UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 AND 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-5392
FIRST COMMONWEALTH CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-0832816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5250 SOUTH SIXTH STREET
P.O. BOX 5147
SPRINGFIELD, IL 62705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (217) 241-6300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No
[ ]
The number of shares outstanding of the registrant's common stock as of
October 31, 1998, was 54,540.
1
<PAGE>
FIRST COMMONWEALTH CORPORATION AND SUBSIDIARIES
(The "Company")
TABLE OF CONTENTS
Part 1 - Financial Information 3
Item 1. Financial Statements 3
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations for the nine and
three months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II - Other Information 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other information 16
Item 6. Exhibits and Reports on Form 8-K. 17
Signatures 18
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 1998 1997
Investments:
Fixed maturities at amortized cost
(market $180,997,557
and $184,782,568) $ 172,995,522 $ 180,649,040
Investments held for sale:
Fixed maturities, at market
(cost $1,498,095 and $1,672,298) 1,508,793 1,668,630
Equity securities, at market
(cost $2,820,685 and $3,184,357) 1,986,074 3,001,744
Mortgage loans on real estate at
amortized cost 9,724,950 9,469,444
Investment real estate, at cost,
net of accumulated depreciation
depreciation 9,283,288 9,760,732
Real estate acquired in satisfaction
of debt 1,646,001 1,724,544
Policy loans 13,972,263 14,207,189
Short-term investments 200,000 1,773,531
Other invested assets 66,212 0
211,383,103 222,254,854
Cash and cash equivalents 28,018,449 15,704,573
Investment in parent 350,000 350,000
Accrued investment income 3,770,950 3,630,773
Reinsurance receivables:
Future policy benefits 37,154,899 37,814,106
Policy claims and other benefits 3,539,631 3,529,078
Other accounts and notes receivable 875,745 840,066
Cost of insurance acquired 17,867,851 18,654,506
Deferred policy acquisition costs 15,353,841 16,745,720
Costs in excess of net assets purchased,
net of accumulated amortization 8,847,723 9,180,471
Property and equipment, net of accumulated
depreciation 3,005,764 3,152,182
Other assets 968,442 715,862
TOTAL ASSETS $ 331,136,398 $ 332,572,191
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 253,854,776 $ 253,964,709
Policy claims and benefits payable 2,086,070 2,080,907
Other policyholder funds 2,263,474 2,445,469
Dividend and endowment accumulations 15,134,097 14,679,816
Income taxes payable:
Current 43,098 10,555
Deferred 2,247,279 3,365,692
Notes payable 17,983,351 18,241,602
Indebtedness to affiliates, net 66,606 27,150
Other liabilities 2,883,567 2,914,991
TOTAL LIABILITIES 296,562,318 297,730,891
Minority interests in consolidated
subsidiaries 1,685,951 1,634,877
Shareholders' equity:
Common stock - $1 par value per share.
Authorized 62,500 shares - 54,540
and 54,555 shares after deducting
treasury shares of 945 and 930 54,540 54,555
Additional paid-in capital 51,875,819 51,877,304
Unrealized depreciation of investments
held for sale (730,576) (198,630)
Accumulated deficit (18,311,654) (18,526,806)
TOTAL SHAREHOLDERS' EQUITY 32,888,129 33,206,423
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 331,136,398 $ 332,572,191
See accompanying notes.
3
<PAGE>
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
1998 1997 1998 1997
Revenues:
Premiums and policy fees $ 7,504,326 $ 8,079,691 $ 24,154,829 $ 26,038,285
Reinsurance premiums and
policy fees (1,260,457) (1,440,297) (3,568,400) (3,663,723)
Net Investment Income 3,802,812 3,689,445 11,330,661 11,388,249
Realized investment gains
(losses),net (426,662) (108,832) (831,893) (136,196)
Other income 17,529 (433) 59,572 63,358
9,637,548 10,219,574 31,144,769 33,689,973
Benefits and other expenses:
Benefits, claims and
settlement expenses:
Life 5,904,412 5,890,748 18,491,002 19,256,571
Reinsurance benefits
and claims (961,260) (481,468) (2,058,693) (1,447,716)
Annuity 353,286 410,813 1,096,020 1,162,166
Dividends to
policyholders 781,429 922,224 2,706,633 3,074,230
Commissions and amortization
of deferred policy
acquisition costs 960,516 1,229,006 3,134,751 3,286,329
Amortization of cost of
insurance acquired 240,236 299,210 786,655 848,156
Operating expenses 2,023,484 2,432,709 6,596,310 7,737,114
Interest expense 399,133 404,253 1,191,119 1,209,858
9,701,236 11,107,495 31,943,797 35,126,708
Loss before income taxes
and minority interest (63,688) (887,921) (799,028) (1,436,735)
Credit for income taxes 742,437 139,988 1,075,315 300,973
Minority interest in gain
of consolidated
subsidiaries (25,016) (14,441) (61,135) (22,162)
Net income (loss) $ 653,733 $ (762,374) $ 215,152 $ (1,157,924)
Basic earnings per share
from continuing
operations and net
income (loss) $ 11.99 $ (13.97) $ 3.94 $ (20.25)
Diluted earnings per share
from continuing
operations and net
income (loss) $ 11.99 $ (13.97) $ 3.94 $ (20.25)
Basic weighted average
shares outstanding 54,542 54,560 54,554 57,171
Diluted weighted average
shares outstanding 54,542 54,560 54,554 57,171
See Accompanying Notes
4
<PAGE>
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30 September 30,
1998 1997
Increase (decrease) in cash and
cash equivalents
Cash flows from operating activities:
Net income (loss) $ 215,152 $ (1,157,924)
Adjustments to reconcile net income
(loss)to net cash provided by
(used in)operating activities net
of changes in assets and
liabilities resulting from the
sales and purchases of subsidiaries:
Amortization/accretion of fixed
maturities 467,716 460,743
Realized investment (gains)
losses, net 831,893 136,196
Policy acquisition costs
deferred (135,000) (557,000)
Amortization of deferred policy
acquisition 1,526,879 1,523,977
Amortization of cost of insurance
acquired 786,655 848,156
Amortization of costs in excess
of net assets purchased 332,748 332,748
Depreciation 350,268 352,074
Minority interest 61,135 22,162
Change in accrued investment
income (140,177) (437,017)
Change in reinsurance receivables 648,654 987,040
Change in policy liabilities and
accruals 785,074 844,478
Charges for mortality and
administration of universal
life and annuity (8,116,570) (7,996,086)
Interest credited to account
balances 5,322,471 5,432,922
Change in income taxes payable (1,085,870) (361,017)
Change in indebtedness (to) from
affiliates, net 39,456 (33,256)
Change in other assets and
liabilities, net (610,058) (1,336,324)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITES 1,280,426 (938,128)
Cash flows from investing activities:
Proceeds from investments sold and
matured:
Fixed maturities held for sale 164,097 0
Fixed maturities sold 0 0
Fixed maturities matured 32,371,454 8,186,791
Equity securities 450,000 105,261
Mortgage loans 943,156 1,146,863
Real estate 1,039,924 510,806
Policy loans 2,941,532 3,799,553
Short-term 1,573,531 400,000
Total proceeds from investments
sold and matured 39,483,694 14,149,274
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (25,166,178) (14,301,690)
Equity securities (79,053) (710,387)
Mortgage loans (1,577,694) (134,314)
Real estate (941,618) (937,268)
Policy loans (2,706,606) (3,573,018)
Other invested assets (66,212) 0
Short-term 0 (400,000)
Total cost of investments acquired (30,537,361) (20,056,677)
Purchase of property and equipment (89,424) (431,910)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 8,856,909 (6,339,313)
Cash flows from financing activities:
Policyholder contract deposits 11,989,493 14,069,987
Policyholder contract withdrawals (9,812,952) (11,280,925)
Payment for fractional shares from
reverse stock split 0 (535,851)
Proceeds from issuance of notes
payable 0 0
Payments of principal on notes
payable (258,251) (758,251)
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,176,541 1,494,960
Net increase (decrease) in cash
and cash equivalents 12,313,876 (5,782,481)
Cash and cash equivalents at
beginning of period 15,704,573 16,801,288
Cash and cash equivalents at end
of period $ 28,018,449 $ 11,018,807
See Accompanying Notes.
5
<PAGE>
FIRST COMMONWEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
First Commonwealth Corporation ("FCC") and its consolidated subsidiaries
(the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission. Although the Company believes the disclosures are
adequate to make the information presented not be misleading, it is
suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto presented in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31,
1997.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary
for a fair presentation of the results of operations for the periods
presented. Operating results for interim periods are not necessarily
indicative of operating results to be expected for the year or of the
Company's future financial condition.
At September 30, 1998, the parent, significant subsidiaries and affiliates
of First Commonwealth Corporation were as depicted on the following
organizational chart.
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1998
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
6
<PAGE>
2. INVESTMENTS
As of September 30, 1998, fixed maturities and fixed maturities held for
sale represented 83% of total invested assets. As prescribed by the
various state insurance department statutes and regulations the insurance
companies' investment portfolio is required to be invested primarily in
investment grade securities to provide ample protection for policyholders.
The Company does not invest in so-called "junk bonds" or derivative
investments. The liabilities of the insurance companies are predominantly
long-term in nature and therefore, the companies invest primarily in long-
term fixed maturity investments. The Company has analyzed its fixed
maturity portfolio and reclassified those securities expected to be sold
prior to maturity as investments held for sale. The investments held for
sale are carried at market value. Management has the intent and ability to
hold its fixed maturity portfolio to maturity and as such carries these
securities at amortized cost. As of September 30, 1998, the carrying value
of fixed maturity securities in default as to principal or interest was
immaterial in the context of consolidated assets or shareholder's equity.
3. NOTES PAYABLE
At September 30, 1998, the Company had $17,983,351 in long term debt
outstanding. The debt is comprised of the following components:
<TABLE>
9/30/98
<S> <C>
Senior debt $ 6,900,000
Subordinated 10 yr. 4,648,524
notes
Subordinated 20 yr. 4,034,827
notes
Other notes payable 2,400,000
$ 17,983,351
</TABLE>
A. SENIOR DEBT
The senior debt is through 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 First of America Bank from time to time as its "base lending
rate." The base rate at September 30, 1998 was 8.5%. Interest is paid
quarterly. Principal payments of $1,000,000 are due in May of each year,
with a final payment due May 8, 2005. On November 8, 1998, the Company
prepaid one-half or $500,000 of the May 1999 principal payment. The base
rate dropped one-half a percentage point during October. The base rate at
October 31, 1998 was 8.0%.
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.
B. SUBORDINATED DEBT
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 provide for
principal payments equal to 1/20th of the principal balance due with each
interest installment beginning December 16, 1997, with a final payment due
June 16, 2002. The 20-year notes bear interest at the rate of 8.5% per
annum, interest payable semi-annually, with a lump sum principal payment
due June 16, 2012. The Company refinanced a total of $504,962 of
subordinated 10-year notes to subordinated 20-year notes bearing interest
at the rate of 8.75% per annum. The terms, other than interest rate, of
the refinanced notes are the same as the original subordinated 20 year
notes.
7
<PAGE>
C. OTHER NOTES PAYABLE
FCC has outstanding promissory notes payable to United Income, Inc. ("UII")
and United Trust, Inc. ("UTI") of $700,000 and $300,000, respectively.
These notes bear interest at the rate of 1% above the variable per annum
rate of interest most recently published by the Wall Street Journal as the
prime rate. Interest is payable quarterly with principal due at maturity
on May 8, 2006. In February 1996, FCC borrowed an additional $150,000 from
UII and $250,000 from UTI to provide additional cash for liquidity. The
note bears interest at the rate of 1% over prime as published in the Wall
Street Journal, with interest payments due quarterly and principal due upon
maturity of the note on June 1, 1999.
In November 1997 FCC borrowed $1,000,000 from UTI to facilitate the
prepayment of the May 1998 principal payment due on the senior debt. . The
note bears interest at the rate of 1% over prime as published in the Wall
Street Journal, with interest payments due quarterly and principal due upon
maturity of the note on November 8, 2006.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
<TABLE>
Year Amount
<S> <C>
1998 $ 258,251
1999 1,916,504
2000 1,516,504
2001 1,516,504
2002 3,840,758
</TABLE>
On November 8, 1998, the Company prepaid $500,000 of the 1999 principal
payment due on the senior debt.
4. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. Some of the lawsuits have resulted in the award
of substantial judgments against the insurer, including material amounts of
punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed insurance
companies. Although the Company cannot predict the amount of any future
assessments, most insurance guaranty fund laws currently provide that an
assessment may be excused or deferred if it would threaten an insurer's
financial strength. Those mandatory assessments may be partially recovered
through reduction in future premium taxes in some states. The Company does
not believe such assessments will be materially different from amounts
already provided for in the financial statements.
The Company and its subsidiaries are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
liabilities. Management is of the opinion that the settlement of those
actions will not have a material adverse effect on the Company's financial
position or results of operations.
5. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $1,004,084 and $1,022,740 in interest
expense through the third quarter of 1998 and 1997, respectively. The
Company paid $10,555 and $60,044 in federal income tax through the third
quarter of 1998 and 1997, respectively.
During the second quarter of 1998, the Company foreclosed on three mortgage
loans, transferring a total value of $70,000 to real estate acquired in
satisfaction of debt.
8
<PAGE>
6. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations as presented on the income statement.
<TABLE>
For the YTD period ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 215,152 54,554 $ 3.94
EFFECT OF DILUTIVE
SECURITIES
None 0 0
DILUTED EPS
Income available to common
shareholders and assumed
conversions $ 215,152 54,554 $ 3.94
</TABLE>
<TABLE>
For the third quarter ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to common $ 653,733 54,542 $ 11.99
shareholders
EFFECT OF DILUTIVE
SECURITIES
None 0 0
DILUTED EPS
Income available to common
shareholders and assumed
conversions $ 653,733 54,542 $ 11.99
</TABLE>
<TABLE>
For the YTD period ended September 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $(1,157,924) 57,171 $ (20.25)
shareholders
EFFECT OF DILUTIVE
SECURITIES
None 0 0
DILUTED EPS
Income available to common
shareholders and assumed
conversions $(1,157,924) 57,171 $ (20.25)
</TABLE>
9
<PAGE>
<TABLE>
For the third quarter ended September 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ (762,374) 54,560 $ (13.97)
EFFECT OF DILUTIVE
SECURITIES
None 0 0
DILUTED EPS
Income available to common
shareholders and assumed
conversions $ (762,374) 54,560 $ (13.97)
</TABLE>
For the periods shown above there were no convertible securities or options
in FCC.
7. PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
8. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds which are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter of 1998. There can be no assurance that the transaction
will be completed. The pending change in control of UTI is not contingent
upon the merger of UTI and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. The Company reports
financial results on a consolidated basis. The consolidated financial
statements include the accounts of FCC and its subsidiaries at September
30, 1998.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from any such statement due to the following important
factors, among other risks and uncertainties inherent in the company's
business:
1. Prevailing interest rate levels, which may affect the ability of the
company to sell its products, the market value of the company's
investments and the lapse ratio of the company's policies,
notwithstanding product design features intended to enhance
persistency of the company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the company's products.
4. Other factors affecting the performance of the company, including, but
not limited to, market conduct claims, insurance industry
insolvencies, stock market performance, and investment performance.
RESULTS OF OPERATIONS
(A) REVENUES
Premiums and policy fee revenues, net of reinsurance premiums and policy
fees, decreased 8% and 6% when comparing the nine and three months ended
September 30, 1998 to the same periods in 1997, respectively. The Company
currently writes little new traditional business, consequently, traditional
premiums will decrease as the amount of traditional business in-force
decreases. Collected premiums on universal life and interest sensitive
products is not reflected in premiums and policy revenues because Generally
Accepted Accounting Principles ("GAAP") requires that premiums collected on
these types of products be treated as deposit liabilities rather than
revenue. Unless the Company acquires a block of in-force business or
marketing changes its focus to traditional business, premium revenue will
continue to decline.
Another cause for the decrease in premium revenues is related to the
potential change in control of UTI over the last two years to two different
parties. During September of 1996, it was announced that control of UTI
would pass to an unrelated party, but the change in control did not
materialize. At this writing, a contract is pending with First Southern
Funding "FSF" (FSF is an affiliate of First Southern Bancorp, Inc., a bank
holding company) for the change in control of UTI. Please refer to the
Notes to the Consolidated Financial Statements for additional information.
The possible changes and resulting uncertainties have hurt the insurance
companies' ability to recruit and maintain sales agents. However,
management believes the affiliation with FSF will facilitate long-term
growth opportunities. The expected long-term benefits to UTI are an
increase in capital, which will enable the Company to pursue further growth
through acquisitions. Nationally there is a trend toward consolidation of
the financial service industry with proposed legislation to remove barriers
between banks and insurance companies.
11
<PAGE>
Net investment income increased 3% when comparing the three months
ended September 30, 1998 to the same period one year-ago. The increase in
the current quarter is due to several factors. The improvement in cash
flow from operations compared to the previous year. The Company changed
banks during 1997, which provided an improvement in yield on cash balances.
Another factor that contributed to the increase is the investment of funds
in mortgage loans. A higher percentage of investments acquired have been
directed to mortgage loans compared to previous periods. These loans
provide an investment yield, which are approximately 3% above the yield
that can be obtained from quality fixed maturities currently available.
Net investment income decreased slightly when comparing the nine months
ended September 30, 1998 to the same period one year ago. The decrease in
net investment income is due to the decrease in invested assets. The
decrease in invested assets and the increase in cash and cash equivalents
is a short-term fluctuation as management positions the Company for the
pending change in control of UTI. The effects of lost investment revenue
are partially offset by the factors discussed in the above quarterly
comparison of investment income.
The Company's investments are generally managed to match related insurance
and policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates is
1% on the "Century 2000" universal life insurance product, which currently
is the Company's primary sales product. The Company monitors investment
yields, and when necessary adjusts credited interest rates on its insurance
products to preserve targeted interest spreads. It is expected that
monitoring of the interest spreads by management will provide the necessary
margin to adequately provide for associated costs on the insurance policies
the Company currently has in force and will write in the future. At the
September 1998 board of directors meeting it was deemed necessary to reduce
interest crediting rates one half of a percentage point on certain
products. This decision was prompted by the overall decline in market
interest rates. The change in credited interest rates affects
approximately $60,000,000 of policy liabilities. The expected savings to
the Company will be approximately $300,000 per year. The change in
credited interest rates is not immediate. The change is effective on the
anniversary of the policy.
The Company had net realized investment losses of $831,893 and $136,196 for
the nine months ended September 30, 1998 and 1997, respectively. The
Company had net realized investment losses of $426,662 and $108,832 for the
three months end September 30, 1998 and 1997, respectively. During third
quarter of 1998 the Company entered into agreements to sell two non-income-
producing properties. The Company recorded a loss of $310,000 based on
these contracts. The Company realized a loss of $88,000 on the investment
in John Alden Financial Corporation common stock. Under the terms of an
acquisition agreement between Fortis, Inc. and John Alden all outstanding
common shares of John Alden were acquired. The foreclosure of three
mortgages during second quarter of 1998 resulted in realized losses of
$301,000. The foreclosed properties were subsequently sold for book value.
(B) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 8% and 9%
for the nine and three months ended September 30, 1998 as compared to the
same periods one year-ago, respectively. The decrease in life benefits net
of reinsurance is due to the decrease in premium revenues that resulted in
lower benefit reserve increases. In addition, policyholder benefits
decreased due to a decrease in death benefit claims of $1,059,000 for the
nine months ended September 30, 1998 compared to the same period one year-
ago. Policyholder benefits increased due to an increase in death benefit
claims of $270,000 for the three months ended September 30, 1998 compared
to the same period one year-ago. There is no single event that caused
death benefits to increase or decrease. Death claims vary from period to
period and therefore, fluctuations in death benefits are to be expected and
are not considered unusual by management.
Operating expenses decreased 15% and 16% for the nine and three months
ended September 30, 1998 as compared to the same periods one year-ago,
respectively. The decrease in operating expenses is due to the decrease in
salaries. The decrease in salaries is due to a 10% reduction in staff
compared to the previous year, including the retirement of an executive
officer.
Interest expense decreased 2% and 1% for the nine and three months ended
September 30, 1998 as compared to the same periods one year-ago,
respectively. Since December 31, 1997, notes payable decreased
approximately $258,000.
12
<PAGE>
In future periods, interest expense is expected to decrease due to
scheduled principal reductions of notes payable. On November 8, 1998, the
Company prepaid $500,000 of the 1999 principal payment due on the senior
debt. In October 1998, the base interest rate of variable rate debt
decreased one-half of one percentage point. This decrease affects
approximately $9,300,000 of the outstanding notes payable as of September
30, 1998. The base rate is defined as the floating daily, variable rate of
interest determined and announced by First of America Bank. Please refer
to Note 3 "Notes Payable" in the Notes to the Consolidated Financial
Statements for more information.
(C) NET INCOME
The improvement in net income for the current periods compared to the
previous year is directly related to the decrease in life benefits and
operating expenses.
FINANCIAL CONDITION
The financial condition of the Company has changed very little since
December 31,1997. Total shareholder's equity decreased 1% as of September
30, 1998 compared to December 31, 1997.
Investments represent approximately 64% and 67% of total assets at
September 30, 1998 and December 31, 1997, respectively. Accordingly,
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 funds that may be used for any one type of investment. In light
of these statutes and regulations, and the Company's business and
investment strategy, the Company generally seeks to invest in United States
government and government agency securities and corporate securities rated
investment grade by established nationally recognized rating organizations.
The liabilities are predominantly long-term in nature and therefore, the
Company invests in long-term fixed maturity investments that are reported
in the financial statements at their amortized cost. The Company has the
ability and intent to hold these investments to maturity; consequently, the
Company does not expect to realize any significant loss from these
investments. The Company does not own any derivative investments or "junk
bonds". As of September 30, 1998, the carrying value of fixed maturity
securities in default as to principal or interest was immaterial in the
context of consolidated assets or shareholders' equity. The Company has
identified securities it may sell and classified them as "investments held
for sale". Investments held for sale are carried at market, with changes
in market value charged directly to shareholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
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% at September 30, 1998, and 5% at
December 31, 1997. Fixed maturities as a percentage of total invested
assets were 82% at September 30, 1998 and December 31, 1997.
Future policy benefits are primarily long-term in nature and therefore, the
Company's investments are predominantly in long-term fixed maturity
investments such as bonds and mortgage loans which provide sufficient
return to cover these obligations. The Company has the ability and intent
to hold these investments to maturity; consequently, the Company's
investment in long-term fixed maturities are reported in the financial
statements at their amortized cost.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to
cover the Company's unamortized deferred policy acquisition costs with
respect to the policy being surrendered.
Cash provided by (used in) operating activities was $1,280,426 and
$(938,128) for the nine months ended September 30, 1998 and 1997,
respectively. The net cash provided by operating activities plus net
policyholder contract deposits after the payment of policyholder
withdrawals equaled $3,456,967 and $1,850,934 for the nine months ended
September 30, 1998 and 1997, respectively. Management utilizes this
measurement of cash flows as an indicator of the performance of the
Company's insurance operations, since reporting regulations require cash
inflows and outflows from universal life insurance products to be shown as
financing activities when reporting on cash flows.
13
<PAGE>
Cash provided by (used in) investing activities was $8,856,909 and
($6,339,313), for the nine months ended September 30, 1998 and 1997,
respectively. The most significant aspect of cash provided by (used in)
investing activities are the fixed maturity transactions. The increase in
fixed maturities matured is due to the timing of the investment strategy,
which started six years ago. The strategy was investing funds into fixed
maturity investments with three to seven year maturities. Over the past
several years the difference between a seven year maturity investment yield
compared to a longer period investment yield was inconsequential. The
Company has not directed its investable funds to so-called "junk bonds" or
derivative investments.
Net cash provided by financing activities was $2,176,541 and $1,494,960 for
the nine months ended September 30, 1998 and 1997, respectively.
Policyholder contract deposits decreased 15% in 1998 compared to 1997.
Policyholder contract withdrawals has decreased 13% in 1998 compared to
1997. 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 September 30, 1998, the Company had a total of $17,983,351 in long-term
debt outstanding. Long-term debt principal reductions are approximately
$1.5 million per year over the next several years. The senior debt is
through First of America Bank - NA and is subject to a credit agreement.
The debt bears interest to 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 First of America Bank
from time to time as its "base lending rate". The base rate changed to 8.5%
on March 1, 1997 and has remained unchanged through September 30, 1998.
Interest is paid quarterly and principal payments of $1,000,000 are due in
May of each year, with a final payment due May 8, 2005. On November 8,
1998, the Company prepaid $500,000 of the May 8,1999, principal payment.
The base interest rate was reduced one-half of one percent during October
1998. Based on the interest rate reduction on approximately $9,300,000 of
the outstanding notes payable as of September 30, 1998 it will save $46,500
of interest expense over a one-year period.
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, with a final payment due June 16, 2002. The aforementioned $840,000
note provides for a lump sum principal payment due June 16, 2002.
Principal reductions of $516,500 per year are required on the
aforementioned notes.
As of September 30, 1998 the Company has a total $31,713,316 of cash and
cash equivalents, short-term investments and investments held for sale in
comparison to $17,983,351 of notes payable. FCC services this debt through
existing cash balances and management fees received from the insurance
subsidiaries. FCC is further able to service this debt through dividends
it may receive from its wholly owned life insurance subsidiary Universal
Guaranty Life Insurance Company (UG).
Since FCC is a holding company, funds required to meet its debt service
requirements and other expenses are primarily provided by its subsidiaries.
On a parent only basis, FCC's cash flow is dependent on revenues from
management and cost sharing arrangements with its subsidiaries and its
earnings received on invested assets and cash balances. At September 30,
1998, substantially all of the consolidated shareholders equity represents
net assets of its subsidiaries. Cash requirements of FCC primarily relate
to servicing its long-term debt. 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, insurance company dividend payments
are regulated by the state insurance department where the company is
domiciled.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,000.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
14
<PAGE>
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 material pending or
threatened regulatory action with respect to the Company or any of its
subsidiaries. The Company does not believe that any insurance guaranty
fund assessments will be materially different from amounts already provided
for in the financial statements.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results. This could have a significant effect on the Company's
business/financial systems as well as products and services, if not
corrected.
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
is being performed using dates from December of 1999 to January of 2001, to
insure all year 2000 processing errors have been corrected. Testing was
completed at the end of the first quarter of 1998. Periodic regression
testing will be performed to monitor continuing compliance. By addressing
year 2000 compliance in a timely manner, compliance will be achieved using
existing staff and without significant impact on the Company operationally
or financially.
PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds which are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter of 1998. There can be no assurance that the transaction
will be completed. The pending change in control of UTI is not contingent
upon the merger of UTI and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds which are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter of 1998. There can be no assurance that the transaction
will be completed. The pending change in control of UTI is not contingent
upon the merger of UTI and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule (filed only electronically with the SEC)
(b) Reports on Form 8-K
No reports of Form 8-K were filed during the quarter.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMONWEALTH CORPORATION
(Registrant)
Date: November 12, 1998 By /s/ James E. Melville
James E. Melville
President, Chief Operating Officer
and Director
Date: November 12, 1998 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President and Chief
Financial Officer
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<DEBT-HELD-FOR-SALE> 1,580,941 1,834,388
<DEBT-CARRYING-VALUE> 172,995,522 185,352,214
<DEBT-MARKET-VALUE> 180,997,557 188,585,275
<EQUITIES> 1,986,074 2,783,623
<MORTGAGE> 9,724,950 10,010,243
<REAL-ESTATE> 10,929,289 14,232,563
<TOTAL-INVEST> 211,383,103 228,824,616
<CASH> 28,018,449 11,018,807
<RECOVER-REINSURE> 40,694,530 41,614,177
<DEFERRED-ACQUISITION> 33,221,692 36,294,779
<TOTAL-ASSETS> 331,136,398 333,534,691
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 235,854,776 254,174,738
<POLICY-HOLDER-FUNDS> 19,483,641 19,240,475
<NOTES-PAYABLE> 17,983,351 18,241,602
0 0
0 0
<COMMON> 54,540 54,560
<OTHER-SE> 32,833,589 34,153,103
<TOTAL-LIABILITY-AND-EQUITY> 331,136,398 333,534,691
20,586,429 22,374,562
<INVESTMENT-INCOME> 11,330,661 11,388,249
<INVESTMENT-GAINS> (831,893) (136,196)
<OTHER-INCOME> 59,572 63,358
<BENEFITS> 20,234,962 22,045,251
<UNDERWRITING-AMORTIZATION> 3,921,406 4,134,485
<UNDERWRITING-OTHER> 7,787,429 8,946,972
<INCOME-PRETAX> (799,028) (1,436,735)
<INCOME-TAX> 1,075,315 300,973
<INCOME-CONTINUING> 215,152 (1,157,924)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 215,152 (1,157,924)
<EPS-PRIMARY> 3.94 (20.25)
<EPS-DILUTED> 3.94 (20.25)
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
