-----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, FRQUwyLwdDOHe44pMl6SpwuqILHHb2URHHdmjHK/h87tNhu3diCuSAABgqsxqdDR vx2BswKwBMCHqaAYvrCZXA== 0000832480-98-000020.txt : 19980814 0000832480-98-000020.hdr.sgml : 19980814 ACCESSION NUMBER: 0000832480-98-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD 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: SEC FILE NUMBER: 000-16867 FILM NUMBER: 98685413 BUSINESS ADDRESS: STREET 1: 5250 SOUTH SIXTH STREET STREET 2: PO BOX 5147 CITY: SPRINGFIELD STATE: IL ZIP: 62703 BUSINESS PHONE: 2172416300 MAIL ADDRESS: STREET 1: PO BOX 5147 STREET 2: 5250 SOUTH SIXTH STREET ROAD CITY: SPRINGFIELD STATE: IL ZIP: 62705 10-Q 1 JUN 30, 1998 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 June 30, 1998 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 of (I.R.S. Employer incorporation or organization) Identification No.) Registrant's telephone number, including area code: (217) 241-6300 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None NASDAQ Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock 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 [ ] At July 31, 1998, the Registrant had outstanding 1,627,200 shares of Common Stock, stated value $.02 per share. UNITED TRUST, INC. (The "Company") TABLE OF CONTENTS Part 1: Financial Information 3 Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 3 Consolidated Statements of Operations for the six and three months ended June 30, 1998 and 1997 4 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Part II - Other Information 18 Item 5. Other information 18 Item 6. Exhibits 18 Signatures 19 2 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements UNITED TRUST, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, December 31, ASSETS 1998 1997 Investments: Fixed maturities at amortized cost (market $182,281,827 and $184,782,568) $ 178,137,161$ 180,970,333 Investments held for sale: Fixed maturities, at market (cost $1,581,670 and $1,672,298) 1,580,941 1,668,630 Equity securities, at market (cost $3,184,357 and $3,184,357) 2,405,955 3,001,744 Mortgage loans on real estate at amortized cost 9,670,902 9,469,444 Investment real estate, at cost, net of accumulated depreciation 9,358,892 9,760,732 Real estate acquired in satisfaction of debt 1,794,544 1,724,544 Policy loans 14,314,416 14,207,189 Short-term investments 327,326 1,798,878 Other invested assets 66,212 0 217,656,349 222,601,494 Cash and cash equivalents 22,831,099 16,105,933 Investment in affiliates 5,682,619 5,636,674 Accrued investment income 3,596,797 3,686,562 Reinsurance receivables: Future policy benefits 37,353,943 37,814,106 Policy claims and other benefits 3,663,810 3,529,078 Other accounts and notes receivable 891,777 845,066 Cost of insurance acquired 40,302,444 41,522,888 Deferred policy acquisition costs 10,063,134 10,600,720 Costs in excess of net assets purchased, net of accumulated amortization 2,695,602 2,777,089 Property and equipment, net of accumulated depreciation 3,322,433 3,412,956 Other assets 738,915 767,258 Total assets $ 348,798,922$ 349,299,824 LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits $ 249,353,796$ 248,805,695 Policy claims and benefits payable 1,422,766 2,080,907 Other policyholder funds 2,374,883 2,445,469 Dividend and endowment accumulations 15,299,590 14,905,816 Income taxes payable: Current 25,520 15,730 Deferred 14,029,415 14,174,260 Notes payable 20,614,220 21,460,223 Indebtedness to affiliates, net 34,900 18,475 Other liabilities 4,082,260 3,790,051 Total liabilities 307,237,350 307,696,626 Minority interests in consolidated subsidiaries 26,263,354 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 (362,587) (29,127) Accumulated deficit (792,181) (1,135,326) Total shareholders' equity 15,298,218 15,356,618 Total liabilities and shareholders' equity $ 348,798,922$ 349,299,824
See accompanying notes 3 UNITED TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Operations Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 1998 1997 1998 1997 Revenues: Premiums and policy fees $ 8,182,157 $ 8,886,198 $ 16,650,503$ 17,958,594 Reinsurance premiums and policy fees (1,071,078) (1,077,416) (2,307,943) (2,223,426) Net investment income 3,786,410 3,825,457 7,513,412 7,670,356 Realized investment gains and (losses), net (494,652) (22,443) (402,404) (28,579) Other income 154,228 260,157 330,257 460,579 10,557,065 11,871,953 21,783,825 23,837,524 Benefits and other expenses: Benefits, claims and settlement expenses: Life 5,521,205 5,955,358 11,544,315 12,626,544 Reinsurance benefits and claims (507,559) (533,072) (1,097,433) (966,248) Annuity 364,554 414,909 742,414 767,412 Dividends to policyholders 909,260 1,024,504 1,925,204 2,152,006 Commissions and amortization of deferred policy acquisition costs 776,558 553,913 1,820,235 1,664,323 Amortization of cost of insurance acquired 609,561 586,023 1,220,444 1,112,287 Operating expenses 2,237,899 2,777,409 4,475,739 5,366,585 Interest expense 482,195 409,686 969,808 824,634 10,393,673 11,188,730 21,600,726 23,547,543 Income before income taxes, minority interest and equity in earnings of investees 163,392 683,223 183,099 289,981 Credit (provision) for income taxes 35,981 (530,769) 121,012 (127,207) Minority interest in gain of consolidated subsidiaries (62,213) (76,042) (95,261) (55,950) Equity in earnings of investees 91,544 25,400 134,295 42,014 Net income $ 228,704 $ 101,812 $ 343,145 $ 148,838 Basic earnings per share from continuing operations and net income $ 0.14 $ 0.05 $ 0.21 $ 0.08 Diluted earnings per share from continuing operations and net income $ 0.15 $ 0.05 $ 0.23 $ 0.08
See accompanying notes 4 UNITED TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Six Months Ended June 30, June 30, 1998 1997 Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income $ 343,145 $ 148,838 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 317,985 321,874 Realized investment (gains) losses, net 402,404 28,579 Policy acquisition costs deferred (112,000) (825,000) Amortization of deferred policy acquisition costs 649,586 729,318 Amortization of cost of insurance acquired 1,220,444 1,112,287 Amortization of costs in excess of net assets purchased 45,000 77,500 Depreciation 239,644 163,591 Minority interest 95,261 55,950 Equity in earnings of investees (134,295) (42,014) Change in accrued investment income 89,765 (84,945) Change in reinsurance receivables 325,431 881,208 Change in policy liabilities and accruals 453,692 (1,237,684) Charges for mortality and administration of universal life and annuity products (5,548,543) (4,736,072) Interest credited to account balances 3,003,308 3,679,554 Change in income taxes payable (135,055) 56,004 Change in indebtedness (to) from affiliates, net 16,425 (84,945) Change in other assets and liabilities, net 165,498 (922,844) Net cash provided by (used in) operating activities 1,437,695 (678,801) Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale 83,928 140,000 Fixed maturities sold 0 0 Fixed maturities matured 19,429,686 3,492,302 Equity securities 0 42,801 Mortgage loans 469,613 834,769 Real estate 827,765 234,073 Policy loans 1,631,118 2,441,970 Short-term 1,473,531 110,000 Total proceeds from investments sold and matured 23,915,641 7,295,915 Cost of investments acquired: Fixed maturities held for sale 0 0 Fixed maturities (16,991,445) (8,262,020) Equity securities 0 (710,388) Mortgage loans (1,082,415) 0 Real estate (480,567) (466,770) Policy loans (1,738,345) (2,099,120) Other invested assets (66,212) 0 Short-term 1,979 (102,509) Total cost of investments acquired (20,357,005)(11,640,807) Purchase of property and equipment (78,364) (347,340) Net cash provided by (used in) investing activities 3,480,272 (4,692,232) Cash flows from financing activities: Policyholder contract deposits 8,025,990 9,997,553 Policyholder contract withdrawals (5,721,299) (7,568,374) Purchase of treasury stock (26,527) 0 Proceeds from issuance of notes payable 0 666,786 Payments of principal on notes payable (470,965) (1,425,038) Payment for fractional shares from reverse stock split 0 (2,128) Payment for fractional shares from reverse stock split of subsidiary 0 (533,992) Net cash provided by financing activities 1,807,199 1,134,807 Net increase (decrease) in cash and cash equivalents 6,725,166 (4,236,226) Cash and cash equivalents at beginning of period 16,105,933 17,326,235 Cash and cash equivalents at end of period $ 22,831,099$ 13,090,009
See accompanying notes 5 UNITED TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared by United Trust Inc. ("UTI") and its consolidated subsidiaries ("Company") pursuant to the rules and regulations of the Securities and Exchange Commission. Although the Company believes the disclosures are adequate to make the information presented not be misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto presented in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1997. The information furnished reflects, in the opinion of the Company, all adjustments (which include only normal and recurring accruals) necessary for a fair presentation of the results of operations for the periods presented. Operating results for interim periods are not necessarily indicative of operating results to be expected for the year or of the Company's future financial condition. At June 30, 1998, the parent, significant subsidiaries and affiliates of United Trust Inc. were as depicted on the following organizational chart. ORGANIZATIONAL CHART AS OF JUNE 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"). 6 2. INVESTMENTS As of June 30, 1998, fixed maturities and fixed maturities held for sale represented 82% of total invested assets. As prescribed by the various state insurance department statutes and regulations, the insurance companies' investment portfolio is required to be invested in investment grade securities to provide ample protection for policyholders. The Company does not invest in so-called "junk bonds" or derivative investments. The liabilities of the insurance companies are predominantly long term in nature and therefore, the companies invest primarily in long term fixed maturity investments. The Company has analyzed its fixed maturity portfolio and reclassified those securities expected to be sold prior to maturity as investments held for sale. The investments held for sale are carried at market. Management has the intent and ability to hold its fixed maturity portfolio to maturity and as such carries these securities at amortized cost. As of June 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 June 30, 1998 and December 31, 1997, the Company has $20,614,220 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 2,413,626 2,350,867 $ 20,614,220 $ 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 June 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, 1997, the Company prepaid the May 1998 principal payment. The credit agreement contains certain covenants with which the Company must comply. These covenants contain provisions common to a loan of this type and include such items as; a minimum consolidated net worth of FCC to be no less than 400% of the outstanding balance of the debt; Statutory capital and surplus of Universal Guaranty Life Insurance Company be maintained at no less than $6,500,000; an earnings covenant requiring the sum of the pre- tax earnings of Universal Guaranty Life Insurance Company and its subsidiaries (based on Statutory Accounting Practices) and the after-tax earnings plus non-cash charges of FCC (based on parent only GAAP practices) shall not be less than two hundred percent (200%) of the Company's interest expense on all of its debt service. The Company is in compliance with all of the covenants of the agreement. B. SUBORDINATED DEBT The subordinated debt was incurred June 16, 1992 as a part of the acquisition of the now dissolved Commonwealth Industries Corporation, (CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum, payable semi-annually beginning December 16, 1992. These notes, except for one $840,000 note, provide for principal payments equal to 1/20th of the principal balance due with each interest installment beginning December 16, 1997, with a final payment due June 16, 2002. The aforementioned $840,000 note provides for a lump sum principal payment due June 16, 2002. 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 7 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 $1,874,899 and a discounted value at June 30, 1998 of $1,521,540. On January 16, 1998, the 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 4. CAPITAL STOCK TRANSACTIONS A. STOCK OPTION PLAN In 1985, the 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 June 30, 1998 options for 42,438 shares were granted and exercised. Options for 1,562 shares remain available for grant. 8 A summary of the status of UTI's stock option plan through June 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 June 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 June 30, 1998 no options were exercised. At June 30, 1998 and December 31, 1997, the Company held a liability of $1,434,903 and $1,376,384, respectively, relating to this plan. At June 30, 1998, UTI common stock had a closing price of $8.625 per share. The following information applies to deferred compensation plan stock options outstanding at June 30, 1998: Number outstanding 105,000 Exercise price $17.50 Remaining contractual life 3 years C. CONVERTIBLE NOTES On July 31, 1997, United Trust Inc. issued convertible notes for cash in the amount of $2,560,000 to seven individuals, all officers or employees of United Trust Inc. The notes bear interest at a rate of 1% over prime, with interest payments due quarterly and principal due upon maturity of July 31, 2004. The conversion price of the notes are graded from $12.50 per share for the first three years, increasing to $15.00 per share for the next two years and increasing to $20.00 per share for the last two years. As of June 30, 1998, the notes were convertible into 204,800 shares of UTI common stock with no conversion privileges having been exercised. At June 30, 1998, UTI common stock had a closing price of $8.625 per share. 9 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 June 30, 1998 Income Shares Per-Share (Numerator) (Denominator) Amount BASIC EPS Income available to common shareholders $ 343,145 1,627,870 $ 0.21 EFFECT OF DILUTIVE SECURITIES Convertible notes 78,389 204,800 Options 1,562 DILUTED EPS Income available to common shareholders and assumed conversions $ 421,534 1,834,232 $ 0.23
For the second quarter ended June 30, 1998 Income Shares Per-Share (Numerator) (Denominator) Amount BASIC EPS Income available to common shareholders $ 228,704 1,627,200 $ 0.14 EFFECT OF DILUTIVE SECURITIES Convertible notes 39,410 204,800 Options 1,562 DILUTED EPS Income available to common shareholders and $ assumed conversions 268,114 1,833,562 $ 0.15
10 For the YTD period ended June 30, 1997 Income Shares Per-Share (Numerator) (Denominator) Amount BASIC EPS Income available to $ 148,838 1,870,016 $0.08 common shareholders EFFECT OF DILUTIVE SECURITIES Options 1,562 DILUTED EPS Income available to common shareholders and assumed conversions $ 148,838 1,871,578 $0.08
For the second quarter ended June 30, 1997 Income Shares Per-Share (Numerator) (Denominator) Amount BASIC EPS Income available to common shareholders $ 101,812 1,869,940 $0.05 EFFECT OF DILUTIVE SECURITIES Options 1,562 DILUTED EPS Income available to common shareholders and assumed conversions $ 101,812 1,871,502 $0.05
UTI has stock options outstanding during the second 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. 6. COMMITMENTS AND CONTINGENCIES The insurance industry has experienced a number of civil jury verdicts which have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. Under the insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies. Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer's financial strength. Mandatory assessments may be partially recovered through a reduction in future premium tax in some states. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements. The Company and its subsidiaries are named as defendants in a number of legal actions arising primarily from claims made under insurance policies. Those actions have been considered in establishing the Company's liabilities. Management and its legal counsel are of the opinion that the settlement of those actions will not have a material adverse effect on the Company's financial position or results of operations. 11 7. OTHER CASH FLOW DISCLOSURE On a cash basis, the Company paid $953,881 and $834,177 in interest expense through the second quarter of 1998 and 1997, respectively. The Company paid $10,555 and $60,044 of federal income tax through the second 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 prior to the end of 1998. 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. Under the terms of the FSF Agreement, FSF will buy 473,523 authorized but unissued shares of UTI common stock for $15.00 a share and will also buy 389,715 shares of UTI common stock that UTI purchased during the last year in private transactions at the average price UTI paid for such stock, plus interest, or approximately $10.00 per share. FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of face amount convertible bonds which are due and payable on any change in control of UTI, in private transactions, primarily from officers of UTI. In addition, FSF will be granted a three year option to purchase up to 1,450,000 shares of UTI common stock for $15.00 per share. Management of UTI intends to use the equity that is being contributed to expand their operations through the acquisition of other life insurance companies. The transaction is subject to the receipt of regulatory and other approvals; and the satisfaction of certain conditions. The transaction is expected to be completed during the third 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. 12 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 June 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 9% when comparing the six and three months ended June 30, 1998 to the same periods in 1997. The Company currently writes little new traditional business, consequently, traditional premiums will decrease as the amount of traditional business in-force decreases. Collected premiums on universal life and interest sensitive products is not reflected in premiums and policy revenues because Generally Accepted Accounting Procedures ("GAAP") requires that premiums collected on these types of products be treated as deposit liabilities rather than revenue. Unless the Company acquires a block of in-force business or marketing changes its focus to traditional business, premium revenue will continue to decline. Another cause for the decrease in premium revenues is related to the potential change in control of UTI over the last two years to two different parties. During September of 1996, it was announced that control of UTI would pass to an unrelated party, but the change in control did not materialize. At this writing, a contract is pending with a different unrelated party for the change in control of UTI. Please refer to the Notes to the Consolidated Financial Statements for additional information. The possible changes and resulting uncertainties have hurt the insurance companies' ability to recruit and maintain sales agents. 13 Net investment income decreased 2% and 1% when comparing the six and three months ended June 30, 1998 to the same period one year-ago, respectively. 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 overall investment yields for 1998 and 1997, are 7.3% and 7%, respectively. The Company's investments are generally managed to match related insurance and policyholder liabilities. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. The minimum interest spread between earned and credited rates is 1% on the "Century 2000" universal life insurance product, which currently is the Company's primary sales product. The Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads. It is expected that monitoring of the interest spreads by management will provide the necessary margin to adequately provide for associated costs on the insurance policies the Company currently has in force and will write in the future. The Company had net realized investment losses of $402,404 and $28,579 for the six months ended June 30, 1998 and 1997, respectively. The Company had net realized investment losses of $494,652 and $22,443 for the three months end June 30, 1998 and 1997, respectively. The current period investment losses can be attributed to the foreclosure of three mortgage loans, which represents 69% of realized investment losses. At this writing, the three foreclosed properties are under contract for sale at book values. (B) EXPENSES Life benefits, net of reinsurance benefits and claims, decreased 10% and 8% for the six and three months ended June 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 $1,329,000 and $722,000 for the six and three months ended June 30, 1998 compared to the same periods one year-ago, respectively. There is no single event that caused death benefits to decrease. Death claims vary from year to year and therefore, fluctuations in death benefits are to be expected and are not considered unusual by management. Operating expenses decreased 17% and 19% for the six and three months ended June 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 15% for the six and three months ended June 30, 1998 as compared to the same periods one year-ago. Since June 30, 1997, notes payable increased approximately $1,938,000. The increase in outstanding indebtedness was due to the issuance of convertible notes to seven individuals, all officers or employees of UTI. In March 1997, the base interest rate for most of the notes payable increased a quarter of a point. The base rate is defined as the floating daily, variable rate of interest determined and announced by First of America Bank. Please refer to Note 3 "Notes Payable" in the Notes to the Consolidated Financial Statements for more information. (C) NET INCOME The 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. FINANCIAL CONDITION The financial condition of the Company has changed very little since December 31,1997. Total shareholder's equity decreased less than 1% as of June 30, 1998 compared to December 31, 1997. 14 Investments represent approximately 62% and 64% of total assets at June 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 June 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. LIQUIDITY AND CAPITAL RESOURCES The Company has three principal needs for cash - the insurance companies' contractual obligations to policyholders, the payment of operating expenses and the servicing of its long-term debt. Cash and cash equivalents as a percentage of total assets were 7% and 5% as of June 30, 1998, and December 31, 1997, respectively. Fixed maturities as a percentage of total invested assets were 82% as of June 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 $1,437,695 and ($678,801) 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 $3,742,386 in 1998 and $1,750,378 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 $3,480,272 and ($4,692,232), 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 $1,807,199 and $1,134,807 for 1998 and 1997, respectively. Policyholder contract deposits decreased 20% in 1998 compared to 1997. Policyholder contract withdrawals has decreased 24% 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. 15 At June 30, 1998, the Company had a total of $20,614,220 in long-term debt outstanding. Long-term debt principal reductions are approximately $1.5 million per year over the next several years. The senior debt is through First of America Bank - NA and is subject to a credit agreement. The debt bears interest to a rate equal to the "base rate" plus nine-sixteenths of one percent. The Base rate is defined as the floating daily, variable rate of interest determined and announced by First of America Bank from time to time as its "base lending rate". The base rate at issuance of the loan was 8.25%. The base rate changed to 8.5% on March 1, 1997. Interest is paid quarterly and principal payments of $1,000,000 are due in May of each year, with a final payment due May 8, 2005. On November 8, 1997, the Company prepaid the $1,000,000 May 8,1998, principal payment. The subordinated debt was incurred June 16, 1992 as a part of the acquisition of the now dissolved Commonwealth Industries Corporation, (CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum, payable semi-annually beginning December 16, 1992. These notes, except for one $840,000 note, provide for principal payments equal to 1/20th of the principal balance due with each interest installment beginning December 16, 1997, with a final payment due June 16, 2002. The aforementioned $840,000 note provides for a lump sum principal payment due June 16, 2002. Principal reductions of $516,500 per year are required on the aforementioned notes. As of June 30, 1998 the Company has a total $27,145,321 of cash and cash equivalents, short-term investments and investments held for sale in comparison to $20,614,220 of notes payable. UTI and FCC service this debt through existing cash balances and management fees received from the insurance subsidiaries. FCC is further able to service this debt through dividends it may receive from UG. Since UTI is a holding company, funds required to meet its debt service requirements and other expenses are primarily provided by its subsidiaries. On a parent only basis, UTI's cash flow is dependent on revenues from a management agreement with UII and its earnings received on invested assets and cash balances. At June 30, 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, 16 systems that are not Year 2000 compliant may be unable to read dates correctly after the Year 1999 and can return incorrect or unpredictable results. This could have a significant effect on the Company's business/financial systems as well as products and services, if not corrected. The Company established a project to address year 2000 processing concerns in September of 1996. In 1997 the Company completed the review of the Company's internally and externally developed software, and made corrections to all year 2000 non-compliant processing. The Company also secured verification of current and future year 2000 compliance from all major external software vendors. In December of 1997, a separate computer operating environment was established with the system dates advanced to December of 1999. A parallel model office was established with all dates in the data advanced to December of 1999. Parallel model office processing is being performed using dates from December of 1999 to January of 2001, to insure all year 2000 processing errors have been corrected. Testing was completed by the end of the first quarter of 1998. Periodic regression testing will be performed to monitor continuing compliance. By addressing year 2000 compliance in a timely manner, compliance will be achieved using existing staff and without significant impact on the Company operationally or financially. PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC. On March 25, 1997, the Board of Directors of UTI and UII voted to recommend to the shareholders a merger of the two companies. Under the Plan of Merger, UTI would be the surviving entity with UTI issuing one share of its stock for each share held by UII shareholders. UTI owns 53% of United Trust Group, Inc., an insurance holding company, and UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any other significant holdings or business dealings. The Board of Directors of each company thus concluded a merger of the two companies would be in the best interests of the shareholders. The merger will result in certain cost savings, primarily related to costs associated with maintaining a corporation in good standing in the states in which it transacts business. A vote of the shareholders of UTI and UII regarding the proposed merger is anticipated to occur prior to the end of 1998. 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. Under the terms of the FSF Agreement, FSF will buy 473,523 authorized but unissued shares of UTI common stock for $15.00 a share and will also buy 389,715 shares of UTI common stock that UTI purchased during the last year in private transactions at the average price UTI paid for such stock, plus interest, or approximately $10.00 per share. FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of face amount convertible bonds which are due and payable on any change in control of UTI, in private transactions, primarily from officers of UTI. In addition, FSF will be granted a three year option to purchase up to 1,450,000 shares of UTI common stock for $15.00 per share. Management of UTI intends to use the equity that is being contributed to expand their operations through the acquisition of other life insurance companies. The transaction is subject to the receipt of regulatory and other approvals; and the satisfaction of certain conditions. The transaction is expected to be completed during the third 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. 17 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION Proposed Merger of United Trust, Inc. and United Income, Inc. On March 25, 1997, the Board of Directors of UTI and UII voted to recommend to the shareholders a merger of the two companies. Under the Plan of Merger, UTI would be the surviving entity with UTI issuing one share of its stock for each share held by UII shareholders. UTI owns 53% of United Trust Group, Inc., an insurance holding company, and UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any other significant holdings or business dealings. The Board of Directors of each company thus concluded a merger of the two companies would be in the best interests of the shareholders. The merger will result in certain cost savings, primarily related to costs associated with maintaining a corporation in good standing in the states in which it transacts business. A vote of the shareholders of UTI and UII regarding the proposed merger is anticipated to occur prior to the end of 1998. 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. Under the terms of the FSF Agreement, FSF will buy 473,523 authorized but unissued shares of UTI common stock for $15.00 a share and will also buy 389,715 shares of UTI common stock that UTI purchased during the last year in private transactions at the average price UTI paid for such stock, plus interest, or approximately $10.00 per share. FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of face amount convertible bonds which are due and payable on any change in control of UTI, in private transactions, primarily from officers of UTI. In addition, FSF will be granted a three year option to purchase up to 1,450,000 shares of UTI common stock for $15.00 per share. Management of UTI intends to use the equity that is being contributed to expand their operations through the acquisition of other life insurance companies. The transaction is subject to the receipt of regulatory and other approvals; and the satisfaction of certain conditions. The transaction is expected to be completed during the third 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. ITEM 6. EXHIBITS The Company hereby incorporates by reference the exhibits as reflected in the Index to Exhibits of the Company's Form 10-K for the year ended December 31, 1997. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED TRUST, INC. (Registrant) Date: August 10, 1998 By /s/ James E. Melville James E. Melville President, Chief Operating Officer and Director Date: August 10, 1998 By /s/ Theodore C. Miller Theodore C. Miller Senior Vice President and Chief Financial Officer 19 EX-7 2 [ARTICLE] 7 [PERIOD-TYPE] 6-MOS 6-MOS [FISCAL-YEAR-END] DEC-31-1998 DEC-31-1997 [PERIOD-END] JUN-30-1998 JUN-30-1997 [DEBT-HELD-FOR-SALE] 1,580,941 1,668,630 [DEBT-CARRYING-VALUE] 178,137,161 180,970,333 [DEBT-MARKET-VALUE] 182,281,827 184,782,568 [EQUITIES] 2,405,955 3,001,744 [MORTGAGE] 9,670,902 9,469,444 [REAL-ESTATE] 11,153,436 11,485,276 [TOTAL-INVEST] 217,656,349 222,601,494 [CASH] 22,831,099 16,105,933 [RECOVER-REINSURE] 41,017,753 41,343,184 [DEFERRED-ACQUISITION] 50,365,578 52,123,608 [TOTAL-ASSETS] 348,798,922 349,299,824 [POLICY-LOSSES] 0 0 [UNEARNED-PREMIUMS] 0 0 [POLICY-OTHER] 249,353,796 248,805,695 [POLICY-HOLDER-FUNDS] 19,097,239 19,432,192 [NOTES-PAYABLE] 20,614,220 21,460,223 [PREFERRED-MANDATORY] 0 0 [PREFERRED] 0 0 [COMMON] 32,545 32,696 [OTHER-SE] 15,265,673 15,323,922 [TOTAL-LIABILITY-AND-EQUITY] 348,798,922 349,299,824 [PREMIUMS] 14,342,560 15,735,168 [INVESTMENT-INCOME] 7,513,412 7,670,356 [INVESTMENT-GAINS] (402,404) (28,579) [OTHER-INCOME] 330,257 460,579 [BENEFITS] 13,114,500 14,579,714 [UNDERWRITING-AMORTIZATION] 3,040,679 2,776,610 [UNDERWRITING-OTHER] 5,45,547 6,191,219 [INCOME-PRETAX] 183,099 289,981 [INCOME-TAX] 121,012 (127,207) [INCOME-CONTINUING] 343,145 148,838 [DISCONTINUED] 0 0 [EXTRAORDINARY] 0 0 [CHANGES] 0 0 [NET-INCOME] 343,145 148,838 [EPS-PRIMARY] .21 .08 [EPS-DILUTED] .23 .08 [RESERVE-OPEN] 0 0 [PROVISION-CURRENT] 0 0 [PROVISION-PRIOR] 0 0 [PAYMENTS-CURRENT] 0 0 [PAYMENTS-PRIOR] 0 0 [RESERVE-CLOSE] 0 0 [CUMULATIVE-DEFICIENCY] 0 0
-----END PRIVACY-ENHANCED MESSAGE-----