<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________ to ___________
Commission File No. 0-4584
THE UNITED GROUP, INC.
-----------------------------------------------------------
(Name of small business issuer as specified in its charter)
NORTH CAROLINA 56-0931793
---------------------------- -----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
SUITE 203, 5960 FAIRVIEW ROAD, CHARLOTTE, NORTH CAROLINA 28210
-------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (704) 554-9280
--------------
Securities Registered Pursuant to Section 12(b) of the act: none
Securities Registered Pursuant to Section 12(g) of the act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of Class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended September 30, 1996 were
$11,620,972.
Aggregate market value of the voting stock held by non-affiliates of the
registrant at September 30,1996: $1,394,910.
Number of shares of registrant's common stock outstanding as of September
30,1996: 985,235.
Documents Incorporated by Reference
-----------------------------------
1. 1996 Annual Report to Shareholders (incorporated by reference into Parts II
and III).
2. Shareholder Information Statement for the 1997 Annual Meeting of
Shareholders (incorporated by reference into Part III).
Transitional Small Business Disclosure Format: Yes No X
----- -----
<PAGE> 2
PART I
Item 1. Business
The information set forth on pages 2 through 3 of Exhibit B, the Company's 1996
Annual Report to Shareholders, under the caption "Description of Business" is
hereby incorporated herein by reference.
Item 2. Properties
The consumer finance subsidiaries of the Company lease office space for the
operation of its business in each city where a branch is located. The
remaining terms of such leases range from one year to ten years. All leased
facilities are adequate for anticipated needs for the present and the immediate
future. These subsidiaries own office furniture, machinery equipment and motor
vehicles used in its consumer finance business. During the year ended
September 30, 1988 the Company formed a subsidiary named United Landmark, Inc.
for the purpose of building branch office facilities to be leased to United
Financial Services, Inc. At September 30,1996, this subsidiary owned five
buildings with one located in Moncks Corner, South Carolina and one located in
each of the North Carolina cities of Lenoir, Newton, Taylorsville and West
Jefferson. The Company intends to seek future opportunities to construct
buildings for use by United Financial branch offices where such ownership is
believed by management to be beneficial to the Company.
Item 3. Legal Proceedings
From time to time the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company
believes that it is not presently a party to any pending legal proceedings that
would have a material adverse effect on its financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders during the quarter ended
September 30, 1996.
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters
The information set forth on page 22 of Exhibit B, the Company's 1996 Annual
Report to Shareholders, under the caption "Common Stock Market Prices and
Dividends" is hereby incorporated herein by reference. On September 30,1996
there were 869 holders of record of the Company's common stock.
1
<PAGE> 3
Item 6. Management's Discussion and Analysis or Plan of Operation
The information set forth on pages 20 through 21 of Exhibit B, the Company's
1996 Annual Report to Shareholders, under the caption "Management Discussion
and Analysis of Financial Condition and Results of Operations" is hereby
incorporated herein by reference.
Item 7. Financial Statements
The consolidated statements of income, changes in stockholders' equity and cash
flows for the years ended September 30, 1996 and 1995, and the related
consolidated balance sheets as of September 30, 1996 and 1995, together with
the related notes thereto and the report of independent auditors, all set forth
on pages 4 through 19 of Exhibit B, the company's 1996 Annual Report to
Shareholders, is hereby incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
In July, 1996, the Charlotte office of The Daniel Professional Group, Inc., the
office responsible fro conducting and supervising all aspects of the 1995
annual audit, was acquired by the managing shareholder of such office to form
the new firm Daniel, Ratliff & Company. Daniel, Ratliff & Company perform the
audit of the 1996 financial statements. In that all personnel assigned to the
engagement remained unchanged from those assigned during the 1995 audit,
management considers Daniel, Ratliff & Company to be the equivalent of the
successor to The Daniel Professional Group, Inc., and does not consider the
hiring of Daniel, Ratliff & Company as a change in auditors. There have been
no disagreements with the Company's independent auditors regarding accounting
and financial disclosure required to be reported pursuant to this item.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Information required by this Item is included in the Company's Shareholder
Information Statement for the 1997 Annual Meeting of shareholders which is
hereby incorporated herein by reference.
Item 10. Executive Compensation
Information required by this Item is included in the Company's Shareholder
Information Statement for the 1997 Annual Meeting of Shareholders which is
hereby incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item is included in the Company's Shareholder
Information Statement for the 1997 Annual Meeting of Shareholders which is
hereby incorporated herein by reference.
2
<PAGE> 4
Item 12. Certain Relationships and Related Transactions
Information required by this Item is included in the Company's Shareholder
Information Statement for the 1997 Annual Meeting of Shareholders which is
hereby incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C>
(a) Exhibits
13. The 1996 Annual Report to Shareholders.
27. Financial Data Schedule (for SEC use only)
99. An organization chart of The United Group, Inc.
as of September 30, 1996.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fiscal
quarter ended September 30,1996.
</TABLE>
3
<PAGE> 5
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
THE UNITED GROUP, INC.
By: /s/ Bill G. Beaver
---------------------------
Bill G. Beaver
President and Director
DATE: 12-5-96
-------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
DATE: 12-5-96 DATE: 12-5-96
---------------------------------------------- ---------------------------------------------
By: /s/ Jack F. Anderson By: /s/ Shelton Gorelick
---------------------------------------------- ---------------------------------------------
Jack F. Anderson, Director Shelton Gorelick, Director
DATE: 12-5-96 DATE: 12-5-96
---------------------------------------------- ---------------------------------------------
By: /s/ Don G. Angell /s/ Glenn Johnson
---------------------------------------------- ---------------------------------------------
Don G. Angell, Director Glenn Johnson, Director
DATE: 12-5-96 DATE: 12-5-96
---------------------------------------------- ---------------------------------------------
By: /s/ R. Steven Lackey By: /s/ Dennis E. Savell
---------------------------------------------- ---------------------------------------------
R. Steven Lackey, Director Dennis E. Savell, Director
DATE: 12-5-96 DATE: 12-5-96
---------------------------------------------- ---------------------------------------------
By: /s/ Gordon E. Rhodes By: /s/ Dennis A. Young
---------------------------------------------- ---------------------------------------------
Gordon E. Rhodes, Director Dennis A. Young, Director
DATE: 12-5-96
----------------------------------------------
By: /s/ Kenneth M. O'Connell
----------------------------------------------
Kenneth M. O'Connell, Secretary-Treasurer,
Chief Financial Officer and Director
</TABLE>
4
<PAGE> 1
EXHIBIT 13
THE UNITED GROUP, INC.
1996 ANNUAL REPORT
<PAGE> 2
THE UNITED GROUP, INC. AND SUBSIDIARIES
1996 ANNUAL REPORT
CONTENTS
<TABLE>
<S> <C>
Selected Financial Data......................................................................... 1
Description of Business......................................................................... 2-3
Financial Statements:
Report of Independent Certified Public Accountants.................................. 4
Consolidated Balance Sheets......................................................... 5-6
Consolidated Statements of Income................................................... 7
Consolidated Statements of Changes in Stockholders' Equity.......................... 8
Consolidated Statements of Cash Flows............................................... 9-10
Notes to Consolidated Financial Statements.......................................... 11-19
Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................... 20-21
Common Stock Market Prices and Dividends........................................................ 22
Directors and Executive Officers................................................................ 22-23
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
THE UNITED GROUP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
=================================================================================================================
YEAR ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer finance operations:
Net finance receivables:
Year end $35,719,822 $34,096,563 $29,950,691 $27,162,977 $24,391,769
Average $34,640,057 $32,144,000 $28,132,810 $25,235,000 $25,178,000
Allowance for credit losses (percent of cash
loans and other contracts) 1.73 1.66 1.70 1.93 1.90
Percent to average net finance receivables:
Interest and fees on loans 27.25 27.01 27.03 27.90 27.46
Interest expense (net of other interest income) 8.10 9.19 8.50 8.32 9.39
Provision for credit losses 2.23 1.55 1.44 2.24 3.68
Net credit income 16.92 16.27 17.09 17.34 14.39
Net insurance income 4.50 5.01 5.32 5.43 4.86
Operating expenses 14.97 15.52 17.08 17.56 16.29
Charge-offs, net of recoveries 2.40 1.57 1.44 1.84 3.61
Gross revenues $11,620,972 $10,853,057 $ 9,563,190 $ 8,892,329 $ 8,691,099
Income before income taxes $ 2,237,922 $ 1,854,056 $ 1,498,185 $ 1,317,059 $ 743,676
Net income:
Amount $ 1,544,922 $ 1,315,056 $ 1,054,185 $ 948,059 $ 630,676
Per common share $ 1.46 $ 1.25 $ 0.98 $ 0.83 $ 0.63
Total assets $41,513,714 $40,057,736 $35,357,297 $32,962,819 $30,117,743
Total debt $35,952,232 $35,930,807 $32,494,996 $30,459,992 $28,405,867
Stockholders' equity $ 5,561,482 $ 4,126,929 $ 2,862,301 $ 2,502,827 $ 1,711,876
</TABLE>
1
<PAGE> 4
THE UNITED GROUP, INC. AND SUBSIDIARIES
DESCRIPTION OF BUSINESS
The United Group, Inc. is a holding company providing financing and management
assistance to its operating subsidiary, United Financial Services, Inc., which
is engaged in the business of making direct cash loans to individuals and
purchasing sales finance contracts from retailers through branch offices in
North and South Carolina.
As of September 30, 1996, United Financial Services, Inc. operates twenty-seven
branch lending offices with twenty in the state of North Carolina and seven in
the state of South Carolina. In each branch office, the Company makes direct
cash loans to individuals. In addition, the Company purchases retail
installment contracts financing the sale of autos, appliances, and other hard
goods from various dealers in the vicinities of each branch office. The
following table details the amounts extended to individual customers and
maximum terms and collateral based upon operations conducted during the fiscal
year ended September 30, 1996:
<TABLE>
<CAPTION>
NORTH CAROLINA SOUTH CAROLINA
<S> <C> <C>
Maximum amount financed $25,000 $25,000
Maximum term 120 months 120 months
Collateral:
Amount financed up to $3,000 Personal Property or Motor Vehicles Personal Property or Motor Vehicles
or Mobile Homes or Mobile Homes
Amount financed over $3,000 Motor Vehicles or Mobile Homes or Motor Vehicles or Mobile Homes or
November 22, 1996 Real Estate
</TABLE>
The Company also makes unsecured loans up to $3,000. In both states, the
Company makes secured real estate loans that are generally limited to $15,000
with terms up to ten (10) years. In addition, finance receivables include
sales finance contracts with maximum terms of thirty-six (36) months.
United Financial Services, Inc. operates branch offices in the state of South
Carolina in Cheraw, Darlington, Florence, Gaffney, Hartsville, Marion, and
Moncks Corner. This operation is regulated by the South Carolina Consumer
Protection Code. Under this law the Company determines the rates that it wants
to charge and may affect these rates after filing with the South Carolina
Department of Consumer Affairs. Such rates are only limited by management's
consideration of reasonableness. Cost factors including interest expense,
credit losses and the amount of individual loans that may be made are taken
into account. The Company has chosen generally to limit its individual loans
in the state of South Carolina to $5,000. The company has chosen to make loans
secured by real estate in South Carolina because such security may be used on
loans of more than $2,500. In March 1993, United Financial Services, Inc.
opened the office in Gaffney, South Carolina that operates under the name UFS
Finance Company. The primary business of this branch office is the financing
and refinancing of contracts secured by motor vehicles.
United Financial Services, Inc. of N.C. is a wholly-owned subsidiary of United
Financial Services, Inc., operating branch offices in Asheboro, Boone,
Cherryville, High Point, Laurinburg, Lenoir, Lexington, Marion, Monroe,
Morganton, Mt. Airy, Newton, North Wilkesboro, Reidsville, Salisbury, Sanford,
Shelby, Statesville, Taylorsville, and West Jefferson, North Carolina. The
consumer finance business in the state of North Carolina is regulated by the
North Carolina Consumer Finance Act administered by the North Carolina Banking
Commission. Finance charge rate ceilings are set by the legislature. The
Company has elected to operate under North Carolina General Statute 53-176 that
permits loans to $10,000 for terms up to eighty-four (84) months. Management,
however, has chosen generally to limit loans to approximately $5,000 with a
maximum term of 48 months. This limit has been adopted due to the inability to
use real estate as collateral.
United Landmark, Inc. Is a wholly-owned subsidiary of United Financial
Services, Inc. This corporation operates as a mortgage banker registered with
the North Carolina Commissioner of Banks for the purpose of making real estate
loans in the North Carolina consumer finance branches operated by United
Financial Services, Inc. of N. C. This subsidiary began making real estate
loans in North Carolina in March 1996. This subsidiary is also the holding
company for buildings owned and used by the branch offices of United Financial
Services, Inc. As of September 30, 1996, this subsidiary owns five buildings
in Moncks Corner, South Carolina and Lenoir, Newton, Taylorsville, and West
Jefferson, North Carolina.
A substantial portion of revenue is contributed by commissions derived from
sale of credit insurance sold with loans made including life, disability,
property, and single interest automobile insurance. On February 1, 1987,
United Financial Services, Inc. formed a life insurance company, UFS Life
Reinsurance Company, which is a wholly-owned subsidiary
2
<PAGE> 5
licensed in the state of Arizona. The underwriter of life and disability
coverages produced by United branch offices has agreed to reinsure such
coverages with UFS Life. This permits the Company to participate in a larger
share of the premiums and to generate investment income from funds held in
reserves. Property and automobile coverages are written through a property and
casualty company under agency agreements under which United Financial assumes
the primary risk for claims and, accordingly, participates in favorable
underwriting results.
United Financial obtains funds for lending by pledging its finance receivables
as collateral under a financing agreement with three banks. The line of credit
depends in part upon United Financial's equity base along with debt subordinate
to the banks and the banks' judgement of general creditworthiness. The
capacity for lending activities is limited to the size of the line of credit
and the ability to attract capital in the form of subordinated debt or
stockholders' equity.
The United Group, Inc. obtains its funds for operations through allocations of
federal income taxes, management fees, dividends, and repayment of loans to, or
advances received from United Financial Services, Inc. At September 30, 1996,
the intercompany account between United Financial and parent had a balance of
$201,797 payable from United Financial Services, Inc. Under current agreements
with its creditor banks, United Financial is allowed to pay management fees to
the parent, make allocations of federal income taxes and pay dividends as
described in Note 4 to the Consolidated Financial Statements. In addition, the
Company offers notes to investors through private placements. Any excess funds
generated from the sale of notes or other sources are lent to the subsidiary on
a demand basis.
Neither the Company nor any of its subsidiaries are dependent upon a single
customer or a few customers. The consumer finance business is seasonal to the
extent that the heaviest volume generally occurs during the fourth calendar
quarter due to Thanksgiving, Christmas and buying for the winter season.
Volume during the first calendar quarter is lower due partly to the heavy
volume in the fourth quarter and the fact that customers' borrowing needs are
relatively low. The balance of volume occurs relatively evenly over the second
and third quarters. The seasonal factors affecting volume can be distorted due
to economic conditions, openings of new branches, advertising campaigns or
other factors. The following table shows loan volume by quarter for the last
five fiscal years ending September 30 (with loan volume amounts shown in
millions):
<TABLE>
<CAPTION>
===================================================================================
1996 1995 1994 1993 1992
===================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTER ENDED Amount % Amount % Amount % Amount % Amount %
December 31 $12.8 28 $12.0 25 $10.5 25 $ 9.3 24 $10.5 31
March 31 9.2 20 11.1 23 8.6 21 8.2 21 7.9 23
June 30 11.6 26 13.0 27 10.5 25 10.6 28 7.6 23
September 30 11.9 26 11.8 25 11.9 29 10.1 27 7.8 23
===================================================================================
TOTAL $45.5 100 $47.9 100 $41.5 100 $38.2 100 $33.8 100
===================================================================================
</TABLE>
The consumer finance industry is competitive in that a large number of consumer
finance lending offices exist in North and South Carolina. More than 500
offices are licensed in North Carolina and more than 700 in South Carolina. In
addition, banks, credit unions, savings and loans and other lending
institutions compete for the Company's customers.
In its daily operations, the competitors may be considered lending offices
within about a 25-mile radius of the Company's branch office. In addition, the
competing offices may be divided into three general groups. These groups
include those that primarily market large loans, those that primarily market
moderate size loans and those that primarily market small loans. The dividing
line between such lenders is not distinctly defined. However, the large loan
lenders generally seek loans more than $5,000. The moderate size market would
include loans from $1,500 up to $5,000 and the small loan market would consist
of those lenders marketing loans of $1,500 or less. United Financial has chosen
the moderate loan market as its primary emphasis. The Company has chosen the
moderate size market because the state law in North Carolina allows sufficient
yields on these size loans to provide a substantial return above the cost of
borrowed money. In South Carolina, where rates have been deregulated, the
Company does not believe that competition allows sufficient rates on larger
loans. The Company previously concentrated its efforts on smaller loans but has
moved to concentrate its efforts on the moderate size market because it believes
that this market permits the charging of sufficient rates and that risk is
reduced due to the ability to secure loans with automobiles, mobile homes and
real estate. In addition, this market employs more funds per unit without
increasing overhead other than the cost of funds and is a primary factor in
increased profitability. Because of the movement to this market, United
Financial Services, Inc. has opened new markets for itself and has seen a strong
demand that is the driving force behind the increases in loan volume shown in
the table above.
The United Group, Inc. and its subsidiaries had 113 employees on September 30,
1996.
3
<PAGE> 6
[LOGO] DANIEL, Suite 230
RATLIFF & 1100 South Tryon Street
COMPANY Charlotte, NC 28203
Certified Public Accountants
.......................
704/371-5000
(fax) 371-4888
Offices in Charlotte & Mooresville
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of The United Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The United
Group, Inc. and Subsidiaries as of September 30, 1996, and the related
consolidated statements of income, changes in stockholders' equity and of cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. The
consolidated financial statements for the year ended September 30, 1995, were
audited by other auditors whose report dated November 22, 1995, expressed an
unqualified opinion on those consolidated financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The United Group,
Inc. and Subsidiaries, as of September 30, 1996, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Daniel, Ratliff, & Company
November 22, 1996
Charlotte, North Carolina
4
<PAGE> 7
THE UNITED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
<TABLE>
<CAPTION>
=======================================================================================
=======================================================================================
ASSETS 1996 1995
=======================================================================================
<S> <C> <C>
Cash $ 932,208 $ 1,646,501
----------- -----------
Marketable securities (Note 2) 1,870,865 1,843,814
----------- -----------
Finance receivables (Notes 3 and 5):
Cash loans and other contracts 38,166,028 36,589,554
Less:
Unearned insurance commissions 1,786,606 1,886,645
Allowance for credit losses 659,600 606,346
----------- -----------
2,446,206 2,492,991
----------- -----------
Net finance receivables 35,719,822 34,096,563
----------- -----------
Notes and accounts receivable:
Due from affiliates (Note 9) 934,315 976,666
Other 1,039,307 637,389
----------- -----------
1,973,622 1,614,055
----------- -----------
Property and equipment at cost, less accumulated
depreciation and amortization (Note 4) 805,706 691,634
----------- -----------
Deferred loan costs and other intangible assets at cost, less
accumulated amortization 43,120 62,048
----------- -----------
Deferred income taxes (Note 7) 67,000 12,000
----------- -----------
Other assets 101,371 91,121
----------- -----------
$41,513,714 $40,057,736
=========== ===========
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
=======================================================================================
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
=======================================================================================
<S> <C> <C>
Notes payable (Note 5 and 9):
Notes payable to banks $30,073,606 $30,346,607
Mortgage loans payable 308,939 224,282
Other notes payable 3,024,648 3,008,216
Senior subordinated notes payable 200,000 300,000
Accounts payable and accrued expenses 2,345,039 2,051,702
----------- -----------
35,952,232 35,930,807
----------- -----------
Stockholders' equity:
Preferred stock, no par value, stated value of $2 per
share; 500,000 shares authorized; no shares issued
and outstanding - -
Common stock, no par value, total stated value of
$100,000; 25,000,000 shares authorized;
1,056,599 and 1,060,461 shares issued, respectively 100,000 100,000
Additional paid-in capital 101,600 127,623
Retained earnings 5,650,995 4,211,129
----------- -----------
5,852,595 4,438,752
Less:
Cost of common stock held by subsidiary
(71,364 and 79,364 shares, respectively) 291,113 311,823
----------- -----------
5,561,482 4,126,929
----------- -----------
$41,513,714 $40,057,736
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 9
THE UNITED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
==================================================================
==================================================================
1996 1995
==================================================================
<S> <C> <C>
Credit income:
Interest and fees on loans $9,441,128 $8,683,556
Investment income and other interest 177,318 177,509
---------- ----------
9,618,446 8,861,065
Less:
Interest expense 2,981,853 3,130,529
Provision for credit losses 771,675 497,524
---------- ----------
Net credit income 5,864,918 5,233,012
---------- ----------
Insurance income:
Insurance commissions and premiums 2,002,526 1,991,992
Less, insurance losses and loss expenses 443,061 380,702
---------- ----------
Net insurance income 1,559,465 1,611,290
---------- ----------
Operating expenses:
Salaries and benefits 3,640,531 3,437,640
Other operating expenses 1,545,930 1,552,606
---------- ----------
Total operating expenses 5,186,461 4,990,246
---------- ----------
Income before provision for income taxes 2,237,922 1,854,056
Provision for income taxes (Note 7) 693,000 539,000
---------- ----------
Net income $1,544,922 $1,315,056
========== ==========
Net income per common share $ 1.46 $ 1.25
========== ==========
Weighted average shares outstanding 1,056,605 1,053,135
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 10
THE UNITED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
============================================================================================
============================================================================================
COMMON
ADDITIONAL STOCK
OUTSTANDING COMMON PAID- IN RETAINED HELD BY
SHARES STOCK CAPITAL EARNINGS SUBSIDIARY TOTAL
============================================================================================
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
SEPTEMBER 30, 1994 963,841 $100,000 $ 69,015 $2,999,615 $(306,329) $2,862,301
DIVIDENDS - - - (103,542) - (103,542)
STOCK ISSUED TO
STOCK BONUS PLAN 28,531 - 249,184 - - 249,184
PURCHASE OF STOCK (13,422) - (120,799) - - (120,799)
PURCHASE OF
STOCK HELD BY
SUBSIDIARY - - (117,000) - 22,406 (94,594)
SALE OF STOCK 2,147 - 19,323 - - 19,323
SALE OF STOCK
TO SUBSIDIARY - - 27,900 - (27,900) -
NET INCOME - - - 1,315,056 - 1,315,056
----------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1995 981,097 100,000 127,623 4,211,129 (311,823) 4,126,929
----------------------------------------------------------------------
DIVIDENDS - - - (105,056) - (105,056)
STOCK ISSUED TO
STOCK BONUS PLAN 27,667 - 308,486 - - 308,486
PURCHASE OF STOCK (23,529) - (245,309) - - (245,309)
PURCHASE OF
STOCK HELD BY
SUBSIDIARY - - (100,350) - 31,860 (68,490)
SALE OF STOCK
TO SUBSIDIARY - - 11,150 - (11,150) -
NET INCOME - - - 1,544,922 - 1,544,922
----------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1996 985,235 $100,000 $ 101,600 $5,650,995 $(291,113) $5,561,482
======================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 11
THE UNITED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
=========================================================================================
=========================================================================================
1996 1995
=========================================================================================
<S> <C> <C>
Cash flows from operating activities:
Interest and fees on loans collected $ 9,801,138 $ 9,552,241
Investment income and other interest income received 172,204 143,665
Insurance commissions and premiums collected 1,632,045 1,844,244
Interest paid (2,764,293) (3,123,234)
Insurance expenses and losses paid (443,061) (380,702)
Cash paid to suppliers and employees (4,801,931) (4,460,047)
Income taxes paid (747,533) (819,000)
------------ ------------
2,848,569 2,757,167
------------ ------------
Cash flows from investing activities:
Cash proceeds of loans made (24,576,552) (24,487,975)
Cash received as repayment of loans 21,921,647 18,879,483
Purchase of marketable securities (243,341) (335,664)
Cash paid to purchase property and equipment (249,567) (138,021)
Proceeds from sale of equipment 5,958 36,263
Cash paid for intangible assets (2,511) (18,187)
Proceeds from sale or maturity of investments 216,290 21,034
------------ ------------
------------ ------------
(2,928,076) (6,043,067)
------------ ------------
Cash flow from financing activities:
Notes payable to banks:
Borrowings 5,100,000 5,502,000
Repayments (5,373,001) (1,950,000)
Mortgage loans:
Borrowings 100,000 -
Repayments (15,343) (13,514)
Other notes:
Borrowings 491,743 781,019
Repayments (475,311) (650,833)
Subordinated debt:
Borrowings 200,000 -
Repayments (300,000) -
Common stock activity: -
Payments to acquire outstanding stock (313,799) (196,070)
Cash dividends to shareholders (49,075) (47,561)
------------ ------------
(634,786) 3,425,041
------------ ------------
Net increase in cash (714,293) 139,141
Cash at beginning of year 1,646,501 1,507,360
------------ ------------
Cash at end of year $ 932,208 $ 1,646,501
============ ============
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
====================================================================================================
====================================================================================================
1996 1995
====================================================================================================
<S> <C> <C>
Reconciliation of net income to net cash provided by operating
activities:
Net income $1,544,922 $1,315,056
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization 150,976 164,128
Investment income not providing cash - (20,326)
Provision for credit losses 771,675 497,524
Provision for deferred income taxes (55,000) (47,000)
Provision for stock bonus plan expense 308,486 249,184
Change in unearned interest charges 360,010 868,685
Change in accrued investment income 8,516 (13,518)
Change in unearned insurance commissions and premiums (100,039) 96,411
Change in accounts receivable (410,434) (193,122)
Change in accounts receivable from affiliates (13,630) -
Change in accounts payable 75,310 27,844
Change in income taxes payable 467 (233,000)
Change in interest payable 217,560 7,295
Change in other assets (10,250) 38,006
Total adjustments 1,303,647 1,442,111
Net cash provided by operating activities $2,848,569 $2,757,167
========== ==========
</TABLE>
Summary of significant noncash transactions:
During the years ended September 30, 1996 and September 30, 1995, the Company
paid dividends of $55,981 through a reduction in notes and accounts receivable
from affiliates.
See accompanying notes to consolidated financial statements.
<PAGE> 13
THE UNITED GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
================================================================================
Note 1 - Summary of accounting policies
- --------------------------------------------------------------------------------
Organization
The United Group, Inc. is a holding company providing financing and management
assistance to its operating subsidiary, United Financial Services, Inc. which
is engaged in the business of making direct cash loans to individuals and
purchasing sales finance contracts from retailers through branch offices in
North and South Carolina.
Basis of consolidation
The consolidated financial statements include the accounts of The United Group,
Inc. and all majority and wholly-owned subsidiaries, which include its consumer
finance subsidiary, United Financial Services, Inc. and its subsidiaries,
United Financial Services, Inc. of N.C., UFS Life Reinsurance Company and
United Landmark, Inc. Intercompany balances and transactions are eliminated in
the consolidated financial statements.
Balance sheet presentation
Since the most significant asset of the Company is finance receivables, the
balance sheets at September 30, 1996 and 1995, have been prepared on an
unclassified basis as to current and long-term assets and liabilities in
accordance with the American Institute of Certified Public Accountants Guide
for Audits of Finance Companies.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash flows
For purposes of reporting cash flows, cash includes cash on hand and in banks,
plus any other short-term investments with original maturities of three months
or less.
Marketable securities
Marketable securities, comprised principally of corporate and government bonds,
are the invested assets of the Company's life reinsurance subsidiary and are
restricted for use by such subsidiary. These investments are carried at the
lower of amortized cost or market. Realized gains and losses are included in
the determination of net income, using the specific identification method.
Property and equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs that will not improve or extend the life of an asset are charged to
expense as incurred. Major renewals and improvements are charged to the
property accounts. Upon retirement or sale of an asset, its cost and related
accumulated depreciation or amortization is removed from the property accounts
and any gain or loss is recorded in income or expense. Depreciation is
provided on the straight-line method for financial reporting purposes.
Intangible assets
Intangible assets include principally deferred loan costs and deferred software
costs. The former are incurred for certain expenditures in conjunction with
notes payable to banks. The costs are being amortized on a straight-line basis
over the estimated life of the expenditure. Deferred software costs represent
expenditures made for development of electronic data processing software to be
used in the Company's recording process. Deferred software costs are being
amortized on a straight-line basis over five years.
<PAGE> 14
Interest and loan fees
Interest and loan fee revenues are recognized on an accrual basis under the
interest method. Under this method, estimates are determined for certain
direct loan origination costs that are then recognized over the lives of the
related loans as a reduction of the loans' yield. The objective of the
interest method is to arrive at a periodic interest income (including
recognition of costs) at a constant effective yield on the net investment in
the receivable (that is, the principal amount of the receivable adjusted by
unamortized costs). Accrual of income is made without regard to delinquency
status. As discussed below, provision is made in the allowance for credit
losses to cover uncollectible accrued income.
Insurance income
Commission and premium income is recognized as revenue over the life of the
contracts using the interest method for credit life insurance, the mean of
straight-line and sum-of-digits methods for credit disability insurance, the
sum-of-digits method for decreasing coverage credit property and auto insurance
and the straight-line method for level coverage credit property insurance. All
insurance products are written under agency agreements with unaffiliated
insurers. UFS Life Reinsurance Company ("UFS Life") is engaged primarily in
the business of reinsuring credit life and credit disability policies
originated by the Company. Premiums are ceded to UFS Life on a written basis
and are earned over the life of the contracts using the methods described
above. Policy liabilities and claim reserves have been established by UFS
Life. Claim reserves are based upon accumulated estimates of claims reported,
plus estimates of incurred but unreported claims.
Allowance for credit losses
An allowance for credit losses is established based on a review of
contractually delinquent accounts in the loan portfolio for probable
uncollectible accounts at the balance sheet date, and a review of historical
loss ratios and industry loss averages to determine a reasonable allowance for
accounts that are uncollectible at the balance sheet date but are not yet
delinquent, or otherwise impaired. The allowance for credit losses includes
amounts for estimates of uncollectible accrued income. When an account becomes
six months contractually past due and a full contractual payment has not been
received in the last sixty days, the balance of the account and any accrued
income is written off. Bankrupt accounts and deficiency balance accounts are
written off when losses on such accounts become known.
Advertising expense
The Company from time to time initiates various forms of advertising, including
direct-response advertising. The Company does not believe that direct-response
advertising generates significant future benefits and, accordingly, all
advertising costs, including direct-response advertising, are expensed when
incurred.
Income taxes
The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, which requires the use of the asset and liability
method and recognizes deferred income taxes for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. These differences result
principally from the recognition of finance income on the interest method for
financial statement purposes and on the Rule of 78's method for tax purposes,
the recognition of insurance income on the accrual method for financial
statement purposes and on the modified cash method for tax purposes, bad debt
reserves expensed for book purposes but not for tax purposes, deferred
compensation expensed for financial statement purposes but deductible only in
the year paid for tax purposes, and differences in financial statement and tax
depreciation methods. The effect on deferred taxes for a change in tax rates
is recognized in income in the period that includes the enactment date.
The Company and its subsidiaries file a consolidated federal income tax return.
Loss subsidiaries receive the benefit of any related tax savings they may
generate for the consolidated group, while income subsidiaries pay income tax
to their next tier parent based upon the applicable federal tax rates, both
based upon the separated return basis. State income tax laws do not generally
permit consolidated income tax returns; accordingly, applicable state income
tax returns are filed for each company.
The Company's reinsurance subsidiary meets requirements to be taxed as a small
property and casualty company under which only investment income is subject to
tax. The Company anticipates that this subsidiary will continue to meet these
requirements until premium volume grows enough to make the cost of meeting the
requirements outweigh the benefits.
<PAGE> 15
Per share amounts
Per share amounts have been computed using the weighted shares outstanding of
1,056,605 for the year ended September 30, 1996, and 1,053,135 for the year
ended September 30, 1995. For purposes of calculating earnings per share,
outstanding shares include shares held by a subsidiary for the benefit of
employees under deferred compensation arrangements.
Segment information
The company operates in only one business segment, the finance business
segment, for industry segment report purposes. Insurance business is included
in the finance business segment in accordance with the American Institute of
Certified Public Accountants Guide for Audits of Finance Companies.
===============================================================================
NOTE 2 - MARKETABLE SECURITIES
- -------------------------------------------------------------------------------
The Company's marketable securities consist principally of corporate and
government bonds. Such securities are usually held to maturity and valued at
the lower of amortized cost or market. The Company had no significant realized
or unrealized gains or losses on such securities during the years ended
September 30, 1996 and 1995. A summary of such securities is as follows as of
September 30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
AMORTIZED
FAIR VALUE AMORTIZED COST FAIR VALUE COST
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 546,451 $ 562,953 $ 537,888 $ 543,860
Corporate and other 1,359,757 1,307,912 1,317,267 1,299,954
- --------------------------------------------------------------------------------
$1,906,208 $1,870,865 $1,855,155 $1,843,814
- --------------------------------------------------------------------------------
</TABLE>
At September 30, 1996, investments in debt securities had maturities as follows:
<TABLE>
<CAPTION>
MATURITY
- --------------------------------------------------------------------------------
WITHIN ONE ONE THROUGH FIVE THROUGH AFTER TEN
YEAR FIVE YEARS TEN YEARS YEARS
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 20,910 $ 66,316 $ 41,290 $434,437
Corporate and other 115,414 192,914 545,847 208,355
- --------------------------------------------------------------------------------
$136,324 $ 259,230 $587,137 $642,792
- --------------------------------------------------------------------------------
</TABLE>
Mortgaged-backed securities have been allocated to the above maturity
categories based upon the scheduled amount of principal to be received by year.
================================================================================
NOTE 3 - FINANCE RECEIVABLES
- --------------------------------------------------------------------------------
Finance receivables consist of direct cash loans, secured real estate loans, and
sales finance contracts. These loans are principally made to individuals in the
blue collar segment of the population. The Company operates branch offices in
the states of North and South Carolina. Approximately seventy-five percent (75%)
of the net finance receivables were originated in branches located in North
Carolina and approximately twenty-five (25%) in branches in South Carolina.
Depending upon creditworthiness and loan size, loans are either unsecured or
secured by personal property, mobile homes, automobiles or real estate. Sales
finance contracts are secured by the respective personal property, automobiles
or mobile homes. The majority of loans are made with maximum terms of
thirty-six (36) months. Some loans, including those secured by mortgages on
real estate, are made with terms up to ten (10) years. Experience of the
Company has shown that
<PAGE> 16
a majority of the finance receivables will be renewed before contractual
maturity dates and, therefore, the foregoing information is not to be regarded
as a forecast of future cash collections. During the years ended September 30,
1996 and 1995, cash collections were approximately $33,355,000 and $30,276,000,
respectively. The ratio of cash collections to average net finance receivable
balances was approximately ninety-six percent (96%) and ninety-four percent
(94%) for the years ended September 30, 1996 and 1995, respectively.
A schedule of delinquencies of direct cash loans and sales finance contracts
based on current contract terms at September 30, and percentage of such
delinquencies compared to cash loans and other contracts is presented below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
PAST DUE AMOUNT % AMOUNT %
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Four payments or more $411,299 1.08 $347,418 .95
Three payments 244,609 .64 83,504 .23
Two payments 249,825 .65 195,475 .53
- -------------------------------------------------------------------------------
TOTALS $905,733 2.37 $626,397 1.71
- -------------------------------------------------------------------------------
</TABLE>
The allowance for credit losses was 1.73% of cash loans and other contracts at
September 30, 1996, and 1.66% at September 30, 1995. Changes in the allowance
for credit losses were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 606,436 $ 550,399
- -------------------------------------------------------------------------------
<S> <C> <C>
Provision for credit losses 771,675 497,524
Loans charged-off (1,008,154) (647,346)
Recoveries 176,596 141,859
Other charges (credits) 113,047 64,000
- -------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 659,600 $ 606,436
- -------------------------------------------------------------------------------
</TABLE>
===============================================================================
NOTE 4 - PROPERTY AND EQUIPMENT
- -------------------------------------------------------------------------------
Property and equipment are summarized as follows at September 30:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Land $ 185,852 $ 144,928
Buildings 337,832 249,287
Equipment, furniture and fixtures 1,034,407 931,813
--------- ---------
1,558,091 1,326,028
Less accumulated depreciation (752,385) (634,394)
- -------------------------------------------------------------------------------
$ 805,706 $ 691,634
- -------------------------------------------------------------------------------
</TABLE>
Depreciation expense totaled approximately $120,000 and $112,000 for the years
ended September 30, 1996 and 1995, respectively.
<PAGE> 17
===============================================================================
NOTE 5 - NOTES PAYABLE
- -------------------------------------------------------------------------------
Notes payable are as follows at September 30:
<TABLE>
<CAPTION>
==========================================================================================
1996 1995
==========================================================================================
<S> <C> <C>
Due to Banks:
Notes payable to banks, with interest payable
monthly, collateralized by finance receivables, all
cash and noncash proceeds of finance receivables (See
description of term, interest rates and major
covenants below) $30,073,606 $30,346,607
----------- -----------
Senior subordinated notes payable:
Senior note payable to the primary carrier of credit
life and disability insurance, subordinated to short-
term notes payable to banks with interest payable
quarterly at prime plus one percent (1%), to be not
less than eight percent (8%) nor more than fourteen
percent (14%); due January 1, 1999 200,000 -
----------- -----------
Senior note payable to the former primary carrier of
credit life and disability insurance, subordinated to
short-term notes payable to banks with interest
payable quarterly at prime plus one percent (1%), to
be not less than nine percent (9%) nor more than
twelve percent (12%); due June 30, 1999; paid in full
in 1996 - 300,000
----------- -----------
Other notes payable:
Various unsecured notes, principally due on demand,
interest payable quarterly or monthly at prime plus
one percent (1%) 3,024,648 3,008,216
----------- -----------
Mortgage loans payable:
Mortgage loan payable to bank at $467 per month
including principal and interest through September
2006, interest at eight percent (8%) adjustable
annually to no more than fourteen percent (14%) 38,317 40,619
Mortgage loan payable to bank at $1,471 per month
including principal and interest through October
2006, interest at eight and three-eights percent (8%)
adjustable annually to no more than fifteen
percent (15%) 117,852 125,238
Mortgage loan payable to bank at $985 per month
including principal and interest through August 2011,
interest at eight and one-half percent (8 1/2%)
adjustable annually to no more than fourteen and
one-half percent (14 1/2%) 99,445 -
Mortgage loan payable to bank at $425 per month plus
interest through June 1997, with the balance of
$49,925 due July 1997, interest at the prime rate
plus one percent (1%) 53,325 58,425
=========== ===========
308,939 224,282
==========================================================================================
TOTAL NOTES PAYABLE $33,607,193 $33,879,105
==========================================================================================
</TABLE>
<PAGE> 18
The loan agreement with respect to the notes payable to banks provides a line
of credit with borrowings of up to $35,500,000 or eighty-five (85%) of eligible
receivables. The Company may borrow, at its option, at the rate of prime plus
one-fourth of one percent ( 1/4 of 1%), or LIBOR plus two and one-half percent
(2 1/2%). The Company pays a facility fee of one-fourth of one percent ( 1/4
of 1%) on the total line of credit. The notes are payable upon demand and are
collateralized by substantially all of the assets of the Company.
Major covenants of the loan agreement provide that United Financial Services,
Inc. (a) shall maintain a ratio of debt to tangible net worth as defined which
shall not exceed 6.5 to 1; (b) shall maintain a ratio of unsubordinated debt to
adjusted tangible net worth as defined which shall not exceed 5.5 to 1; (c)
shall maintain tangible net worth of not less than $6,700,000 to increase
annually by eighty percent (80%) of earnings after permitted dividends; (d)
shall maintain subordinated debt of not less than $500,000; (e) shall maintain
interest coverage as defined in excess of 1.2 to 1; and (f) is permitted to
make allocations of management fees, dividends and federal income taxes for the
purpose of servicing debt at the parent company level. The aggregate total of
such allocations in any one fiscal year may not exceed the total of federal
income taxes calculated to be due from the Company and its subsidiaries,
without regard to payment of management fees, plus fifty percent (50%) of the
after tax consolidated net income of the Company and subsidiaries calculated
without regard to payment of management fees.
As described above, the Company's subsidiaries have various debt agreements
requiring various ratios and net tangible asset levels which, in effect,
restrict the distribution of assets to the parent company and correspondingly
the payment of cash dividends by the Company to stockholders. At September 30,
1996, restricted net assets of the consolidated subsidiaries were $6,700,000.
Senior subordinated notes payable are unsecured. Mortgage loans payable are
secured by all land and buildings owned by the Company.
Total short-term debt at September 30, 1996, amounted to $33,098,254. The
aggregate annual maturities of long-term debt of $508,939 are as follows for
years ending September 30:
<TABLE>
<S> <C> <C> <C>
1997 - $ 16,545 1998- $ 20,316
1999 - $ 221,634 2000- $ 23,067
2001 - $ 24,623 balance thereafter - $202,754
</TABLE>
Following is a summary of information relating to short-term notes payable at
September 30:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MAXIMUM AVERAGE MONTHLY WEIGHTED AVERAGE
OUTSTANDING AMOUNT INTEREST
AT ANY MONTH END OUTSTANDING RATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Line-of-credit due banks:
1996 $30,346,607 $29,460,530 8.48
1995 $30,346,607 $28,555,838 9.31
Other short-term borrowings:
1996 $ 3,160,037 $ 3,064,096 9.47
1995 $ 3,026,088 $ 2,895,618 10.05
</TABLE>
===============================================================================
NOTE 6 - LEASE COMMITMENTS
- -------------------------------------------------------------------------------
The company leases office space for its home and branch offices. These leases
are all operating leases expiring at various dates through 2004. The future
minimum rental commitments required under all operating leases of $409,391 are
as follows for the years ending September 30:
<PAGE> 19
<TABLE>
<S> <C> <C> <C>
1997 - $154,023 1998- $118,068
1999 - $ 75,850 2000- $ 44,950
2001 - $ 15,675 balance thereafter - $ 825
</TABLE>
The total rent expense for the years ended September 30, 1996 and 1995, was
approximately $225,000 and $222,000, respectively.
===============================================================================
NOTE 7 - INCOME TAXES
- -------------------------------------------------------------------------------
The deferred income tax asset (liability) reflected on the balance sheet is
comprised of the following at September 30:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Insurance income adjustments $177,000 $245,000
Allowance for credit losses 241,000 221,000
Deferred compensation 259,000 238,000
Other 50,000 50,000
-------- --------
727,000 754,000
-------- --------
Deferred tax liabilities:
Unearned finance charge adjustments 403,000 478,000
Reserve for tax audit adjustments 250,000 250,000
Other 7,000 14,000
-------- --------
660,000 742,000
- -------------------------------------------------------------------------------
NET DEFERRED TAX ASSET (LIABILITY) $ 67,000 $ 12,000
- -------------------------------------------------------------------------------
</TABLE>
The provision for income tax expense is summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Current:
Federal income taxes currently payable $682,000 $537,000
State income taxes currently payable to state taxing
authorities included in other accrued liabilities 66,000 49,000
-------- --------
748,000 586,000
-------- --------
Change in deferred income taxes payable:
Utilization of state net economic loss carryforwards - 50,000
Change in the valuation allowance relating to
utilization of state net economic loss carryforwards - (50,000)
Changes in other components of deferred tax assets and
liabilities (55,000) (47,000)
(55,000) (47,000)
- -------------------------------------------------------------------------------
PROVISION FOR INCOME TAX EXPENSE $693,000 $539,000
- -------------------------------------------------------------------------------
</TABLE>
A reconciliation of the provision for income taxes to the federal statutory
rate is as follows:
<PAGE> 20
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for income taxes at the federal statutory rate $ 761,000 34% $630,000 34%
State income taxes, less federal tax benefit 40,000 2% 34,000 2%
Other, principally effect of exempt income relating to
reinsurance subsidiary (108,000) (5%) (125,000) (7%)
- ---------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES $ 693,000 31% $539,000 29%
- ---------------------------------------------------------------------------------------------------------------------
===============================================================================
NOTE 8 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------------------------------------------
</TABLE>
For cash, marketable securities, accounts receivable and debt, management
estimates that the carrying amount is a reasonable estimate of fair value.
These estimates are based upon the carrying amounts for cash and accounts
receivable, upon quoted market prices for marketable securities and upon rates
currently available to the Company for debt. For finance receivables,
management estimates that the fair value of net finance receivables is
approximately $40,000,000 based upon estimated market prices of consumer
finance branch offices and residual income streams from insurance. Fair value
estimates are subjective in nature and involve uncertainties and matters of
significant judgement and, therefore, cannot be determined with precision.
Fair value estimates do not reflect the total value of the Company as a going
concern.
NOTE 9 - RELATED PARTY TRANSACTIONS
- -----------------------------------
The major related party transactions of The United Group, Inc. and Subsidiaries
are summarized below:
Related party notes and accounts receivable
Notes and accounts receivable - affiliates were as follows at September 30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable from Angell Group Incorporated (AGI) $900,926 $900,926
Note receivable from Angell Care, Inc. (ACI), an affiliate
of AGI, bearing interest at the prime rate plus one-quarter
percent (1/4%) 33,389 75,740
- --------------------------------------------------------------------------------
$934,315 $976,666
- --------------------------------------------------------------------------------
</TABLE>
Accounts receivable from AGI, an affiliate of The United Group, Inc., has
arisen principally from income tax allocations in prior years when the Company
was part of the AGI consolidated group. Management of AGI and ACI intends to
repay the above notes and accounts receivable from future equity distributions
made by the Company to Don Angell, the sole shareholder of AGI, or through
future stock repurchase transactions between Don Angell and the Company.
Amounts due from AGI and its subsidiaries are secured by 249,933 shares of
common stock of The United Group, Inc. owned by Don Angell.
Related party notes payable
In addition to the items previously discussed, the Company had $402,714 and
$294,529 in notes payable to various affiliates, stockholders, directors and
officers outstanding at September 30, 1996 and 1995, respectively. These notes
are among those listed and further described in Note 4.
===============================================================================
NOTE 10 - STOCK BONUS PLAN
- -------------------------------------------------------------------------------
The Company has a stock bonus plan as a vehicle to fund redemption of certain
parent company stock and to provide retirement benefits to employees. The
Company's stock bonus plan covers all full-time employees, and is funded
entirely with Company contributions. Contributions are discretionary and are
determined annually by the Board of Directors, up to a maximum of fifteen
percent (15%) of annual compensation. Contributions are funded as accrued.
Participants in the plan become vested after five (5) years of service.
Forfeitures are used to reduce annual contributions. Contributions in
<PAGE> 21
the form of parent company stock are valued at fair market value determined
annually via independent appraisal of the stock at the contribution date. Such
value was $11.25 per share at September 30, 1996. The expense recorded under
this plan was $286,807 and $253,184 for the years ended September 30, 1996 and
1995, respectively. Outstanding shares of common stock held by the plan and
allocated to employees totalled 236,698 and 223,744 at September 30, 1996 and
1995, respectively.
Terminated employees have the right to redeem vested shares at fair market
value determined annually as previously described. Approximately ninety
percent (90%) of the shares held by the plan are vested at September 30, 1996.
The Company redeemed 14,713 shares at $9.00 per share during the year ended
September 30, 1996.
===============================================================================
NOTE 11 - CONCENTRATIONS OF CREDIT RISK
- -------------------------------------------------------------------------------
Concentrations of credit risk with respect to finance receivables are discussed
in Note 2. In addition, the Company and its subsidiaries had cash in bank
accounts that exceed the federally insured amount for individual account
holders by approximately $1,000,000 at September 30, 1996.
===============================================================================
NOTE 12 - SUBSEQUENT EVENT
- -------------------------------------------------------------------------------
On November 1, 1996, the Company entered into a merger agreement with Norwest
Corporation, a Delaware corporation. Norwest Corporation is a large public
held corporation with divisions operating in the same line of business as the
Company. Under the terms of the agreement, the shareholders of the Company
will in effect exchange all shares of stock of The United Group, Inc. for
shares of common stock of Norwest Corporation. The number of shares of Norwest
common stock to be received is based upon a value of $18,000,000 divided by the
per share price of Norwest common stock as measured by the average of the
closing prices of a share of Norwest common stock as reported on the
consolidated tapes of the New York Stock Exchange during the period of ten (10)
trading days ending on the day immediately preceding the meeting of the
shareholders of The United Group, Inc. to vote on approval of the merger. The
merger is structured to qualify as a pooling of interests, and is anticipated
to close in January or February of 1997. Consummation of the merger is subject
to various conditions and requirements, including approval by a majority of the
shareholders of The United Group, Inc., and accordingly, it cannot be assured
that the merger will be consummated.
<PAGE> 22
THE UNITED GROUP, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================
COMPARISON OF FISCAL 1996 VERSUS FISCAL 1995
- -------------------------------------------------------------------------------
During the year ended September 30, 1996, the Company produced loan volume of
approximately $45,500,000 compared with $47,900,000 in Fiscal 1995. No branch
offices were opened or closed during Fiscal 1996. A branch opened in April
1995 produced loan volume of approximately $1,300,000 in 1996 and $664,000 in
1995. Therefore, branches opened more than one year produced loan volume of
$44,200,000 during Fiscal 1996 compared with $45,713,000 in Fiscal 1995.
Management believes that this decrease in loan volume is the result of
difficulties in attracting qualified customers due to the prevalence of credit
cards and consumer debt overload. In addition, lending policies have been
tightened somewhat and the movement toward more secured lending has been
accelerated. In March 1996, the Company began making real estate loans in
North Carolina and at September 30, 1996 had approximately $1,300,000
outstanding in such loans. These steps have accelerated the movement from the
smaller loan market to the intermediate loan market. As a result, the average
loan made in Fiscal 1996 increased to $1,951 from $1,637 in 1995 and $1,428 in
1994. During Fiscal 1996, bulk purchases of receivables were made totaling in
excess of $1,000,000. The result was an increase in net finance receivables of
$1,623,259 or 4.7% compared to an increase during 1995 of approximately
$4,100,000 or 13.8%.
Profitability improved in Fiscal 1996 over 1995 due to several factors. First,
the increased finance receivables generated an increase in revenues. Interest
and fees on loans increased by $757,572 which is an increase of 8.7%. This
increase was generated partially by an increase of $285,840 in a new fee on
loans made in North Carolina. In addition, average net receivables increased
by $2,496,057 which produced additional interest revenues. Net insurance
income decreased by $51,825, a decrease of 3.26%. Increases in insurance
income do not follow increases in interest income due to rate reductions,
decreased penetration on larger loans and other factors. Salaries and benefits
increased at a modest pace of 5.9% compared to a 12.1% rate of increase in
1995. Other operating expenses declined by $6,676 after a decrease in 1995 of
$189,049 or 10.8% as a result of aggressive efforts to control and reduce
expenses where possible.
Interest expense for Fiscal 1996 decreased over Fiscal 1995 by $148,676. This
expense decreased by $237,013 due to a decrease in the average rate paid to
banks and increased by $88,337 due to an increase in the amount of debt
outstanding to the banks.
===============================================================================
FUTURE PROFITABILITY
- -------------------------------------------------------------------------------
The future profitability of the company is highly dependent upon the course of
short-term interest rates since the cost of the primary source funds, the bank
line of credit, is tied to the prime interest rate charged by the banks or to
LIBOR. Each percentage point increase in the prime rate increases the
Company's interest expense by approximately $300,000 at the current level of
borrowing. Rate increases generated additional interest expense of
approximately $514,000 in Fiscal 1995 compared with rates paid in 1994.
However, in Fiscal 1996 rates paid were reduced as discussed above. This
increase in expense can be somewhat mitigated by the fact that the rates of
interest charged in South Carolina are not subject to regulation and can be
increased somewhat if necessary. In addition, the Company intends to be more
aggressive in its control of operating expenses during times when interest
rates are high. As discussed above, these efforts generated savings during
Fiscal 1996. During 1995, the United Financial Services, Inc. negotiated an
adjustment in the interest rate paid to the banks so that the company can elect
to pay either prime plus one-fourth of one percent (1/4 of 1%) or LIBOR plus
two and one-half percent (2 and 1/2%). The company believes that on average,
the LIBOR rate will be elected which will generate an average reduction of
about three-fourths of one percent (3/4 of 1%) in the average interest rate
paid. At the current level of borrowing, this would translate to a savings of
approximately $225,000 annually. Experience has shown that periods of high
rates run in cycles and that such a cycle may currently be occurring or be in
its latter stages. Experience has also shown that these cycles eventually run
their course and rates return to lower levels.
===============================================================================
Credit Loss Experience
- -------------------------------------------------------------------------------
Delinquency is computed based on the amount past due according to the original
payment terms of a loan (known as the contractual method). Management closely
monitors delinquency to measure the quality of the loan portfolio and the
potential for credit losses. In addition, delinquency statistics give
management important information concerning trends in particular branches or
areas. Management uses this information to determine the need to adjust
collection efforts and to adjust credit policies in order to maintain the
quality of the loan portfolio.
<PAGE> 23
The Company maintains an allowance for loan losses in an amount that, in
management's opinion, is adequate to cover losses expected to occur in the
existing loan portfolio. The Company charges against current earnings, as a
provision for loan losses, amounts added to the allowance to maintain it at
levels expected to cover future losses of principal. The Company's policy is
to charge-off loans that are 180 days past due contractually, or sooner if the
loan is deemed uncollectible in cases such as deficiency balances after a
repossession is sold. This policy was previously 210 days in Fiscal 1995 and
240 days in Fiscal 1994. Collection efforts on charged-off loans continue
until the obligation is satisfied or until it is determined such obligation is
not collectible or the cost of continued collection efforts will exceed the
potential for recovery. Accounts charged-off are debited to the allowance for
loan losses. Recoveries of previously charged-off loans are credited to the
allowance for loan losses.
The following table summarizes statistics relating to the condition of
receivables, the allowance for loan losses and credit loss experience over the
last five fiscal years:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Percentage of receivables past due:
Four payments or more 1.08 0.95 0.91 1.02 1.56
Three payments 0.64 0.23 0.32 0.27 0.32
Two payments 0.65 0.53 0.41 0.37 0.58
--------------------------------------------
Total 2.37 1.71 1.64 1.66 2.46
============================================
Accounts two or more payments
past due known to have filed
under federal bankruptcy law 0.78 0.70 0.61 0.64 1.13
============================================
Percentage of average net finance receivables:
Cash collections 96.00 94.00 93.00 87.00 83.00
Provision for credit losses 2.23 1.55 1.44 2.24 3.68
Charge-offs, net of recoveries 2.40 1.57 1.44 1.84 3.61
</TABLE>
===============================================================================
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------------------------------------------------------
The Company finances its operations and growth through cash flow from
operations and borrowings under the bank line of credit. In 1996, the Company
produced cash flow from operations of $2,848,569 compared with $2,757,167 in
1995. In addition, the Company collected cash as repayments on loans of
$21,921,647 in 1996 and $18,879,483 in 1995. An important element in these
cash collections is the condition of finance receivables discussed above.
The Company's primary ongoing cash requirements relate to funding growth in
loan receivables in both existing and new branch offices. The Company plans to
continue efforts to employ additional receivables in existing branch offices.
In addition, new offices will be opened as available personnel and locations
appear to make such openings attractive to management. The Company currently
has a total line of credit of $35,500,000 with its banks. Approximately
$5,400,000 of this line is not used as of September 30, 1996. The Company
believes that this line of credit along with internally generated cash flows is
adequate to fund anticipated growth.
===============================================================================
INFLATION
- -------------------------------------------------------------------------------
The Company does not believe that inflation has a material adverse effect on
its financial condition or results of operations. The primary impact of
inflation on the operations of the Company is reflected in increased operating
costs. While increases in operating costs would adversely affect the Company's
operations, such effects can be offset in the long-term by increases in the
size of loans made as well as rate increases should interest rates remain at
high levels due to high levels of inflation.
<PAGE> 24
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Common stock of the Company is traded in a limited over the counter market
on a "best effort" basis. Therefore, firm quotations for shares of the common
stock are not available. During Fiscal 1996, the Company purchased 23,860
shares of common stock at $11.15 per share. During Fiscal 1995, the Company
purchased 13,422 shares of common stock at $9.00 per share. Shares of stock
contributed to the stock bonus plan were valued at $11.15 per share during
Fiscal 1996 and at $9.00 per share during Fiscal 1995.
On February 28, 1995, and on February 28, 1996, the Company paid cash dividends
of $.10 per common share. Under North Carolina law, a corporation may make a
distribution to its shareholders if after such distribution: (1) the
corporation can pay its debts, as they come due in the usual course of
business; or (2) the corporation's total assets exceed its total liabilities.
In addition, the Company is dependent on funds which it can generate in the
form of dividends or loans from its subsidiaries or others in order to meet
debt servicing obligations, to pay current operating expenses and to pay any
dividends declared.
The Company's subsidiaries have various debt agreements requiring various
ratios and net tangible asset levels, which in effect, restrict the
distribution of assets to the parent company and correspondingly the payment of
cash dividends by the Company to stockholders. These ratios and restrictions
are more particularly described in Note 4 to the financial statements contained
in this report.
DIRECTORS AND EXECUTIVE OFFICERS
The following table identifies all directors and executive officers of the
Company and describes the business experience of each such director and
executive officer during the past five years:
<TABLE>
<CAPTION>
==================================================================================
BUSINESS EXPERIENCE,
OTHER DIRECTORSHIPS
AND POSITIONS WITH THIS EXECUTIVE
COMPANY OR ITS DIRECTOR OFFICER
NAME AGE SUBSIDIARIES SINCE SINCE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack F. Anderson 70 President of 1969 -
Insurance Service
and Credit
Corporation, a
general insurance
agency, a position
he has held for
more than five
years
Don G. Angell 57 Director, Chairman 1991 -
of the Board and
Chief Executive
Officer of
Meadowbrook Health
Care Services,
Inc., positions
which he has held
for more than five
years
Bill G. Beaver 57 President of the 1982 1981
Company and of
United Financial
Services, Inc., a
wholly-owned
subsidiary of the
Company, a position
he has held for
more than five
years
Shelton Gorelick 67 Former Chairman of 1991 -
Capitol Finance
Group, a consumer
finance subsidiary
of First Union
Corp., a position
which he held for
more than five
years prior to July
1990; Director of
First Union
Corporation of
North Carolina;
President and sole
shareholder of
SGIC, Inc., an
investment company,
a position he has
held for more than
five years
Glenn Johnson 72 President and owner 1980 -
of Glenn's
Tastee-Freez, a
position he has
held for more than
five years
R. Steven Lackey 45 Senior Vice 1992 1985
President, United
Financial Services,
Inc., a
wholly-owned
subsidiary of the
Company, a position
he has held for
more than five
years
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
==================================================================================
BUSINESS EXPERIENCE,
OTHER DIRECTORSHIPS
AND POSITIONS WITH THIS EXECUTIVE
COMPANY OR ITS DIRECTOR OFFICER
NAME AGE SUBSIDIARIES SINCE SINCE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kenneth M. O'Connell 48 Secretary-Treasurer 1975 1975
of the Company and
of United Financial
Services, Inc., a
wholly-owned
subsidiary of the
Company, a position
which he has held
for more than five
years.
Dennis E. Savell 53 Investment Limited 1990 -
Partner, J.C.
Bradford & Co.,
Charlotte, NC, a
position that he
has held for more
than five years
Gordon E. Rhodes 69 President of Dealer 1993 -
Resources, Inc.,
Atlanta, Ga., a
financial insurance
agency from
September, 1994 to
present; Senior
Vice President of
Heritage Life
Insurance company
and Director of
Heritage Insurance
Group, Agura Hills,
CA., an insurance
holding company
owned by Quaker
State Corporation,
from March 1, 1990
to July 1, 1994,
and by GE Capital
Corp, from that
date to present;
President of
Sturdivant Life
Insurance Company,
a stock life
insurance company
owned by Heritage
Life Insurance
Company, a position
he held for more
than five years;
Director and
chairman of the
Advisory Board of
North Wilkesboro
branch of Branch
Bank and Trust Co.
Dennis A. Young 50 President and 1983 -
Director of Angell
Group Incorporated
form May 1982
through July 1990;
Executive director
of the East
Carolina University
Educational
Foundation
Incorporated from
September 1991 to
present.
</TABLE>
<PAGE> 26
STOCK TRANSFER
Stock Transfer Department
The United Group, Inc.
Suite 203
5960 Fairview Road
Charlotte, North Carolina 28210
GENERAL COUNSEL
The Bishop Law Firm
5950 Fairview Road
Charlotte, North Carolina 28210
ACCOUNTANTS
Daniel, Ratliff & Company
1100 South Tryon Street
Suite 230
Charlotte, North Carolina 28203
CORPORATE MAILING ADDRESS
The United Group, Inc.
Suite 203
5960 Fairview Road
Charlotte, North Carolina 28210
10-KSB AVAILABILITY
A COPY OF THE COMPANY'S FORM 10-KSB REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION IS AVAILABLE UPON WRITTEN REQUEST TO THE COMPANY.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE UNITED GROUP, INC. FOR THE YEAR ENDED SEPTEMBER 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 932,208
<SECURITIES> 1,870,865
<RECEIVABLES> 38,166,028
<ALLOWANCES> 659,600
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,558,091
<DEPRECIATION> 752,385
<TOTAL-ASSETS> 41,513,714
<CURRENT-LIABILITIES> 0
<BONDS> 308,939
0
0
<COMMON> 100,000
<OTHER-SE> 5,461,482
<TOTAL-LIABILITY-AND-EQUITY> 5,561,482
<SALES> 11,620,972
<TOTAL-REVENUES> 11,620,972
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,629,522
<LOSS-PROVISION> 771,675
<INTEREST-EXPENSE> 2,981,853
<INCOME-PRETAX> 2,237,922
<INCOME-TAX> 693,000
<INCOME-CONTINUING> 1,544,922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,544,922
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.46
</TABLE>
<PAGE> 1
EXHIBIT 99
ORGANIZATION OF THE COMPANY AS OF SEPTEMBER 30, 1996
Don Gray Angell
The United Group, Inc.
52.78% (1) (2)
United Financial Services, Inc.
100% (2)
United Landmark, United UFS Life
Inc. Financial Reinsurance
Services, Inc. Company
100% (2) of N.C.
100% (2)
100% (2)
(1) The Registrant.
(2) A North Carolina Corporation.
(3) An Arizona Corporation.
