UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 AND 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] 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
October 31, 1998, was 1,627,200.
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
ITEM 1: FINANCIAL STATEMENTS 3
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31,
1997 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE AND THREE MONTHS
ENDED
SEPTEMBER 30, 1998 AND 1997 4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD
ENDED SEPTEMBER 30, 1998 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
PART II - OTHER INFORMATION 22
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2. CHANGES IN SECURITIES 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 23
SIGNATURES 24
2
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,December 31,
ASSETS 1998 1997
Investments:
Fixed maturities at amortized cost
(market $180,997,557 and $184,782,568)$ 173,273,717 $180,970,333
Investments held for sale:
Fixed maturities, at market
(cost $1,498,095 and $1,672,298) 1,508,793 1,668,630
Equity securities, at market
(cost $2,820,685 and $3,184,357) 1,986,074 3,001,744
Mortgage loans on real estate
at amortized cost 9,724,950 9,469,444
Investment real estate, at cost,
net of accumulated depreciation 9,283,288 9,760,732
Real estate acquired in satisfaction
of debt 1,646,001 1,724,544
Policy loans 13,972,263 14,207,189
Short-term investments 224,144 1,798,878
Other invested assets 66,212 0
211,685,442 222,601,494
Cash and cash equivalents 28,390,490 16,105,933
Investment in affiliates 5,823,726 5,636,674
Accrued investment income 4,019,454 3,686,562
Reinsurance receivables:
Future policy benefits 37,154,221 37,814,106
Policy claims and other benefits 3,539,631 3,529,078
Other accounts and notes receivable 915,764 845,066
Cost of insurance acquired 39,804,518 41,522,888
Deferred policy acquisition costs 9,698,841 10,600,720
Costs in excess of net assets purchased,
net of accumulated amortization 2,665,309 2,777,089
Property and equipment,
net of accumulated depreciation 3,259,525 3,412,956
Other assets 968,442 767,258
Total assets $ 347,925,363$ 349,299,824
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 247,817,394$ 248,805,695
Policy claims and benefits payable 2,086,070 2,080,907
Other policyholder funds 2,263,474 2,445,469
Dividend and endowment accumulations 15,334,597 14,905,816
Income taxes payable:
Current 55,699 15,730
Deferred 13,119,824 14,174,260
Notes payable 20,615,335 21,460,223
Indebtedness to affiliates, net 33,789 18,475
Other liabilities 4,178,581 3,790,051
Total liabilities 305,504,763 307,696,626
Minority interests in
consolidated subsidiaries 26,635,449 26,246,580
Shareholders' equity:
Common stock - no par value,
stated value $.02 per share
Authorized 3,500,000 shares -
1,627,200 and 1,634,779 shares
issued after deducting treasury shares
of 285,039 and 277,460 32,545 32,696
Additional paid-in capital 16,420,441 16,488,375
Unrealized depreciation of
investments held for sale (333,656) (29,127)
Accumulated deficit (334,179) (1,135,326)
Total shareholders' equity 15,785,151 15,356,618
Total liabilities and shareholders'
Equity $ 347,925,363$ 349,299,824
See accompanying notes
3
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30 September 30 September 30 September 30,
1998 1997 1998 1997
Revenues:
Premiums and
policy fees $ 7,504,326$ 8,079,691 $24,154,829$ 26,038,285
Reinsurance premiums
and policy fees (1,260,457)(1,440,297) (3,568,400) (3,663,723)
Net investment income 3,791,774 3,686,861 11,305,186 11,357,217
Realized investment
gains and (losses), net (433,084) (114,436) (835,488) (143,015)
Other income 164,967 142,314 495,224 602,893
9,767,526 10,354,133 31,551,351 34,191,657
Benefits and other expenses:
Benefits, claims and
settlement expenses:
Life 6,044,255 5,615,588 17,588,570 18,242,132
Reinsurance benefits
and claims (961,031) (481,468) (2,058,464) (1,447,716)
Annuity 352,619 411,395 1,095,033 1,178,807
Dividends to policyholders 781,429 922,224 2,706,633 3,074,230
Commissions and
amortization of deferred
policy acquisition costs 824,516 1,083,006 2,644,751 2,747,329
Amortization of cost
of insurance acquired 497,926 612,007 1,718,370 1,724,294
Operating expenses 1,953,061 2,378,618 6,428,800 7,745,203
Interest expense 479,180 492,258 1,448,988 1,316,892
9,971,955 11,033,628 31,572,681 34,581,171
Loss before
income taxes, minority
interest and equity in
earnings of investees (204,429) (679,495) (21,330) (389,514)
Credit (provision)
for income taxes 880,800 (157,919) 1,001,812 (285,126)
Minority interest in (gain) loss
of consolidated
subsidiaries (351,811) 353,893 (447,072) 297,943
Equity in earnings
(loss) of investees 133,442 (40,920) 267,737 1,094
Net income (loss) $ 458,002 $ (524,441)$ 801,147 $ (375,603)
Basic earnings per
share from continuing
operations and net
income (loss) $ 0.28 $ (0.30)$ 0.49 $ (0.21)
Diluted earnings per
share from continuing
operations and net
income (loss) $ 0.27 $ (0.30)$ 0.50 $ (0.21)
Basic weighted average
shares outstanding 1,627,200 1,719,806 1,627,644 1,819,398
Diluted weighted average
shares outstanding 1,833,562 1,719,806 1,834,006 1,819,398
See accompanying notes
4
UNITED TRUST, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED SEPTEMBER 30,1998
COMMON STOCK
BALANCE, BEGINNING OF YEAR $ 32,696
ISSUED DURING YEAR 0
PURCHASE TREASURY STOCK (151)
BALANCE, END OF PERIOD 32,545
ADDITIONAL PAID-IN CAPITAL
BALANCE, BEGINNING OF YEAR 16,488,375
ISSUED DURING YEAR 0
PURCHASE TREASURY STOCK (67,934)
BALANCE, END OF PERIOD 16,420,441
RETAINED EARNINGS (ACCUMULATED DEFICIT)
BALANCE, BEGINNING OF YEAR (1,135,326)
NET INCOME 801,147 $ 801,147
BALANCE, END OF PERIOD (334,179)
ACCUMULATED OTHER COMPREHENSIVE INCOME
BALANCE, BEGINNING OF YEAR (29,127)
UNREALIZED DEPRECIATION ON SECURITIES (304,529)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 0
MINIMUM PENSION LIABILITY ADJUSTMENT 0
OTHER COMPREHENSIVE INCOME (304,529) (304,529)
COMPREHENSIVE INCOME $ 496,618
BALANCE, END OF PERIOD (333,656)
TOTAL SHAREHOLDER'S EQUITY,
END OF PERIOD $ 15,785,151
See accompanying notes
5
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended
September 30 September 30,
1998 1997
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ 801,147 $ (375,603)
Adjustments to reconcile net income
(loss) 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 507,219 505,440
Realized investment (gains) losses, net 835,488 143,015
Policy acquisition costs deferred (135,000) (557,000)
Amortization of deferred policy
acquisition costs 1,036,879 984,977
Amortization of cost of
insurance acquired 1,718,370 1,724,294
Amortization of costs in excess of net
assets purchased 67,500 116,250
Depreciation 357,682 333,653
Minority interest 447,072 (297,943)
Equity in earnings of investees (267,737) (1,094)
Change in accrued investment income (332,892) (632,561)
Change in reinsurance receivables 649,332 986,960
Change in policy liabilities and accruals (118,794) (153,240)
Charges for mortality and administration of
universal life and annuity products (8,116,570) (7,996,086)
Interest credited to account balances 5,322,471 5,432,922
Change in income taxes payable (1,014,467) 210,864
Change in indebtedness
(to) from affiliates, net 15,314 (31,820)
Change in other assets and liabilities, net (22,087) (1,256,796)
Net cash provided by
(used in) operating activities 1,750,927 (863,768)
Cash flows from investing activities:
Proceeds from investments
sold and matured:
Fixed maturities held for sale 164,097 0
Fixed maturities sold 0 0
Fixed maturities matured 32,371,454 8,186,791
Equity securities 450,000 105,261
Mortgage loans 943,156 1,146,863
Real estate 1,039,924 510,806
Policy loans 2,941,532 3,799,553
Short-term 1,581,203 410,000
Total proceeds from investments
sold and matured 39,491,366 14,159,274
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (25,166,178)(14,301,690)
Equity securities (79,053) (710,387)
Mortgage loans (1,577,694) (134,314)
Real estate (941,618) (937,268)
Policy loans (2,706,606) (3,573,018)
Other invested assets (66,212) 0
Short-term 0 (404,475)
Total cost of investments acquired (30,537,361)(20,061,152)
Purchase of property and equipment (89,424) (431,910)
Net cash provided by
(used in) investing activities 8,864,581 (6,333,788)
Cash flows from financing activities:
Policyholder contract deposits 11,989,493 14,069,987
Policyholder contract withdrawals (9,812,952) (11,280,925)
Purchase of treasury stock (26,527) (926,599)
Purchase of additional shares
of equity investee 0 (165,374)
Proceeds from issuance of notes payable 0 2,560,000
Payments of principal on notes payable (480,965) (758,251)
Payment for fractional shares
from reverse stock split 0 (2,381)
Payment for fractional shares from
reverse stock split of subsidiary 0 (535,851)
Net cash provided by financing activities 1,669,049 2,960,606
Net increase (decrease) in
cash and cash equivalents 12,284,557 (4,236,950)
Cash and cash equivalents
at beginning of period 16,105,933 17,326,235
Cash and cash equivalents
at end of period $ 28,390,490 $ 13,089,285
See accompanying notes
6
UNITED TRUST, INC. AND CONSOLIDATED 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 September 30, 1998, the parent, significant subsidiaries and affiliates
of United Trust Inc. were as depicted on the following organizational
chart.
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1998
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
7
2. INVESTMENTS
As of September 30, 1998, 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. Management has the intent and ability to hold
its fixed maturity portfolio to maturity and as such carries these
securities at amortized cost. As of September 30, 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 September 30, 1998 and December 31, 1997, the Company has $20,615,335
and $21,460,223 in long-term debt outstanding, respectively. The debt is
comprised of the following components:
1998 1997
Senior debt $ 6,900,000 $ 6,900,000
Subordinated 10 yr. 5,488,523 5,746,774
notes
Subordinated 20 yr. 3,252,071 3,902,582
notes
Convertible notes 2,560,000 2,560,000
Other notes payable 2,414,741 2,350,867
$ 20,615,335 $ 21,460,223
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 September 30, 1998 was 8.5%. Interest is paid
quarterly. Principal payments of $1,000,000 are due in May of each year,
with a final payment due May 8, 2005. On November 8, 1998, the Company
prepaid one half or $500,000 of the May 1999 principal payment. The base
rate dropped one half a percentage point during October. The base rate at
October 31, 1998 was 8.0%.
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
8
note provides for a lump sum principal payment due June 16, 2002. The 20-
year notes bear interest at the rate of 8.5% per annum, interest payable
semi-annually, with a lump sum principal payment due June 16, 2012. The
Company refinanced a total of $504,962 of subordinated 10-year notes to
subordinated 20-year notes bearing interest at the rate of 8.75% per annum.
The terms, other than interest rate, of the refinanced notes are the same
as the original subordinated 20-year notes.
C. CONVERTIBLE NOTES
On July 31, 1997, United Trust Inc. issued convertible notes for cash in
the amount of $2,560,000 to seven individuals, all officers or employees of
United Trust Inc. The notes bear interest at a rate of 1% over prime, with
interest payments due quarterly and principal due upon maturity of July 31,
2004. The conversion price of the notes are graded from $12.50 per share
for the first three years, increasing to $15.00 per share for the next two
years and increasing to $20.00 per share for the last two years.
D. OTHER NOTES PAYABLE
United Income, Inc. holds two promissory notes receivable totaling $850,000
due from FCC. Each note bears interest at the rate of 1% over prime as
published in the Wall Street Journal, with interest payments due quarterly.
Principal of $150,000 is due upon the maturity date of June 1, 1999, with
the remaining principal payment of $700,000 becoming due upon the maturity
date of May 8, 2006.
As partial proceeds in the acquisition of common stock from certain
officers and directors in the third quarter of 1997, the Company issued
unsecured promissory notes. These notes bear interest at 1% over prime
with interest payments due quarterly. Principal comes due at varying times
with $150,000 maturing on January 31, 1999, $1,654,507 maturing on July 31,
2005 and one note of $70,392 requiring annual principal reductions of
$10,000 until maturity on September 23, 2004. The interest rates were
deemed favorable to UTI and as a result, the Company has discounted the
notes to reflect a 15% effective rate of interest for financial statement
purposes. The notes have a total face maturity value of $1,864,899 and a
discounted value at September 30, 1998 of $1,522,377.
On January 16, 1998, UTI acquired 7,579 shares of its common stock from the
estate of Robert Webb, a former director, for $26,527 and a promissory note
valued at $41,819 due January 16, 2005. The note bears interest at a rate
of 1% over prime, with interest due quarterly and principal due on
maturity. The note has been discounted to reflect a 15% effective rate for
financial statement purposes.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1998 $ 258,251
1999 1,826,504
2000 1,526,504
2001 1,526,504
2002 4,690,758
On November 8, 1998, the Company prepaid $500,000 of the 1999 principal
payment due on the senior debt.
4. CAPITAL STOCK TRANSACTIONS
A. STOCK OPTION PLAN
In 1985, UTI initiated a nonqualified stock option plan for employees,
agents and directors of UTI under which options to purchase up to 44,000
shares of UTI's common stock are granted at a fixed price of $.20 per
share. Through September 30, 1998 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 September 30,
1998 and December 31, 1997 is presented below.
1998 1997
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 1,562 $ 0.20 1,562 $ 0.20
Granted 0 0.00 0 0.00
Exercised 0 0.00 0 0.20
Forfeited 0 0.00 0 0.00
Outstanding at end of period 1,562 $ 0.20 1,562 $ 0.20
Options exercisable at
end of period 1,562 $ 0.20 1,562 $ 0.20
Fair value of options granted
during the period $ 0.00 $ 0.00
The following information applies to options outstanding at September 30,1998:
Number outstanding 1,562
Exercise price $ 0.20
Remaining contractual life Indefinite
B. DEFERRED COMPENSATION PLAN
UTI and FCC established a deferred compensation plan during 1993 pursuant
to which an officer or agent of FCC, UTI or affiliates of UTI, could defer
a portion of their income over the next two and one-half years in return
for a deferred compensation payment payable at the end of seven years in
the amount equal to the total income deferred plus interest at a rate of
approximately 8.5% per annum and a stock option to purchase shares of
common stock of UTI. At the beginning of the deferral period an officer or
agent received an immediately exercisable option to purchase 2,300 shares
of UTI common stock at $17.50 per share for each $25,000 ($10,000 per year
for two and one-half years) of total income deferred. The option expires
on December 31, 2000. A total of 105,000 options were granted in 1993
under this plan. As of September 30, 1998 no options were exercised. At
September 30, 1998 and December 31, 1997, the Company held a liability of
$1,464,616 and $1,376,384, respectively, relating to this plan. At
September 30, 1998, UTI common stock had a closing price of $6.50 per
share.
The following information applies to deferred compensation plan stock
options outstanding at September 30, 1998:
Number outstanding 105,000
Exercise price $17.50
Remaining contractual life 2.25 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
September 30, 1998, the notes were convertible into 204,800 shares of UTI
common stock with no conversion privileges having been exercised. At
September 30, 1998, UTI common stock had a closing price of $6.50 per
share.
10
D. PURCHASE OF TREASURY STOCK
On January 16, 1998, UTI acquired 7,579 shares of its common stock from the
estate of Robert Webb, a former director, for $26,527 and a promissory note
valued at $41,819 due January 16, 2005. The note bears interest at a rate
of 1% over prime, with interest due quarterly and principal due on
maturity.
5. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations as presented on the income statement.
For the YTD period ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
BASIC EPS
Income available to
common shareholders $ 801,147 1,627,644 $ 0.49
EFFECT OF DILUTIVE SECURITIES
Convertible notes 118,236 204,800
Options 1,562
DILUTED EPS
Income available to common
shareholders and assumed
conversions 919,383 1,834,006 $ 0.50
For the third quarter ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
BASIC EPS
Income available to
common shareholders $ 458,002 1,627,200 $ 0.28
EFFECT OF DILUTIVE SECURITIES
Convertible notes 39,847 204,800
Options 1,562
DILUTED EPS
Income available to common
shareholders and assumed
conversions 497,849 1,833,562 $ 0.27
11
For the YTD period ended September 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
BASIC EPS
Income available to common
shareholders $ (375,603) 1,819,398 $ (0.21)
EFFECT OF DILUTIVE SECURITIES 0 0
DILUTED EPS
Income available to common
shareholders and assumed
conversions (375,603) 1,819,398 $ (0.21)
For the third quarter ended September 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
BASIC EPS
Income available to
common shareholders $ (524,441) 1,719,806 $ (0.30)
EFFECT OF DILUTIVE SECURITIES 0 0
DILUTED EPS
Income available to common
shareholders and
assumed conversions (524,441) 1,719,806 $ (0.30)
UTI has stock options outstanding during the third 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.
Had UTI not incurred losses in the third quarter of 1997 and for the year
to date period ending September 30, 1997, convertible notes for 204,800
shares and options for 1,562 shares would have been included in the diluted
earnings per share calculations.
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 $1,232,658 and $1,107,090 in interest
expense through the third quarter of 1998 and 1997, respectively. The
Company paid $15,730 and $60,044 of federal income tax through the third
quarter of 1998 and 1997, respectively.
As partial proceeds for the acquisition of treasury common stock of UTI
during 1998, UTI issued promissory notes of $41,819 due January 16, 2005.
During the second quarter of 1998, the Company foreclosed on three mortgage
loans, transferring a total value of $70,000 to real estate acquired in
satisfaction of debt.
8. PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
9. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. 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. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter 1998. There can be no assurance that the transaction will
be completed. The pending change in control of UTI is not contingent upon
the merger of UTI and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
13
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 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-RETIREMENT BENEFITS.
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. 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.
14
UNITED TRUST, INC. AND CONSOLIDATED SUBSIDIARIES
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 September 30, 1998.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from any such statement due to the following important
factors, among other risks and uncertainties inherent in the company's
business:
1. Prevailing interest rate levels, which may affect the ability of the
company to sell its products, the market value of the company's
investments and the lapse ratio of the company's policies,
notwithstanding product design features intended to enhance
persistency of the company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the company's products.
4. Other factors affecting the performance of the company, including, but
not limited to, market conduct claims, insurance industry
insolvencies, stock market performance, and investment performance.
RESULTS OF OPERATIONS
(A) REVENUES
Premiums and policy fee revenues, net of reinsurance premiums and policy
fees, decreased 6% and 8% when comparing the three and nine months ended
September 30, 1998 to the same periods in 1997, respectively. 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.
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 First Southern
Funding "FSF" (FSF is an affiliate of First Southern Bancorp, Inc., a bank
holding company) 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. However,
management believes the affiliation with FSF will facilitate long-term
growth opportunities. The expected long-term benefits to UTI are an
increase in capital, which will enable the Company to pursue further growth
through acquisitions. Nationally there is a trend toward consolidation of
the financial service industry with proposed legislation to remove barriers
between banks and insurance companies.
15
Net investment income increased 3% when comparing the three months
ended September 30, 1998 to the same period one year-ago. The increase in
the current quarter is due to several factors. The improvement in cash
flow from operations compared to the previous year. The Company changed
banks during 1997, which provided an improvement in yield on cash balances.
Another factor that contributed to the increase is the investment of funds
in mortgage loans. A higher percentage of investments acquired have been
directed to mortgage loans compared to previous periods. These loans
provide an investment yield, which are approximately 3% above the yield
that can be obtained from quality fixed maturities currently available.
Net investment income decreased slightly when comparing the nine months
ended September 30, 1998 to the same period one year ago. The decrease in
net investment income is due to the decrease in invested assets. The
decrease in invested assets and the increase in cash and cash equivalents
is a short-term fluctuation as management positions the Company for the
pending change in control of UTI. The effects of lost investment revenue
are partially offset by the factors discussed in the above quarterly
comparison of investment income.
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
September 1998 board of directors meeting it was deemed necessary to reduce
interest crediting rates one half of a percentage point on certain
products. This decision was prompted by the overall decline in market
interest rates. The change in credited interest rates affects
approximately $60,000,000 of policy liabilities. The expected savings to
the Company will be approximately $300,000 per year. The change in
credited interest rates is not immediate. The change is effective on the
anniversary of the policy.
The Company had net realized investment losses of $835,488 and $143,015 for
the nine months ended September 30, 1998 and 1997, respectively. The
Company had net realized investment losses of $433,084 and $114,436 for the
three months end September 30, 1998 and 1997, respectively. During third
quarter of 1998 the Company entered into agreements to sell two non-income-
producing properties. The Company recorded a loss of $310,000 based on
these contracts. The foreclosed properties were subsequently sold for book
value. The Company realized a loss of $88,000 on the investment in John
Alden Financial Corporation common stock. Under the terms of an
acquisition agreement between Fortis, Inc. and John Alden all outstanding
common shares of John Alden were acquired. The foreclosure of three
mortgages during second quarter of 1998 resulted in realized losses of
$301,000.
(B) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 8% and 1%
for the nine and three months ended September 30, 1998 as compared to the
same periods one year-ago, respectively. The decrease in life benefits net
of reinsurance is due to the decrease in premium revenues that resulted in
lower benefit reserve increases. In addition, policyholder benefits
decreased due to a decrease in death benefit claims of $1,059,000 for the
nine months ended September 30, 1998 compared to the same period one year-
ago. Policyholder benefits increased due to an increase in death benefit
claims of $270,000 for the three months ended September 30, 1998 compared
to the same period one year-ago. There is no single event that caused
death benefits to increase or decrease. Death claims vary from period to
period and therefore, fluctuations in death benefits are to be expected and
are not considered unusual by management.
In future periods, life benefits should decrease due to the reduction in
credited interest rates. At the September 1998 board of directors meeting
it was deemed necessary to reduce interest crediting rates one half of a
percentage point on certain products. This decision was prompted by the
overall decline in market interest rates. The change in credited interest
rates affects approximately $60,000,000 of policy liabilities. The
expected savings to the Company will be approximately $300,000 per year.
The change in credited interest rates is not immediate. The change is
effective on the anniversary of the policy.
16
Operating expenses decreased 17% and 18% for the nine and three months
ended September 30, 1998 as compared to the same periods one year-ago,
respectively. The decrease in operating expenses is due to the decrease in
salaries. The decrease in salaries is due to a 10% reduction in staff
compared to the previous year, including the retirement of an executive
officer.
Interest expense increased 10% for the nine months ended September 30, 1998
as compared to the same period one year-ago. Interest expense decreased 3%
for the three months ended September 30, 1998. The decrease for the third
quarter of 1998 is due to the decrease in notes payable compared to the
previous year. The increase in interest expense for the nine months ended
as of September 30, 1998 compared to one year ago is due to the $4,061,000
of debt incurred on July 31, 1997.
In future periods, interest expense is expected to decrease due to
scheduled principal reductions of notes payable. On November 8, 1998, the
Company prepaid $500,000 of the 1999 principal payment due on the senior
debt. In October 1998, the base interest rate of variable rate debt
decreased one half of one percentage point. This decrease affects
approximately $10,961,000 of the outstanding notes payable as of September
30, 1998. 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.
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. DURING 1997, THE INSURANCE SUBSIDIARIES INCURRED A LOSS
ON THEIR FEDERAL INCOME TAX RETURN THAT WAS CARRIED FORWARD TO FUTURE
PERIODS. A TAX BENEFIT WAS NOT INCURRED IN THE FINANCIAL STATEMENTS AS A
CORRESPONDING ALLOWANCE WAS ESTABLISHED AGAINST THE DEFERRED TAX ASSET
ATTRIBUTABLE TO THE TAX LOSS CARRYFORWARD.
(C) NET INCOME
The improvement in net income for the current periods compared to the
previous year is directly related to the decrease in life benefits and
operating expenses AND THE CHANGE IN DEFERRED INCOME TAXES.
FINANCIAL CONDITION
The financial condition of the Company reflects a 3% increase in
shareholder's equity as of September 30, 1998 compared to December 31,
1997.
Investments and cash and cash equivalents represent approximately 69% and
68% of total assets at September 30, 1998 and December 31, 1997,
respectively. Accordingly, investments are the largest asset group of the
Company. The Company's insurance subsidiaries are regulated by insurance
statutes and regulations as to the type of investments that they are
permitted to make and the amount of funds that may be used for any one type
of investment. In light of these statutes and regulations, and the
Company's business and investment strategy, the Company generally seeks to
invest in United States government and government agency securities and
corporate securities rated investment grade by established nationally
recognized rating organizations.
The liabilities are predominantly long-term in nature and therefore, the
Company invests in long-term fixed maturity investments that are reported
in the financial statements at their amortized cost. The Company has the
ability and intent to hold these investments to maturity; consequently, the
Company does not expect to realize any significant loss from these
investments. The Company does not own any derivative investments or "junk
bonds". As of September 30, 1998, the carrying value of fixed maturity
securities in default as to principal or interest was immaterial in the
context of consolidated assets or shareholders' equity. The Company has
identified securities it may sell and classified them as "investments held
for sale". Investments held for sale are carried at market, with changes
in market value charged directly to shareholders' equity.
17
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 8% and 5% as of September 30, 1998, and
December 31, 1997, respectively. Fixed maturities as a percentage of total
invested assets were 82% as of September 30, 1998 and December 31, 1997.
Future policy benefits are primarily long-term in nature and therefore, the
Company's investments are predominantly in long-term fixed maturity
investments such as bonds and mortgage loans which provide sufficient
return to cover these obligations. The Company has the ability and intent
to hold these investments to maturity; consequently, the Company's
investment in long-term fixed maturities is reported in the financial
statements at their amortized cost.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to
cover the Company's unamortized deferred policy acquisition costs with
respect to the policy being surrendered.
Cash provided by (used in) operating activities was $1,750,927 and
($863,768) in 1998 and 1997, respectively. The net cash provided by (used
in) operating activities plus net policyholder contract deposits after the
payment of policyholder withdrawals equaled $3,927,468 in 1998 and
$1,925,294 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 $8,864,581 and
($6,333,788), for 1998 and 1997, respectively. The most significant aspect
of cash provided by (used in) investing activities are the fixed maturity
transactions. The increase in fixed maturities matured is due to the
timing of the investment strategy, which was started six years ago. The
strategy was investing funds into fixed maturity investments with three to
seven year maturities. Over the past several years the difference between
a seven year maturity investment yield compared to a longer period
investment yield was inconsequential. The Company has not directed its
investable funds to so-called "junk bonds" or derivative investments.
Net cash provided by financing activities was $1,669,049 and $2,960,606 for
1998 and 1997, respectively. Policyholder contract deposits decreased 15%
in 1998 compared to 1997. Policyholder contract withdrawals has decreased
13% 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 September 30, 1998, the Company had a total of $20,615,335 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 changed to
8.5% on March 1, 1997 and has remained unchanged through September 30,
1998. 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, 1998, the Company prepaid $500,000 of the May 8,1999, principal payment.
The base interest rate was reduced 0.5% during October 1998. Based on the
interest rate reduction on approximately $10,961,000 of the outstanding
notes payable as of September 30, 1998 it will save $55,000 of interest
expense over a one-year period.
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.
18
As of September 30, 1998 the Company has a total $28,390,490 of cash and
cash equivalents, short-term investments and investments held for sale in
comparison to $20,615,335 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 September 30, 1998, substantially all of the
consolidated shareholders equity represents net assets of its subsidiaries.
Cash requirements of UTI primarily relate to servicing its long-term debt.
The Company's insurance subsidiaries have maintained adequate statutory
capital and surplus and have not used surplus relief or financial
reinsurance, which have come under scrutiny by many state insurance
departments. The payment of cash dividends to shareholders is not legally
restricted. However, insurance company dividend payments are regulated by
the state insurance department where the insurance company is domiciled.
UTI is the ultimate parent of UG through ownership of several intermediary
holding companies. UG can not pay a dividend directly to UTI due to the
ownership structure. Please refer to Note 1 of the Notes to the
Consolidated Financial Statements. UG's dividend limitations are described
below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,000.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. In addition, the
Company does not believe that the regulatory initiatives currently under
consideration by various regulatory agencies will have a material adverse
impact on the Company. The Company is not aware of any material pending or
threatened regulatory action with respect to the Company or any of its
subsidiaries. The Company does not believe that any insurance guaranty
fund assessments will be materially different from amounts already provided
for in the financial statements.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
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.
19
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 during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI date 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 that 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. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter 1998. There can be no assurance that the transaction will
be completed. The pending change in control of UTI is not contingent upon
the merger of UTI and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
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.
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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-RETIREMENT BENEFITS.
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. 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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 during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
Pending Change in Control of United Trust, Inc.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. 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. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter 1998. There can be no assurance that the transaction will
be completed. The pending change in control of UTI is not contingent upon
the merger of UTI and UII.
22
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 AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule (filed only electronically with the SEC)
(b) Reports on Form 8-K
No reports of Form 8-K were filed during the quarter.
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SIGNATURES
The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of its September 30, 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
September 30, 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
24