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 June 30, 1998 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (217) 241-6300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock
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 [ ]
At July 31, 1998, the Registrant had outstanding 1,627,200 shares of Common
Stock, stated value $.02 per share.
<PAGE>
UNITED TRUST, INC.
(The "Company")
TABLE OF CONTENTS
Part 1: Financial Information 3
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations for the six and
three months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II - Other Information 18
Item 5. Other information 18
Item 6. Exhibits 18
Signatures 19
2
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<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
ASSETS 1998 1997
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $182,281,827
and $184,782,568) $ 178,137,161$ 180,970,333
Investments held for sale:
Fixed maturities, at market
(cost $1,581,670 and $1,672,298) 1,580,941 1,668,630
Equity securities, at market
(cost $3,184,357 and $3,184,357) 2,405,955 3,001,744
Mortgage loans on real estate
at amortized cost 9,670,902 9,469,444
Investment real estate, at cost,
net of accumulated depreciation 9,358,892 9,760,732
Real estate acquired in
satisfaction of debt 1,794,544 1,724,544
Policy loans 14,314,416 14,207,189
Short-term investments 327,326 1,798,878
Other invested assets 66,212 0
217,656,349 222,601,494
Cash and cash equivalents 22,831,099 16,105,933
Investment in affiliates 5,682,619 5,636,674
Accrued investment income 3,596,797 3,686,562
Reinsurance receivables:
Future policy benefits 37,353,943 37,814,106
Policy claims and other benefits 3,663,810 3,529,078
Other accounts and notes receivable 891,777 845,066
Cost of insurance acquired 40,302,444 41,522,888
Deferred policy acquisition costs 10,063,134 10,600,720
Costs in excess of net assets purchased,
net of accumulated amortization 2,695,602 2,777,089
Property and equipment,
net of accumulated depreciation 3,322,433 3,412,956
Other assets 738,915 767,258
Total assets $ 348,798,922$ 349,299,824
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 249,353,796$ 248,805,695
Policy claims and benefits payable 1,422,766 2,080,907
Other policyholder funds 2,374,883 2,445,469
Dividend and endowment accumulations 15,299,590 14,905,816
Income taxes payable:
Current 25,520 15,730
Deferred 14,029,415 14,174,260
Notes payable 20,614,220 21,460,223
Indebtedness to affiliates, net 34,900 18,475
Other liabilities 4,082,260 3,790,051
Total liabilities 307,237,350 307,696,626
Minority interests in
consolidated subsidiaries 26,263,354 26,246,580
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 3,500,000 shares - 1,627,200 and $1,634,779
shares issued after deducting treasury shares of
285,039 and 277,460 32,545 32,696
Additional paid-in capital 16,420,441 16,488,375
Unrealized depreciation of
investments held for sale (362,587) (29,127)
Accumulated deficit (792,181) (1,135,326)
Total shareholders' equity 15,298,218 15,356,618
Total liabilities and
shareholders' equity $ 348,798,922$ 349,299,824
</TABLE>
See accompanying notes
3
<PAGE>
<TABLE>
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Premiums and
policy fees $ 8,182,157 $ 8,886,198 $ 16,650,503$ 17,958,594
Reinsurance premiums
and policy fees (1,071,078) (1,077,416) (2,307,943) (2,223,426)
Net investment income 3,786,410 3,825,457 7,513,412 7,670,356
Realized investment gains
and (losses), net (494,652) (22,443) (402,404) (28,579)
Other income 154,228 260,157 330,257 460,579
10,557,065 11,871,953 21,783,825 23,837,524
Benefits and other expenses:
Benefits, claims and
settlement expenses:
Life 5,521,205 5,955,358 11,544,315 12,626,544
Reinsurance
benefits and claims (507,559) (533,072) (1,097,433) (966,248)
Annuity 364,554 414,909 742,414 767,412
Dividends to
policyholders 909,260 1,024,504 1,925,204 2,152,006
Commissions and amortization
of deferred policy
acquisition costs 776,558 553,913 1,820,235 1,664,323
Amortization of cost
of insurance acquired 609,561 586,023 1,220,444 1,112,287
Operating expenses 2,237,899 2,777,409 4,475,739 5,366,585
Interest expense 482,195 409,686 969,808 824,634
10,393,673 11,188,730 21,600,726 23,547,543
Income before income taxes, minority
interest and equity in earnings
of investees 163,392 683,223 183,099 289,981
Credit (provision) for
income taxes 35,981 (530,769) 121,012 (127,207)
Minority interest in gain of
consolidated subsidiaries (62,213) (76,042) (95,261) (55,950)
Equity in earnings
of investees 91,544 25,400 134,295 42,014
Net income $ 228,704 $ 101,812 $ 343,145 $ 148,838
Basic earnings per share
from continuing operations
and net income $ 0.14 $ 0.05 $ 0.21 $ 0.08
Diluted earnings per share
from continuing operations
and net income $ 0.15 $ 0.05 $ 0.23 $ 0.08
</TABLE>
See accompanying notes
4
<PAGE>
<TABLE>
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
June 30, June 30,
1998 1997
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 343,145 $ 148,838
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 317,985 321,874
Realized investment (gains) losses, net 402,404 28,579
Policy acquisition costs deferred (112,000) (825,000)
Amortization of deferred
policy acquisition costs 649,586 729,318
Amortization of cost of
insurance acquired 1,220,444 1,112,287
Amortization of costs in excess of net
assets purchased 45,000 77,500
Depreciation 239,644 163,591
Minority interest 95,261 55,950
Equity in earnings of investees (134,295) (42,014)
Change in accrued investment income 89,765 (84,945)
Change in reinsurance receivables 325,431 881,208
Change in policy liabilities and accruals 453,692 (1,237,684)
Charges for mortality and administration of
universal life and annuity products (5,548,543) (4,736,072)
Interest credited to account balances 3,003,308 3,679,554
Change in income taxes payable (135,055) 56,004
Change in indebtedness (to)
from affiliates, net 16,425 (84,945)
Change in other assets
and liabilities, net 165,498 (922,844)
Net cash provided by (used in)
operating activities 1,437,695 (678,801)
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 83,928 140,000
Fixed maturities sold 0 0
Fixed maturities matured 19,429,686 3,492,302
Equity securities 0 42,801
Mortgage loans 469,613 834,769
Real estate 827,765 234,073
Policy loans 1,631,118 2,441,970
Short-term 1,473,531 110,000
Total proceeds from investments
sold and matured 23,915,641 7,295,915
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (16,991,445) (8,262,020)
Equity securities 0 (710,388)
Mortgage loans (1,082,415) 0
Real estate (480,567) (466,770)
Policy loans (1,738,345) (2,099,120)
Other invested assets (66,212) 0
Short-term 1,979 (102,509)
Total cost of investments acquired (20,357,005)(11,640,807)
Purchase of property
and equipment (78,364) (347,340)
Net cash provided by (used in)
investing activities 3,480,272 (4,692,232)
Cash flows from financing activities:
Policyholder contract deposits 8,025,990 9,997,553
Policyholder contract withdrawals (5,721,299) (7,568,374)
Purchase of treasury stock (26,527) 0
Proceeds from issuance
of notes payable 0 666,786
Payments of principal on
notes payable (470,965) (1,425,038)
Payment for fractional shares
from reverse stock split 0 (2,128)
Payment for fractional shares from
reverse stock split of subsidiary 0 (533,992)
Net cash provided by
financing activities 1,807,199 1,134,807
Net increase (decrease) in
cash and cash equivalents 6,725,166 (4,236,226)
Cash and cash equivalents
at beginning of period 16,105,933 17,326,235
Cash and cash equivalents
at end of period $ 22,831,099$ 13,090,009
</TABLE>
See accompanying notes
5
<PAGE>UNITED TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
United Trust Inc. ("UTI") and its consolidated subsidiaries ("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 June 30, 1998, the parent, significant subsidiaries and affiliates of
United Trust Inc. were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF JUNE 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 June 30, 1998, 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 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. 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 June 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.
3. NOTES PAYABLE
At June 30, 1998 and December 31, 1997, the Company has $20,614,220 and
$21,460,223 in long-term debt outstanding, respectively. The debt is
comprised of the following components:
<TABLE>
1998 1997
<S> <C> <C>
Senior debt $ 6,900,000 $ 6,900,000
Subordinated 10 yr. 5,488,523 5,746,774
notes
Subordinated 20 yr. 3,252,071 3,902,582
notes
Convertible notes 2,560,000 2,560,000
Other notes payable 2,413,626 2,350,867
$ 20,614,220 $ 21,460,223
</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 June 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, 1997, the Company
prepaid the May 1998 principal payment.
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, 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. 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
7
<PAGE>
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.
C. CONVERTIBLE NOTES
On July 31, 1997, United Trust Inc. issued convertible notes for cash in
the amount of $2,560,000 to seven individuals, all officers or employees of
United Trust Inc. The notes bear interest at a rate of 1% over prime, with
interest payments due quarterly and principal due upon maturity of July 31,
2004. The conversion price of the notes are graded from $12.50 per share
for the first three years, increasing to $15.00 per share for the next two
years and increasing to $20.00 per share for the last two years.
D. OTHER NOTES PAYABLE
United Income, Inc. holds two promissory notes receivable totaling $850,000
due from FCC. Each note bears interest at the rate of 1% over prime as
published in the Wall Street Journal, with interest payments due quarterly.
Principal of $150,000 is due upon the maturity date of June 1, 1999, with
the remaining principal payment of $700,000 becoming due upon the maturity
date of May 8, 2006.
As partial proceeds in the acquisition of common stock from certain
officers and directors in the third quarter of 1997, the Company issued
unsecured promissory notes. These notes bear interest at 1% over prime
with interest payments due quarterly. Principal comes due at varying times
with $150,000 maturing on January 31, 1999, $1,654,507 maturing on July 31,
2005 and one note of $70,392 requiring annual principal reductions of
$10,000 until maturity on September 23, 2004. The interest rates were
deemed favorable to UTI and as a result, the Company has discounted the
notes to reflect a 15% effective rate of interest for financial statement
purposes. The notes have a total face maturity value of $1,874,899 and a
discounted value at June 30, 1998 of $1,521,540.
On January 16, 1998, the UTI acquired 7,579 shares of its common stock from
the estate of Robert Webb, a former director, for $26,527 and a promissory
note valued at $41,819 due January 16, 2005. The note bears interest at a
rate of 1% over prime, with interest due quarterly and principal due on
maturity. The note has been discounted to reflect a 15% effective rate for
financial statement purposes.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1998 $ 258,251
1999 1,826,504
2000 1,526,504
2001 1,526,504
2002 4,690,758
4. CAPITAL STOCK TRANSACTIONS
A. STOCK OPTION PLAN
In 1985, the UTI initiated a nonqualified stock option plan for employees,
agents and directors of UTI under which options to purchase up to 44,000
shares of UTI's common stock are granted at a fixed price of $.20 per
share. Through June 30, 1998 options for 42,438 shares were granted and
exercised. Options for 1,562 shares remain available for grant.
8
<PAGE>
A summary of the status of UTI's stock option plan through June 30, 1998
and December 31, 1997 is presented below.
1998 1997
Exercise Exercise
Shares Price Shares Price
Outstanding at
beginning of year 1,562 $ 0.20 1,562 $ 0.20
Granted 0 0.00 0 0.00
Exercised 0 0.00 0 0.20
Forfeited 0 0.00 0 0.00
Outstanding at end
of period 1,562 $ 0.20 1,562 $ 0.20
Options exercisable
at end of period 1,562 $ 0.20 1,562 $ 0.20
Fair value of options granted
during the period $ 0.00 $ 0.00
The following information applies to options outstanding at June 30, 1998:
Number outstanding 1,562
Exercise price $ 0.20
Remaining contractual life Indefinite
B. DEFERRED COMPENSATION PLAN
UTI and FCC established a deferred compensation plan during 1993 pursuant
to which an officer or agent of FCC, UTI or affiliates of UTI, could defer
a portion of their income over the next two and one-half years in return
for a deferred compensation payment payable at the end of seven years in
the amount equal to the total income deferred plus interest at a rate of
approximately 8.5% per annum and a stock option to purchase shares of
common stock of UTI. At the beginning of the deferral period an officer or
agent received an immediately exercisable option to purchase 2,300 shares
of UTI common stock at $17.50 per share for each $25,000 ($10,000 per year
for two and one-half years) of total income deferred. The option expires
on December 31, 2000. A total of 105,000 options were granted in 1993
under this plan. As of June 30, 1998 no options were exercised. At June
30, 1998 and December 31, 1997, the Company held a liability of $1,434,903
and $1,376,384, respectively, relating to this plan. At June 30, 1998, UTI
common stock had a closing price of $8.625 per share.
The following information applies to deferred compensation plan stock
options outstanding at June 30, 1998:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 3 years
C. CONVERTIBLE NOTES
On July 31, 1997, United Trust Inc. issued convertible notes for cash in
the amount of $2,560,000 to seven individuals, all officers or employees of
United Trust Inc. The notes bear interest at a rate of 1% over prime, with
interest payments due quarterly and principal due upon maturity of July 31,
2004. The conversion price of the notes are graded from $12.50 per share
for the first three years, increasing to $15.00 per share for the next two
years and increasing to $20.00 per share for the last two years. As of
June 30, 1998, the notes were convertible into 204,800 shares of UTI common
stock with no conversion privileges having been exercised. At June 30,
1998, UTI common stock had a closing price of $8.625 per share.
9
<PAGE>
D. PURCHASE OF TREASURY STOCK
On January 16, 1998, UTI acquired 7,579 shares of its common stock from the
estate of Robert Webb, a former director, for $26,527 and a promissory note
valued at $41,819 due January 16, 2005. The note bears interest at a rate
of 1% over prime, with interest due quarterly and principal due on
maturity.
5. 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 June 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to
common shareholders $ 343,145 1,627,870 $ 0.21
EFFECT OF DILUTIVE
SECURITIES
Convertible notes 78,389 204,800
Options 1,562
DILUTED EPS
Income available to
common shareholders and
assumed conversions $ 421,534 1,834,232 $ 0.23
</TABLE>
<TABLE>
For the second quarter ended June 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
BASIC EPS
<S> <C> <C> <C>
Income available to
common shareholders $ 228,704 1,627,200 $ 0.14
EFFECT OF DILUTIVE
SECURITIES
Convertible notes 39,410 204,800
Options 1,562
DILUTED EPS
Income available to
common shareholders and $
assumed conversions 268,114 1,833,562 $ 0.15
</TABLE>
10
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<TABLE>
For the YTD period ended June 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
BASIC EPS
<S> <C> <C> <C>
Income available to $ 148,838 1,870,016 $0.08
common shareholders
EFFECT OF DILUTIVE SECURITIES
Options 1,562
DILUTED EPS
Income available to
common shareholders and
assumed conversions $ 148,838 1,871,578 $0.08
</TABLE>
<TABLE>
For the second quarter ended June 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
BASIC EPS
<S> <C> <C> <C>
Income available to
common shareholders $ 101,812 1,869,940 $0.05
EFFECT OF DILUTIVE SECURITIES
Options 1,562
DILUTED EPS
Income available to
common shareholders and
assumed conversions $ 101,812 1,871,502 $0.05
</TABLE>
UTI has stock options outstanding during the second quarter of 1998 and
1997 for 105,000 shares of common stock at $17.50 per share that were not
included in the computation of diluted EPS because the exercise price was
greater than the average market price of the common shares.
6. 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 the 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. Mandatory assessments may be partially recovered
through a reduction in future premium tax 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.
11
<PAGE>
7. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $953,881 and $834,177 in interest expense
through the second quarter of 1998 and 1997, respectively. The Company
paid $10,555 and $60,044 of federal income tax through the second quarter
of 1998 and 1997, respectively.
As partial proceeds for the acquisition of treasury common stock of UTI
during 1998, UTI issued promissory notes of $41,819 due January 16, 2005.
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. 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 prior to the end of 1998. The proposed merger is not
contingent upon the pending change in control of UTI.
9. 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. 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. The
transaction is expected to be completed during the third quarter 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.
12
<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 which appear elsewhere
in this report. The Company reports financial results on a consolidated
basis. The consolidated financial statements include the accounts of UTI
and its subsidiaries at June 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 9% when comparing the six and three months ended June 30,
1998 to the same periods in 1997. 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
Procedures ("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 a different
unrelated party 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.
13
<PAGE>
Net investment income decreased 2% and 1% when comparing the six and
three months ended June 30, 1998 to the same period one year-ago,
respectively. 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 overall investment yields for 1998 and 1997, are 7.3% and 7%,
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 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.
The Company had net realized investment losses of $402,404 and $28,579 for
the six months ended June 30, 1998 and 1997, respectively. The Company
had net realized investment losses of $494,652 and $22,443 for the three
months end June 30, 1998 and 1997, respectively. The current period
investment losses can be attributed to the foreclosure of three mortgage
loans, which represents 69% of realized investment losses. At this
writing, the three foreclosed properties are under contract for sale at
book values.
(B) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 10% and 8%
for the six and three months ended June 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 $1,329,000 and
$722,000 for the six and three months ended June 30, 1998 compared to the
same periods one year-ago, respectively. There is no single event that
caused death benefits to decrease. Death claims vary from year to year and
therefore, fluctuations in death benefits are to be expected and are not
considered unusual by management.
Operating expenses decreased 17% and 19% for the six and three months ended
June 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 increased 15% for the six and three months ended June 30,
1998 as compared to the same periods one year-ago. Since June 30, 1997,
notes payable increased approximately $1,938,000. The increase in
outstanding indebtedness was due to the issuance of convertible notes to
seven individuals, all officers or employees of UTI. In March 1997, the
base interest rate for most of the notes payable increased a quarter of a
point. 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 less than 1% as of
June 30, 1998 compared to December 31, 1997.
14
<PAGE>
Investments represent approximately 62% and 64% of total assets at June 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 June 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 7% and 5% as of June 30, 1998, and December
31, 1997, respectively. Fixed maturities as a percentage of total invested
assets were 82% as of June 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 is 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 $1,437,695 and
($678,801) in 1998 and 1997, respectively. The net cash provided by (used
in) operating activities plus net policyholder contract deposits after the
payment of policyholder withdrawals equaled $3,742,386 in 1998 and
$1,750,378 in 1997. 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.
Cash provided by (used in) investing activities was $3,480,272 and
($4,692,232), for 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 was 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 $1,807,199 and $1,134,807 for
1998 and 1997, respectively. Policyholder contract deposits decreased 20%
in 1998 compared to 1997. Policyholder contract withdrawals has decreased
24% 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.
15
<PAGE>
At June 30, 1998, the Company had a total of $20,614,220 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 at issuance of the loan was
8.25%. The base rate changed to 8.5% on March 1, 1997. 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, 1997, the Company
prepaid the $1,000,000 May 8,1998, principal payment.
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 June 30, 1998 the Company has a total $27,145,321 of cash and cash
equivalents, short-term investments and investments held for sale in
comparison to $20,614,220 of notes payable. UTI and FCC service 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 UG.
Since UTI 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, 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 June 30, 1998, substantially all of the consolidated
shareholders equity represents net assets of its subsidiaries. Cash
requirements of UTI 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 insurance company is domiciled. UTI is the
ultimate parent of UG through ownership of several intermediary holding
companies. UG can not pay a dividend directly to UTI due to the ownership
structure. Please refer to Note 1 of the Notes to the Consolidated
Financial Statements. UG's dividend limitations are described below
without effect of the ownership structure.
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.
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,
16
<PAGE>
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 by 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.
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 prior to the end of 1998. 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. 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. The
transaction is expected to be completed during the third quarter 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.
17
<PAGE>
PART II - OTHER INFORMATION
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 prior to the end of 1998. 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. 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. The
transaction is expected to be completed during the third quarter 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.
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, 1997.
18
<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: August 10, 1998 By /s/ James E. Melville
James E. Melville
President, Chief Operating Officer
and Director
Date: August 10, 1998 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
19
<PAGE>
[ARTICLE] 7
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 6-MOS 6-MOS
[FISCAL-YEAR-END] DEC-31-1998 DEC-31-1997
[PERIOD-END] JUN-30-1998 JUN-30-1997
[DEBT-HELD-FOR-SALE] 1,580,941 1,668,630
[DEBT-CARRYING-VALUE] 178,137,161 180,970,333
[DEBT-MARKET-VALUE] 182,281,827 184,782,568
[EQUITIES] 2,405,955 3,001,744
[MORTGAGE] 9,670,902 9,469,444
[REAL-ESTATE] 11,153,436 11,485,276
[TOTAL-INVEST] 217,656,349 222,601,494
[CASH] 22,831,099 16,105,933
[RECOVER-REINSURE] 41,017,753 41,343,184
[DEFERRED-ACQUISITION] 50,365,578 52,123,608
[TOTAL-ASSETS] 348,798,922 349,299,824
[POLICY-LOSSES] 0 0
[UNEARNED-PREMIUMS] 0 0
[POLICY-OTHER] 249,353,796 248,805,695
[POLICY-HOLDER-FUNDS] 19,097,239 19,432,192
[NOTES-PAYABLE] 20,614,220 21,460,223
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[COMMON] 32,545 32,696
[OTHER-SE] 15,265,673 15,323,922
[TOTAL-LIABILITY-AND-EQUITY] 348,798,922 349,299,824
[PREMIUMS] 14,342,560 15,735,168
[INVESTMENT-INCOME] 7,513,412 7,670,356
[INVESTMENT-GAINS] (402,404) (28,579)
[OTHER-INCOME] 330,257 460,579
[BENEFITS] 13,114,500 14,579,714
[UNDERWRITING-AMORTIZATION] 3,040,679 2,776,610
[UNDERWRITING-OTHER] 5,45,547 6,191,219
[INCOME-PRETAX] 183,099 289,981
[INCOME-TAX] 121,012 (127,207)
[INCOME-CONTINUING] 343,145 148,838
[DISCONTINUED] 0 0
[EXTRAORDINARY] 0 0
[CHANGES] 0 0
[NET-INCOME] 343,145 148,838
[EPS-PRIMARY] .21 .08
[EPS-DILUTED] .23 .08
[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>
