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, 1999
OR
[ ] 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. 0-16867
UNITED TRUST GROUP, INC.
------------------------
(Exact name of registrant as specified in its charter)
ILLINOIS 37-1172848
-------- ----------
(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, 1999 was 3,288,448.
<PAGE>
UNITED TRUST GROUP, INC. AND SUBSIDIARIES
(The "Company")
TABLE OF CONTENTS
Part 1. Financial Information....................... ........................3
ITEM 1. FINANCIAL STATEMENTS...............................................3
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998......................................................3
Consolidated Statements of Operations for the nine and three months
ended September 30, 1999 and 1998......................................4
Consolidated Statement of Shareholders'Equity for the Period ended
September 30, 1999.....................................................5
Consolidated Statements of Cash Flows for the nine months ende
September 30, 1999 and 1998............................................6
Notes to Consolidated Financial Statements................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........23
PART II. OTHER INFORMATION..................................................24
ITEM 1. LEGAL PROCEEDINGS.................................................24
ITEM 2. CHANGE IN SECURITIES..............................................24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............24
ITEM 5. OTHER INFORMATION.................................................24
ITEM 6. EXHIBITS..........................................................24
SIGNATURES....................................................................25
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 1999 1998
--------------- ---------------
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $148,925,191 and $179,885,379) $ 149,255,416 $ 174,240,848
Investments held for sale:
Fixed maturities, at market
(cost $27,670,119 and $1,494,636) 26,851,666 1,505,406
Equity securities, at market
(cost $2,886,315 and $2,725,061) 2,041,483 2,087,416
Mortgage loans on real estate at amortized cost 15,628,903 10,941,614
Investment real estate, at cost,
net of accumulated depreciation 6,757,667 8,979,183
Real estate acquired in satisfaction of debt 1,550,000 1,550,000
Policy loans 14,078,689 14,134,041
Other long-term investments 906,278 906,278
Short-term investments 1,327,261 1,062,796
--------------- ---------------
218,397,363 215,407,582
Cash and cash equivalents 20,537,648 26,378,463
Investment in affiliates 0 5,549,515
Accrued investment income 3,299,486 3,563,383
Reinsurance receivables:
Future policy benefits 36,359,944 36,965,938
Policy claims and other benefits 4,342,914 3,563,963
Current income taxes receivable 325,377 0
Cost of insurance acquired 37,877,756 39,307,960
Deferred policy acquisition costs 5,536,559 6,324,548
Costs in excess of net assets purchased,
net of accumulated amortization 1,486,358 2,642,210
Property and equipment,
net of accumulated depreciation 3,068,223 3,179,203
Other assets 693,296 941,656
--------------- ---------------
TOTAL ASSETS $ 331,924,924 $ 343,824,421
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 245,985,686 $ 248,391,753
Policy claims and benefits payable 2,998,489 2,183,434
Other policyholder funds 1,723,925 2,150,632
Dividend and endowment accumulations 14,598,532 15,329,048
Income taxes payable:
Current 0 115,785
Deferred 9,679,764 9,438,758
Notes payable 6,351,943 9,529,138
Indebtedness to affiliates, net 0 22,244
Other liabilities 5,228,645 5,890,059
--------------- ---------------
TOTAL LIABILITIES 286,566,984 293,050,851
--------------- ---------------
Minority interests in consolidated subsidiaries 9,198,584 25,412,259
--------------- ---------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 7,000,000 shares - 3,288,448 and 2,490,438 shares
issued after deducting treasury shares of 47,507 and 28,000 65,769 49,809
Additional paid-in capital 37,688,712 27,403,172
Accumulated deficit (675,605) (1,814,818)
Accumulated other comprehensive income (loss) (919,520) (276,852)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 36,159,356 25,361,311
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 331,924,924 $ 343,824,421
=============== ===============
</TABLE>
See accompanying notes.
3
<PAGE>
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Premiums and policy fees $ 6,414,356 $ 7,504,326 $ 20,116,924 $ 24,154,829
Reinsurance premiums and policy fees (1,077,236) (1,260,457) (3,067,023) (3,568,400)
Net investment income 3,628,538 3,791,774 10,872,137 11,305,186
Realized investment gains and (losses), net (44,635) (433,084) (384,290) (835,488)
Other income 43,337 164,967 398,205 495,224
---------------- ----------------- ----------------- ----------------
8,964,360 9,767,526 27,935,953 31,551,351
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 5,610,839 6,044,255 17,416,173 17,588,570
Reinsurance benefits and claims (1,358,420) (961,031) (2,841,454) (2,058,464)
Annuity 358,796 352,619 1,059,957 1,095,033
Dividends to policyholders 253,155 781,429 913,819 2,706,633
Commissions and amortization of deferred
policy acquisition costs 631,863 824,516 2,138,360 2,644,751
Amortization of cost of insurance acquired 439,006 497,926 1,430,204 1,718,370
Operating expenses 1,678,571 1,953,061 5,641,564 6,428,800
Interest expense 152,146 479,180 511,478 1,448,988
---------------- ----------------- ----------------- ----------------
7,765,956 9,971,955 26,270,101 31,572,681
Income before income taxes, minority interest
and equity in earnings of investees 1,198,404 (204,429) 1,665,852 (21,330)
Income tax (expense) credit (112,544) 880,800 (345,799) 1,001,812
Minority interest in income of
consolidated subsidiaries (202,589) (351,811) (234,395) (447,072)
Equity in earnings of investees 0 133,442 53,555 267,737
---------------- ----------------- ----------------- ----------------
Net income $ 883,271 $ 458,002 $ 1,139,213 $ 801,147
================ ================= ================= ================
Basic earnings per share from continuing
operations and net income $ 0.29 $ 0.28 $ 0.42 $ 0.49
================ ================= ================= ================
Diluted earnings per share from continuing
operations and net income $ 0.29 $ 0.27 $ 0.45 $ 0.50
================ ================= ================= ================
Basic weighted average shares outstanding 3,070,691 1,627,200 2,685,982 1,627,644
================ ================= ================= ================
Diluted weighted average shares outstanding 3,275,722 1,833,562 2,891,013 1,834,006
================ ================= ================= ================
</TABLE>
See accompanying notes.
4
<PAGE>
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the Period ended September 30,1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock
Balance, beginning of year $ 49,809
Issued during year 16,350
Purchase treasury stock (390)
------------------
Balance, end of period 65,769
------------------
Additional paid-in capital
Balance, beginning of year 27,403,172
Issued during year 10,435,105
Purchase treasury stock (149,565)
------------------
Balance, end of period 37,688,712
------------------
Retained earnings (accumulated deficit)
Balance, beginning of year (1,814,818)
Net income 1,139,213 $ 1,139,213
------------------ ------------------
Balance, end of period (675,605)
------------------
Accumulated other comprehensive income (loss)
Balance, beginning of year (276,852)
Unrealized depreciation on securities (642,668)
Foreign currency translation adjustments 0
Minimum pension liability adjustment 0
------------------
Other comprehensive income (loss) (642,668) (642,668)
------------------ ------------------
Comprehensive income $ 496,545
==================
Balance, end of period (919,520)
------------------
Total shareholder's equity, end of period $ 36,159,356
==================
</TABLE>
See accompanying notes.
5
<PAGE>
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flow from operating activities:
Net income $ 1,139,213 $ 801,147
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 400,693 507,219
Realized investment (gains) losses, net 384,290 835,488
Policy acquisition costs deferred (570,000) (650,000)
Amortization of deferred policy acquisition costs 1,357,989 1,551,879
Amortization of cost of insurance acquired 1,430,204 1,718,370
Amortization of costs in excess of net
assets purchased 67,500 67,500
Depreciation 383,716 357,682
Minority interest 234,395 447,072
Equity in earnings of investees (53,555) (267,737)
Change in accrued investment income 263,897 (332,892)
Change in reinsurance receivables (172,957) 649,332
Change in policy liabilities and accruals (1,791,318) (118,794)
Charges for mortality and administration of
universal life and annuity products (8,077,001) (8,116,570)
Interest credited to account balances 4,825,505 5,322,471
Change in income taxes payable (200,156) (1,014,467)
Change in indebtedness (to) from affiliates, net (22,244) 15,314
Change in other assets and liabilities, net (392,841) (22,087)
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (792,670) 1,750,927
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 1,430,000 164,097
Fixed maturities sold 0 0
Fixed maturities matured 26,259,579 32,371,454
Equity securities 0 450,000
Mortgage loans 5,482,076 943,156
Real estate 2,250,413 1,039,924
Policy loans 2,482,926 2,941,532
Short-term 1,236,251 1,581,203
------------- -------------
Total proceeds from investments sold and matured 39,141,245 39,491,366
Cost of investments acquired:
Fixed maturities held for sale (27,623,353) 0
Fixed maturities (1,643,871) (25,166,178)
Equity securities (161,256) (79,053)
Mortgage loans (10,119,365) (1,577,694)
Real estate (526,955) (941,618)
Policy loans (2,427,574) (2,706,606)
Other long-term investments 0 (66,212)
Short-term (1,502,210) 0
------------- -------------
Total cost of investments acquired (44,004,584) (30,537,361)
Purchase of property and equipment (171,775) (89,424)
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,035,114) 8,864,581
Cash flows from financing activities:
Policyholder contract deposits 10,967,503 11,989,493
Policyholder contract withdrawals (8,672,924) (9,812,952)
Purchase of treasury stock (149,955) (26,527)
Purchase of stock of subsidiaries (49,768) 0
Cash received in merger 607,508 0
Payments of principal on notes payable (2,715,395) (480,965)
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (13,031) 1,669,049
------------- -------------
Net increase (decrease) in cash and cash equivalents (5,840,815) 12,284,557
Cash and cash equivalents at beginning of period 26,378,463 16,105,933
------------- -------------
Cash and cash equivalents at end of period $ 20,537,648 $ 28,390,490
============= =============
</TABLE>
See accompanying notes.
6
<PAGE>
UNITED TRUST GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
On July 26, 1999 United Income, Inc. (UII), merged into United Trust, Inc.
(UTI). Immediately following the merger, United Trust Group Inc. (UTG), which
was then 100% owned by UTI, was liquidated and UTI changed its name to United
Trust Group, Inc. (UTG). The accompanying consolidated financial statements have
been prepared by ("UTG") 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 each Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
1998.
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, 1999, the parent, significant subsidiaries and affiliates of
UTG were as depicted on the following organizational chart.
United Trust Group, Inc. ("UTG") is the ultimate controlling company. UTG owns
81% 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 86%
of Appalachian Life Insurance Company ("APPL") and APPL owns 100% of Abraham
Lincoln Insurance Company ("ABE").
7
<PAGE>
2. INVESTMENTS
As of September 30, 1999, fixed maturities and fixed maturities held for sale
represented 81% 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 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, 1999, 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 September 30, 1999 and December 31, 1998, the Company had $6,351,943 and
$9,529,138 in long-term debt outstanding, respectively. The debt is comprised of
the following components:
1999 1998
------------- -------------
Senior debt $ 25,000 $ 100,000
Subordinated 10 yr. notes 840,000 2,267,067
Subordinated 20 yr. notes 2,024,643 3,252,071
Convertible debentures 902,300 0
Convertible notes 2,560,000 2,560,000
Other notes payable 0 1,350,000
------------- -------------
$ 6,351,943 $ 9,529,138
============= =============
A. SENIOR DEBT
The senior debt is through National City Bank (formerly First of America Bank -
Illinois NA) and is subject to a credit agreement. The debt bears interest at a
rate equal to the "base rate" plus nine-sixteenths of one percent. The Base rate
is defined as the floating daily, variable rate of interest determined and
announced by National City Bank from time to time as its "base lending rate."
The base rate at September 30, 1999 was 8.25%. Interest is paid quarterly.
During second quarter 1999 the Company prepaid a $75,000 principal payment. The
remaining principal balance of $25,000 will be payable on or before the debt
maturity date of May 8, 2005, and is being maintained to keep the Company's
credit relationship with National City Bank in place.
The credit agreement contains certain covenants with which the Company must
comply. These covenants contain provisions common to a loan of this type and
include such items as; a minimum consolidated net worth of FCC to be no less
than 400% of the outstanding balance of the debt; Statutory capital and surplus
of Universal Guaranty Life Insurance Company be maintained at no less than
$6,500,000; an earnings covenant requiring the sum of the pre-tax earnings of
Universal Guaranty Life Insurance Company and its subsidiaries (based on
Statutory Accounting Practices) and the after-tax earnings plus non-cash charges
of FCC (based on parent only GAAP practices) shall not be less than two hundred
percent (200%) of the Company's interest expense on all of its debt service. The
Company is in compliance with all of the covenants of the agreement.
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 eac
8
<PAGE>
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 original 20-year notes bear interest at the rate
of 8 1/2% per annum on $2,747,109 and 8.75% per annum on $504,962 payable
semi-annually with a lump sum principal payment due June 16, 2012. During second
quarter, 1999, the Company prepaid $2,640,000 of its nonaffiliated debt
consisting of the remaining 10 year notes excepting the $840,000 note, all of
the twenty year notes with 8.75% interest rates and $708,366 of the 8.5% 20 year
notes. In the third quarter of 1999 an additional 20 year, 8.5% note, in the
amount of $14,100 was retired as a result of the merger of UII into UTG.
C. CONVERTIBLE DEBENTURES
In early 1994, UII received $902,300 from the sale of Debentures. The Debentures
were issued pursuant to an indenture between UII and National City Bank
(formerly First of America Bank - Southeast Michigan, N.A.), as trustee. The
Debentures are general unsecured obligations of UII, subordinate in right of
payment to any existing or future senior debt of UII. The Debentures are
exchangeable and transferable, and were convertible at any time prior to March
31, 1999 into UII's Common Stock at a conversion price of $25.00 per share,
subject to adjustment in certain events. The conversion right has now expired
without any conversions taking place. The Debentures bear interest from March
31, 1994, payable quarterly, at a variable rate equal to one percentage point
above the prime rate published in the Wall Street Journal from time to time. On
or after March 31, 1999, the Debentures will be redeemable at UII's option, in
whole or in part, at redemption prices declining from 103% of their principal
amount. No sinking fund will be established to redeem Debentures. The Debentures
will mature on March 31, 2004. The Debentures are not listed on any national
securities exchange, and became obligations of UTG with the merger of UII into
UTG.
D. CONVERTIBLE NOTES
On July 31, 1997, UTG issued convertible notes for cash in the amount of
$2,560,000 to seven individuals, all officers or employees of UTG. 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. On March 1, 1999, First Southern Bancorp, Inc., an affiliate
of First Southern Funding, LLC, acquired all the outstanding UTI convertible
notes from the original holders. Pursuant to an agreement, First Southern
Bancorp, Inc. will convert the notes to common stock by July 31, 2000.
E. OTHER NOTES PAYABLE
UII held three promissory notes receivable totaling $1,350,000 due from FCC. Two
of the notes, totaling $850,000, bear interest at the rate of 1% over prime as
published in the Wall Street Journal, with interest payments due quarterly.
Principal of $150,000 was due upon the maturity date of June 1, 1999 which has
now been extended to a maturity date of June 30, 2002, with the remaining
principal payment of $700,000 becoming due upon the maturity date of May 8,
2006. The third note in the amount of $500,000 bears interest at the rate of
7.5%, with interest payments due quarterly and principal due upon the maturity
date of March 31, 2004. The three promissory notes held by UII became assets of
UTG as a result of the merger of UII into UTG. These notes are now eliminated in
consolidation pursuant to rules governing inter-company activities of
consolidated entities.
Scheduled principal reductions on the Company's total outstanding debt for the
next five years is as follows:
Year Amount
---- ------
1999 $ 0
2000 0
2001 0
2002 840,000
2003 0
9
<PAGE>
4. CAPITAL STOCK TRANSACTIONS
A. STOCK OPTION PLANS
In 1985, UTG initiated a nonqualified stock option plan for employees, agents
and directors of the Company under which options to purchase up to 44,000 shares
of UTG's common stock are granted at a fixed price of $.20 per share. Options
for 42,438 shares have been granted and exercised. At the September 21, 1999
board meeting, the Directors of UTG voted to discontinue UTG's stock option
plan, leaving options for 1,562 shares ungranted and therefore ultimately
forfeited. There were no stock options granted, exercised or exercisable through
September 30, 1999 and December 31, 1998.
UII had a stock option plan, which was assumed by UTG through the merger with
UII, under which certain directors, officers and employees may be issued options
to purchase up to 31,500 shares of common stock at $13.07 per share. Options
become exercisable at 25% annually beginning one year after date of grant and
expire generally in five years. In November 1992, 10,437 option shares were
granted. At September 30, 1999, options for 451 shares were exercisable and
options for 20,576 shares were available for grant. At the September 21, 1999
board meeting, the Directors of UTG voted to discontinue this stock option plan,
leaving options for 20,576 shares ungranted and therefore ultimately forfeited.
A summary of the status of UTG's stock option plan for the periods ended
September 30, 1999 and December 31, 1998, and changes during the periods ending
on those dates is presented below.
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
Outstanding at beginning of period 451 $ 13.07 451 $ 13.07
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
Granted 0 0.00 0 0.00
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
Exercised 0 0.00 0 0.00
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
Forfeited 0 0.00 0 0.00
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
Outstanding at end of period 451 $ 13.07 451 $ 13.07
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
</TABLE>
The following information applies to options outstanding at September 30, 1999:
Number Outstanding 451
Exercise Price $13.07
Remaining contractual life on 430 options 1/2 year
Remaining contractual life on 21 options 1 year
On January 15, 1991 UII adopted an additional Non-Qualified Stock Option Plan,
assumed by UTG through the UII merger, under which certain employees and sales
personnel may be granted options. The plan provides for the granting of up to
42,000 options at an exercise price of $.47 per share. The options generally
expire five years from the date of grant. Options for 10,220 shares of common
stock were granted in 1991, options for 1,330 shares were granted in 1993 and
options for 301 shares were granted in 1995. A total of 11,620 option shares
have been exercised through September 30, 1999. At September 30, 1999, 231
options have been granted and remain exercisable. At the September 21, 1999
board meeting, the Directors of UTG voted to discontinue this stock option plan,
leaving options for 30,149 shares ungranted and therefore ultimately forfeited.
10
<PAGE>
A summary of the status of UTG's stock option plan for the periods ended
September 30, 1999 and December 31, 1998, and changes during the periods ending
on those dates is presented below.
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
Outstanding at beginning of period 231 $ 0.47 231 $ 0.47
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
Granted 0 0.00 0 0.00
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
Exercised 0 0.00 0 0.00
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
Forfeited 0 0.00 0 0.00
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
Outstanding at end of period 231 $ 0.47 231 $ 0.47
---------------------------------------------- ------------------ ---------------- ---------------- ---------------
</TABLE>
The following information applies to options outstanding at September 30, 1999:
Number Outstanding 231
Exercise Price $ 0.47
Remaining contractual life 1/2 year
B. DEFERRED COMPENSATION PLAN
UTG and FCC established a deferred compensation plan during 1993 pursuant to
which an officer or agent of FCC, or affiliates of UTG, 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 UTG. At the
beginning of the deferral period an officer or agent received an immediately
exercisable option to purchase 2,300 shares of UTG 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 September 30, 1999 no
options were exercised. At September 30, 1999 and December 31, 1998, the Company
held a liability of $1,588,332 and $1,494,520, respectively, relating to this
plan. At September 30, 1999, UTG common stock had a market price of $8.125 per
share.
The following information applies to deferred compensation plan stock options
outstanding at September 30, 1999:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 1.25 years
C. CONVERTIBLE NOTES
On July 31, 1997, UTG issued convertible notes for cash in the amount of
$2,560,000 to seven individuals, all officers or employees of UTG. 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 September 30, 1999, the notes were convertible into
204,800 shares of UTG common stock with no conversion privileges having been
exercised. At September 30, 1999, UTG common stock had a market price of $8.125
per share. On March 1, 1999, First Southern Bancorp, Inc., an affiliate of First
Southern Funding, LLC, acquired all the outstanding UTG convertible notes from
the original holders. Pursuant to an agreement, First Southern Bancorp, Inc.
will convert the notes to common stock by July 31, 2000.
11
<PAGE>
D. STOCK OPTIONS
At the time of the closing on the UTG stock sale to First Southern Funding, LLC
("FSF") and its affiliates on November 20, 1998, and as part of the transaction,
UTG granted, for nominal consideration, an irrevocable, exclusive option to FSF
to purchase up to 1,450,000 shares of UTG common stock for a purchase price in
cash equal to $15.00 per share, with such option to expire on July 1, 2001. As
of September 30, 1999, no options were exercised. At September 30, 1999, UTG
common stock had a market value of $8.125 per share.
The following information applies to options outstanding at September 30,
1999:
Number outstanding 1,450,000
Exercise price $ 15.00
Remaining contractual life 1 3/4 years
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>
<CAPTION>
For the YTD period ended September 30, 1999
--------------- ------ ------------------ ---- -----------------
<S> <C> <C> <C>
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
BASIC EPS
Income available to common shareholders $ 1,139,213 2,685,982 $ 0.42
=================
EFFECT OF DILUTIVE SECURITIES
Convertible notes 169,644 204,800
Options 231
--------------- ------------------
DILUTED EPS
Income available to common shareholders and $
assumed conversions 1,308,857 2,891,013 $ 0.45
=============== ================== =================
For the third quarter ended September 30, 1999
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
BASIC EPS
Income available to common shareholders $ 883,271 3,070,691 $ 0.29
=================
EFFECT OF DILUTIVE SECURITIES
Convertible notes 57,592 204,800
Options 231
--------------- ------------------
DILUTED EPS
Income available to common shareholders and $
assumed conversions 940,863 3,275,722 $ 0.29
=============== ================== =================
12
<PAGE>
For the YTD period ended September 30, 1998
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
BASIC EPS
Income available to common shareholders $ 801,147 1,627,644 $ 0.49
=================
EFFECT OF DILUTIVE SECURITIES
Convertible notes 118,236 204,800
--------------- ------------------
DILUTED EPS
Income available to common shareholders and $
assumed conversions 919,383 1,834,006 $ 0.50
=============== ================== =================
For the third quarter ended September 30, 1998
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
BASIC EPS
Income available to common shareholders $ 458,002 1,627,200 $ 0.28
=================
EFFECT OF DILUTIVE SECURITIES
Convertible notes 39,847 204,800
--------------- ------------------
DILUTED EPS
Income available to common shareholders and $ 497,849
assumed conversions 1,833,562 $ 0.27
=============== ================== =================
</TABLE>
UTG has stock options outstanding during the third quarter of 1999 and 1998 for
105,000 shares of common stock at $17.50 per share, options for 1,450,000 and 0
shares of common stock respectively at $15.00 per share, and 451 shares of
common stock at $13.07 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. On March 31, 1999 the conversion privilege of the
convertible debenture bonds expired. As such, as of the expiration date of the
conversion privilege, these securities are no longer considered a dilutive
instrument for the calculation of diluted earnings per share.
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. Mandator
13
<PAGE>
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 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.
7. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $440,017 and $1,296,947 in interest expense
during the first nine months of 1999 and 1998, respectively. The Company paid
$544,318 and $15,730 in federal income tax during the first nine months of 1999
and 1998, respectively.
8. 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 owned 53% of United Trust Group, Inc., an insurance holding company, and UII
owned 47% of United Trust Group, Inc. At the time the decision to merge was
made, neither UTI nor UII had 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 occurred
on July 26, 1999, with shareholders of both companies approving the transaction.
UTI issued 817,517 shares of its authorized but unissued common stock to former
UII shareholders, exclusive of any dissenter shareholders, in the merger.
Immediately following the merger, United Trust Group, Inc. (UTG), which was then
100% owned by UTI, was liquidated and UTI changed its name to United Trust
Group, Inc.
The merger of UII was accounted for as a purchase of UII and was valued at
$12.74 per share. This value was determined using the average price of UTI
shares issued on November 20, 1998 in a separate transaction with First Southern
Funding LLC, an outside third party. The purchase price is comprised of the
following components:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investments $ 62,279,460
Cash and cash equivalents 4,830,171
Accrued investment income 1,029,741
Reinsurance receivables 11,291,237
Cost of insurance acquired 13,265,699
Costs in excess of net assets purchased 868,750
Property and equipment 868,652
Other assets 672,427
------------------
Total assets 95,106,137
Policy liabilities and accruals (74,427,627)
Income taxes payable - current and deferred (2,140,155)
Notes payable (3,865,344)
Other liabilities (1,521,989)
Minority interests (2,699,567)
------------------
Net purchase price $ 10,451,455
==================
</TABLE>
14
<PAGE>
The following table summarizes certain unaudited operating results of UTG as
though the merger transaction had taken place on January 1, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, 1999 December 31, 1998
Total revenues $ 27,733,535 $ 40,250,810
Total benefits and other expenses $ 25,913,981 $ 46,206,060
Operating income $ 1,819,554 $ (5,955,250)
Net Income $ 1,270,898 $ (829,784)
Basic earnings per share $ 0.38 $ (0.33)
Diluted earnings per share $ 0.41 $ (0.33)
</TABLE>
9. ACCOUNTING AND LEGAL DEVELOPMENTS
The FASB has issued SFAS 133 entitled, Accounting for Derivative Instruments and
hedging Activities, which is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued SFAS 137, which
delays the effective date of SFAS 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a specific type of exposure
hedge. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. The adoption
of SFAS 133 is not expected to have a material effect on our financial position
or results of operations, since the Company has no derivative or hedging type
investments.
15
<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 that appear elsewhere in this report. The Company
reports financial results on a consolidated basis. The consolidated financial
statements include the accounts of UTG and its subsidiaries at September 30,
1999.
On July 26, 1999, the shareholders of UTI and UII approved a plan of merger. In
the transaction, UTI issued 817,517 shares of its authorized but unissued common
stock to former UII shareholders, exclusive of any dissenter shareholders.
Immediately following the merger, United Trust Group, Inc., which was then 100%
owned by UTI, was liquidated and UTI changed its name to United Trust Group,
Inc. (UTG). The merger had little effect on a majority of the individual line
items of the financial statements. UII's primary asset was its equity ownership
of United Trust Group, Inc., which was already a consolidated subsidiary of UTI.
The primary changes to UTI from the merger was the increase in capital from the
shares issued and a decrease to the minority interest liability, representing
the minority share of UTG that UII owned prior to the merger.
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 17% when comparing the first nine months 1999 to 1998 and 15%
comparing third quarter only results. 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.
During 1998, the Boards of UG and USA approved a permanent premium reduction on
certain of its participating products in force commonly referred to as the
16
<PAGE>
initial contract and the presidents plan. The premium reduction was generally
20% with 35% used on initial contract plans of UG with original issue ages less
than 56 years old. The dividends were also reduced, and the net effect to the
policyholder was a slightly lower net premium. This change became effective with
the 1999 policy anniversary. This action was taken by the Boards to ensure these
policyholders will be protected in future periods from potential dividend
reductions at least to the extent of the permanent premium reduction amount. By
reducing the required premium payment, it makes replacement activity by other
insurance companies more difficult as ongoing premium payments are compared from
the current policy to a potential replacement policy. This premium reduction
accounted for approximately 10% of the total premium revenue decline. A
corresponding decline is reflected in the policy benefits line item dividends to
policyholders.
Net investment income decreased 4% when comparing the first nine months of 1999
to 1998 and 4% comparing third quarter results. The decrease in net investment
income is due to the decline of the national prime rate during September and
October of 1998. During September and October of 1998, the national prime rate
declined three quarters of one percent (.75%). This decline reduced yields on
investments available in the marketplace in which the Company invests primarily
fixed maturities. The interest rate environment is improving in 1999. The
national prime rate rose a total of one half of one percent (.50%) in July and
August of 1999. Changes in the national prime rate may impact net investment
income in the future. Approximately 22.2% of the total fixed maturity portfolio
will mature within the next year, with another 58.0% maturing in the next two to
five years. The Company has recently begun looking at the mortgage loan market
for possible investments, due to our affiliation with First Southern Funding and
its affiliates ("FSF"). FSF is the largest shareholder of UTG. Our affiliation
with FSF provides additional resources in the mortgage loan market. FSF is in
the banking industry and has experience and expertise in underwriting commercial
and residential mortgage loans. The Company believes it can issue or acquire
loans, which will provide attractive yields while maintaining high quality and
low risk.
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 March 1999 Board of Directors meeting, the Board lowered
crediting rates one half percent on all products that could be lowered. This
adjustment was in response to continued declines in interest rates in the
marketplace. The change will result in interest crediting reductions of
approximately $600,000 per year. Policy interest crediting rate changes become
effective on an individual policy basis on the next policy anniversary.
Therefore, it will take a full year from the time the change is determined for
the full impact of such change to be realized.
(B) EXPENSES
Life benefits, net of reinsurance benefits and claims, are 14% lower in 1999
compared to 1998 for the nine months results and 22% lower for the third quarter
results. Two events occurred in 1999, which differ from 1998 experience. The
decrease in premium revenues from normal policy terminations resulted in lower
benefit reserve increases in the current period. Additionally, the premium
reduction on certain participating policies resulted in a lower dividend to
policyholders expense than in the previous year. See discussion above in
premiums and policy fee revenues for a more detailed explanation of this event.
Policyholder benefits increased due to an increase in death benefit claims of
$531,000 from the prior year nine month period but declined $727,000 from the
prior third quarter period. There is no single event that caused the mortality
variances. Policy claims vary from year to year and therefore, fluctuations in
mortality are to be expected and are not considered unusual by management. At
the March 1999 Board of Directors meeting, the Board lowered crediting rates one
half percent on all products that could be lowered. This adjustment was in
response to continued declines in interest rates in the marketplace. The change
will result in interest crediting reductions of approximately $600,000 per year.
Policy interest crediting rate changes become effective on an individual policy
basis on the next policy anniversary. Therefore, it will take a full year from
the time the change is determined for the full impact of such change to be
realized.
Operating expenses decreased 12% in 1999 compared to 1998 for the nine month
period and decreased 14% for the third quarter only period. The decrease in
17
<PAGE>
operating expenses is due in part, to a decrease in salaries from staff
reduction. In most instances, the workload was absorbed into the remaining
workforce. First year sales production has shown a declining trend in the last
three years. The Company has tried a variety of solutions to bolster new sales
production including additional training, home office assistance in providing
leads on prospective clients and a review of current product offerings. First
year production in the first quarter of 1999 resulted in cash received from new
sales of only 54% of that received in first quarter 1998, or $560,000 less. With
continued declining new business, costs associated with supporting new business,
primarily salary costs, as a percentage of new business received continued to
grow. In March of 1999, the Company determined it could no longer continue to
support these fixed costs in light of the new business trend and no indication
it would reverse any time soon. It was determined these fixed costs should be
reduced to be commensurate with the level of new sales production activity
currently being experienced. As such, in March 1999 seven employees of the
Company (approximately 8% of the total staff), were terminated due to lack of
business activity. This action resulted in expense savings of approximately
$275,000 per year.
Interest expense decreased 65% in 1999 compared to 1998 for the first nine
months and 68% when comparing third quarter. In November 1998, UTI received
approximately $11,000,000 from the issuance of common stock to First Southern
Funding and its affiliates. These funds were used to retire nonaffiliated debt.
Additionally, with the new capital and expectations of future growth, management
has formulated a plan to repay the remaining nonaffiliated debt within the next
two years. At September 30, 1999, UTG had $6,351,943 in notes payable. On March
1, 1999, First Southern acquired the $2,560,000 of UTI convertible debt
outstanding from the seven officers and employees who previously held the notes.
Pursuant to the terms of an agreement with First Southern, this debt will be
converted to equity by July 31, 2000. This results in $3,791,943 of
nonaffiliated debt remaining to be repaid. The Company believes this can be
accomplished in the next two years through dividends from the subsidiaries,
namely dividends to FCC from UG and from expected operating cashflows. During
second quarter 1999, UTI and FCC retired $2,715,395 of nonaffiliated debt. This
was accomplished through an ordinary dividend from its subsidiary, UG of
$2,000,000 and from operating cash available.
The provision for income taxes reflected a significant change from the same
periods one year ago. This is the result of changes in the deferred tax
liability. Deferred taxes are established to recognize future tax effects
attributable to temporary differences between the financial statements and the
tax return. As these differences are realized in the financial statement or tax
return, the deferred income tax established on the difference is recognized in
the financial statements as an income tax expense or credit. Several of the
companies within the group, including the life insurance companies, have federal
net operating loss carryforwards for tax purposes for which no deferred tax
asset is recognized in the financial statements as an allowance has been
established against this asset. In periods in which a portion of the tax loss
carryforward is utilized, no deferred tax expense is recorded due to this
allowance. The 1998 results utilized a larger portion of the tax loss
carryforwards than the 1999 results. Additionally, in 1999, the tax loss
carryforwards of some of the companies are fully utilized resulting in the
companies becoming taxable.
(C) NET INCOME
The Company had a first nine month net income of $1,139,213 in 1999 compared to
$801,147 in 1998, and a third quarter net income of $883,271 in 1999 compared to
$458,002 in 1998. Lower interest expense costs from the retirement of
nonaffiliated debt, lower operating costs and lower policy reserve increases,
partially offset by increased death claim experience and an increase in income
tax expense, contributed to the difference in earnings.
FINANCIAL CONDITION
- -------------------
Total shareholder's equity increased approximately 43% as of September 30, 1999
compared to December 31, 1998. This is primarily the result of the additional
shares of common stock issued by UTG in the merger of UII. The merger resulted
in an increase in equity of $10,451,000.
Investments represent approximately 66% and 63% of total assets at September 30,
1999 and December 31, 1998, 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 an
18
<PAGE>
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, 1999,
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. To
provide additional flexibility and liquidity, the Company has categorized almost
all fixed maturity investments acquired in the first nine months of 1999 as
available for sale. It was determined it would be in the Company's best
financial interest to classify these new purchases as available for sale to
provide additional liquidity. All of the fixed maturity acquisitions in the
first nine months of 1999 were U.S. government, government agency or Federal
National Mortgage Association ("FNMA") securities.
The Company has recently begun looking at the mortgage loan market for possible
investments, due to our affiliation with First Southern Funding and its
affiliates ("FSF"). FSF is the largest shareholder of UTG. Our affiliation with
FSF provides additional resources in the mortgage loan market. FSF is in the
banking industry and has experience and expertise in underwriting commercial and
residential mortgage loans. The Company believes it can issue or acquire loans,
which will provide attractive yields while maintaining high quality and low
risk.
The Company has continued its efforts to significantly reduce and eventually
eliminate all outstanding debt. In second quarter 1999, UTI and FCC paid
$2,715,395 in principal on the nonaffiliated debt. The Company may reduce the
debt another $1,000,000 to $1,500,000 before year end 1999. The Company expects
to achieve this through a dividend from UG of approximately $1,200,000 and from
operating cashflows.
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 6% and 8% as of September 30, 1999, and December 31, 1998,
respectively. Fixed maturities as a percentage of total invested assets were 81%
and 82% as of September 30, 1999 and December 31, 1998, 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 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. To provide
additional flexibility and liquidity, the Company has categorized almost all
fixed maturity investments acquired in the first nine months of 1999 as
available for sale. It was determined it would be in the Company's best
financial interest to classify these new purchases as available for sale to
provide additional liquidity. All of the fixed maturity acquisitions in the
first nine months of 1999 were U.S. government, government agency or Federal
National Mortgage Association ("FNMA") securities. By increasing the amount of
investments carried in the available for sale category, the Company can invest a
larger percentage of its cash and cash equivalents holdings in long-term
investments.
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 $(792,670) and $1,750,927 in
1999 and 1998, respectively. The change between periods is due to the decline in
premium revenues and an increase in death benefits. The net cash provided by
19
<PAGE>
(used in) operating activities plus net policyholder contract deposits after the
payment of policyholder withdrawals equaled $1,501,909 in 1999 and $3,927,468 in
1998. 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 $(5,035,114) and $8,864,581,
for 1999 and 1998, respectively. In 1999, the Company used cash to acquire
long-term investments. The Company acquired fixed maturities and mortgage loans.
The most significant aspect of cash provided by (used in) investing activities
are the fixed maturity transactions. Fixed maturities account for 67% and 82% of
the total cost of investments acquired in 1999 and 1998, respectively. The
Company has not directed its investable funds to so-called "junk bonds" or
derivative investments.
Net cash provided by (used in) financing activities was $(13,031) and $1,669,049
for 1999 and 1998, respectively. The change between periods is due to the
payments of principal on notes payable. Policyholder contract deposits decreased
9% in 1999 compared to 1998. Policyholder contract withdrawals has decreased 12%
in 1999 compared to 1998. During first quarter of 1999, the Company had a large
annuity contract surrender of approximately $400,000. Exclusive of this single
policy surrender, policyholder withdrawals were 16% less than the previous year.
At September 30, 1999, the Company had a total of $6,351,943 in long-term debt
outstanding. The notes payable consist of both fixed rate and variable rate
notes. The average interest rate for fixed rate notes is 8.21% and variable rate
notes is 9.24%. UTG and FCC service this debt through 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. Please refer to the
Notes to the Financial Statements for a complete description of the debt
structure.
In November 1998, UTI received approximately $11,000,000 from the issuance of
common stock to First Southern Funding and its affiliates. These funds were used
to retire nonaffiliated debt. Additionally, with the new capital and
expectations of future growth, management has formulated a plan to repay the
remaining nonaffiliated debt within the next two years.
On March 1, 1999, First Southern acquired the $2,560,000 of UTI convertible debt
outstanding from the seven officers and employees who previously held the notes.
Pursuant to the terms of an agreement with First Southern, this debt will be
converted to equity by July 31, 2000. This means there is $3,791,943 of debt
remaining to be repaid. The Company believes this can be accomplished in the
next two years through dividends from the subsidiaries, namely dividends to FCC
from UG and from expected operating cashflows.
During second quarter 1999 the Company prepaid its senior debt with a $75,000
principal payment. The remaining balance of $25,000 will be payable on or before
the debt maturity date of May 8, 2005, and is being maintained to keep the
Company's credit relationship with National City Bank in place.
During second quarter 1999, the Company prepaid $2,640,000 of its nonaffiliated
subordinated debt consisting of the remaining 10 year notes excepting the
$840,000 note, all of the twenty year notes with 8.75% interest rates and
$708,366 of the 8.5% 20 year notes.
On March 1, 1999, First Southern acquired the $2,560,000 of UTI convertible debt
outstanding from the seven officers and employees who previously held the notes.
Pursuant to the terms of an agreement with First Southern, this debt will be
converted to equity by July 31, 2000.
Since UTG 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, UTG's cash flow is dependent on revenues from a management
agreement with USA and its earnings received on invested assets and cash
balances. At September 30, 1999, substantially all of the consolidated
shareholders equity represents net assets of its subsidiaries. Cash requirements
of UTG 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. UTG is the ultimate parent of UG through ownership of FCC. UG can not
pay a dividend directly to UTG due to the ownership structure. Please refer to
20
<PAGE>
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, 1998, UG
had a statutory gain from operations of $3,266,000. At December 31, 1998, UG's
statutory capital and surplus amounted to $15,281,000. Extraordinary dividends
(amounts in excess of ordinary dividend limitations) require prior approval of
the insurance commissioner and are not restricted to a specific calculation. UG
has paid $2,000,000 in dividends during 1999 to FCC.
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.
As of September 30, 1999 the Company has a total of $50,758,058 of cash and cash
equivalents, short-term investments and investments held for sale in comparison
to $6,351,943 of notes payable. 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 by the end of the first quarter of 1998. Periodic
regression testing is being performed to monitor continuing compliance. By
addressing year 2000 compliance in a timely manner, compliance has been achieved
using existing staff and without significant impact on the Company operationally
or financially.
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 owned 53% of United Trust Group, Inc., an insurance holding company, and UII
owned 47% of United Trust Group, Inc. At the time the decision to merge was
made, 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.
21
<PAGE>
A vote of the shareholders of UTI and UII regarding the proposed merger occurred
on July 26, 1999, with shareholders of both companies approving the transaction.
UTI issued 817,517 shares of its authorized but unissued common stock to former
UII shareholders, exclusive of any dissenter shareholders, in the merger.
Immediately following the merger, United Trust Group, Inc., which was now 100%
owned by UTI, was liquidated and UTI changed its name to United Trust Group,
Inc. (UTG).
ACCOUNTING AND LEGAL DEVELOPMENTs
- ---------------------------------
The FASB has issued SFAS 133 entitled, Accounting for Derivative Instruments and
hedging Activities, which is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued SFAS 137, which
delays the effective date of SFAS 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a specific type of exposure
hedge. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. The adoption
of SFAS 133 is not expected to have a material effect on our financial position
or results of operations, since the Company has no derivative or hedging type
investments.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk relates, broadly, to changes in the value of financial instruments
that arise from adverse movements in interest rates, equity prices and foreign
exchange rates. The Company is exposed principally to changes in interest rates,
which affect the market prices of its fixed maturities available for sale and
its variable rate debt outstanding. The Company's exposure to equity prices and
foreign currency exchange rates is immaterial.
Interest rate risk
The Company could experience economic losses if it were required to liquidate
fixed income securities available for sale during periods of rising and/or
volatile interest rates. The Company attempts to mitigate its exposure to
adverse interest rate movements through a staggering of the maturities of its
fixed maturity investments and through maintaining cash and other short-term
investments to assure sufficient liquidity to meet its obligations and to
address reinvestment risk considerations.
Tabular presentation
The following table provides information about the Company's long-term debt that
is sensitive to changes in interest rates. The table presents principal cash
flows and related weighted average interest rates by; expected maturity dates.
The Company has no derivative financial instruments or interest rate swap
contracts.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
September 30, 1999
- ------------------------------------------------------------------------------------------------------------------
Expected maturity date
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 Thereafter Total Fair value
- ------------------- ---------- ---------- ---------- ------------ -------- ------------ ------------ -------------
Long-term debt
- ------------------- ---------- ---------- ---------- ------------ -------- ------------ ------------ -------------
Fixed rate 0 0 0 840,000 0 2,024,643 2,864,643 2,542,564
- ------------------- ---------- ---------- ---------- ------------ -------- ------------ ------------ -------------
Avg. int. rate 0 0 0 7.50% 0 8.50% 8.21%
- ------------------- ---------- ---------- ---------- ------------ -------- ------------ ------------ -------------
Variable rate 0 0 0 0 0 3,487,300 3,487,300 3,487,300
- ------------------- ---------- ---------- ---------- ------------ -------- ------------ ------------ -------------
Avg. int. rate 0 0 0 0 0 9.24% 9.24%
- ------------------- ---------- ---------- ---------- ------------ -------- ------------ ------------ -------------
</TABLE>
23
<PAGE>
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
NONE
ITEM 2. CHANGE IN SECURITIES.
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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 owned 53% of United Trust Group, Inc., an insurance holding company, and UII
owned 47% of United Trust Group, Inc. At the time the decision to merge was
made, 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 occurred
on July 26, 1999 at a special shareholder meeting, with shareholders of both
companies approving the transaction. UTI shareholders cast 1,779,049 votes in
favor of the merger and 14,597 votes against the merger. Immediately following
the merger, United Trust Group, Inc. (UTG), which was now 100% owned by UTI, was
liquidated and UTI changed its name to United Trust Group, Inc.
In addition to the merger vote, UTI shareholders also voted to increase the
authorized common stock of the Company from 3,500,000 shares to 7,000,000. This
matter was also approved, receiving 1,810,771 votes in favor of the increase and
29,356 votes against the increase. The Company has no current plans for the
additional authorized shares.
ITEM 5. OTHER INFORMATION.
None
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,
1998.
24
<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 GROUP, INC.
------------------------
(Registrant)
Date: November 8, 1999 By /s/ James E. Melville
- ----- ---------------- -- ---------------------
James E. Melville
President, Chief Operating Officer
and Director
Date: November 8, 1999 By /s/ Theodore C. Miller
- ----- ---------------- -- ----------------------
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
25
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> SEP-30-1998
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 26,851,666
<DEBT-CARRYING-VALUE> 149,255,416
<DEBT-MARKET-VALUE> 148,925,191
<EQUITIES> 2,041,483
<MORTGAGE> 15,628,903
<REAL-ESTATE> 8,307,667
<TOTAL-INVEST> 218,397,363
<CASH> 20,537,648
<RECOVER-REINSURE> 40,702,858
<DEFERRED-ACQUISITION> 5,536,559
<TOTAL-ASSETS> 331,924,924
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 245,985,686
<POLICY-HOLDER-FUNDS> 19,320,946
<NOTES-PAYABLE> 6,351,943
0
0
<COMMON> 65,769
<OTHER-SE> 36,093,587
<TOTAL-LIABILITY-AND-EQUITY> 331,924,924
17,049,901
<INVESTMENT-INCOME> 10,872,137
<INVESTMENT-GAINS> (384,290)
<OTHER-INCOME> 398,205
<BENEFITS> 16,548,495
<UNDERWRITING-AMORTIZATION> 2,138,360
<UNDERWRITING-OTHER> 7,583,246
<INCOME-PRETAX> 1,665,852
<INCOME-TAX> (345,799)
<INCOME-CONTINUING> 1,139,213
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,139,213
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.45
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
