UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-16867
UNITED TRUST GROUP, 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, 2001, were 3,555,250.
UNITED TRUST GROUP, INC. AND SUBSIDIARIES
(The "Company")
TABLE OF CONTENTS
Part 1. Financial Information................................................3
ITEM 1. FINANCIAL STATEMENTS...............................................3
Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000.3
Consolidated Statements of Operations for the nine and three months
ended September 30, 2001 and 2000..........................................4
Consolidated Statement of Changes in Shareholders' Equity for the
nine months ended September 30, 2001.......................................5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000................................................6
Notes to Consolidated Financial Statements.................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........16
PART II. OTHER INFORMATION..................................................17
ITEM 1. LEGAL PROCEEDINGS.................................................17
ITEM 2. CHANGE IN SECURITIES..............................................17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............17
ITEM 5. OTHER INFORMATION.................................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................17
SIGNATURES....................................................................18
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
----------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 2001 2000
------------- --------------
Investments:
Fixed maturities at amortized cost
(market $83,896,454 and $122,623,563) $ 80,400,649 $ 121,922,963
Investments held for sale:
Fixed maturities, at market
(cost $86,826,188 and $42,914,186) 89,143,005 43,128,280
Equity securities, at market
(cost $4,250,823 and $5,413,507) 4,425,260 5,129,571
Mortgage loans on real estate at amortized cost 28,298,530 32,896,671
Investment real estate, at cost,
net of accumulated depreciation 12,168,452 13,096,245
Policy loans 13,668,235 14,090,900
Other long-term investments 200,000 200,000
Short-term investments 653,604 1,686,397
------------- --------------
228,957,735 232,151,027
Cash and cash equivalents 26,204,983 15,065,076
Accrued investment income 2,649,548 3,482,036
Reinsurance receivables:
Future policy benefits 34,293,414 35,083,244
Policy claims and other benefits 4,057,562 3,911,258
Cost of insurance acquired 34,053,396 35,239,256
Deferred policy acquisition costs 3,437,563 3,948,496
Costs in excess of net assets purchased,
net of accumulated amortization 725,184 1,118,525
Property and equipment,
net of accumulated depreciation 2,477,057 2,762,619
Income taxes receivable, current 168,188 178,335
Other assets 1,414,565 680,239
------------- --------------
Total assets $ 338,439,195 $ 333,620,111
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 237,408,687 $ 240,238,991
Policy claims and benefits payable 3,509,968 2,639,248
Other policyholder funds 1,266,119 1,445,857
Dividend and endowment accumulations 13,151,879 13,515,427
Income taxes payable:
Deferred 13,974,862 12,056,497
Notes payable 5,703,165 1,817,169
Other liabilities 9,066,942 6,292,841
------------- --------------
Total liabilities 284,081,622 278,006,030
------------- --------------
Minority interests in consolidated subsidiaries 9,244,261 8,899,648
------------- --------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 7,000,000 shares - 3,558,670 and 4,175,066 shares
issued after deducting treasury shares of 66,357 and 47,507 71,174 83,501
Additional paid-in capital 42,849,777 47,730,980
Retained earnings (accumulated deficit) 529,688 (1,435,335)
Accumulated other comprehensive income 1,662,673 335,287
------------- --------------
Total shareholders' equity 45,113,312 46,714,433
------------- --------------
Total liabilities and shareholders' equity $ 338,439,195 $ 333,620,111
============= ==============
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
-------------- ------------- ------------- --------------
Revenues:
Premiums and policy fees $ 5,006,069 $ 5,594,757 $ 15,839,391 $ 17,794,387
Reinsurance premiums and policy fees (868,708) (1,124,450) (2,378,771) (2,785,347)
Net investment income 3,557,702 3,927,944 11,503,804 12,189,927
Realized investment gains and (losses), net 32,798 (20,096) 45,392 219,943
Other income 235,413 93,411 387,044 334,961
-------------- ------------- ------------- --------------
7,963,274 8,471,566 25,396,860 27,753,871
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 4,719,889 5,489,010 15,043,502 17,568,271
Reinsurance benefits and claims (732,664) (908,201) (2,038,346) (2,492,681)
Annuity 362,899 300,267 930,153 908,193
Dividends to policyholders 236,133 247,697 781,983 767,446
Commissions and amortization of deferred
policy acquisition costs 123,480 361,588 876,835 1,498,270
Amortization of cost of insurance acquired 387,990 414,237 1,185,860 1,179,385
Operating expenses 1,573,817 2,095,530 4,856,690 6,656,089
Interest expense 108,018 63,110 244,438 338,736
-------------- ------------- ------------- --------------
6,779,562 8,063,238 21,881,115 26,423,709
Income before income taxes, minority interest
and equity in earnings of investees 1,183,712 408,328 3,515,745 1,330,162
Income tax expense (383,753) (255,842) (1,087,195) (431,765)
Minority interest in (income) loss of
consolidated subsidiaries (154,086) 10,683 (463,527) (95,715)
-------------- ------------- ------------- --------------
Net income $ 645,873 $ 163,169 $ 1,965,023 $ 802,682
============== ============= ============= ==============
Basic earnings per share from continuing
operations and net income $ 0.18 $ 0.04 $ 0.52 $ 0.20
============== ============= ============= ==============
Diluted earnings per share from continuing
operations and net income $ 0.18 $ 0.04 $ 0.52 $ 0.20
============== ============= ============= ==============
Basic weighted average shares outstanding 3,565,462 4,106,057 3,793,886 4,016,027
============== ============= ============= ==============
Diluted weighted average shares outstanding 3,565,462 4,106,057 3,793,886 4,016,027
============== ============= ============= ==============
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the nine months ended September 30, 2001
--------------------------------------------------------------------------------------------------
Common stock
Balance, beginning of year $ 83,501
Issued during year 0
Purchase treasury shares (12,327)
---------------
Balance, end of period 71,174
---------------
Additional paid-in capital
Balance, beginning of year 47,730,980
Issued during year 0
Purchase treasury shares (4,881,203)
---------------
Balance, end of period 42,849,777
---------------
Retained earnings (accumulated deficit)
Balance, beginning of year (1,435,335)
Net income 1,965,023 $ 1,965,023
--------------- ---------------
Balance, end of period 529,688
---------------
Accumulated other comprehensive income
Balance, beginning of year 335,287
Other comprehensive income
Unrealized appreciation on securities,
net of deferred taxes 1,327,386 1,327,386
--------------- ---------------
Comprehensive income $ 3,292,409
===============
Balance, end of period 1,662,673
---------------
Total shareholders' equity, end of period $ 45,113,312
===============
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
2001 2000
------------ ------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 1,965,023 $ 802,682
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization/accretion of fixed maturities 87,998 127,536
Realized investment gains (45,392) (219,943)
Policy acquisition costs deferred (129,000) (253,000)
Amortization of deferred policy acquisition costs 639,933 1,036,530
Amortization of cost of insurance acquired 1,185,860 1,179,385
Amortization of costs in excess of net
assets purchased 67,500 67,500
Depreciation 272,786 380,486
Minority interest 463,527 95,715
Change in accrued investment income 832,488 214,083
Change in reinsurance receivables 643,526 976,377
Change in policy liabilities and accruals (1,251,478) (3,017,121)
Charges for mortality and administration of
universal life and annuity products (7,094,380) (7,714,335)
Interest credited to account balances 4,368,033 4,648,099
Change in income taxes payable 1,076,855 402,475
Change in other assets and liabilities, net (2,095,175) 202,514
------------ ------------
Net cash provided by (used in) operating activities 988,104 (1,071,017)
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 15,250,000 5,357,593
Fixed maturities matured 43,515,439 21,813,939
Equity securities 2,240,967 0
Mortgage loans 11,156,017 3,610,398
Real estate 1,334,693 2,588,702
Policy loans 2,281,517 2,251,846
Other long-term investments 0 906,278
Short-term 2,154,528 413,230
------------ ------------
Total proceeds from investments sold and matured 77,933,161 36,941,986
Cost of investments acquired:
Fixed maturities held for sale (56,082,030) (19,072,012)
Fixed maturities (1,124,925) 0
Equity securities (1,143,724) (1,763,354)
Mortgage loans (6,654,908) (16,712,422)
Real estate (250,781) (863,363)
Policy loans (1,858,852) (2,111,781)
Other long-term investments 0 (200,000)
Short-term (1,118,435) (383,250)
------------ ------------
Total cost of investments acquired (68,233,655) (41,106,182)
Purchase of property and equipment (78,888) (77,094)
Sale of property and equipment 201,064 0
------------ ------------
Net cash provided by (used in) investing activities 9,821,682 (4,241,290)
Cash flows from financing activities:
Policyholder contract deposits 8,751,698 9,783,488
Policyholder contract withdrawals (7,276,743) (8,714,723)
Purchase of treasury stock (1,123,234) 0
Purchase of stock of subsidiaries (21,600) (81,624)
Payments of principal on notes payable 0 (1,540,800)
------------ ------------
Net cash provided by (used in) financing activities 330,121 (553,659)
------------ ------------
Net increase (decrease) in cash and cash equivalents 11,139,907 (5,865,966)
Cash and cash equivalents at beginning of period 15,065,076 21,027,804
------------ ------------
Cash and cash equivalents at end of period $ 26,204,983 $ 15,161,838
============ ============
See accompanying notes.
UNITED TRUST GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements are unaudited and have been
prepared by United Trust Group, Inc. ("UTG") and its consolidated subsidiaries
("Company") pursuant to the rules and regulations of the Securities and Exchange
Commission. These consolidated financial statements should 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, 2000.
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, 2001, significant subsidiaries of United Trust Group, Inc. were
as depicted on the following organizational chart.
2. INVESTMENTS
As of September 30, 2001, fixed maturities and fixed maturities held for sale
represented 74% 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. At the time
of acquisition, the Company determines the classification of the fixed maturity
investment. Investments classified as held for sale are carried at market value.
Investments classified as held to maturity are carried at amortized cost. As of
September 30, 2001, 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, 2001 and December 31, 2000, the Company had $5,703,165 and
$1,817,169 long-term debt outstanding, respectively.
09/30/01 12/31/00
---------- ----------
Subordinated 20 yr. Notes 1,817,169 1,817,169
Other notes payable 3,885,996 0
----------- -----------
$ 5,703,165 $ 1,817,169
=========== ===========
A. Subordinated debt
The subordinated debt was incurred June 16, 1992 as a part of the acquisition of
the now dissolved Commonwealth Industries Corporation, (CIC). Subsequent to
September 30, 2001, UTG paid $1,302,495 of the outstanding principal of the
subordinated 20 year notes and amended the interest rate on the outstanding
principal balance of the remaining notes from an 8.5% fixed rate, to a 1% under
prime variable rate, with interest to begin accruing at the effective time of
the amendments. Prior to these amendments, the 20-year notes accrued interest at
the rate of 8 1/2% per annum. A lump sum principal payment on the balance of the
notes remains due June 16, 2012.
B. Other notes payable
The other notes payable were incurred to facilitate the repurchase of stock in
April 2001, as outlined in note 11 to these financial statements. These notes
bear interest at the rate of 7% per annum (paid quarterly) with payments of
principal to be made in five equal annual installments, the first such payment
of principal to be due on April 12, 2002.
The collective scheduled principal reductions on these notes for the next five
years is as follows:
Year Amount
-------- -----------
2001 $ 0
2002 777,199
2003 777,199
2004 777,199
2005 777,199
4. CAPITAL STOCK TRANSACTIONS
A. Deferred Compensation Plan
At September 30, 2001 and December 31, 2000, the Company held a liability of
$47,533 and $116,999 relating to a deferred compensation plan that existed
during 1993 and has been discontinued. The final payments due under this plan
will be paid in May 2002. Common stock options associated with this plan all
expired on December 31, 2000, with no options being exercised.
B. Shares Acquired By FSF and Affiliates With Options Granted
On November 20, 1998, First Southern Funding LLC, ("FSF") and affiliates
acquired 929,904 shares of common stock of UTG from UTG and certain UTG
shareholders. As consideration for the shares, FSF paid UTG $10,999,995 and
certain shareholders of UTG $999,990 in cash.
Included in the stock acquisition agreement is an earnings covenant whereby UTG
warrants UTG and its subsidiaries and affiliates will have future earnings of at
least $30,000,000 for a five-year period beginning January 1, 1998. Such
earnings are computed based on statutory results excluding inter-company
activities such as inter-company dividends plus realized and unrealized gains
and losses on real estate, mortgage loans and unaffiliated common stocks. At the
end of the covenant period, an adjustment is to be made equal to the difference
between the then market value and statutory carrying value of real estate still
owned that existed at the beginning of the covenant period. Should UTG not meet
the covenant requirements, any shortfall will first be reduced by the actual
average tax rate for UTG for the period, then will be further reduced by
one-half of the percentage, if any, representing UTG's ownership percentage of
the insurance company subsidiaries. This result will then be reduced by
$250,000. The remaining amount will be paid by UTG in the form of UTG common
stock valued at $15.00 per share with a maximum number of shares to be issued of
500,000. However, there shall be no limit to the number of shares transferred to
the extent that there are legal fees, settlements, damage payments or other
losses as a result of certain legal action taken. The price and number of shares
shall be adjusted for any applicable stock splits, stock dividends or other
recapitalizations.
5. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares
outstanding during each year, retroactively adjusted to give effect to all stock
splits, in accordance with Statement of Financial Accounting Standards No. 128.
UTG had no stock options outstanding at September 30, 2001. At September 30,
2000, UTG had stock options outstanding in the amount of 34,320 at an option
price of $15.00, and 105,000 at an option price of $17.50, which are not
included in the computation of dilutive earnings per share, since the exercise
price was greater than the average market price of the common shares. Therefore,
for both periods presented, the computation of diluted earnings per share is the
same as basic earnings per share.
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.
Management cannot predict the effect these lawsuits may have on the Company in
the future.
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 State of Florida began an investigation of industrial life insurance
policies in the fall of 1999 regarding policies with race-based premiums. This
investigation has quickly spread to other states and to other types of small
face amount policies and was expanded to consider the fairness of premiums for
all small policies including policies which did not have race-based premiums.
The NAIC historically has defined a "small face amount policy" as one with a
face amount of $15,000 or less. Under current reviews, some states have
increased this amount to policies of $25,000 or less. These states are
attempting to force insurers to refund "excess premiums" to insureds or
beneficiaries of insureds. This issue has become very complex and may become a
political "hot potato". The Company's insurance subsidiaries have no race-based
premium products, but do have policies with face amounts under the
above-scrutinized limitations. The outcome of this issue could be dramatic on
the insurance industry as a whole as well as the Company itself. The Company
will continue to monitor developments regarding this matter to determine to what
extent, if any, the Company may be exposed.
David A. Morlan, individually and on behalf of all others similarly situated v.
Universal Guaranty Life Ins., United Trust Assurance Co., United Security
Assurance Co., United Trust Group, Inc. and First Commonwealth Corporation,
(U.S. Court of Appeals for the Seventh Circuit, Appeal No. 01-3795)
On April 26, 1999, the above lawsuit was filed by David Morlan and Louis Black
in the Southern District of Illinois against Universal Guaranty Life Insurance
Company ("UG") and United Trust Assurance Company ("UTAC") (merged into UG in
1992). After the lawsuit was filed, the plaintiffs, who were former insurance
salesmen, amended their complaint, dropped Louis Black as a plaintiff, and added
United Security Assurance Company ("USAC"), UTG and FCC as defendants. The
plaintiffs are alleging that they were employees of UG, UTAC or USAC rather than
independent contractors. The plaintiffs are seeking class action status and have
asked to recover various employee benefits, costs and attorneys' fees, as well
as monetary damages based on the defendants' alleged failure to withhold certain
taxes.
On September 18, 2001, in response to these briefs, the case was dismissed
without predjudice because Morlan lacked standing to pursue the claims against
defendants. The plaintiffs have appealed the dismissal of the case to the United
States Court of Appeals for the Seventh Circuit.
The Company continues to believe that it has meritorious grounds to defend this
lawsuit, and it intends to defend the case vigorously. It believes that the
defense and ultimate resolution of the lawsuit should not have a material
adverse effect upon the business, results of operations or financial condition
of the Company. Nevertheless, if the lawsuit were to be successful, it is likely
that such resolution would have a material adverse effect on the Company's
business, results of operations and financial condition.
During the fourth quarter of 2000, the Company established a liability of
$500,000 to cover estimated legal costs associated with the defense of this
matter. At September 30, 2001 a $245,860 liability remained for defense of this
matter.
The Company and its subsidiaries are named as defendants in a number of legal
actions arising as a part of the ordinary course of business relating primarily
to 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 $205,414 and $297,926 in interest expense
during the first nine months of 2001 and 2000, respectively. The Company paid
$60,636 and $6,500 in federal income tax during the first nine months of 2001
and 2000, respectively. At September 30, 2001, the Company had acquired
$4,097,126 in fixed maturity investments for which the cash had not yet been
paid. The payable for these securities is included in the line item other
liabilities on the balance sheet.
On July 31, 2000, First Southern Bancorp, Inc., pursuant to the terms of a
previous agreement, converted the $2,560,000 of convertible debt it held of UTG
into 204,800 shares of common stock of UTG.
8. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions that at times may
exceed federally insured limits. The Company maintains its primary operating
cash accounts with First Southern National Bank ("FSNB"), a subsidiary of First
Southern Bancorp, Inc. ("FSB"), the largest shareholder of UTG. These accounts
hold approximately $5,000,000 for which there are no pledges or guarantees
outside FDIC insurance limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents. Mr. Jess Correll is the controlling shareholder, a
director and officer of each of FSB, FSNB and UTG.
9. PROPOSED MERGER
On June 5, 2001, United Trust Group, Inc. (NASDAQ Small Cap Market symbol UTGI)
and FCC jointly announced their respective Boards of Directors approved a
definitive agreement whereby UTG would acquire the remaining common shares
(approximately 18%) of FCC which UTG does not currently own. Under the terms of
the agreement, FCC will be merged with and into UTG, with UTG continuing as the
surviving entity in the merger.
Pursuant to the merger agreement, UTG will pay $250 in cash for each share of
FCC common stock not held by United Trust Group. The transaction is subject to
various conditions precedent set forth in the merger agreement, including the
approval of the transaction by the shareholders of FCC. FCC plans to submit the
transaction to the vote of the FCC shareholders to be held at a special meeting
to be called for that purpose. Shareholders of FCC are urged to read the Proxy
Statement when it becomes available.
10. REVERSE STOCK SPLIT
On June 5, 2001, the board of directors of Appalachian Life Insurance Company, a
West Virginia corporation and then 88% owned indirect subsidiary of FCC,
approved, subject to shareholder and any required regulatory approvals, a
reverse split of the common stock of Appalachian Life Insurance Company. Under
the terms of the reverse stock split, any shareholder of Appalachian Life
Insurance Company who owns less than 118,700 shares prior to the effective time
of the reverse split would receive a cash payment based upon $6.50 per share
(pre-reverse stock split) of Appalachian Life Insurance Company, and Appalachian
Life Insurance Company would become a wholly owned subsidiary of Universal
Guaranty Life Insurance Company, a wholly owned subsidiary of FCC.
Subsequent to the reporting period for this quarterly filing, the reverse stock
split and the amendment to the Articles of Incorporation of Appalachian Life
Insurance Company to effect the same was approved by the shareholders of
Appalachian Life Insurance Company, and the required regulatory approvals and
clearances were received. The reverse stock split was effected on October 26,
2001. At that time, Appalachian Life Insurance Company became a wholly owned
subsidiary of Universal Guaranty Life Insurance Company, a wholly owned
subsidiary of FCC.
11. STOCK REPURCHASES
In April 2001, UTG completed the purchase of 22,500 shares of UTG common stock
and 544 shares of First Commonwealth Corporation common stock from James E.
Melville and family pursuant to the Melville Purchase Agreement in exchange for
five year promissory notes of UTG in the aggregate prinicipal amount of
$288,800. Also, in April 2001, UTG completed the purchase of 559,440 shares of
UTG common stock from Larry E. Ryherd and family pursuant to the Ryherd Purchase
Agreement in exchange for cash and a five-year promissory note of UTG in the
principal amount of $3,527,494 (see note 3B "Other notes payable").
In April 2001, UTG also purchased in a separate transaction 10,891 shares of UTG
common stock from Robert E. Cook for cash and a five-year promissory note of UTG
in the principal amount of $69,702 (see note 3B "Other notes payable").
On June 5, 2001, the board of directors of UTG authorized the repurchase from
time to time in the open market or in privately negotiated transactions of up to
$1 million of UTG's common stock. Repurchased shares will be available for
future issuance for general corporate purposes. Through October 31, 2001, UTG
has spent $92,055 in the acquisition of 14,610 shares under this program.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's consolidated
results of operations, financial condition and liquidity and capital resources.
This analysis should be read in conjunction with the consolidated financial
statements and related notes that appear elsewhere in this report. The Company
reports financial results on a consolidated basis. The consolidated financial
statements include the accounts of UTG and its subsidiaries at September 30,
2001.
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 and other insurance
regulatory initiatives and developments, 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, an
unfavorable outcome of pending litigation, stock market performance,
investment performance, and any uncertainty of the impact of events of
September 11, 2001 and related events thereafter.
Results of Operations
(a) Revenues
Premiums and policy fee revenues, net of reinsurance premiums and policy fees,
decreased 10% when comparing the first nine months of 2001 to 2000 and decreased
7% for the third quarter comparison. 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.
Net investment income decreased 6% when comparing the first nine months of 2001
to 2000 and decreased 9% for the third quarter comparison. During 2000, the
Company received $632,000 in investment earnings from a joint venture real
estate development project that was completed in the first quarter of 2000. In
addition, the prime rate was 3.50% lower at September 30, 2001 than it was at
September 30, 2000. This resulted in lower earnings on short-term funds as well
as on longer-term investments acquired. Investment income declines were
partially offset by an increase in mortgage loan activity. Mortgage loan
interest was $2,227,000 for the first nine months of 2001 compared to $1,095,000
in the same period of 2000. Yields on these loans were approximately 2% higher
than on fixed maturities the Company would otherwise have acquired.
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 Company
monitors investment yields, and when necessary (and if permitted under the terms
of the insurance product or policy) adjusts credited interest rates on its
insurance products to preserve targeted interest spreads, ranging from 1% to 2%.
It is expected that monitoring of the interest spreads by management will
provide the necessary margin to adequately provide for associated costs on the
insurance policies the Company currently has in force and will write in the
future. At the March 2001 Board of Directors meeting, the Boards of the
insurance subsidiaries of UTG lowered crediting rates one-half percent on all
rate-adjustable products that could be lowered. With this latest reduction the
vast majority of the Company's rate-adjustable products are lowered to their
guaranteed minimum rates, and as such, cannot be lowered any further. These
adjustments were in response to continued declines in interest rates in the
marketplace. The decrease is expected to result in approximately $500,000 in
interest crediting savings annually, when fully implemented. Policy interest
crediting rate changes become effective on an individual policy basis on the
next policy anniversary. Therefore, it will take a full year from the time the
change is determined for the full impact of such change to be realized.
(b) Expenses
Benefits, claims and settlement expenses net of reinsurance benefits and claims,
decreased 14% in 2001 compared to 2000 for the first nine month period and
decreased 13% for the third quarter comparison. Death benefit claims were
approximately $1,435,000 less than the prior nine month period. Policy claims
vary from year to year and therefore, fluctuations in mortality are to be
expected and are not considered unusual by management. The reserve decreases on
interest sensitive business in force is due to the interest crediting rates and
decrease in death benefit claims. Reserves continue to increase on in-force
policies as the age of the insureds increases.
Operating expenses decreased 27% in 2001 compared to 2000 for the first nine
month period and decreased 25% for the third quarter comparison. During the
third quarter 2000, the Company settled a legal matter for $550,000. At the
March 27, 2000 Board of Directors meeting, UTG, FCC and each of their affiliates
accepted the resignation of Larry E. Ryherd as Chairman of the Board of
Directors and Chief Executive Officer of those respective companies. Mr. Ryherd
had 28 months remaining on an employment contract with the Company at the end of
March 2000. As such, a charge of $933,333 was incurred in first quarter 2000 for
the remainder of this contract. Additionally, the Company accrued $125,000 in
expenses in the first quarter 2000 related to severance costs from the
termination of three employees. Exclusive of the above accruals, operating
expenses declined 13% from the prior year nine months primarily as the result of
lower salary and related employee costs.
Interest expense decreased 28% in the first nine months of 2001 compared to 2000
and increased 71% for the third quarter results. At September 30, 2001 and
September 30, 2000, UTG had $5,703,165 and 1,817,169 in long-term debt. During
2000, the Company repaid $4,100,800 of its debt. In April 2001, the Company
issued $3,885,996 in new debt to purchase common stock owned primarily by two
former officers and directors of the Company and their respective families.
(c) Net income
The Company reported a net income of $1,965,023 for the first nine months of
2001 compared to $802,682 in 2000 and net income of $645,873 for third quarter
2001 compared to $163,169 for third quarter 2000. The increase in net income is
primarily attributable to the decrease in death benefit claims in addition to
the decrease in operating expenses from the previous year.
Financial Condition
Total shareholder's equity decreased approximately $1,601,000 as of September
30, 2001 compared to December 31, 2000. This is primarily due to the UTG
acquisition of its common stock in April of 2001 from two former officers and
directors of the Company and their respective families.
Investments represent approximately 68% and 71% of total assets at September 30,
2001 and December 31, 2000, 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 high quality low risk investments.
In 1999, the Company began investing more of its funds in mortgage loans. This
is the result of increased mortgage investment opportunities available through
First Southern National Bank ("FSNB"), an affiliate of Jesse Correll. Mr.
Correll and his affiliates control a majority of the outstanding common stock of
UTG, and Mr. Correll is the Chairman and CEO of, as well as a director of, UTG,
FCC and their three insurance company subsidiaries. FSNB has been able to
provide the Company with additional opportunities to participate in commercial
and residential mortgage loans, which provide more attractive yields than the
traditional bond market. During 2001, the Company issued approximately
$4,535,000 in new mortgage loans. These new loans were originated through FSNB
and funded by the Company through participation agreements with FSNB. FSNB
services the loans covered by these participation agreements. The Company pays
FSNB a .25% servicing fee on these loans and a one-time fee at loan origination
of .50% of the original loan amount to cover costs incurred by FSNB relating to
the processing and establishment of the loan. The loans issued in 2001 had an
average yield of approximately 7.49%. The Company anticipates continuing to
primarily invest in mortgage loans and government agency bonds for the short
period. All mortgage loans held by the Company are first position loans. The
Company has no loans that are in default and in the process of foreclosure at
September 30, 2001.
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, 2001,
the carrying value of fixed maturity securities in default as to principal or
interest was immaterial in the context of consolidated assets or shareholders'
equity. The Company has identified securities it may sell and classified them as
"investments held for sale". Investments held for sale are carried at market,
with changes in market value charged directly to shareholders' equity. To
provide additional flexibility and liquidity, the Company has categorized all
fixed maturity investments acquired in 2000 and 2001 as available for sale.
Securities originally classified as available for sale have since matured, thus
reducing the amount of securities carried in this category. It was determined it
would be in the Company's best financial interest to classify these new
purchases as available for sale to provide additional liquidity.
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 4% as of September 30, 2001, and December 31, 2000,
respectively. Fixed maturities as a percentage of total invested assets were 74%
and 71% as of September 30, 2001 and December 31, 2000, respectively.
Future policy benefits are primarily long-term in nature and therefore, the
Company's investments are predominantly in long-term fixed maturity investments
such as bonds and mortgage loans which provide sufficient return to cover these
obligations. The Company has the ability and intent to hold these investments to
maturity; consequently, the Company's investment in long-term fixed maturities
is reported in the financial statements at their amortized cost. To provide
additional flexibility and liquidity, the Company has categorized all fixed
maturity investments acquired in 2000 and 2001 as available for sale.
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 for the first nine months was
$988,104 and $(1,071,017) in 2001 and 2000, respectively. The net cash provided
by (used in) operating activities plus net policyholder contract deposits after
the payment of policyholder withdrawals equaled $2,463,059 in 2001 and $(2,252)
in 2000. 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 for the first nine months was
$9,821,682 and $(4,241,290), for 2001 and 2000, respectively. The most
significant aspect of cash used in investing activities are the fixed maturity
transactions. Fixed maturities account for 84% and 46% of the total cost of
investments acquired in 2001 and 2000, respectively. The Company has not
directed its investable funds to so-called "junk bonds" or derivative
investments.
Net cash provided by (used in) financing activities for the first nine months
was $330,121 and $(553,659) for 2001 and 2000, respectively. Policyholder
contract deposits decreased 11% in 2001 compared to 2000. Policyholder contract
withdrawals decreased 17% in 2001 compared to 2000.
At September 30, 2001, the Company had a total of $5,703,165 in long-term debt
outstanding. In April 2001, the Company issued $3,885,996 in new debt in
exchange for the acquisition of UTG and FCC common stock. This debt will bear
interest at a rate of 7% per annum with payments of principal to be made in five
equal annual installments due until maturity in 2006. Management believes the
existing debt will be serviced through sources that include current cash
balances of UTG, expected future operating cashflows and repayment of affiliate
receivables held by UTG. The proposed merger of UTG and FCC (see note 9 to the
financial statements) will result in the addition of approximately $2.5 million
in additional debt through draws on a line of credit. Interest on this debt will
accrue at a floating rate equal to prime. Subsequent to September 30, 2001, UTG
paid $1,302,495 of the outstanding principal on its subordinated 20 year notes
(see note 3A to the financial statements).
UTG 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, UTG's cash flow is dependent on its earnings received on notes receivable
from FCC. At September 30, 2001, substantially all of the consolidated
shareholders equity represents net assets of its subsidiaries. Cash requirements
of UTG 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. UTG is the ultimate parent of UG through ownership of FCC. UG can not
pay a dividend directly to UTG 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 such as UG 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, 2000, UG had a statutory gain from operations of $75,150. At
December 31, 2000, UG's statutory capital and surplus amounted to $14,288,015.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk relates, broadly, to changes in the value of financial instruments
that arise from adverse movements in interest rates, equity prices and foreign
exchange rates. The Company is exposed principally to changes in interest rates
which affect the market prices of its fixed maturities available for sale and
its variable rate debt outstanding. The Company's exposure to equity prices and
foreign currency exchange rates is immaterial. The information is presented in
U.S. Dollars, the Company's reporting currency.
Interest rate risk
The Company could experience economic losses if it were required to liquidate
fixed income securities available for sale during periods of rising and/or
volatile interest rates. The Company attempts to mitigate its exposure to
adverse interest rate movements through a staggering of the maturities of its
fixed maturity investments and through maintaining cash and other short term
investments to assure sufficient liquidity to meet its obligations and to
address reinvestment risk considerations.
Tabular presentation
The following table provides information about the Company's long term debt that
is sensitive to changes in interest rates. The table presents principal cash
flows and related weighted average interest rates by; expected maturity dates.
The Company has no derivative financial instruments or interest rate swap
contracts.
---------------------------------------------------------------------------------------------
September 30, 2001
---------------------------------------------------------------------------------------------
Expected maturity date
---------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total Fair
value
---------------- -------- -------- -------- -------- -------- ---------- ---------- ---------
Long term debt
---------------- -------- -------- -------- -------- -------- ---------- ---------- ---------
Fixed rate 0 777,199 777,199 777,199 777,199 2,594,369 5,703,165 5,917,444
---------------- -------- -------- -------- -------- -------- ---------- ---------- ---------
Avg. int. rate 0 7.0% 7.0% 7.0% 7.0% 8.05% 7.48%
---------------- -------- -------- -------- -------- -------- ---------- ---------- ---------
Variable rate 0 0 0 0 0 0 0 0
---------------- -------- -------- -------- -------- -------- ---------- ---------- ---------
Avg. int. rate 0 0 0 0 0 0 0
---------------- -------- -------- -------- -------- -------- ---------- ---------- ---------
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
See Note 6 to the Financial Statements included in Part I of this filing for an
update of the David A. Morlan legal matter reported on previous quarterly
filings.
ITEM 2. CHANGE IN SECURITIES.
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. OTHER INFORMATION.
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NONE
(b) Reports on form 8K
NONE
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 GROUP, INC.
(Registrant)
Date: November 5, 2001 By /s/ Randall L. Attkisson
-------------------------- ---------------------------------
Randall L. Attkisson
President, Chief Operating Officer
and Director
Date: November 5, 2001 By /s/ Theodore C. Miller
-------------------------- ---------------------------------
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
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 GROUP, INC.
(Registrant)
Date: November 5, 2001 By /s/ Randall L. Attkisson
-------------------------- ---------------------------------
Randall L. Attkisson
President, Chief Operating Officer
and Director
Date: November 5, 2001 By /s/ Theodore C. Miller
-------------------------- ---------------------------------
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
