiciled insurance company, which requires notification to the insurance commissioner for the payment of an ordinary dividend within 5 business days following the declaration and no less than 10 business days prior to payment. Ordinary dividends are defined as the greater of: a) prior year statutory earnings or b) 10% of statutory capital and surplus. At December 31, 2002 ABE had a total statutory shareholders' equity of $2,799,296 and a statutory gain from operations of $182,866. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. ABE paid an ordinary dividend of $280,000 to UG in 2002.
The Company's insurance subsidiaries are assessed contributions by life and health guaranty associations in almost all states to indemnify policyholders of failed companies. In several states the company may reduce, premium taxes paid to recover a portion of assessments paid to the states' guaranty fund association. This right of "offset" may come under review by the various states, and the company cannot predict whether and to what extent legislative initiatives may affect this right to offset. In addition, some state guaranty associations have adjusted the basis by which they assess the cost of insolvencies to individual companies. The Company believes that its reserve for future guaranty fund assessments is sufficient to provide for assessments related to known insolvencies. This reserve is based upon management's current expectation of the availability of this right of offset, known insolvencies and state guaranty fund assessment bases. However, changes in the basis whereby assessments are charged to individual companies and changes in the availability of the right to offset assessments against premium tax payments could materially affect the company's results.
The insurance regulatory framework continues to be scrutinized by various states, the federal government and the National Association of Insurance Commissioners ("NAIC"). The NAIC is an association whose membership consists of the insurance commissioners or their designees of the various states. The NAIC has no direct regulatory authority over insurance companies. However, its primary purpose is to provide a more consistent method of regulation and reporting from state to state. This is accomplished through the issuance of model regulations, which can be adopted by individual states unmodified, modified to meet the state's own needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes, which require registration and periodic reporting by insurance companies controlled by other corporations licensed to transact business within their respective jurisdictions. The insurance subsidiaries are subject to such legislation and registered as controlled insurers in those jurisdictions in which such registration is required. Statutes vary from state to state but typically require periodic disclosure, concerning the corporation that controls the registered insurers and all subsidiaries of such corporation. In addition, prior notice to, or approval by, the state insurance commission of material intercorporate transfers of assets, reinsurance agreements, management agreements (see Note 9 to the consolidated financial statements), and payment of dividends (see Note 2 to the consolidated financial statements) in excess of specified amounts by the insurance subsidiary, within the holding company system, are required. Each year the NAIC calculates financial ratio results (commonly referred to as IRIS ratios) for each company. These ratios compare various financial information pertaining to the statutory balance sheet and income statement. The results are then compared to pre-established normal ranges determined by the NAIC. Results outside the range typically require explanation to the domiciliary insurance department.
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 ("RBC") 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:
At December 31, 2002, each of the insurance subsidiaries has a Ratio that is in excess of 5, which is 500% of the authorized control level; accordingly, the insurance subsidiaries meet the RBC requirements.
The State of Florida began an investigation of industrial life insurance policies in the fall of 1999 regarding policies with race-based premiums. This investigation has quickly spread to other states and to other types of small face amount policies and was expanded to consider the fairness of premiums for all small policies including policies which did not have race-based premiums. The NAIC historically has defined a "small face amount policy" as one with a face amount of $15,000 or less. Under current reviews, some states have increased this amount to policies of $25,000 or less. These states are attempting to force insurers to refund "excess premiums" to insureds or beneficiaries of insureds. The Company's insurance subsidiaries have no race-based premium products, but do have policies with face amounts under the above-scrutinized limitations. The outcome of this issue could be dramatic on the insurance industry as a whole as well as the Company itself. The Company will continue to monitor developments regarding this matter to determine to what extent, if any, the Company may be exposed.
The Financial Accounting Standards Board ("FASB") has issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, Statement No. 147, Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9, and Statement No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123.
Statement 147 was issued to address and clarify the application of the purchase method of accounting as it applies to acquisitions of financial institutions, except transactions between two or more mutual enterprises. The provisions of Statement 147 are effective on October 1, 2002. The adoption of Statement 147 did not affect the Company's financial position or results of operations, since the Company has had no acquisitions of this nature during the reporting period.
Independent Auditors' Report for the years ended December 31, 2002, 2001, 2000................................36
We have audited the accompanying consolidated balance sheets of UNITED TRUST GROUP, INC. (an Illinois corporation) and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. 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.
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, 2002 and 2001, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
ASSETS 2002 2001 --------------- -------------- Investments: Fixed maturities held to maturity, at amortized cost (market $60,517,065 and $77,725,410) $ 58,327,663 $ 75,005,395 Investments held for sale: Fixed maturities, at market (cost $105,244,887 and $97,584,094) 108,704,518 98,628,440 Equity securities, at market (cost $4,122,887 and $3,937,812) 4,883,870 3,852,716 Mortgage loans on real estate at amortized cost 23,804,827 23,386,895 Investment real estate, at cost, net of accumulated depreciation 17,503,812 18,226,451 Policy loans 13,346,504 13,608,456 Short-term investments 377,676 581,382 --------------- -------------- 226,948,870 233,289,735
Cash and cash equivalents 24,050,485 15,477,348 Accrued investment income 2,452,840 3,002,860 Reinsurance receivables: Future policy benefits 33,039,036 33,776,688 Policy claims and other benefits 3,770,285 4,042,779 Cost of insurance acquired 23,156,164 33,081,336 Deferred policy acquisition costs 2,462,487 3,107,919 Cost in excess of net assets purchased, net of accumulated amortization 0 345,779 Property and equipment, net of accumulated depreciation 2,203,408 2,459,117 Income taxes receivable, current 245,132 215,865 Other assets 574,263 139,245 --------------- -------------- Total assets $ 318,902,970 $ 328,938,671 =============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits $ 234,762,656 $ 236,449,241 Policy claims and benefits payable 1,834,952 2,781,920 Other policyholder funds 1,176,359 1,255,990 Dividend and endowment accumulations 12,628,294 13,055,024 Deferred income taxes 12,239,060 13,569,523 Notes payable 2,995,275 4,400,670 Other liabilities 4,943,507 4,880,896 --------------- -------------- Total liabilities 270,580,103 276,393,264 --------------- -------------- Minority interests in consolidated subsidiaries 0 7,771,793 --------------- --------------
UNITED TRUST GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three Years Ended December 31, 2002
Premiums and policy fees $ 18,693,022 $ 20,444,514 $ 23,045,858 Reinsurance premiums and policy fees (2,700,622) (3,172,098) (3,556,172) Net investment income 13,346,824 15,067,059 16,085,833 Realized investment gains(losses), net 13,634 436,840 (260,078) Other income 817,186 589,017 431,682 --------------- ---------------- ---------------- 30,170,044 33,365,332 35,747,123
Net income (loss) $ 1,499,618 $ 2,439,573 $ (696,426) =============== ================ ================
Basic weighted average shares outstanding 3,505,424 3,733,432 4,056,439 =============== ================ ================
Diluted weighted average shares outstanding 4,005,424 3,733,432 4,056,439 =============== ================ ================
Common stock Balance, beginning of year $ 70,996 $ 83,501 $ 79,405 Issued during year 1,177 0 4,096 Treasury shares acquired (1,447) (555) 0 Retired during year 0 (11,950) 0 ------------ ------------ ------------ Balance, end of year $ 70,726 $ 70,996 $ 83,501 ============ ============ ============
Additional paid-in capital Balance, beginning of year $ 42,789,636 $ 47,730,980 $ 45,175,076 Issued during year 705,514 0 2,555,904 Treasury shares acquired (518,806) (172,927) 0 Retired during year 0 (4,768,417) 0 ------------ ------------ ------------ Balance, end of year $ 42,976,344 $ 42,789,636 $ 47,730,980 ============ ============ ============
Retained earnings (accumulated deficit) Balance, beginning of year $ 1,004,238 $ (1,435,335) $ (738,909) Net income (loss) 1,499,618 $ 1,499,618 2,439,573 $ 2,439,573 (696,426) $ (696,426) ------------ ------------ ------------ Balance, end of year $ 2,503,856 $ 1,004,238 $ (1,435,335) ============ ============ ============
Accumulated other comprehensive income (deficit) Balance, beginning of year $ 908,744 $ 335,287 $ (1,138,900) Other comprehensive income Unrealized holding gain on securities net of minority interest and reclassification adjustment 1,863,197 1,863,197 573,457 573,457 1,474,187 1,474,187 ------------ ----------- ------------ ----------- ------------ ----------- Comprehensive income $ 3,362,815 $ 3,013,030 $ 777,761 =========== =========== =========== Balance, end of year $ 2,771,941 $ 908,744 $ 335,287 =========== ============ ============
Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale 29,748,521 30,309,229 5,607,700 Fixed maturities matured 19,957,888 47,848,810 27,103,149 Equity securities 0 6,312,727 189,270 Mortgage loans 6,472,013 14,738,313 4,279,622 Real estate 1,179,931 2,135,472 4,743,146 Policy loans 3,112,687 2,912,296 2,918,627 Other long-term investments 0 0 906,278 Short-term 203,706 2,229,528 1,042,826 -------------- ------------- -------------- Total proceeds from investments sold and matured 60,674,746 106,486,375 46,790,618 Cost of investments acquired: Fixed maturities held for sale (37,341,428) (84,801,095) (19,996,972) Fixed maturities (3,973,623) (1,124,925) (1,486,255) Equity securities (185,075) (4,608,649) (2,673,199) Mortgage loans (6,889,945) (5,325,569) (21,862,521) Real estate (401,318) (6,995,455) (1,246,912) Policy loans (2,850,735) (2,429,852) (2,858,415) Short-term 0 (1,124,512) (498,956) -------------- ------------- -------------- Total cost of investments acquired (51,642,124) (106,410,057) (50,623,230) Purchase of property and equipment (24,439) (138,388) (108,346) Sale of property and equipment 0 201,064 0 -------------- ------------- -------------- Net cash provided by (used in) investing activities 9,008,183 138,994 (3,940,958) -------------- ------------- --------------
Cash flows from financing activities: Policyholder contract deposits 10,291,519 11,361,882 12,724,345 Policyholder contract withdrawals (7,959,754) (9,342,372) (10,962,425) Payments of principal on notes payable (3,405,395) (1,302,495) (1,540,800) Proceeds from line of credit 2,000,000 0 0 Purchase of stock of affiliates 0 (632,131) (87,399) Payments from FCC merger (1,586,500) 0 0 Issuance of common stock 706,691 0 0 Purchase of treasury stock (520,253) (1,176,653) 0 -------------- ------------- -------------- Net cash provided by (used in) financing activities (473,692) (1,091,769) 133,721 -------------- ------------- --------------
A. ORGANIZATION - At December 31, 2002, the significant majority-owned subsidiaries of UNITED TRUST GROUP, INC., were as depicted on the following organizational chart.
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 4.0% to 5.5% for the years ended December 31, 2002 and 2001 and 4.5% to 5.5% for the year ended December 31, 2000, respectively.
2003 $ 4,371,000 $ 6,066,000 $ 1,695,000 2004 4,140,000 6,034,000 1,894,000 2005 3,875,000 6,084,000 2,209,000 2006 3,560,000 6,422,000 2,862,000 2007 3,145,000 5,994,000 2,849,000
The following table summarizes deferred policy acquisition costs and related data for the years shown.
Interest accretion 55,000 76,000 100,000 Amortization charged to income (769,432) (1,083,577) (1,552,040) -------------- --------------- -------------- Net amortization (714,432) (1,007,557) (1,452,040) -------------- --------------- -------------- Change for the year (645,432) (840,577) (1,179,040) -------------- --------------- --------------
Deferred, end of year $ 2,462,487 $ 3,107,919 $ 3,948,496 ============== =============== ==============
The following table reflects the components of the income statement for the line item commissions and amortization of deferred policy acquisition costs:
Net amortization of deferred policy acquisition costs $ 714,432 $ 1,007,577 $ 1,452,040 Commissions 71,429 255,397 637,273 ------------ ------------ -------------- Total $ 785,861 $ 1,262,974 $ 2,089,313 ============ ============ ==============
2003 $ 17,000 $ 790,000 $ 773,000 2004 15,000 675,000 660,000 2005 12,000 572,000 560,000 2006 10,000 476,000 466,000 2007 9,000 350,000 341,000
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. On January 1, 2002, the Company adopted FASB Statement No. 142, Goodwill and Intangible Assets, which required that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. Accumulated amortization of cost in excess of net assets purchased was $1,780,146 as of December 31, 2002 and 2001, respectively. At December 31, 2002, the Company had no goodwill on its balance sheet. The goodwill balance at year end 2001 was eliminated in the purchase accounting valuations relating to the June 2002 merger of FCC.
S. PARTICIPATING INSURANCE - Participating business represents 18% and 22% of the ordinary life insurance in force at December 31, 2002 and 2001, respectively. Premium income from participating business represents 25%, 26%, and 27% of total premiums for the years ended December 31, 2002, 2001 and 2000, respectively. The amount of dividends to be paid is determined annually by the respective insurance subsidiary's Board of Directors. Earnings allocable to participating policyholders are based on legal requirements that vary by state.
2002 2001 2000 --------------- ---------------- --------------- Current tax expense $ 7,893 $ 53,539 $ 85,440 Deferred tax expense 471,462 1,127,594 143,343 --------------- ---------------- --------------- $ 479,355 $ 1,181,133 $ 228,783 =============== ================ ===============
The Company has established a deferred tax asset of $364,358 for its operating loss carryforwards and has established no allowance in the current year. The total allowances established on deferred tax assets in the prior year was $183,908.
2002 2001 2000 ------------- ------------- -------------- Net income (loss) $ 1,499,618 $ 2,439,573 $ (696,426) Federal income tax provision 327,472 12,043 60,550 Loss (gain) of subsidiaries (861,049) (2,409,467) 762,656 ------------- ------------- -------------- Taxable income $ 966,041 $ 42,149 $ 598,606 ============= ============= ==============
At December 31, 2002, the Company had a total of $656,716 in investment real estate and $1,477,950 in equity securities, which did not produce income during 2002.
Carrying Value ------------------------------------- 2002 2001 -------------- ------------- Investments held for sale: Fixed maturities U.S. Government, government agencies and authorities $ 27,646,891 $ 36,182,839 State, municipalities and political subdivisions 212,015 202,256 Collateralized mortgage obligations 66,820,749 54,003,623 All other corporate bonds 14,024,863 8,239,722 -------------- ------------- $ 108,704,518 $ 98,628,440 ============== =============
Fixed maturities held to maturity: U.S. Government, government agencies and authorities $ 7,480,490 $ 6,904,757 State, municipalities and political subdivisions 8,195,248 11,788,567 Collateralized mortgage obligations 60,820 128,471 Public utilities 15,134,965 22,219,127 All other corporate bonds 27,456,140 33,964,473 -------------- ------------- $ 58,327,663 $ 75,005,395 ============== =============
Below Investment Grade Investments 2002 2001 2000 ----------------------------- -------------- ------------ ------------ Public Utilities $ 1,274,374 $ 2,091,138 $ 0 CMO 40,146 43,189 239,165 Corporate 1,370,622 271,420 23,000 -------------- ------------ ------------ Total $ 2,685,142 $ 2,405,747 $ 262,165 ============== ============ ============
Cost or Gross Gross Estimated Amortized Unrealized Unrealized Market 2002 Cost Gains Losses Value ------------------------------------ ------------- ------------ -------------- ------------- Investments held for sale: U.S. Government and govt. Agencies and authorities $ 26,271,281 $ 1,375,610 $ 0 $ 27,646,891 States, municipalities and Political subdivisions 193,619 18,396 0 212,015 Collateralized mortgage Obligations 65,603,941 1,225,986 (9,178) 66,820,749 Public utilities 0 0 0 0 All other corporate bonds 13,176,046 869,187 (20,370) 14,024,863 ------------- ------------ -------------- ------------- 105,244,887 3,489,179 (29,548) 108,704,518 Equity securities 4,122,887 1,795,527 (1,034,544) 4,883,870 ------------- ------------ -------------- ------------- Total $ 109,367,774 $ 5,284,706 $ (1,064,092) $ 113,588,388 ============= ============ ============== =============
Fixed maturities held to maturity: U.S. Government and govt. Agencies and authorities $ 7,480,490 $ 403,473 $ (3) $ 7,883,960 States, municipalities and Political subdivisions 8,195,248 406,211 (7,753) 8,593,706 Collateralized mortgage Obligations 60,820 4,296 0 65,116 Public utilities 15,134,965 509,875 (96,029) 15,548,811 All other corporate bonds 27,456,140 1,058,270 (88,938) 28,425,472 ------------- ------------ -------------- ------------- Total $ 58,327,663 $ 2,382,125 $ (192,723) $ 60,517,065 ============= ============ ============== =============
Cost or Gross Gross Estimated Amortized Unrealized Unrealized Market 2001 Cost Gains Losses Value -------------------------------------- -------------- ------------ -------------- ------------- Investments held for sale: U.S. Government and govt. Agencies and authorities $ 35,240,384 $ 942,455 $ 0 $ 36,182,839 States, municipalities and Political subdivisions 192,059 10,197 0 202,256 Collateralized mortgage Obligations 53,777,577 447,019 (220,973) 54,003,623 Public utilities 0 0 0 0 All other corporate bonds 8,374,074 321 (134,673) 8,239,722 -------------- ------------ -------------- ------------- 97,584,094 1,399,992 (355,646) 98,628,440 Equity securities 3,937,812 953,448 (1,038,544) 3,852,716 -------------- ------------ -------------- ------------- Total $ 101,521,906 $ 2,353,440 $ (1,394,190) $ 102,481,156 ============== ============ ============== =============
Cost or Gross Gross Proceeds Amortized Realized Realized From Year ended December 31, 2000 Cost Gains Losses Sale --------------------------------- ------------- ----------- ------------- ------------- Scheduled principal repayments, Calls and tenders: Held for sale $ 5,611,476 $ 71 $ (3,847) $ 5,607,700 Held to maturity 27,047,819 59,463 (4,133) 27,103,149 Sales: Held for sale 0 0 0 0 Held to maturity 0 0 0 0 ------------- ----------- ------------- ------------- Total $ 32,659,295 $ 59,534 $ (7,980) $ 32,710,849 ============= =========== ============= =============
The financial statements include various estimated fair value information at December 31, 2002 and 2001, 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.
2002 2001 -------------------------------------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair Assets Amount Value Amount Value -------------- -------------- --------------- --------------- Fixed maturities $ 58,327,663 $ 60,517,065 $ 75,005,395 $ 77,725,410 Fixed maturities held for sale 108,704,518 108,704,518 98,628,440 98,628,440 Equity securities 4,883,870 4,883,870 3,852,716 3,852,716 Mortgage loans on real estate 23,804,827 23,882,286 23,386,895 23,360,333 Investment in real estate 17,503,812 17,503,812 18,226,451 18,226,451 Policy loans 13,346,504 13,346,504 13,608,456 13,608,456 Short-term investments 377,676 377,676 581,382 581,382
As is customary in the insurance industry, the insurance subsidiaries of the Company cede insurance to, and assume insurance from, other insurance companies under reinsurance agreements. Reinsurance agreements are intended to limit a life insurer's maximum loss on a large or unusually hazardous risk or to obtain a greater diversification of risk. The ceding insurance company remains primarily liable with respect to ceded insurance should any reinsurer be unable to meet the obligations assumed by it. However, it is the practice of insurers to reduce their exposure to loss to the extent that they have been reinsured with other insurance companies. The Company sets a limit on the amount of insurance retained on the life of any one person. The Company will not retain more than $125,000, including accidental death benefits, on any one life. At December 31, 2002, the Company had gross insurance in force of $2.441 billion of which approximately $527 million was ceded to reinsurers.
UG entered a coinsurance agreement with Park Avenue Life Insurance Company ("PALIC") as of September 30, 1996. Under the terms of the agreement, UG ceded to PALIC substantially all of its 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 hold an "A" (Excellent), and "A+" (Superior) rating, respectively, from A.M. Best, an industry rating company. The agreement with PALIC accounts for approximately 66% of the reinsurance receivables, as of December 31, 2002.
On September 30, 1998, UG entered into a coinsurance agreement with The Independent Order of Vikings, an Illinois fraternal organization ("IOV"). Under the terms of the agreement, UG agreed to assume on a coinsurance basis, 25% of the reserves and liabilities arising from all inforce insurance contracts issued by the IOV to its members. At December 31, 2002, the IOV insurance inforce was approximately $1,700,000, with reserves being held on that amount of approximately $400,000.
On October 1, 2002, APPL entered into a 100% coinsurance agreement, with UG, whereby APPL ceded and UG assumed all policies in force of APPL as of the effective date of the agreement. Under the coinsurance arrangement, UG has primary responsibility for the policies, but APPL remains contingently liable for the policies. At December 31, 2002, APPL has insurance inforce of approximately $160,000,000, with reserves being held on that amount of approximately $20,800,000, which were assumed by UG in the transaction.
The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 2002, 2001 and 2000 was as follows:
Shown in thousands --------------------------------------------------------- 2002 2001 2000 Premiums Premiums Premiums Earned Earned Earned ---------------- ---------------- ---------------- Direct $ 18,597 $ 20,333 $ 22,970 Assumed 96 111 76 Ceded (2,701) (3,172) (3,556) ---------------- ---------------- ---------------- Net premiums $ 15,992 $ 17,272 $ 19,490 ================ ================ ================
On June 10, 2002 UTG and Fiserv LIS formed an alliance between their respective organizations to provide third party administration (TPA) services to insurance companies seeking business process outsourcing solutions. Fiserv LIS 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. To facilitate the alliance, the Company plans to convert its existing business and TPA clients to "ID3", a software system owned by Fiserv LIS to administer an array of life, health and annuity products in the insurance industry. Fiserv LIS 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.
The Company is currently evaluating its alternatives to converting its existing business to "ID3". Currently, the Company is analyzing alternatives and options for the conversion with total costs ranging from $500,000 to $1,700,000. Alternatives include completing the conversion with the existing staff of the Company, to outsourcing the entire conversion to Fiserv LIS. Management is reviewing the possible alternatives, weighing the pros and cons of each, and expects to make a decision shortly.
David A. Morlan, individually and on behalf of all others similarly situated v. Universal Guaranty Life Ins., United Trust Assurance Co., United Security Assurance Co., United Trust Group, Inc. and First Commonwealth Corporation, (U.S. District Court for the Southern District of Illinois)
At its September 2002 meeting, the Board of Directors of UTG approved initial offerings under the plan to qualified individuals. This initial offering was at a purchase price of $12.00 per share. A total of 58,891 shares of UTG common stock were issued under this plan in 2002, to eight individuals. Each participant under the plan executed a "stock restriction and buy-sell agreement", which among other things provides UTG with a right of first refusal on any future sales of the shares acquired by the participant under this plan.
The purchase price of shares repurchased under the stock restriction and buy-sell agreement shall be computed, on a per share basis, equal to the sum of (i) the original purchase price paid to acquire such shares from UTG and (ii) the consolidated statutory net earnings (loss) per share of such shares during the period from the end of the month next preceding the month in which such shares were acquired pursuant to the plan, to the end of the month next preceding the month in which the sale of such shares to UTG occurs. At December 31, 2002, shares issued under this program had a value of $11.94 per share pursuant to the above formula.
At a December 17, 2001 joint meeting of the board of directors of UTG, FCC and their insurance subsidiaries, the boards of directors of the insurance subsidiaries discussed and decided to further explore and pursue a possible sale of the insurance charters of each of APPL and ABE. In the alternative to a sale of the APPL charter, the boards also discussed and decided to further explore a possible merger of APPL into UG. At the September 24, 2002 joint meeting of the board of directors of UTG and its insurance subsidiaries, the boards of directors of UG and ABE each approved the exploration of a merger transaction whereby ABE will be merged with and into UG. The UG and ABE Boards are expected to approve the merger transaction at the March 2003 meeting. The completion of the transaction is contingent upon the necessary regulatory approvals and is expected to be completed in mid 2003.
In preparation for a possible charter sale of APPL, UG and APPL entered into a 100% coinsurance agreement effective October 1, 2002, whereby UG assumed and APPL ceded all of the existing business of APPL. The coinsurance transaction had no financial impact on the consolidated financial statements or operating results of UTG.
On November 15, 2001, UTG was extended a $3,300,000 line of credit from the First National Bank of the Cumberlands located in Livingston, Tennessee. The First National Bank of the Cumberlands is owned by Millard V. Oakley, who is a Director of UTG. The original line of credit expired one year from the date of issue and was renewed in 2002 for an additional one-year term. The line of credit is available for general business uses. The interest rate provided for in the agreement is variable and indexed to be the lowest of the U.S. prime rates as published in the money section of the Wall Street Journal, with any interest rate adjustments to be made monthly. During 2002, the Company borrowed a total of $1,600,000 under this line of credit and incurred interest expense of $17,419. All funds drawn were repaid prior to December 31, 2002. No borrowings were incurred during 2001.
On April 12, 2001, UTG also completed the purchase of 559,440 shares of UTG common stock from Larry E. Ryherd and family pursuant to the Ryherd Purchase Agreement for cash payments totaling $948,026 and a five year promissory note of UTG in the principal amount of $3,527,494. The purchase by UTG of the remaining 3,775 shares of UTG common stock to be purchased for cash at $8.00 per share pursuant to the Ryherd Purchase Agreement along with an additional 570 shares from certain parties to the Ryherd Purchase Agreement was completed on June 20, 2001. The promissory notes of UTG received by certain of the sellers pursuant to the Melville Purchase Agreement and the Ryherd Purchase Agreement bear interest at a rate of 7% per annum (paid quarterly) with payments of principal to be made in five equal annual installments, the first such payment of principal to be due on the first anniversary of the closing.
ABE paid fees to FCC pursuant to a cost sharing and management fee agreement. FCC provided management services for ABE to carry on its business. The agreement required 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 $188,494, $332,673 and $371,211 in 2002, 2001 and 2000, respectively under this agreement. ABE paid fees of $170,729 in 2002 to UTG under this agreement.
Since the Company's affiliation with FSF, UG has acquired mortgage loans through participation agreements with FSNB. FSNB services the loans covered by these 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 $70,140, $79,730 and $34,721 in servicing fees and $35,127, $22,626 and $91,392 in origination fees to FSNB during 2002, 2001 and 2000, respectively.
On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002, the shareholders of UTG approved, the United Trust Group, 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.
In April 2001, UTG completed the purchase of 22,500 shares of UTG common stock and 544 shares of First Commonwealth Corporation common stock from James E. Melville and family pursuant to the Melville Purchase Agreement in exchange for five year promissory notes of UTG in the aggregate principal amount of $288,800. During 2002, UTG made principal reductions totaling $115,520 on the Melville notes.
In April 2001, UTG also purchased in a separate transaction 10,891 shares of UTG common stock from Robert E. Cook, a former director, for cash and a five-year promissory note of UTG in the principal amount of $69,702. During 2002, UTG repaid this note in full.
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. The option expired unexercised on July 1, 2001.
2002 2001 2000 ------------------------------ ------------------------------- ------------------------------ EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE SHARES SHARES SHARES ------------- --------------- ------------- ---------------- ------------- --------------- Outstanding at beginning of Period 0 $15.00 19,108 $15.00 166,104 $15.00 Granted 0 0.00 0 0.00 0 0.00 Exercised 0 0.00 0 0.00 0 0.00 Forfeited 0 15.00 19,108 15.00 146,996 15.00 ------------- --------------- ------------- ---------------- ------------- --------------- Outstanding at end of period 0 $15.00 0 $15.00 19,108 $15.00 ============= =============== ============= ================ ============= ===============
Effect of Dilutive Securities Earnings covenant 0 500,000 Options 0 0 --------------- ------------------
Diluted EPS Income available to common shareholders and $ assumed conversions 1,499,618 4,005,424 $ 0.37 =============== ================== =================
Diluted EPS Income available to common shareholders and $ 4,056,439 assumed conversions (696,426) $ (0.17) =============== ================== =================
At December 31, 2002, UTG has an obligation to issue to FSF or its assigns 500,000 shares of UTG common stock, as the result of a failed earnings covenant (See note 10D to the consolidated financial statements above). As such, the computation of diluted earnings per share differs from basic earnings per share for the year ending December 31, 2002. UTG had no stock options outstanding for the year ended December 31, 2001. As such, the computation of diluted earnings per share is the same as basic earnings per share at December 31, 2001. 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 year ending December 31, 2000, since the Company had a loss from continuing operation for the year presented, and any assumed conversion, exercise, or contingent issuance of securities would have an antidilutive effect on earnings per share.
UTG had granted stock options to FSF of 1,450,000 shares of UTG common stock 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 the passage of time and the 51% limitation, all remaining stock options of 19,108 at $15.00 per share expired on July 1, 2001. No options were exercised during 2001. These options were not included in the computation of diluted EPS because the exercised price was greater than the average market price of the common shares for each respective year.
The subordinated debt was incurred June 16, 1992 as a part of the acquisition of the now dissolved Commonwealth Industries Corporation. These notes bear interest at the variable rate of 1% under prime per annum (paid quarterly). In May 2002 a principal payment of $113,112 was made on the subordinated debt. On July 9, 2002, the remaining outstanding balance of $401,562 on these notes was paid.
The collective scheduled principal reductions on these notes for the next five years is as follows:
2003 $ 705,499 2004 763,259 2005 763,259 2006 763,258 2007 0
On April 1, 2002, UTG was extended a $5,000,000 line of credit ("LOC") from an unaffiliated third party, Southwest Bank of St. Louis. The LOC will expire one-year from the date of issue. As collateral for any draws under the line of credit, the former FCC, which has now merged into UTG, pledged 100% of the common stock of its insurance subsidiary UG. Borrowings under the LOC will bear interest at the rate of 0.25% in excess of Southwest Bank of St. Louis' prime rate. At December 31, 2002, the Company had no outstanding borrowings attributable to this LOC. During 2002 the Company had total borrowings of $400,000 on this LOC which were all repaid during the year. Draws on this LOC were used to retire the remaining subordinated debt, as described in note 11A above.
As of December 31, 2002, the Company has $893,500 that has not been disbursed to former minority shareholders of FCC in connection with FCC's merger with and into UTG. The total consideration to be paid by the Company to the former minority shareholders as a result of the merger is $2,480,000 (see note 15 to the consolidated financial statements). At December 31, 2002, the Company sold $115,000 in fixed maturity investments for which the cash had not yet been received. The receivable for these securities is included in the line item "Other assets" on the consolidated balance sheet.
The Company maintains cash balances in financial institutions that at times may exceed federally insured limits. The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of the largest shareholder of UTG, Jesse T. Correll, the Company's CEO and Chairman. In aggregate at December 31, 2002 these accounts hold approximately $5,000,000 for which there are no pledges or guarantees outside FDIC insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Unrealized holding gains during period $ 2,868,146 $ (1,003,851) $ 1,864,295
Tax Before-Tax (Expense) Net of Tax 2001 Amount or Benefit Amount ---------------------------------------------- ---------------- ----------------- ---------------
In 2000 the Company's deferred tax asset was carried at zero net of allowances. In 2002 and 2001, the Company established a deferred tax liability of $1,170,197 and $385,432 for the unrealized gains based on the applicable United States statutory rate of 35%.
Premiums and policy fees, net $ 5,337,148 $ 5,201,585 $ 4,470,307 $ 4,480,646 Net investment income 4,252,494 4,009,489 3,927,944 3,895,906 Total revenues 9,933,932 9,348,373 8,471,566 7,993,252 Policy benefits including dividends 6,119,515 5,502,941 5,128,773 5,528,128 Commissions and amortization of DAC and COI 1,097,759 804,071 775,825 1,004,470 Operating expenses 2,827,918 1,732,641 2,095,530 3,459,697 Operating income (loss) (244,223) 1,166,057 408,328 (2,037,231) Net income (loss) (47,394) 686,907 163,169 (1,499,108) Basic earnings (loss) per share (0.01) 0.17 0.04 (0.39) Diluted earnings (loss) per share (0.01) 0.17 0.04 (0.39)