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 June 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, 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 July 25,
1999, was 2,490,438.
1
UNITED TRUST, INC. AND SUBSIDIARIES
(The "Company")
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION................................................3
ITEM 1. FINANCIAL STATEMENTS...............................................3
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.....3
Consolidated Statements of Operations for the Six and Three Months
Ended June 30, 1999 and 1998.........................................4
Consolidated Statement of Shareholders'equity for the Period Ended
June 30, 1999........................................................5
Consolidated Statements of Cash Flows for the Six Months Ended
June 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......................................14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........20
PART II. OTHER INFORMATION..................................................21
ITEM 1. LEGAL PROCEEDINGS.................................................21
ITEM 2. CHANGE IN SECURITIES..............................................21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............21
ITEM 5. OTHER INFORMATION.................................................21
ITEM 6. EXHIBITS..........................................................21
SIGNATURES....................................................................22
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------
June 30, December 31,
ASSETS 1999 1998
--------------- ---------------
Investments:
Fixed maturities at amortized cost
(market $156,711,258 and $179,885,379) $ 156,195,095 $ 174,240,848
Investments held for sale:
Fixed maturities, at market
(cost $28,345,298 and $1,494,636) 27,662,754 1,505,406
Equity securities, at market
(cost $2,886,317 and $2,725,061) 2,186,210 2,087,416
Mortgage loans on real estate at amortized cost 10,647,867 10,941,614
Investment real estate, at cost,
net of accumulated depreciation 6,810,635 8,979,183
Real estate acquired in satisfaction of debt 1,550,000 1,550,000
Policy loans 14,108,008 14,134,041
Other long-term investments 906,278 906,278
Short-term investments 2,181,226 1,062,796
--------------- ---------------
222,248,073 215,407,582
Cash and cash equivalents 15,266,626 26,378,463
Investment in affiliates 5,491,494 5,549,515
Accrued investment income 3,809,079 3,563,383
Reinsurance receivables:
Future policy benefits 36,593,010 36,965,938
Policy claims and other benefits 3,732,835 3,563,963
Cost of insurance acquired 38,316,762 39,307,960
Deferred policy acquisition costs 5,751,222 6,324,548
Costs in excess of net assets purchased,
net of accumulated amortization 2,597,210 2,642,210
Property and equipment,
net of accumulated depreciation 3,111,063 3,179,203
Other assets 1,058,464 941,656
--------------- ---------------
Total assets $ 337,975,838 $ 343,824,421
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 246,912,647 $ 248,391,753
Policy claims and benefits payable 2,239,116 2,183,434
Other policyholder funds 1,915,383 2,150,632
Dividend and endowment accumulations 14,745,808 15,329,048
Income taxes payable:
Current 2,649 115,785
Deferred 9,639,082 9,438,758
Notes payable 6,813,743 9,529,138
Indebtedness to affiliates, net 20,956 22,244
Other liabilities 5,492,486 5,890,059
--------------- ---------------
Total liabilities 287,781,870 293,050,851
--------------- ---------------
Minority interests in consolidated subsidiaries 24,997,836 25,412,259
--------------- ---------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 3,500,000 shares - 2,490,438 and 2,490,438 shares
issued after deducting treasury shares of 28,000 and 28,000 49,809 49,809
Additional paid-in capital 27,403,172 27,403,172
Accumulated deficit (1,558,876) (1,814,818)
Accumulated other comprehensive income (697,973) (276,852)
--------------- ---------------
Total shareholders' equity 25,196,132 25,361,311
--------------- ---------------
Total liabilities and shareholders' equity $ 337,975,838 $ 343,824,421
=============== ===============
See accompanying notes.
3
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------------- ----------------- ----------------- -----------------
Revenues:
Premiums and policy fees $ 6,655,438 $ 8,182,157 $ 13,702,568 $ 16,650,503
Reinsurance premiums and policy fees (950,168) (1,071,078) (1,989,787) (2,307,943)
Net investment income 3,603,212 3,786,410 7,243,599 7,513,412
Realized investment gains and (losses), net (355,998) (494,652) (339,655) (402,404)
Other income 183,998 154,228 354,868 330,257
---------------- ----------------- ----------------- -----------------
9,136,482 10,557,065 18,971,593 21,783,825
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 5,647,567 5,521,205 11,805,334 11,544,315
Reinsurance benefits and claims (737,789) (507,559) (1,483,034) (1,097,433)
Annuity 355,583 364,554 701,161 742,414
Dividends to policyholders 303,685 909,260 660,664 1,925,204
Commissions and amortization of deferred
policy acquisition costs 636,137 776,558 1,506,497 1,820,235
Amortization of cost of insurance acquired 495,270 609,561 991,198 1,220,444
Operating expenses 1,882,088 2,237,899 3,962,993 4,475,739
Interest expense 161,455 482,195 359,332 969,808
---------------- ----------------- ----------------- -----------------
8,743,996 10,393,673 18,504,145 21,600,726
Income before income taxes, minority interest
and equity in earnings of investees 392,486 163,392 467,448 183,099
Income tax (expense) credit (293,258) 35,981 (233,255) 121,012
Minority interest in income of
consolidated subsidiaries (10,777) (62,213) (31,806) (95,261)
Equity in earnings of investees 35,030 91,544 53,555 134,295
---------------- ----------------- ----------------- -----------------
Net income $ 123,481 $ 228,704 $ 255,942 $ 343,145
================ ================= ================= =================
Basic earnings per share from continuing
operations and net income $ 0.05 $ 0.14 $ 0.10 $ 0.21
================ ================= ================= =================
Diluted earnings per share from continuing
operations and net income $ 0.07 $ 0.15 $ 0.14 $ 0.23
================ ================= ================= =================
Basic weighted average shares outstanding 2,490,438 1,627,200 2,490,438 1,627,870
================ ================= ================= =================
Diluted weighted average shares outstanding 2,696,800 1,833,562 2,696,800 1,834,232
================ ================= ================= =================
See Accompanying notes.
4
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the Period ended June 30,1999
- ------------------------------------------------------------------------------------------------------------------------
Common stock
Balance, beginning of year $ 49,809
Issued during year 0
Purchase treasury stock 0
------------------
Balance, end of period 49,809
------------------
Additional paid-in capital
Balance, beginning of year 27,403,172
Issued during year 0
Purchase treasury stock 0
------------------
Balance, end of period 27,403,172
------------------
Retained earnings (accumulated deficit)
Balance, beginning of year (1,814,818)
Net income 255,942 $ 255,942
------------------ ------------------
Balance, end of period (1,558,876)
------------------
Accumulated other comprehensive income
Balance, beginning of year (276,852)
Unrealized depreciation on securities (421,121)
Foreign currency translation adjustments 0
Minimum pension liability adjustment 0
------------------
Other comprehensive income (421,121) (421,121)
------------------ ------------------
Comprehensive income $ (165,179)
==================
Balance, end of period (697,973)
------------------
Total shareholder's equity, end of period $ 25,196,132
==================
See accompanying notes.
5
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- -----------------------------------------------------------------------------------------------------
Six Months Ended
June 30, June 30,
1999 1998
------------- --------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating
activities:
Net income $ 255,942 $ 343,145
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 283,021 317,985
Realized investment (gains) losses, net 339,655 402,404
Policy acquisition costs deferred (385,000) (488,000)
Amortization of deferred policy acquisition costs 958,326 1,025,586
Amortization of cost of insurance acquired 991,198 1,220,444
Amortization of costs in excess of net
assets purchased 45,000 45,000
Depreciation 261,941 239,644
Minority interest 31,806 95,261
Equity in earnings of investees (53,555) (134,295)
Change in accrued investment income (245,696) 89,765
Change in reinsurance receivables 204,056 325,431
Change in policy liabilities and accruals (1,696,571) 453,692
Charges for mortality and administration of
universal life and annuity products (5,399,734) (5,548,543)
Interest credited to account balances 3,284,367 3,003,308
Change in income taxes payable 87,188 (135,055)
Change in indebtedness (to) from affiliates, net (1,288) 16,425
Change in other assets and liabilities, net (499,108) 165,498
------------- --------------
Net cash provided by (used in) operating activities (1,538,452) 1,437,695
Cash flows from investing activities: Proceeds from
investments sold and
matured:
Fixed maturities held for sale 630,000 83,928
Fixed maturities sold 0 0
Fixed maturities matured 19,420,359 19,429,686
Equity securities 0 0
Mortgage loans 3,026,853 469,613
Real estate 2,092,874 827,765
Policy loans 1,636,161 1,631,118
Short-term 383,780 1,473,531
------------- --------------
Total proceeds from investments sold and matured 27,190,027 23,915,641
Cost of investments acquired:
Fixed maturities held for sale (27,497,142) 0
Fixed maturities (1,643,873) (16,991,445)
Equity securities (161,256) 0
Mortgage loans (2,733,106) (1,082,415)
Real estate (356,563) (480,567)
Policy loans (1,610,128) (1,738,345)
Other long-term investments 0 (66,212)
Short-term (1,502,210) 1,979
------------- --------------
Total cost of investments acquired (35,504,278) (20,357,005)
Purchase of property and equipment (113,764) (78,364)
------------- --------------
Net cash provided by (used in) investing activities (8,428,015) 3,480,272
Cash flows from financing activities:
Policyholder contract deposits 7,412,179 8,025,990
Policyholder contract withdrawals (5,842,154) (5,721,299)
Purchase of treasury stock 0 (26,527)
Payments of principal on notes payable (2,715,395) (470,965)
------------- --------------
Net cash provided by (used in) financing activities (1,145,370) 1,807,199
------------- --------------
Net increase (decrease) in cash and cash equivalents (11,111,837) 6,725,166
Cash and cash equivalents at beginning of period 26,378,463 16,105,933
------------- --------------
Cash and cash equivalents at end of period $ 15,266,626 $ 22,831,099
============= ==============
See accomyanying notes.
6
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, 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 June 30, 1999, the parent, significant subsidiaries and affiliates of United
Trust Inc. were as depicted on the following organizational chart.
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
2. INVESTMENTS
As of June 30, 1999, fixed maturities and fixed maturities held for sale
represented 83% of total invested assets. As prescribed by the various state
insurance department statutes and regulations, the insurance companies'
investment portfolio is required to be invested 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 June 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 June 30, 1999 and December 31, 1998, the Company has $6,813,743 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 2,038,743 3,252,071
Convertible notes 2,560,000 2,560,000
Other notes payable 1,350,000 1,350,000
------------- -------------
$ 6,813,743 $ 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 June 30, 1999 was 7.75%. Interest is paid quarterly. 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 each
interest installment beginning December 16, 1997, with a final payment due June
16, 2002. The aforementioned $840,000 note provides for a lump sum principal
payment due June 16, 2002. The original 20-year notes bear interest at the rate
of 8 1/2% per annum on $2,747,109 and 8.75%
8
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 outside 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.
C. Convertible notes
On July 31, 1997, UTI issued convertible notes for cash in the amount of
$2,560,000 to seven individuals, all officers or employees of UTI. 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.
D. Other notes payable
UII holds 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 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. 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.
Scheduled principal reductions on the Company's debt for the next five years is
as follows:
Year Amount
---- ------
1999 $ 150,000
2000 0
2001 0
2002 840,000
2003 0
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 June 30, 1999 options for 42,438 shares were granted and exercised.
Options for 1,562 shares remain available for grant.
9
A summary of the status of UTI's stock option plan through June 30, 1999 and
December 31, 1998 is presented below.
1999 1998
---- ----
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year 1,562 $ 0.20 1,562 $ 0.20
Granted 0 0.00 0 0.00
Exercised 0 0.00 0 0.20
Forfeited 0 0.00 0 0.00
-------- --------
Outstanding at end of period 1,562 $ 0.20 1,562 $ 0.20
===== ======
Options exercisable at end of period 1,562 $ 0.20 1,562 $ 0.20
Fair value of options granted
during the period $ 0.00 $ 0.00
The following information applies to options outstanding at June 30, 1999:
Number outstanding 1,562
Exercise price $ 0.20
Remaining contractual life Indefinite
B. Deferred compensation plan
UTI and FCC established a deferred compensation plan during 1993 pursuant to
which an officer or agent of FCC, UTI or affiliates of UTI, could defer a
portion of their income over the next two and one-half years in return for a
deferred compensation payment payable at the end of seven years in the amount
equal to the total income deferred plus interest at a rate of approximately 8.5%
per annum and a stock option to purchase shares of common stock of UTI. At the
beginning of the deferral period an officer or agent received an immediately
exercisable option to purchase 2,300 shares of UTI common stock at $17.50 per
share for each $25,000 ($10,000 per year for two and one-half years) of total
income deferred. The option expires on December 31, 2000. A total of 105,000
options were granted in 1993 under this plan. As of June 30, 1999 no options
were exercised. At June 30, 1999 and December 31, 1998, the Company held a
liability of $1,556,639 and $1,494,520, respectively, relating to this plan. At
June 30, 1999, UTI common stock had a market price of $8.25 per share.
The following information applies to deferred compensation plan stock options
outstanding at June 30, 1999:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 1.50 years
C. Convertible notes
On July 31, 1997, United Trust Inc. issued convertible notes for cash in the
amount of $2,560,000 to seven individuals, all officers or employees of United
Trust Inc. The notes bear interest at a rate of 1% over prime, with interest
payments due quarterly and principal due upon maturity of July 31, 2004. The
conversion price of the notes are graded from $12.50 per share for the first
three years, increasing to $15.00 per share for the next two years and
increasing to $20.00 per share for the last two years. As of June 30, 1999, the
notes were convertible into 204,800 shares of UTI common stock with no
conversion privileges having been exercised. At June 30, 1999, UTI common stock
had a market price of $8.25 per share. 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.
10
D. Stock options
At the time of the closing on the UTI stock sale to First Southern Funding, LLC
("FSF") and its affiliates on November 20, 1998, and as part of the transaction,
UTI granted, for nominal consideration, an irrevocable, exclusive option to FSF
to purchase up to 1,450,000 shares of UTI 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 June 30, 1999, no options were exercised. At June 30, 1999, UTI common stock
had a market value of $8.25 per share.
The following information applies to options outstanding at June 30, 1999:
Number outstanding 1,450,000
Exercise price $ 15.00
Remaining contractual life 2.00 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.
For the YTD period ended June 30, 1999
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
Basic EPS
Income available to common shareholders $ 255,942 2,490,438 $ 0.10
=================
Effect of Dilutive Securities
Convertible notes 111,692 204,800
Options 1,562
--------------- ------------------
Diluted EPS
Income available to common shareholders and $
assumed conversions 367,634 2,696,800 $ 0.14
=============== ================== =================
For the second quarter ended June 30, 1999
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
Basic EPS
Income available to common shareholders $ 123,481 2,490,438 $ 0.05
=================
Effect of Dilutive Securities
Convertible notes 55,847 204,800
Options 1,562
--------------- ------------------
Diluted EPS
Income available to common shareholders and $
assumed conversions 179,328 2,696,800 $ 0.07
=============== ================== =================
11
For the YTD period ended June 30, 1998
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
Basic EPS
Income available to common shareholders $ 343,145 1,627,870 $ 0.21
=================
Effect of Dilutive Securities
Convertible notes 78,389 204,800
Options 1,562
--------------- ------------------
Diluted EPS
Income available to common shareholders and $
assumed conversions 421,534 1,834,232 $ 0.23
=============== ================== =================
For the second quarter ended June 30, 1998
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
Basic EPS
Income available to common shareholders $ 228,704 1,627,200 $ 0.14
=================
Effect of Dilutive Securities
Convertible notes 39,410 204,800
Options 1,562
--------------- ------------------
Diluted EPS
Income available to common shareholders and $
assumed conversions 268,114 1,833,562 $ 0.15
=============== ================== =================
UTI has stock options outstanding during the second quarter of 1999 and 1998 for
105,000 shares of common stock at $17.50 per share and options for 1,450,000 and
0 shares of common stock respectively at $15.00 per share that were not included
in the computation of diluted EPS because the exercise price was greater than
the average market price of the common shares.
6. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts which
have been returned against life and health insurers in the jurisdictions in
which the Company does business involving the insurers' sales practices, alleged
agent misconduct, failure to properly supervise agents, and other matters. Some
of the lawsuits have resulted in the award of substantial judgments against the
insurer, including material amounts of punitive damages. In some states, juries
have substantial discretion in awarding punitive damages in these circumstances.
Under the insurance guaranty fund laws in most states, insurance companies doing
business in a participating state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although the Company cannot predict the amount of any future assessments, most
insurance guaranty fund laws currently provide that an assessment may be excused
or deferred if it would threaten an insurer's financial strength. Mandatory
assessments may be partially recovered through a reduction in future premium tax
in some states. The Company does not believe such assessments will be materially
different from amounts already provided for in the financial statements.
12
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 $301,651 and $953,881 in interest expense
during the first six months of 1999 and 1998, respectively. The Company paid
$429,000 and $10,555 in federal income tax during the first six 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 owns 53% of United Trust Group, Inc., an insurance holding company, and UII
owns 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 817,627 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 now
100% owned by UTI, was liquidated and UTI changed its name to United Trust
Group, Inc.
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.
13
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 UTI and its subsidiaries at June 30, 1999.
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 18% when comparing the first six months 1999 to 1998 and 20% comparing
second quarters. 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
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 13% 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 six months of 1999
to 1998 and 5% comparing second quarter results. During September and October of
1998, the national prime rate declined three quarters of
14
one percent (.75%). This decline reduced yields on investments available in the
marketplace in which the Company invests, primarily fixed maturities.
Approximately 10.5% of the total fixed maturity portfolio will mature during
1999, with another 47.2% maturing in the next two to five years. If interest
rates remain at current levels, investment income will continue to decline as
these maturities are reinvested at current market rates.
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 comparable in 1999 to
1998 for the quarter and year to date results. Although the end results are
similar, two events for offsetting amounts were incurred 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.
Policyholder benefits increased due to an increase in death benefit claims of
$1,258,000 from the prior year six month period and $740,000 from the prior
second quarter period. There is no single event that caused mortality to
increase. Policy claims vary from year to year and therefore, fluctuations in
mortality are to be expected and are not considered unusual by management. 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 11% in 1999 compared to 1998. The decrease in
operating expenses is due in part, to a decrease in salaries from normal
attrition. 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 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 63% in 1999 compared to 1998 for the first six months
and 67% when comparing second 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 outside debt.
Additionally, with the new capital and expectations of future growth, management
has formulated a plan to repay the remaining outside debt within the next two
years. At June 30, 1999, UTI had $6,813,743 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. UII, an equity investee of UTI, holds notes receivable from
UTI and its subsidiaries of
15
$1,364,100. Upon the merger of UTI and UII, these notes would be eliminated in
consolidation. UII has $902,300 of outside debt that will be assumed by UTI in
the merger. This means there would be $3,791,943 of outside 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 outside 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.
(c) Net income
The Company had a first six month net income of $255,942 in 1999 compared to
$343,145 in 1998, and a second quarter net income of $123,481 in 1999 compared
to $228,704 in 1998. Increased death claim experience and an increase in income
tax expense, partially offset by lower interest expense costs from the
retirement of outside debt and lower policy reserve increases, contributed to
the difference in earnings.
Financial Condition
The financial condition of the Company has changed very little since December
31,1998. Total shareholder's equity decreased approximately $165,000 as of June
30, 1999 compared to December 31, 1998.
Investments represent approximately 66% and 61% of total assets at June 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 any one type
of investment. In light of these statutes and regulations, and the Company's
business and investment strategy, the Company generally seeks to invest in
United States government and government agency securities and corporate
securities rated investment grade by established nationally recognized rating
organizations.
The liabilities are predominantly long-term in nature and therefore, the Company
invests in long-term fixed maturity investments that are reported in the
financial statements at their amortized cost. The Company has the ability and
intent to hold these investments to maturity; consequently, the Company does not
expect to realize any significant loss from these investments. The Company does
not own any derivative investments or "junk bonds". As of June 30, 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 six months of 1999 as
available for sale. Securities originally classified as available for sale have
since matured, thus reducing the amount of securities carried in this category.
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 six 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. Yields are more attractive than those in the recent bond market,
and with the expertise First Southern can provide in this area, the Company
believes it can issue or acquire loans which will provide attractive yields
while maintaining high quality and low risk.
16
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 outside debt. The Company anticipates reducing
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 5% and 8% as of June 30, 1999, and December 31, 1998,
respectively. Fixed maturities as a percentage of total invested assets were 83%
and 82% as of June 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 six months of 1999 as available
for sale. Securities originally classified as available for sale have since
matured, thus reducing the amount of securities carried in this category. 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 six 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 $(1,538,452) and $1,437,695
in 1999 and 1998, respectively. The net cash provided by (used in) operating
activities plus net policyholder contract deposits after the payment of
policyholder withdrawals equaled $31,573 in 1999 and $3,742,386 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 $(8,428,015) and $3,480,272,
for 1999 and 1998, respectively. The most significant aspect of cash provided by
(used in) investing activities are the fixed maturity transactions. Fixed
maturities account for 82% and 83% 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 $(1,145,370) and
$1,807,199 for 1999 and 1998, respectively. Policyholder contract deposits
decreased 8% in 1999 compared to 1998. Policyholder contract withdrawals has
increased 2% 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 slightly less than
the previous year.
At June 30, 1999, the Company had a total of $6,813,743 in long-term debt
outstanding. The debt structure is described in the following paragraphs.
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 outside debt. Additionally, with the new capital and expectations of
future growth, management has formulated a plan to repay the remaining outside
debt within the next two years. At June 30, 1999, UTI had $6,813,743 in notes
payable. On March 1, 1999, First
17
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. UII, an equity investee of UTI, holds notes receivable from
UTI and its subsidiaries of $1,364,100. Upon the merger of UTI and UII, these
notes will be eliminated in consolidation. UII has $902,300 of outside debt that
will be assumed by UTI in the merger. This means there would be $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.
The senior debt is through National City Bank (formerly First of America Bank)
and is subject to a credit agreement. As of June 30, 1999 the outstanding
principal balance of the senior debt is $25,000. 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 National City Bank from time to time as its "base lending rate".
The base rate at June 30, 1999 was 7.75% and has remained unchanged through the
date of this filing. Interest is paid quarterly. The remaining principal balance
will be payable on the maturity date, May 8, 2005, and is being maintained to
keep the Company's credit relationship with National City Bank in place.
The subordinated debt was incurred June 16, 1992 as a part of an acquisition and
consists of 10 and 20 year notes. As of March 31, 1999 the outstanding principal
balance of the 10-year notes is $2,267,000 and the 20-year notes is $3,252,000.
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 $840,000 note provides for a lump sum principal payment
due June 16, 2002. In June 1997, the Company refinanced $204,267 of its
subordinated 10-year notes to subordinated 20-year notes bearing interest at the
rate of 8.75%. The repayment terms of these notes are the same as the original
subordinated 20 year notes. The 20-year notes bear interest at the rate of 8
1/2% per annum on $3,530,000 and 8.75% per annum on $505,000, 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 outside 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 July 31, 1997, United Trust Inc. issued convertible notes totaling $2,560,000
to seven individuals, all officers or employees of United Trust Inc. As of
December 31, 1998, the outstanding principal balance of the convertible notes is
$2,560,000. The notes bear interest at a rate of 1% over prime, currently at
7.75%, 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,
1999, the notes were convertible into 204,800 shares of UTI common stock with no
conversion privileges having been exercised. 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.
As of June 30, 1999 the Company has a total of $45,110,606 of cash and cash
equivalents, short-term investments and investments held for sale in comparison
to $6,813,743 of notes payable. UTI and FCC service this debt through existing
cash balances and management fees received from the insurance subsidiaries. FCC
is further able to service this debt through dividends it may receive from UG.
Since UTI is a holding company, funds required to meet its debt service
requirements and other expenses are primarily provided by its subsidiaries. On a
parent only basis, UTI's cash flow is dependent on revenues from a management
agreement with UII and its earnings received on invested assets and cash
balances. At June 30, 1999, substantially all of the consolidated shareholders
equity represents net assets of its subsidiaries. Cash requirements of UTI
primarily relate to servicing its long-term debt. The Company's insurance
subsidiaries have maintained adequate statutory capital and surplus and have not
used surplus relief or financial reinsurance, which have come under scrutiny by
many state insurance departments. The payment of cash dividends to shareholders
is not legally restricted. However, insurance company dividend payments are
regulated by the state insurance department where the insurance company is
domiciled. UTI is the ultimate parent of UG through ownership of several
intermediary holding companies. UG can not pay a dividend directly to UTI due to
the ownership structure.
18
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, 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.
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 owns 53% of United Trust Group, Inc., an insurance holding company, and UII
owns 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, with shareholders of both companies approving the transaction.
UTI issued 817,627 shares of its authorized but
19
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 now 100% owned by UTI, was liquidated and UTI
changed its name to United Trust Group, Inc.
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.
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.
June 30, 1999
Expected maturity date
1999 2000 2001 2002 2003 Thereafter Total Fair value
Long term debt
Fixed rate 0 0 0 840,000 0 2,538,743 3,378,743 3,246,080
Avg. int. rate 0 0 0 7.50% 0 8.30% 8.10%
Variable rate 150,000 0 0 0 0 3,285,000 3,435,000 3,435,000
Avg. int. rate 8.75% 0 0 0 0 8.75% 8.75%
20
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 owns 53% of United Trust Group, Inc., an insurance holding company, and UII
owns 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 shareholders 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED TRUST, INC.
------------------
(Registrant)
Date: August 11, 1999 By /s/ James E. Melville
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James E. Melville
President, Chief Operating Officer
and Director
Date: August 11, 1999 By /s/ Theodore C. Miller
- ----------------------- --------------------------
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
22