SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1997 Commission File No. 0-16867
UNITED TRUST, INC.
(Exact Name of Registrant as specified in its Charter)
5250 South Sixth Street
P.O. Box 5147
Springfield, IL 62705
(Address of principal executive offices, including zip code)
Illinois 37-1172848
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
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 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
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Shares outstanding at April 30, 1997:
18,700,935
Common stock, no par value per share<PAGE>
<PAGE>
UNITED TRUST, INC.
(the "Company")
INDEX
Part I: Financial Information
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 5
Notes to Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II: Other Information
Item 5. Other information 15
Item 6. Exhibits 15
Signatures 16
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
March 31, December 31,
ASSETS 1997 1996
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $181,564,148 and $181,815,225) $ 182,749,989 $ 179,926,785
Investments held for sale:
Fixed maturities,at market
(cost $1,984,661 and $1,984,661) 1,950,874 1,961,166
Equity securities, at market
(cost $2,086,159 and $2,086,159) 1,786,301 1,794,405
Mortgage loans on real estate
at amortized cost 10,483,654 11,022,792
Investment real estate, at cost,
net of accumulated depreciation 10,563,907 10,543,490
Real estate acquired in satisfaction
of debt, at cost 3,846,946 3,846,946
Policy loans 14,214,256 14,438,120
Short term investments 431,218 430,983
226,027,145 223,964,687
Cash and cash equivalents 15,801,573 17,326,235
Investment in affiliates 4,841,711 4,826,584
Accrued investment income 4,106,755 3,461,799
Reinsurance receivables:
Future policy benefits 38,612,664 38,745,013
Policy claims and other benefits 3,614,387 3,856,124
Other accounts and notes receivable 861,106 894,321
Cost of insurance acquired 43,452,078 43,917,280
Deferred policy acquisition costs 11,084,697 11,325,356
Costs in excess of net assets purchased,
less accumulated amortization 5,458,058 5,496,808
Other assets 2,119,762 1,659,455
Total assets $ 355,979,936 $ 355,473,662
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 250,269,058 $ 248,879,317
Policy claims and benefits payable 2,377,785 3,193,806
Other policyholder funds 2,822,880 2,784,967
Dividend and endowment accumulations 14,284,423 13,913,676
Income taxes payable:
Current 5,228 70,663
Deferred 12,785,125 13,193,431
Notes payable 19,573,953 19,573,953
Indebtedness to (from) affiliates, net (20,053) 31,837
Other liabilities 6,014,869 5,975,483
Total liabilities 308,113,268 307,617,133
Minority interests in consolidated subsidiaries 29,812,882 29,842,672
Shareholders' equity:
Common stock - no par value, stated value
$.02 per share. Authorized 35,000,000
shares - 18,700,935 and 18,700,935 shares
issued after deducting treasury shares
of 423,840 and 423,840 374,019 374,019
Additional paid-in capital 18,301,974 18,301,974
Unrealized depreciation of investments
held for sale (93,155) (86,058)
Accumulated deficit (529,052) (576,078)
Total shareholders' equity 18,053,786 18,013,857
Total liabilities and
shareholders' equity $ 355,979,936 $ 355,473,662
</TABLE>
See accompanying notes.
3
<PAGE>
UNITED TRUST, INC.
AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Operations
March 31, March 31,
1997 1996
<S> <C> <C>
Revenues:
Premium income $ 8,168,038 $ 8,928,482
Reinsurance premium (1,096,128) (1,290,979)
Other considerations 904,358 885,499
Other considerations paid to reinsurers (49,882) (41,491)
Net investment income 3,844,899 3,973,349
Realized investment gains and (losses), net (6,136) (12,031)
Other income 200,422 427,311
11,965,571 12,870,140
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 6,293,565 5,110,320
Reinsurance benefits and claims (55,555) (239,965)
Annuity 352,503 446,893
Dividends to policyholders 1,127,502 1,211,512
Commissions and amortization of deferred
policy acquisition costs 1,110,410 1,161,850
Amortization of cost of insurance acquired 526,264 1,357,624
Operating expenses 2,589,176 3,447,329
Interest expense 414,948 446,192
12,358,813 12,941,755
Loss before income taxes, minority interest
and equity in loss of investees (393,242) (71,615)
Credit for income taxes 403,562 577,097
Minority interest in loss (income)
of consolidated subsidiaries 20,092 (271,143)
Equity in earnings of investees 16,614 70,398
Net income $ 47,026 $ 304,737
Net income per common share $ 0.00 $ 0.02
Weighted average common
shares outstanding 18,700,935 18,677,324
</TABLE>
See accompanying notes.
4
<PAGE>
UNITED TRUST, INC.
AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Cash Flows
March 31, March 31,
1997 1996
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 47,026 $ 304,737
Adjustments to reconcile net income 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 173,627 244,426
Realized investment (gains) losses, net 6,136 12,031
Policy acquisition costs deferred (234,000) (509,000)
Amortization of deferred acquisition costs 474,659 441,843
Amortization of cost of insurance acquired 526,264 1,357,624
Amortization of costs in excess of net
assets purchased 38,750 40,720
Depreciation 101,245 127,657
Minority interest (20,092) 271,143
Equity in earnings of investees (16,614) (70,398)
Change in accrued investment income (644,956) (579,218)
Change in reinsurance receivables 374,086 324,060
Change in policy liabilities and accruals (4,983) (524,288)
Charges for mortality and administration of
universal life and annuity products (2,632,738) (2,537,539)
Interest credited to account balances 1,840,372 1,724,414
Change in income taxes payable (473,741) (593,091)
Change in indebtedness (to) from
affiliates, net (51,890) (39,271)
Change in other assets and liabilites, net (36,077) 901,607
Net cash provided by operating activities (532,926) 897,457
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale matured 0 134,283
Fixed maturities sold 0 0
Fixed maturities matured 953,856 11,242,187
Equity securities 0 8,990
Mortgage loans 539,138 386,844
Real estate 159,705 1,123,088
Policy loans 954,692 1,049,195
Short term 0 0
Total proceeds from investments sold and matured 2,607,391 13,810,304
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (3,947,561) (11,337,342)
Equity securities 0 0
Mortgage loans 0 (50,724)
Real estate (252,742) (208,574)
Policy loans (1,178,553) (1,035,474)
Short term 0 0
Total cost of investments acquired (5,378,856) (12,632,114)
Net cash provided by (used in) investing activities (2,771,465) 1,178,190
Cash flows from financing activities:
Policyholder contract deposits 5,190,761 6,472,538
Policyholder contract withdrawals (3,411,032) (4,553,787)
Proceeds from issuance of note payable 0 150,000
Payments of principal on notes payable 0 (1,501,492)
Net cash provided by financing activities 1,779,729 567,259
Net increase (decrease) in cash and cash equivalents (1,524,662) 2,642,906
Cash and cash equivalents at beginning of period 17,326,235 12,528,025
Cash and cash equivalents at end of period $ 15,801,573 $ 15,170,931
</TABLE>
See accompanying notes
5
<PAGE>
UNITED TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
by United Trust, Inc. ("Trust") 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, 1996.
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 March 31, 1997, the parent, significant subsidiaries and affiliates
of United Trust, Inc. were as depicted on the following organizational
chart.
6
<PAGE>
ORGANIZATIONAL CHART
AS OF MARCH 31, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI
owns 53% of United Trust Group ("UTG") and 30% of United Income, Inc.
("UII"). UII owns 47% of UTG. UTG owns 72% of First Commonwealth
Corporation ("FCC") and 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").
7
<PAGE>
2. FIXED MATURITIES
As of March 31, 1997, fixed maturities and fixed maturities held for
sale represented 82% 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 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 maturities 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.
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 March 31, 1997, 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.
3. MORTGAGE LOANS AND REAL ESTATE
The Company holds approximately $10,484,000 in mortgage loans and
$14,411,000 in real estate holdings which represent 5% and 6% of total
invested assets of the Company, respectively. All mortgage loans held
by the Company are first position loans. The Company has $645,000 in
mortgage loans net of a $10,000 reserve allowance, which are in
default or in the process of foreclosure representing approximately 6%
of the total portfolio.
Letters are sent to each mortgagee when the loan becomes 30 days or
more delinquent. Loans 90 days or more delinquent are placed on a
non-performing status and classified as delinquent loans. Reserves
for loan losses on delinquent loans are established based on
management's analysis of the loan balances and what is believed to be
the realizable value of the property should foreclosure take place.
Loans are placed on a non-accrual status based on a quarterly case by
case analysis of the likelihood of repayment.
The following tables show the distribution of mortgage loans and real
estate by type.
MORTGAGE LOANS AMOUNT % OF TOTAL
FHA/VA $ 630,361 6%
Commercial $ 1,657,545 16%
Residential $ 8,195,748 78%
REAL ESTATE AMOUNT % OF TOTAL
Home Office $ 2,894,128 20%
Commercial $ 2,376,406 16%
Residential development $ 5,293,373 37%
Foreclosed real estate $ 3,846,946 27%
8
<PAGE>
4. NOTES PAYABLE
At March 31, 1997, the Company has $19,574,000 in notes payable.
Notes payable is comprised of the following components:
Senior debt $ 8,400,000
Subordinated 10 yr. notes 6,194,000
Subordinated 20 yr. notes 3,830,000
Other notes payable 1,150,000
$ 19,574,000
The senior debt is through First of America Bank - Illinois NA and is
subject to a credit agreement. The refinanced 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 issuance of the
loan was 8.25%, and has increased to 8.5% on March 25, 1997. Interest
is paid quarterly. Principal payments of $1,000,000 are due in May of
each year beginning in 1997, with a final payment due May 8, 2005.
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 and does not foresee any problem in maintaining
compliance in the future.
United Income, Inc. and First Fidelity Mortgage Company through an
assignment from United Trust, Inc. hold promissory notes receivable of
$700,000 and $300,000 respectively due from FCC. 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 $150,000 from an affiliate 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.
The subordinated debt was incurred June 16, 1992 as a part of an
acquisition. 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 June 16, 1997, with a final payment due June 16,
2002. The $840,000 note provides for a lump sum principal payment due
June 16, 2002. The 20 year notes bear interest at the rate of 8 1/2%
per annum, payable semi-annually beginning December 16, 1992, with a
lump sum principal payment due June 16, 2012.
9
<PAGE>
Scheduled principal reductions on the Company's debt for the next five
years are as follows:
YEAR AMOUNT
1997 $ 1,037,000
1998 1,537,000
1999 1,687,000
2000 1,537,000
2001 1,537,000
5. 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 a 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 and its legal counsel are 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.
6. TERMINATION OF AGREEMENT REGARDING PENDING CHANGE IN CONTROL OF
UNITED TRUST, INC.
On April 14, 1997, United Trust, Inc. and United Income, Inc. formally
terminated their stock purchase agreement contract with LaSalle Group,
Inc. ("LaSalle"), whereby LaSalle was to acquire certain authorized
but unissued shares of UTI and UII and additional outstanding shares
in privately negotiated transactions so that LaSalle would own not
less than 51% of the outstanding common stock of UTI and indirectly
control 51% of UII.
LaSalle had not performed its obligations under the terms of the
contract, and the Company felt it should be free to negotiate with
other interested parties in becoming an equity partner.
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
financial condition, changes in financial condition and results of
operations which reflect the performance of the Company. The
information in the consolidated financial statements and related notes
should be read in conjunction with this section.
LIQUIDITY AND CAPITAL RESOURCES
The Company and its consolidated subsidiaries have three principal
needs for cash - the insurance companies contractual obligations to
policyholders, the payment of operating expenses and servicing of its
long-term debt. Cash and cash equivalents as a percentage of total
assets were 4.5% and 5.0% as of March 31, 1997, and December 31, 1996,
respectively. Fixed maturities as a percentage of total invested
assets were 81% and 80% as of March 31, 1997 and December 31, 1996,
respectively.
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 a sufficient return to cover these obligations. Most of the
insurance company assets, other than policy loans, are invested in
fixed maturities and other investments, substantially all of which are
readily marketable. Although there is no present need or intent to
dispose of such investments, the life companies could liquidate
portions of their investments if such a need arose. 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.
Consolidated operating activities of the Company produced cash flows
of ($695,000) and $702,000 in first quarter of 1997 and 1996,
respectively. The net cash (used in) or provided by operating
activities plus net policyholder contract deposits after the payment
of policyholder withdrawals, equalled $1,085,000 in first quarter of
1997 and $2,621,000 in first quarter of 1996. 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.
Cash provided by (used in) investing activities was ($2,771,000) and
$1,178,000 for first quarter of 1997 and 1996, respectively. The most
significant aspect of cash provided by (used in) investing activities
is the fixed maturity transactions. Fixed maturities account for 73%
and 90% of the total cost of investments acquired in first quarter of
1997 and 1996, respectively. The Company has not directed its
investable funds to so-called "junk bonds" or derivative investments.
Net cash provided by financing activities was $1,780,000 and $817,000
for first quarter of 1997 and 1996, respectively. Policyholder
contract deposits decreased 20% in first quarter of 1997 compared to
first quarter of 1996. The decrease is due to the decline in first
year premium production. Policyholder contract withdrawals has
decreased 25% in first quarter of 1997 compared to first quarter of
1996.
11
<PAGE>
On May 8, 1996, FCC refinanced its senior debt of $8,900,000.
The refinancing was completed through First of America Bank - Illinois
NA and is subject to a credit agreement. The refinanced 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
issuance of the loan was 8.25%, and has increased to 8.50% on March
25, 1997. Interest is paid quarterly and principal payments of
$1,000,000 are due in May of each year beginning in 1997, with a final
payment due May 8, 2005. The Company satisfied its $1,000,000
principal obligation for 1997 by prepaying $500,000 on November 8,
1996 and a payment of $500,000 on May 8, 1997. The next scheduled
principal payment is $1,000,000 due on May 8, 1998.
On a parent only basis, UTI's cash flow is dependent on revenues from
a management agreement with UII and its earnings received on invested
assets and cash balances. At March 31, 1997, substantially all of the
consolidated shareholders equity represents net assets of its
subsidiaries. Cash requirements of UTI primarily relate to the
payment of expenses related to maintaining the Company as a
corporation in good standing with the various regulatory bodies which
govern corporations in the jurisdictions where the Company does
business. 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. UG's dividend limitations are described below.
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, 1996, UG had a statutory
gain from operations of $8,006,000. At December 31, 1996, UG's
statutory capital and surplus amounted to $10,227,000. Extraordinary
dividends (amounts in excess of ordinary dividend limitations) require
prior approval of the insurance commissioner and are not restricted to
a specific calculation.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
RESULTS OF OPERATIONS
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996:
(a) REVENUES
Premium income, net of reinsurance premium, decreased 7% when
comparing first quarter 1997 to the first quarter of 1996. The
decrease is primarily attributed to the reduction in new business
production. The Company's primary product is the "Century 2000"
universal life insurance product. Universal life and interest
sensitive insurance products contribute only the risk charge to
premium income, however traditional insurance products contribute all
monies received to premium income. Since the Company does not
actively market traditional life insurance products, it is expected
that premium income will continue to decrease in future periods as a
result of expected lapses of business in force.
Other considerations, net of reinsurance, increased approximately 1%
compared to one year ago. Other considerations consist of
administrative charges on universal life and interest sensitive life
insurance products. The insurance in force relating to these types of
products continues to increase as marketing efforts are focused on
universal life insurance products.
Net investment income decreased 3% when comparing the first quarter of
1997 to 1996. The decrease is the result of a smaller invested asset
base from one year ago. During the fourth quarter 1996, the Company
transferred approximately $22,000,000 in assets as part of a
coinsurance agreement with First International Life Insurance Company
("FILIC"). The overall investment yields for first quarter 1997 and
1996, are 7.28% and 7.12%, respectively. The improvement in
investment yield is primarily attributed to the fixed maturity
portfolio. The Company has invested financing cash flows generated by
cash received through sales of universal life insurance products.
12
<PAGE>
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, the Company's primary product. The Company
monitors investment yields, and when necessary adjusts credited
interest rates on its insurance products to preserve targeted spreads.
It is expected that the monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on insurance policies the Company has in force and
will write in the future.
(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, increased 28%
in the first quarter of 1997 compared to 1996. The increase in life
benefits is attributed to an increase in mortality. There is no
single event that caused mortality to increase. Policy claims vary
from year to year and therefore, fluctuations in mortality are to be
expected and are not considered unusual by management.
Commissions and amortization of deferred policy acquisition costs
decreased 4% in first quarter 1997 compared to first quarter 1996.
The decrease was due to the decline in first year premium production.
Amortization of cost of insurance acquired decreased 61% in first
quarter 1997 compared to 1996. The decrease is attributed to the
coinsurance agreement with First International Life Insurance Company
("FILIC") as of September 30, 1996. Under the terms of the agreement,
UG ceded to FILIC substantially all of its paid-up life insurance
policies. Paid-up life insurance generally refers to a non-premium
paying life insurance policy. Cost of insurance acquired is amortized
in relation to expected future profits, including direct charge-offs
for any excess of the unamortized asset over the projected future
profits. The Company did not have any charge-offs during the periods
covered by this report.
Operating expenses decreased 25% when comparing first quarter of 1997
to first quarter of 1996. The decrease in operating expenses is
attributable to the settlement of certain litigation in the fourth
quarter of 1996. The Company incurred elevated legal fees in the
previous year due to the litigation. Operating expenses were further
reduced from a restructuring of the home office personnel completed in
late 1996.
Interest expense decreased 8% in first quarter of 1997 compared to
1996. On May 8, 1996, FCC refinanced its senior debt of $8,900,000.
The refinanced debt bears interest to a rate equal to the "base rate"
plus nine-sixteenths of one percent. Prior to refinancing, the
interest rate was equal to the base rate plus one percent. The
decrease in interest rate and principal reductions made during the
last year, provided the decrease in interest expense for the first
quarter of 1997.
(c) NET INCOME (LOSS)
The Company had net income of $47,000 for first quarter 1997 compared
to $305,000 for the first quarter of 1996. The decline in net income
is primarily due to the increase in mortality and the decrease in
premium income.
FINANCIAL CONDITION
The financial condition of the Company changed very little since
December 31, 1996. The most significant changes to occur is a
decrease in cash and cash equivalents and the corresponding increase
in fixed maturities. Future policy benefits increased as expected due
to the aging in force business.
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.
13
<PAGE>
The liabilities are predominantly long term in nature and therefore,
the Company invests in long term fixed maturity investments which 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 March 31, 1997, 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.
FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection
with the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which
have financial resources or ratings greater than those of the Company.
The insurance industry is a mature industry. In recent years, the
industry has experienced virtually no growth in life insurance sales,
though the aging population has increased the demand for retirement
savings products. Management believes that the Company's ability to
compete is dependent upon, among other things, its ability to attract
and retain agents to market its insurance products and its ability to
develop competitive and profitable products.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
REVERSE STOCK SPLIT
On March 25, 1997, the Board of Directors voted to have a reverse
stock split of UTI's common stock whereby one new share of common
stock will be issued for each 10 shares that are currently held by
each shareholder. Fractional shares will receive a cash payment on
the basis of $1.00 for each old share. The reverse split will be
effective to shareholders of record on May 12, 1997.
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 (after its reverse stock split of one share for
each ten shares) for each share held by UII shareholders (after its
reverse stock split of one share for every 14,2857 shares).
UTI stock currently trades on NASDAQ. The reverse stock split should
increase the price at which the Company's stock trades, enabling it to
meet new NASDAQ requirements regarding eligibility to remain listed.
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.
ITEM 6. EXHIBITS
The Company hereby incorporates by reference the exhibits as reflected
in the Index to Exhibits of the Company's Form 10-K for the year ended
December 31, 1996.
15
<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.
UNITED TRUST, INC.
(Registrant)
Date: May 13, 1997 By /s/ Thomas F. Morrow
Thomas F. Morrow, Chief
Operating Officer, President,
Treasurer and Director
Date: May 13, 1997 By /s/ James E. Melville
James E. Melville, Chief
Financial Officer and Senior
Executive Vice President
16
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
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<OTHER-INCOME> 200,422 427,311
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<INCOME-PRETAX> (393,242) (71,615)
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