-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BqQyHRskU25coRHEmZTf/pRh1eYbY72BZVO1WIp1zijTHEze837SFFTd3pcOfEnP Po9AFHrU+vkBUgC4CAlE5g== 0000832480-97-000004.txt : 19970515 0000832480-97-000004.hdr.sgml : 19970515 ACCESSION NUMBER: 0000832480-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED TRUST INC /IL/ CENTRAL INDEX KEY: 0000832480 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 371172848 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16867 FILM NUMBER: 97605555 BUSINESS ADDRESS: STREET 1: 5250 SOUTH SIXTH STREET STREET 2: PO BOX 5147 CITY: SPRINGFIELD STATE: IL ZIP: 62703 BUSINESS PHONE: 2177864300 MAIL ADDRESS: STREET 1: PO BOX 5147 STREET 2: 5250 SOUTH SIXTH STREET ROAD CITY: SPRINGFIELD STATE: IL ZIP: 62705 10-Q 1 MAR 31, 1997 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 1997 Commission File No. 0-16867 UNITED TRUST, INC. (Exact Name of Registrant as specified in its Charter) 5250 South Sixth Street P.O. Box 5147 Springfield, IL 62705 (Address of principal executive offices, including zip code) Illinois 37-1172848 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 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 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 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Shares outstanding at April 30, 1997: 18,700,935 Common stock, no par value per share UNITED TRUST, INC. (the "Company") INDEX Part I: Financial Information Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 3 Consolidated Statements of Operations for the three months ended March 31, 1997 and 1996 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996 5 Notes to Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II: Other Information Item 5. Other information 15 Item 6. Exhibits 15 Signatures 16 2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNITED TRUST, INC. AND SUBSIDIARIES Consolidated Balance Sheets March 31, December 31, ASSETS 1997 1996 Investments: Fixed maturities at amortized cost (market $181,564,148 and $181,815,225) $ 182,749,989 $ 179,926,785 Investments held for sale: Fixed maturities,at market (cost $1,984,661 and $1,984,661) 1,950,874 1,961,166 Equity securities, at market (cost $2,086,159 and $2,086,159) 1,786,301 1,794,405 Mortgage loans on real estate at amortized cost 10,483,654 11,022,792 Investment real estate, at cost, net of accumulated depreciation 10,563,907 10,543,490 Real estate acquired in satisfaction of debt, at cost 3,846,946 3,846,946 Policy loans 14,214,256 14,438,120 Short term investments 431,218 430,983 226,027,145 223,964,687 Cash and cash equivalents 15,801,573 17,326,235 Investment in affiliates 4,841,711 4,826,584 Accrued investment income 4,106,755 3,461,799 Reinsurance receivables: Future policy benefits 38,612,664 38,745,013 Policy claims and other benefits 3,614,387 3,856,124 Other accounts and notes receivable 861,106 894,321 Cost of insurance acquired 43,452,078 43,917,280 Deferred policy acquisition costs 11,084,697 11,325,356 Costs in excess of net assets purchased, less accumulated amortization 5,458,058 5,496,808 Other assets 2,119,762 1,659,455 Total assets $ 355,979,936 $ 355,473,662 LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits $ 250,269,058 $ 248,879,317 Policy claims and benefits payable 2,377,785 3,193,806 Other policyholder funds 2,822,880 2,784,967 Dividend and endowment accumulations 14,284,423 13,913,676 Income taxes payable: Current 5,228 70,663 Deferred 12,785,125 13,193,431 Notes payable 19,573,953 19,573,953 Indebtedness to (from) affiliates, net (20,053) 31,837 Other liabilities 6,014,869 5,975,483 Total liabilities 308,113,268 307,617,133 Minority interests in consolidated subsidiaries 29,812,882 29,842,672 Shareholders' equity: Common stock - no par value, stated value $.02 per share. Authorized 35,000,000 shares - 18,700,935 and 18,700,935 shares issued after deducting treasury shares of 423,840 and 423,840 374,019 374,019 Additional paid-in capital 18,301,974 18,301,974 Unrealized depreciation of investments held for sale (93,155) (86,058) Accumulated deficit (529,052) (576,078) Total shareholders' equity 18,053,786 18,013,857 Total liabilities and shareholders' equity $ 355,979,936 $ 355,473,662
See accompanying notes. 3 UNITED TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Operations March 31, March 31, 1997 1996 Revenues: Premium income $ 8,168,038 $ 8,928,482 Reinsurance premium (1,096,128) (1,290,979) Other considerations 904,358 885,499 Other considerations paid to reinsurers (49,882) (41,491) Net investment income 3,844,899 3,973,349 Realized investment gains and (losses), net (6,136) (12,031) Other income 200,422 427,311 11,965,571 12,870,140 Benefits and other expenses: Benefits, claims and settlement expenses: Life 6,293,565 5,110,320 Reinsurance benefits and claims (55,555) (239,965) Annuity 352,503 446,893 Dividends to policyholders 1,127,502 1,211,512 Commissions and amortization of deferred policy acquisition costs 1,110,410 1,161,850 Amortization of cost of insurance acquired 526,264 1,357,624 Operating expenses 2,589,176 3,447,329 Interest expense 414,948 446,192 12,358,813 12,941,755 Loss before income taxes, minority interest and equity in loss of investees (393,242) (71,615) Credit for income taxes 403,562 577,097 Minority interest in loss (income) of consolidated subsidiaries 20,092 (271,143) Equity in earnings of investees 16,614 70,398 Net income $ 47,026 $ 304,737 Net income per common share $ 0.00 $ 0.02 Weighted average common shares outstanding 18,700,935 18,677,324
See accompanying notes. 4 UNITED TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows March 31, March 31, 1997 1996 Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income $ 47,026 $ 304,737 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 173,627 244,426 Realized investment (gains) losses, net 6,136 12,031 Policy acquisition costs deferred (234,000) (509,000) Amortization of deferred acquisition costs 474,659 441,843 Amortization of cost of insurance acquired 526,264 1,357,624 Amortization of costs in excess of net assets purchased 38,750 40,720 Depreciation 101,245 127,657 Minority interest (20,092) 271,143 Equity in earnings of investees (16,614) (70,398) Change in accrued investment income (644,956) (579,218) Change in reinsurance receivables 374,086 324,060 Change in policy liabilities and accruals (4,983) (524,288) Charges for mortality and administration of universal life and annuity products (2,632,738) (2,537,539) Interest credited to account balances 1,840,372 1,724,414 Change in income taxes payable (473,741) (593,091) Change in indebtedness (to) from affiliates, net (51,890) (39,271) Change in other assets and liabilites, net (36,077) 901,607 Net cash provided by operating activities (532,926) 897,457 Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale matured 0 134,283 Fixed maturities sold 0 0 Fixed maturities matured 953,856 11,242,187 Equity securities 0 8,990 Mortgage loans 539,138 386,844 Real estate 159,705 1,123,088 Policy loans 954,692 1,049,195 Short term 0 0 Total proceeds from investments sold and matured 2,607,391 13,810,304 Cost of investments acquired: Fixed maturities held for sale 0 0 Fixed maturities (3,947,561) (11,337,342) Equity securities 0 0 Mortgage loans 0 (50,724) Real estate (252,742) (208,574) Policy loans (1,178,553) (1,035,474) Short term 0 0 Total cost of investments acquired (5,378,856) (12,632,114) Net cash provided by (used in) investing activities (2,771,465) 1,178,190 Cash flows from financing activities: Policyholder contract deposits 5,190,761 6,472,538 Policyholder contract withdrawals (3,411,032) (4,553,787) Proceeds from issuance of note payable 0 150,000 Payments of principal on notes payable 0 (1,501,492) Net cash provided by financing activities 1,779,729 567,259 Net increase (decrease) in cash and cash equivalents (1,524,662) 2,642,906 Cash and cash equivalents at beginning of period 17,326,235 12,528,025 Cash and cash equivalents at end of period $ 15,801,573 $ 15,170,931
See accompanying notes 5 UNITED TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared by United Trust, Inc. ("Trust") and its consolidated subsidiaries (the "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, 1996. The information furnished reflects, in the opinion of the Company, all adjustments (which include only normal and recurring accruals) necessary for a fair presentation of the results of operations for the periods presented. Operating results for interim periods are not necessarily indicative of operating results to be expected for the year or of the Company's future financial condition. At March 31, 1997, the parent, significant subsidiaries and affiliates of United Trust, Inc. were as depicted on the following organizational chart. 6 ORGANIZATIONAL CHART AS OF MARCH 31, 1997 United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns 53% of United Trust Group ("UTG") and 30% of United Income, Inc. ("UII"). UII owns 47% of UTG. UTG owns 72% of First Commonwealth Corporation ("FCC") and 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. FIXED MATURITIES As of March 31, 1997, fixed maturities and fixed maturities held for sale represented 82% of total invested assets. As prescribed by the various state insurance department statutes and regulations, the insurance companies' investment portfolio is required to be invested primarily in investment grade securities to provide ample protection for policyholders. 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 maturities portfolio and reclassified those securities expected to be sold prior to maturity as investments held for sale. The investments held for sale are carried at market. Management has the intent and ability to hold its fixed maturity portfolio to maturity and as such carries these securities at amortized cost. As of March 31, 1997, 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. MORTGAGE LOANS AND REAL ESTATE The Company holds approximately $10,484,000 in mortgage loans and $14,411,000 in real estate holdings which represent 5% and 6% of total invested assets of the Company, respectively. All mortgage loans held by the Company are first position loans. The Company has $645,000 in mortgage loans net of a $10,000 reserve allowance, which are in default or in the process of foreclosure representing approximately 6% of the total portfolio. Letters are sent to each mortgagee when the loan becomes 30 days or more delinquent. Loans 90 days or more delinquent are placed on a non-performing status and classified as delinquent loans. Reserves for loan losses on delinquent loans are established based on management's analysis of the loan balances and what is believed to be the realizable value of the property should foreclosure take place. Loans are placed on a non-accrual status based on a quarterly case by case analysis of the likelihood of repayment. The following tables show the distribution of mortgage loans and real estate by type. MORTGAGE LOANS AMOUNT % OF TOTAL FHA/VA $ 630,361 6% Commercial $ 1,657,545 16% Residential $ 8,195,748 78% REAL ESTATE AMOUNT % OF TOTAL Home Office $ 2,894,128 20% Commercial $ 2,376,406 16% Residential development $ 5,293,373 37% Foreclosed real estate $ 3,846,946 27% 8 4. NOTES PAYABLE At March 31, 1997, the Company has $19,574,000 in notes payable. Notes payable is comprised of the following components: Senior debt $ 8,400,000 Subordinated 10 yr. notes 6,194,000 Subordinated 20 yr. notes 3,830,000 Other notes payable 1,150,000 $ 19,574,000 The senior debt is through First of America Bank - Illinois NA and is subject to a credit agreement. The refinanced 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 issuance of the loan was 8.25%, and has increased to 8.5% on March 25, 1997. Interest is paid quarterly. Principal payments of $1,000,000 are due in May of each year beginning in 1997, with a final payment due May 8, 2005. 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 and does not foresee any problem in maintaining compliance in the future. United Income, Inc. and First Fidelity Mortgage Company through an assignment from United Trust, Inc. hold promissory notes receivable of $700,000 and $300,000 respectively due from FCC. These notes bear interest at the rate of 1% above the variable per annum rate of interest most recently published by the Wall Street Journal as the prime rate. Interest is payable quarterly with principal due at maturity on May 8, 2006. In February 1996, FCC borrowed $150,000 from an affiliate to provide additional cash for liquidity. The note bears interest at the rate of 1% over prime as published in the Wall Street Journal, with interest payments due quarterly and principal due upon maturity of the note on June 1, 1999. The subordinated debt was incurred June 16, 1992 as a part of an acquisition. 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 June 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. The 20 year notes bear interest at the rate of 8 1/2% per annum, payable semi-annually beginning December 16, 1992, with a lump sum principal payment due June 16, 2012. 9 Scheduled principal reductions on the Company's debt for the next five years are as follows: YEAR AMOUNT 1997 $ 1,037,000 1998 1,537,000 1999 1,687,000 2000 1,537,000 2001 1,537,000 5. 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 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. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements. The Company and its subsidiaries are named as defendants in a number of legal actions arising primarily from claims made under insurance policies. Those actions have been considered in establishing the Company's liabilities. Management and its legal counsel are of the opinion that the settlement of those actions will not have a material adverse effect on the Company's financial position or results of operations. 6. TERMINATION OF AGREEMENT REGARDING PENDING CHANGE IN CONTROL OF UNITED TRUST, INC. On April 14, 1997, United Trust, Inc. and United Income, Inc. formally terminated their stock purchase agreement contract with LaSalle Group, Inc. ("LaSalle"), whereby LaSalle was to acquire certain authorized but unissued shares of UTI and UII and additional outstanding shares in privately negotiated transactions so that LaSalle would own not less than 51% of the outstanding common stock of UTI and indirectly control 51% of UII. LaSalle had not performed its obligations under the terms of the contract, and the Company felt it should be free to negotiate with other interested parties in becoming an equity partner. 10 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 financial condition, changes in financial condition and results of operations which reflect the performance of the Company. The information in the consolidated financial statements and related notes should be read in conjunction with this section. LIQUIDITY AND CAPITAL RESOURCES The Company and its consolidated subsidiaries have three principal needs for cash - the insurance companies contractual obligations to policyholders, the payment of operating expenses and servicing of its long-term debt. Cash and cash equivalents as a percentage of total assets were 4.5% and 5.0% as of March 31, 1997, and December 31, 1996, respectively. Fixed maturities as a percentage of total invested assets were 81% and 80% as of March 31, 1997 and December 31, 1996, 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 a sufficient return to cover these obligations. Most of the insurance company assets, other than policy loans, are invested in fixed maturities and other investments, substantially all of which are readily marketable. Although there is no present need or intent to dispose of such investments, the life companies could liquidate portions of their investments if such a need arose. The Company has the ability and intent to hold these investments to maturity; consequently, the Company's investment in long term fixed maturities are 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. Consolidated operating activities of the Company produced cash flows of ($695,000) and $702,000 in first quarter of 1997 and 1996, respectively. The net cash (used in) or provided by operating activities plus net policyholder contract deposits after the payment of policyholder withdrawals, equalled $1,085,000 in first quarter of 1997 and $2,621,000 in first quarter of 1996. 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. Cash provided by (used in) investing activities was ($2,771,000) and $1,178,000 for first quarter of 1997 and 1996, respectively. The most significant aspect of cash provided by (used in) investing activities is the fixed maturity transactions. Fixed maturities account for 73% and 90% of the total cost of investments acquired in first quarter of 1997 and 1996, respectively. The Company has not directed its investable funds to so-called "junk bonds" or derivative investments. Net cash provided by financing activities was $1,780,000 and $817,000 for first quarter of 1997 and 1996, respectively. Policyholder contract deposits decreased 20% in first quarter of 1997 compared to first quarter of 1996. The decrease is due to the decline in first year premium production. Policyholder contract withdrawals has decreased 25% in first quarter of 1997 compared to first quarter of 1996. 11 On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The refinancing was completed through First of America Bank - Illinois NA and is subject to a credit agreement. The refinanced 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 issuance of the loan was 8.25%, and has increased to 8.50% on March 25, 1997. Interest is paid quarterly and principal payments of $1,000,000 are due in May of each year beginning in 1997, with a final payment due May 8, 2005. The Company satisfied its $1,000,000 principal obligation for 1997 by prepaying $500,000 on November 8, 1996 and a payment of $500,000 on May 8, 1997. The next scheduled principal payment is $1,000,000 due on May 8, 1998. On a parent only basis, UTI's cash flow is dependent on revenues from a management agreement with UII and its earnings received on invested assets and cash balances. At March 31, 1997, substantially all of the consolidated shareholders equity represents net assets of its subsidiaries. Cash requirements of UTI primarily relate to the payment of expenses related to maintaining the Company as a corporation in good standing with the various regulatory bodies which govern corporations in the jurisdictions where the Company does business. 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 company is domiciled. UG's dividend limitations are described below. 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, 1996, UG had a statutory gain from operations of $8,006,000. At December 31, 1996, UG's statutory capital and surplus amounted to $10,227,000. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. Management believes the overall sources of liquidity available will be sufficient to satisfy its financial obligations. RESULTS OF OPERATIONS FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996: (a) REVENUES Premium income, net of reinsurance premium, decreased 7% when comparing first quarter 1997 to the first quarter of 1996. The decrease is primarily attributed to the reduction in new business production. The Company's primary product is the "Century 2000" universal life insurance product. Universal life and interest sensitive insurance products contribute only the risk charge to premium income, however traditional insurance products contribute all monies received to premium income. Since the Company does not actively market traditional life insurance products, it is expected that premium income will continue to decrease in future periods as a result of expected lapses of business in force. Other considerations, net of reinsurance, increased approximately 1% compared to one year ago. Other considerations consist of administrative charges on universal life and interest sensitive life insurance products. The insurance in force relating to these types of products continues to increase as marketing efforts are focused on universal life insurance products. Net investment income decreased 3% when comparing the first quarter of 1997 to 1996. The decrease is the result of a smaller invested asset base from one year ago. During the fourth quarter 1996, the Company transferred approximately $22,000,000 in assets as part of a coinsurance agreement with First International Life Insurance Company ("FILIC"). The overall investment yields for first quarter 1997 and 1996, are 7.28% and 7.12%, respectively. The improvement in investment yield is primarily attributed to the fixed maturity portfolio. The Company has invested financing cash flows generated by cash received through sales of universal life insurance products. 12 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, the Company's primary product. The Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted spreads. It is expected that the monitoring of the interest spreads by management will provide the necessary margin to adequately provide for associated costs on insurance policies the Company has in force and will write in the future. (b) EXPENSES Life benefits, net of reinsurance benefits and claims, increased 28% in the first quarter of 1997 compared to 1996. The increase in life benefits is attributed to an increase in mortality. 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. Commissions and amortization of deferred policy acquisition costs decreased 4% in first quarter 1997 compared to first quarter 1996. The decrease was due to the decline in first year premium production. Amortization of cost of insurance acquired decreased 61% in first quarter 1997 compared to 1996. The decrease is attributed to the coinsurance agreement with First International Life Insurance Company ("FILIC") as of September 30, 1996. Under the terms of the agreement, UG ceded to FILIC substantially all of its paid-up life insurance policies. Paid-up life insurance generally refers to a non-premium paying life insurance policy. Cost of insurance acquired is amortized in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The Company did not have any charge-offs during the periods covered by this report. Operating expenses decreased 25% when comparing first quarter of 1997 to first quarter of 1996. The decrease in operating expenses is attributable to the settlement of certain litigation in the fourth quarter of 1996. The Company incurred elevated legal fees in the previous year due to the litigation. Operating expenses were further reduced from a restructuring of the home office personnel completed in late 1996. Interest expense decreased 8% in first quarter of 1997 compared to 1996. On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The refinanced debt bears interest to a rate equal to the "base rate" plus nine-sixteenths of one percent. Prior to refinancing, the interest rate was equal to the base rate plus one percent. The decrease in interest rate and principal reductions made during the last year, provided the decrease in interest expense for the first quarter of 1997. (c) NET INCOME (LOSS) The Company had net income of $47,000 for first quarter 1997 compared to $305,000 for the first quarter of 1996. The decline in net income is primarily due to the increase in mortality and the decrease in premium income. FINANCIAL CONDITION The financial condition of the Company changed very little since December 31, 1996. The most significant changes to occur is a decrease in cash and cash equivalents and the corresponding increase in fixed maturities. Future policy benefits increased as expected due to the aging in force business. 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. 13 The liabilities are predominantly long term in nature and therefore, the Company invests in long term fixed maturity investments which are reported in the financial statements at their amortized cost. The Company has the ability and intent to hold these investments to maturity; consequently, the Company does not expect to realize any significant loss from these investments. The Company does not own any derivative investments or "junk bonds". As of March 31, 1997, 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. FUTURE OUTLOOK The Company operates in a highly competitive industry. In connection with the development and sale of its products, the Company encounters significant competition from other insurance companies, many of which have financial resources or ratings greater than those of the Company. The insurance industry is a mature industry. In recent years, the industry has experienced virtually no growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Management believes that the Company's ability to compete is dependent upon, among other things, its ability to attract and retain agents to market its insurance products and its ability to develop competitive and profitable products. 14 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION REVERSE STOCK SPLIT On March 25, 1997, the Board of Directors voted to have a reverse stock split of UTI's common stock whereby one new share of common stock will be issued for each 10 shares that are currently held by each shareholder. Fractional shares will receive a cash payment on the basis of $1.00 for each old share. The reverse split will be effective to shareholders of record on May 12, 1997. 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 (after its reverse stock split of one share for each ten shares) for each share held by UII shareholders (after its reverse stock split of one share for every 14,2857 shares). UTI stock currently trades on NASDAQ. The reverse stock split should increase the price at which the Company's stock trades, enabling it to meet new NASDAQ requirements regarding eligibility to remain listed. 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. 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, 1996. 15 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: May 13, 1997 By /s/ Thomas F. Morrow Thomas F. Morrow, Chief Operating Officer, President, Treasurer and Director Date: May 13, 1997 By /s/ James E. Melville James E. Melville, Chief Financial Officer and Senior Executive Vice President 16 EX-27 2
7 3-MOS 3-MOS DEC-31-1997 DEC-31-1996 MAR-31-1997 MAR-31-1996 1,950,874 1,961,166 182,749,989 179,926,785 181,564,148 181,815,225 1,786,301 1,794,405 10,483,654 11,022,792 10,563,907 10,543,490 226,027,145 223,964,687 15,801,573 17,326,235 42,227,051 42,601,137 11,084,697 11,325,356 355,979,936 355,473,662 0 0 0 0 250,269,058 248,879,317 19,485,088 19,892,449 19,573,953 19,573,953 0 0 0 0 374,019 374,019 17,679,767 17,639,838 355,979,936 355,473,662 7,926,386 8,481,511 3,844,899 3,973,349 (6,136) (12,031) 200,422 427,311 7,718,015 6,528,760 1,110,410 1,161,850 3,530,388 5,251,145 (393,242) (71,615) (403,562) (577,097) 47,026 304,737 0 0 0 0 0 0 47,026 304,737 0.00 0.02 0.00 0.02 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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