UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 2)
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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, 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
April 30, 1998, was 1,627,200.
1
<PAGE>
UNITED TRUST, INC. AND SUBSIDIARIES
(The "Company")
Form 10-Q/A
This amendment includes all the information from the original filing and
the amended information. The amendment includes the addition of the
financial schedule "Consolidated Statement of Changes in Shareholders'
Equity". This amendment has been prepared to include the new information
presented in gray shading on the hard copy and in all caps on the
electronic filing under EDGAR.
TABLE OF CONTENTS
Part 1: Financial Information 3
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997 3
Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997 4
Consolidated Statement of Changes in Shareholders'
Equity for the period ended March 31, 1998 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II - Other Information 20
Item 5. Other information 20
Item 6. Exhibits 20
Signatures 21
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
ASSETS 1998 1997
<TABLE>
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $179,693,379 and $184,782,568) $ 175,588,738 $ 180,970,333
Investments held for sale:
Fixed maturities, at market
(cost $1,669,020 and $1,672,298) 1,668,515 1,668,630
Equity securities, at market
(cost $3,184,357 and $3,184,357) 2,619,571 3,001,744
Mortgage loans on real estate at amortized cost 9,314,870 9,469,444
Investment real estate, at cost,
net of accumulated depreciation 9,137,807 9,760,732
Real estate acquired in satisfaction of debt 1,724,544 1,724,544
Policy loans 14,242,429 14,207,189
Short-term investments 627,845 1,798,878
Other invested assets 66,212 0
214,990,531 222,601,494
Cash and cash equivalents 24,978,271 16,105,933
Investment in affiliates 5,622,841 5,636,674
Accrued investment income 4,037,979 3,686,562
Reinsurance receivables:
Future policy benefits 37,601,740 37,814,106
Policy claims and other benefits 3,576,509 3,529,078
Other accounts and notes receivable 903,254 845,066
Cost of insurance acquired 40,912,005 41,522,888
Deferred policy acquisition costs 10,283,427 10,600,720
Costs in excess of net assets purchased,
net of accumulated amortization 2,718,102 2,777,089
Property and equipment,
net of accumulated depreciation 3,390,147 3,412,956
Other assets 1,007,870 767,258
Total assets $ 350,022,676 $ 349,299,824
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 249,368,889 $ 248,805,695
Policy claims and benefits payable 1,939,075 2,080,907
Other policyholder funds 2,519,118 2,445,469
Dividend and endowment accumulations 15,089,100 14,905,816
Income taxes payable:
Current 10,662 15,730
Deferred 14,078,843 14,174,260
Notes payable 21,511,706 21,460,223
Indebtedness to affiliates, net 85,476 18,475
Other liabilities 4,209,287 3,790,051
Total liabilities 308,812,156 307,696,626
Minority interests in consolidated subsidiaries 26,021,111 26,246,580
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 3,500,000 shares - 1,627,200 and 1,634,77
issued after deducting treasury shares of 285,039 an 32,544 32,696
Additional paid-in capital 16,420,442 16,488,375
Unrealized depreciation of investments held for sale (242,692) (29,127)
Accumulated deficit (1,020,885) (1,135,326)
Total shareholders' equity 15,189,409 15,356,618
Total liabilities and shareholders' equity $ 350,022,676 $ 349,299,824
</TABLE>
See accompanying notes.
3
<PAGE>
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended
March 31, March 31,
1998 1997
Revenues:
<TABLE>
<S> <C> <C>
Premiums and policy fees $8,468,346 $9,072,396
Reinsurance premiums and polic (1,236,865) (1,146,010)
Net investment income 3,727,002 3,844,899
Realized investment gains and
(losses), net 92,248 (6,136)
Other income 176,029 200,422
11,226,760 11,965,571
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 6,023,110 6,671,186
Reinsurance benefits and claim (589,874) (433,176)
Annuity 377,860 352,503
Dividends to policyholders 1,015,944 1,127,502
Commissions and amortization of
deferred policy acquisition costs 1,043,677 1,110,410
Amortization of cost of insurance
acquired 610,883 526,264
Operating expenses 2,237,840 2,589,176
Interest expense 487,613 414,948
11,207,053 12,358,813
Income(loss)before income taxes,
minority interest and equity
in earnings of investees 19,707 (393,242)
Income tax credit 85,031 403,562
Minority interest in loss (income)
of consolidated subsidiaries (33,048) 20,092
Equity in earnings of investee 42,751 16,614
Net income $ 114,441 $ 47,026
Basic earnings per share from continuing
operations and net income $ 0.07 $ 0.03
Diluted earnings per share from continuing
operations and net income $ 0.08 $ 0.03
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING 1,628,547 1,870,094
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 1,834,909 1,871,656
</TABLE>
See accompanying notes.
4
<PAGE>
UNITED TRUST, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED MARCH 31,1998
<TABLE>
<S> <C> <C>
COMMON STOCK
BALANCE, BEGINNING OF YEAR $ 32,696
ISSUED DURING YEAR 0
PURCHASE TREASURY STOCK (152)
BALANCE, END OF PERIOD 32,544
ADDITIONAL PAID-IN CAPITAL
BALANCE, BEGINNING OF YEAR 16,488,375
ISSUED DURING YEAR 0
PURCHASE TREASURY STOCK (67,933)
BALANCE, END OF PERIOD 16,420,442
RETAINED EARNINGS (ACCUMULATED DEFICIT)
BALANCE, BEGINNING OF YEAR (1,135,326)
NET INCOME 114,441 $ 114,441
BALANCE, END OF PERIOD (1,020,885)
ACCUMULATED OTHER COMPREHENSIVE INCOME
BALANCE, BEGINNING OF YEAR (29,127)
UNREALIZED DEPRECIATION ON SECURITIES 0
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS (213,565)
MINIMUM PENSION LIABILITY ADJUSTMENT 0
OTHER COMPREHENSIVE INCOME (213,565) (213,565)
COMPREHENSIVE INCOME $ (99,124)
BALANCE, END OF PERIOD (242,692)
TOTAL SHAREHOLDER'S EQUITY,
END OF PERIOD $ 15,189,409
</TABLE>
See accompanying notes.
5
<PAGE>
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
March 31, March 31,
1998 1997
<TABLE>
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 114,441 $ 47,026
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 146,403 173,627
Realized investment (gains) losses, net (92,248) 6,136
Policy acquisition costs deferred (89,000) (234,000)
Amortization of deferred policy acquisition costs 406,293 474,659
Amortization of cost of insurance acquired 610,883 526,264
Amortization of costs in excess of net
assets purchased 22,500 38,750
Depreciation 118,631 101,245
Minority interest 33,048 (20,092)
Equity in earnings of investees (42,751) (16,614)
Change in accrued investment income (351,417) (644,956)
Change in reinsurance receivables 164,935 374,086
Change in policy liabilities and accruals 31,192 (4,983)
Charges for mortality and administration of
universal life and annuity products (2,715,992) (2,632,738)
Interest credited to account balances 1,781,211 1,840,372
Change in income taxes payable (100,485) (473,741)
Change in indebtedness (to) from affiliates, net 67,001 (51,890)
Change in other assets and liabilities, net 204,736 (7,954)
Net cash provided by (used in) operating activities 309,381 (504,803)
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 0 0
Fixed maturities sold 0 0
Fixed maturities matured 15,433,649 953,856
Equity securities 0 0
Mortgage loans 154,574 539,138
Real estate 745,741 159,705
Policy loans 909,847 954,692
Short-term 1,180,000 0
Total proceeds from investments sold and matured 18,423,811 2,607,391
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (10,210,000) (3,947,561)
Equity securities 0 0
Mortgage loans 0 0
Real estate (138,171) (252,742)
Policy loans (945,087) (1,178,553)
Other invested assets (66,212) 0
Short-term 0 0
Total cost of investments acquired (11,359,470) (5,378,856)
Purchase of property and equipment (56,741) (28,123)
Net cash provided by (used in) investing activities 7,007,600 (2,799,588)
Cash flows from financing activities:
Policyholder contract deposits 4,505,638 5,190,761
Policyholder contract withdrawals (2,923,754) (3,411,032)
Purchase of treasury stock (26,527) 0
Net cash provided by financing activities 1,555,357 1,779,729
Net increase (decrease) in cash and
cash equivalents 8,872,338 (1,524,662)
Cash and cash equivalents at beginning of period 16,105,933 17,326,235
Cash and cash equivalents at end of period $ 24,978,271 $ 15,801,573
</TABLE>
See accompanying notes.
6
<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 March 31, 1998, the parent, significant subsidiaries and affiliates of
United Trust Inc. were as depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF MARCH 31, 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").
7
<PAGE>
2. INVESTMENTS
As of March 31, 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 March 31, 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 March 31, 1998 and December 31, 1997, the Company has $21,511,706 and
$21,460,223 in long-term debt outstanding, respectively. The debt is
comprised of the following components:
<TABLE>
<S> <C> <C>
1998 1997
Senior debt $ 6,900,000 $ 6,900,000
Subordinated 10 yr.
notes 5,746,774 5,746,774
Subordinated 20 yr.
notes 3,902,582 3,902,582
Convertible notes 2,560,000 2,560,000
Other notes payable 2,392,686 2,350,867
$ 21,511,706 $ 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 March 31, 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. In June
1997, the Company refinanced a $204,267 subordinated 10-year note as a
subordinated 20-year notes bear interest at the rate of 8.75% per annum.
8
<PAGE>
The repayment terms of the refinanced note are the same as the original
subordinated 20 year notes. The original 20-year notes bear interest at
the rate of 8.50% per annum on $3,397,620 and 8.75% per annum on $504,962
(of which the $204,267note refinanced in the current year is included),
payable semi-annually, with a lump sum principal payment due June 16, 2012.
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 March 31, 1998 of $1,510,530.
On January 16, 1998, the Company acquired 7,579 shares of UTI 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.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1998 $ 526,504
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 Company 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 UTI's common stock are granted at a fixed
price of $.20 per share. Through March 31, 1998 options for 42,438 shares
were granted and exercised. Options for 1,562 shares remain available for
grant.
9
<PAGE>
A summary of the status of UTI's stock option plan through March 31, 1998
and December 31, 1997 is presented below.
1998 1997
Exercise Exercise
Shares Price Shares Price
<TABLE>
<S> <C> <C> <C> <C>
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
</TABLE>
The following information applies to options outstanding at March 31,1998:
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 March 31, 1998 no options were exercised. At March
31, 1998 and December 31, 1997, the Company held a liability of $1,405,544
and $1,376,384, respectively, relating to this plan. At March 31, 1998, UTI
common stock had a bid price of $9.375 and an ask price of $9.875 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
March 31, 1998, the notes were convertible into 204,800 shares of UTI
common stock with no conversion privileges having been exercised. At March
31, 1998, UTI common stock had a bid price of $9.375 and an ask price of
$9.875 per share.
10
<PAGE>
D. Purchase of treasury stock
On January 16, 1998, the Company acquired 7,579 shares of UTI 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.
For the period ended March 31, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<TABLE>
<S> <C> <C> <C>
Basic EPS
Income available to common $ 114,441 1,628,547 $ 0.07
shareholders
Effect of Dilutive
Securities
Convertible notes 38,979 204,800
Options 1,562
Diluted EPS
Income available to common
shareholders and assumed
conversions 153,420 1,834,909 $ 0.08
For the period ended March 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common
shareholders $ 47,026 1,870,094 $ 0.03
Effect of Dilutive
Securities
Convertible notes
Options 1,562
Diluted EPS
Income available to common
shareholders and assumed
conversions 47,026 1,871,656 $ 0.03
</TABLE>
UTI has stock options outstanding during the first 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.
11
<PAGE>
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.
7. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $285,784 and $216,650 in interest expense
during the first quarter of 1998 and 1997, respectively. The Company paid
no federal income tax in the first quarter of 1998 and $60,044 of federal
income tax in the first quarter of 1997.
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.
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 sometime during the third quarter of 1998.
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. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
12
<PAGE>
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 not expected to be completed before July 31, 1998, and there
can be no assurance that the transaction will be completed.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
10. ACCOUNTING AND LEGAL DEVELOPMENTS
THE FASB HAS ISSUED SFAS 130 ENTITLED REPORTING COMPREHENSIVE INCOME, WHICH IS
EFFECTIVE FOR FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15,
1997. SFAS 130 ESTABLISHES STANDARDS FOR REPORTING AND PRESENTATION OF
COMPREHENSIVE INCOME AND ITS COMPONENTS IN A FULL SET OF FINANCIAL STATEMENTS.
COMPREHENSIVE INCOME INCLUDES ALL CHANGES IN SHAREHOLDERS' EQUITY, EXCEPT THOSE
ARISING FROM TRANSACTIONS WITH SHAREHOLDERS, AND INCLUDES NET INCOME AND NET
UNREALIZED GAINS(LOSSES) ON SECURITIES. SFAS 130 WAS ADOPTED AS OF JANUARY 1,
1998. ADOPTING THE NEW STANDARD REQUIRED US TO MAKE ADDITIONAL DISCLOSURES IN
THE CONSOLIDATED FINANCIAL STATEMENTS, BUT DID NOT AFFECT THE COMPANY'S
FINANCIAL POSITION OR RESULTS OF OPERATIONS.
ALL ITEMS OF OTHER COMPREHENSIVE INCOME REFLECT NO RELATED TAX EFFECT, SINCE
THE COMPANY HAS AN ALLOWANCE AGAINST THE COLLECTION OF ANY FUTURE TAX BENEFITS.
IN ADDITION, THERE WAS NO SALE OR LIQUIDATION OF INVESTMENTS REQUIRING A
RECLASSIFICATION ADJUSTMENT FOR THE PERIOD PRESENTED.
THE FASB HAS ISSUED SFAS 131 ENTITLED, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, WHICH IS EFFECTIVE FOR FINANCIAL STATEMENTS
FOR FISCAL YEARS BEGINNNING AFTER DECEMBER 15, 1997. SFAS 131 REQUIRES THAT A
PUBLIC BUSINESS ENTERPRISE REPORT FINANCIAL AND DESCRIPTIVE INFORMATION ABOUT
ITS REPORTABLE OPERATING SEGMENTS. OPERATING SEGMENTS ARE COMPONENTS OF AN
ENTERPRISE ABOUT WHICH SEPARATE FINANCIAL INFORMATION IS AVAILABLE THAT IS
EVALUATED REGULARLY IN DECIDING HOW TO ALLOCATE RESOURCES AND IN ASSESSING
PERFORMANCE. SFAS 131 WAS ADOPTED AS OF JANUARY 1, 1998. ADOPTING THE NEW
STANDARD HAD NO EFFECT ON OUR FINANCIAL POSITION OR RESULTS OF OPERATIONS,
SINCE THE COMPANY HAS NO REPORTABLE OPERATING SEGMENTS.
THE FASB HAS ISSUED SFAS 132 ENTITLED, EMPLOYERS' DISCLOSURES ABOUT PENSIONS
AND OTHER POSTRETIREMENT BENEFITS, WHICH IS EFFECTIVE FOR FINANCIAL STATEMENTS
FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997. SFAS 132 REVISES CURRENT
DISCLOSURE REQUIREMENTS FOR EMPLOYER PROVIDED POST-RETIREMENT BENEFITS. THE
STATEMENT DOES NOT CHANGE RETIREMENT MEASUREMENT OR RECOGNITION ISSUES. SFAS
132 WAS ADOPTED AS OF JANUARY 1, 1998. ADOPTING THE NEW STANDARD HAD NO AFFECT
ON OUR FINANCIAL POSITION OR RESULTS OF OPERATIONS, SINCE THE COMPANY HAS NO
PENSION PLAN OR OTHER OBLIGATION FOR POST-RETIREMENT BENEFITS.
THE FASB HAS ISSUED SFAS 133 ENTITLED, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, WHICH IS EFFECTIVE FOR ALL FISCAL YEARS BEGINNING
AFTER JUNE 15, 1999. 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.
13
<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 March 31, 1998.
Results of Operations
First quarter 1998 compared to first quarter 1997
(a) Revenues
Premiums and policy fee revenues, net of reinsurance premiums and policy
fees, decreased 9% when comparing 1998 to 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.
Net investment income decreased 3% when comparing 1998 to 1997. The
decrease in net investment income is due to the decrease in invested
assets. Although , net investment income decreased, overall investment
yields increased from 7% in 1997 to 7.3% in 1998. During the first quarter
of 1998, the Company had maturities of approximately $15,000,000 from the
fixed maturity portfolio. Of these maturities, approximately $10,000,000
was reinvested in fixed maturities and the remaining funds were placed in
interest bearing cash equivalent accounts. the Company's investment
advisor is anticipating a favorable shift, in the near future, of fixed
maturity yields. The increase in cash is a short-term fluctuation. The
Company anticipates the purchase of additional long-term fixed maturities
in the near future.
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 realized investment gains of $92,248 in the first quarter
of 1998, compared to a realized nvestment loss of $6,136 in the first
quarter of 1997. the current quarter investment gain can be attributed to
a sale of real estate property for a profit of $82,024. The Company had
other gains and losses during the period that comprised the remaining
amount reported but were immaterial in nature on an individual basis.
14
<PAGE>
(b) Expenses
Life benefits, net of reinsurance benefits and claims, decreased 13% in
1998 as compared to 1997. The decrease in premium revenues resulted in
lower benefit reserve increases in 1998. In addition, policyholder
benefits decreased due to a decrease in death benefit claims of $607,000
from the prior period. There is no single event that caused mortality to
decrease. Policy claims vary from year to year and therefore, fluctuations
in mortality are to be expected and are not considered unusual by
management.
Operating expenses decreased 14% in 1998 compared to 1997. 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 18% in 1998 compared to 1997. Since March 31,
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 Company had a net income of $114,441 in 1998 compared to $47,026 in
1997. The improvement is directly related to the decrease in life benefits
and operating expenses.
Financial Condition
The financial condition of the Company has changed very little since
December 31,1997. Total shareholder's equity decreased 1% as of March 31,
1998 compared to December 31, 1997.
Investments represent approximately 61% and 64% of total assets at March
31, 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 March 31, 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 March 31, 1998, and
December 31, 1997, respectively. Fixed maturities as a percentage of total
invested assets were 82% as of March 31, 1998 and December 31, 1997.
15
<PAGE>
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 $309,381 and ($504,803)
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 $1,891,265 in 1998 and
$1,274,926 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 $7,007,600 and
($2,799,588), for 1998 and 1997, respectively. The most significant aspect
of cash provided by (used in) investing activities are the fixed maturity
transactions. Fixed maturities account for 90% and 73% of the total cost
of investments acquired in 1998 and 1997, respectively. The Company has
not directed its investable funds to so-called "junk bonds" or derivative
investments.
Net cash provided by financing activities was $1,555,357 and $1,779,729 for
1998 and 1997, respectively. Policyholder contract deposits decreased 13%
in 1998 compared to 1997. Policyholder contract withdrawals has decreased
14% in 1998 compared to 1997. The change in policyholder contract
withdrawals is not attributable to any one significant event. Factors that
influence policyholder contract withdrawals are fluctuation of interest
rates, competition and other economic factors.
At March 31, 1998, the Company had a total of $21,511,706 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 March 31, 1998 the Company has a total $29,894,202 of cash and cash
equivalents, short-term investments and investments held for sale in
comparison to $21,511,706 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 March 31, 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
16
<PAGE>
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,
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 sometime during the third quarter of 1998.
17
<PAGE>
Pending Change in Control of United Trust, Inc.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds which are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before July 31, 1998, and there
can be no assurance that the transaction will be completed.
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.
ACCOUNTING AND LEGAL DEVELOPMENTS
THE FASB HAS ISSUED SFAS 130 ENTITLED REPORTING COMPREHENSIVE INCOME, WHICH IS
EFFECTIVE FOR FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNNING AFTER DECEMBER
15, 1997. SFAS 130 ESTABLISHES STANDARDS FOR REPORTING AND PRESENTATION OF
COMPREHENSIVE INCOME AND ITS COMPONENTS IN A FULL SET OF FINANCIAL STATEMENTS.
COMPREHENSIVE INCOME INCLUDES ALL CHANGES IN SHAREHOLDERS' EQUITY, EXCEPT THOSE
ARISING FROM TRANSACTIONS WITH SHAREHOLDERS, AND INCLUDES NET INCOME AND NET
UNREALIZED GAINS (LOSSES) ON SECURITIES. SFAS 130 WAS ADOPTED JANUARY 1, 1998.
ADOPTING THE NEW STANDARD REQUIRED US TO MAKE ADDITIONAL DISCLOSURES IN THE
CONSOLIDATED FINANCIAL STATEMENTS, BUT DID NOT AFFECT THE COMPANY'S FINANCIAL
POSITION OR RESULTS OF OPERATIONS.
ALL ITEMS OF OTHER COMPREHENSIVE INCOME REFLECT NO RELATED TAX EFFECT, SINCE THE
COMPANY HAS AN ALLOWANCE AGAINST THE COLLECTION OF ANY FUTURE TAX BENEFITS. IN
ADDITION, THERE WAS NO SALE OR LIQUIDATION OF INVESTMENTS REQUIRING A
RECLASSIFICATION ADJUSTMENT FOR THE PERIOD PRESENTED.
THE FASB HAS ISSUED SFAS 131 ENTITLED, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, WHICH IS EFFECTIVE FOR FINANCIAL STATEMENTS
FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997. SFAS 131 REQUIRES THAT A
PUBLIC BUSINESS ENTERPRISE REPORT FINANCIAL AND DESCRIPTIVE INFORMATION ABOUT
ITS REPORTABLE OPERATING SEGMENTS. OPERATING SEGMENTS ARE COMPONENTS OF AN
ENTERPRISE ABOUT WHICH SEPARATE FINANCIAL INFORMATION IS AVAILABLE THAT IS
EVALUATED REGULARLY IN DECIDING HOW TO ALLOCATE RESOURCES AND IN ASSESSING
PERFORMANCE. SFAS 131 WAS ADOPTED AS OF JANUARY 1, 1998. ADOPTING THE NEW
STANDARD HAD NO AFFECT ON OUR FINANCIAL POSITION OR RESULTS OF OPERATIONS, SINCE
THE COMPANY HAS NO REPORTABLE OPERATING SEGMENTS.
THE FASB HAS ISSUED SFAS 132 ENTITLED, EMPLOYERS' DISCLOSURES ABOUT PENSIONS
AND OTHER POSTRETIREMENT BENEFITS, WHICH IS EFFECTIVE FOR FINANCIAL STATEMENTS
FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997. SFAS 132 REVISES CURRENT
DISCLOSURE REQUIREMENTS FOR EMPLOYER PROVIDED POST-RETIREMENT BENEFITS. THE
STATEMENT DOES NOT CHANGE RETIREMENT MEASUREMENT OR RECOGNITION ISSUES. SFAS 132
WAS ADOPTED AS OF JANUARY 1, 1998. ADOPTING THE NEW STANDARD HAD NO AFFECT ON
OUR FINANCIAL POSITION OR RESULTS OF OPERATIONS, SINCE THE COMPANY HAS NO
PENSION PLAN OR OTHER OBLIGATION FOR POST-RETIRMENT BENEFITS.
18
<PAGE>
THE FASB HAS ISSUED SFAS 133 ENTITLED, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITES, WHICH IS EFFECTIVE FOR ALL FISCAL QUARTERS OF FISCAL
YEARS BEGINNING AFTER JUNE 15, 1999. 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.
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.
19
<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 sometime during the third quarter of 1998.
Pending Change in Control of United Trust, Inc.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds which are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before July 31, 1998, and there
can be no assurance that the transaction will be completed.
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.
20
<PAGE>
Signatures
The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of its March 31, 1998 filing of
Form 10-Q as set forth on the index page:
Each amendment as shown on the index page is amended to replace
the existing item, statement or exhibit reflected in the March 31,
1998 Form 10-Q filing.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED TRUST, INC.
(Registrant)
Date: January 15, 1999 By /s/ James E. Melville
James E. Melville
President, Chief Operating Officer
and Director
Date: January 15, 1999 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
21
<PAGE>