<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 1999
-----------------------------------------------------
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 0-18298
number -------------------------------------------------------------
Unitrin, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4255452
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One East Wacker Drive, Chicago, Illinois 60601
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(Address of principal executive offices) (Zip Code)
(312)661-4600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
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
------- -------
73,179,396 shares of common stock, $0.10 par value, were outstanding as of March
31, 1999.
<PAGE>
UNITRIN, INC.
INDEX
<TABLE>
<CAPTION>
Page
---------
<S> <C> <C>
PART I. Financial Information.
Item 1. Financial Statements.
Condensed Consolidated Statements of 1
Income for the Three Months Ended
March 31, 1999 and 1998 (Unaudited).
Condensed Consolidated Balance Sheets as of 2
March 31, 1999 (Unaudited) and
December 31, 1998.
Condensed Consolidated Statements of Cash 3
Flows for the Three Months Ended
March 31, 1999 and 1998 (Unaudited).
Notes to the Condensed Consolidated 4-6
Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 7-11
PART II. Other Information.
Item 6. Exhibits and Reports on Form 8-K. 12
Signatures 13
</TABLE>
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31, March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Revenues:
Premiums $324.2 $289.9
Consumer Finance Revenues 29.1 28.3
Net Investment Income 49.8 41.8
Net Gains on Sales of Investments 24.3 60.9
-------------- --------------
Total Revenues 427.4 420.9
-------------- --------------
Expenses:
Insurance Claims and Policyholders' Benefits 209.5 183.7
Insurance Expenses 135.9 118.5
Consumer Finance Expenses 24.0 23.4
Interest and Other Expenses 4.0 2.8
-------------- --------------
Total Expenses 373.4 328.4
-------------- --------------
Income before Income Taxes and Equity
in Net Income of Investees 54.0 92.5
Income Tax Expense 18.1 31.7
-------------- --------------
Income before Equity in Net Income of Investees 35.9 60.8
Equity in Net Income of Investees 16.3 15.2
-------------- --------------
Net Income $ 52.2 $ 76.0
============== ==============
Net Income Per Share $ 0.70 $ 1.01
============== ==============
Net Income Per Share Assuming Dilution $ 0.70 $ 1.00
============== ==============
</TABLE>
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
1
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
(Unaudited)
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized
Cost: 1999 - $2,565.4; 1998 - $2,492.5) $2,597.3 $2,557.3
Equity Securities at Fair Value
(Cost: 1999 - $646.5; 1998 - $831.2) 797.7 786.3
Investees at Cost Plus Cumulative Undistributed Earnings
(Fair Value: 1999 - $1,038.0; 1998 - $1,223.2) 606.3 581.2
Other 304.7 379.4
-------- --------
Total Investments 4,306.0 4,304.2
-------- --------
Cash 6.4 8.6
Consumer Finance Receivables 542.9 532.0
Other Receivables 334.5 290.8
Deferred Policy Acquisition Costs 331.4 332.0
Other Assets 448.4 442.3
-------- --------
Total Assets $5,969.6 $5,909.9
======== ========
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $2,097.9 $2,079.0
Property and Casualty 434.0 447.7
-------- --------
Total Insurance Reserves 2,531.9 2,526.7
-------- --------
Investment Certificates 547.4 544.6
Unearned Premiums 261.7 263.2
Accrued and Deferred Income Taxes 460.4 378.8
Notes Payable 51.1 116.2
Accrued Expenses and Other Liabilities 256.6 258.0
-------- --------
Total Liabilities 4,109.1 4,087.5
-------- --------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 million Shares Authorized;
73,179,396 and 75,977,750 Shares Issued and Outstanding at
March 31, 1999 and December 31, 1998 7.3 7.6
Paid-in Capital 414.5 428.2
Retained Earnings 1,319.5 1,373.4
Accumulated Other Comprehensive Income 119.2 13.2
-------- --------
Total Shareholders' Equity 1,860.5 1,822.4
-------- --------
Total Liabilities and Shareholders' Equity $5,969.6 $5,909.9
======== ========
</TABLE>
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
2
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION> Three Months Ended
---------------------------------------------
March 31, March 31,
1999 1998
------------------ ----------------
<S> <C> <C>
Operating Activities:
Net Income $ 52.2 $ 76.0
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operations:
Change in Deferred Policy Acquisition Costs 0.2 5.9
Equity in Net Income of Investees before Taxes (25.1) (23.5)
Amortization of Investments 5.7 5.7
Increase (Decrease) in Insurance Reserves and Unearned Premiums 1.4 (8.1)
Increase in Accrued and Deferred Income Taxes 24.5 38.1
Increase (Decrease) in Accrued Expenses and Other Liabilities (1.4) 16.4
Net Gains on Sales of Investments (24.3) (60.9)
Provision for Loan Losses 5.7 5.3
Other, Net (45.9) 10.7
------------------ ----------------
Net Cash Provided (Used) by Operating Activities (7.0) 65.6
------------------ ----------------
Investing Activities:
Sales and Maturities of Fixed Maturities 100.8 189.9
Purchases of Fixed Maturities (179.1) (214.2)
Sales and Redemptions of Equity Securities 211.3 77.0
Purchases of Equity Securities (2.1) (10.3)
Change in Consumer Finance Receivables (16.1) 19.1
Change in Short-term Investments 75.6 14.8
Other, Net (5.8) (6.6)
------------------ ----------------
Net Cash Provided by Investing Activities 184.6 69.7
------------------ ----------------
Financing Activities:
Change in Investment Certificates 2.9 (33.4)
Changes in Universal Life and Annuity Accounts 2.3 1.8
Notes Payable Proceeds 48.8 10.0
Notes Payable Payments (113.9) (85.2)
Cash Dividends Paid (25.8) (24.5)
Common Stock Repurchases (94.8) (1.2)
Other, Net 0.7 2.4
------------------ ----------------
Net Cash Used by Financing Activities (179.8) (130.1)
------------------ ----------------
Increase (Decrease) in Cash (2.2) 5.2
Cash, Beginning of Year 8.6 14.5
------------------ ----------------
Cash, End of Period $ 6.4 $ 19.7
================== ================
</TABLE>
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
3
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 -- Basis of Presentation
The unaudited Condensed Consolidated Financial Statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission") but do not include all
information and footnotes required by generally accepted accounting principles.
In the opinion of management, the Condensed Consolidated Financial Statements
reflect all adjustments necessary for a fair presentation. The preparation of
interim financial statements relies heavily on estimates. This factor and
certain other factors, such as the seasonal nature of some portions of the
insurance business, as well as market conditions, call for caution in drawing
specific conclusions from interim results. The accompanying Condensed
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and related notes included in the Company's
Annual Report on Form 10-K filed with the Commission for the year ended December
31, 1998.
On February 12, 1999, the Company's Board of Directors authorized a 2-for-1
stock split payable on March 26, 1999 in the form of a dividend distribution of
one share of common stock for each share of common stock outstanding on March 5,
1999, the record date for the dividend. Accordingly, prior year share and per
share amounts have been restated retroactively as if the distribution had
occurred prior to the periods presented.
Note 2 -- Accounting Changes
Effective January 1, 1999, the Company prospectively adopted Statement of
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP No. 98-1 requires the Company to
capitalize qualifying computer software costs incurred during the application
development stage. The effect of adoption was not material.
Note 3 -- Net Income Per Share
Net Income Per Share and Net Income Per Share Assuming Dilution determined in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" for the three months ended March 31, 1999 and 1998 was as
follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------
March 31, March 31,
(Dollars and Shares in Millions, Except Per Share Amounts) 1999 1998
- --------------------------------------------------------------- ------------------- ------------------
<S> <C> <C>
Net Income $52.2 $76.0
Dilutive Effect on Net Income from
Investees' Equivalent Shares (0.2) (0.4)
--------------------- ---------------------
Net Income Assuming Dilution $52.0 $75.6
===================== =====================
Weighted Average Common Shares Outstanding 74.2 75.2
Dilutive Effect of Unitrin Stock Option Plans 0.3 0.3
--------------------- ---------------------
Weighted Average Common Shares and
Equivalent Shares Outstanding Assuming Dilution 74.5 75.5
===================== =====================
Net Income Per Share $0.70 $1.01
===================== =====================
Net Income Per Share Assuming Dilution $0.70 $1.00
===================== =====================
</TABLE>
4
<PAGE>
Note 4 -- Investment in Investees
Unitrin accounts for its Investments in Investees (Curtiss-Wright Corporation,
Litton Industries, Inc. ("Litton") and UNOVA, Inc.) under the equity method of
accounting using the most recent publicly-available financial reports and other
publicly-available information. The Company's investment in Litton exceeded 10%
of Shareholders' Equity at December 31, 1998. The amounts included in Unitrin's
financial statements for Litton represent amounts reported by Litton for periods
ending two months earlier. Accordingly, amounts included in these financial
statements represent the amounts reported by Litton for the three month periods
ended January 31, 1999 and 1998. Summarized financial information reported by
Litton for such periods was:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
Jan. 31, Jan. 31,
(Dollars in Millions) 1999 1998
- ------------------------------------------ ------------------- -----------------
<S> <C> <C>
Revenues $1,130.9 $973.8
=================== =================
Cost of Sales $ 884.4 $741.2
=================== =================
Income from Continuing Operations $ 44.0 $ 40.6
=================== =================
Net Income $ 44.0 $ 40.6
=================== =================
</TABLE>
Based on the most recently available public information, Unitrin's voting
percentage in Litton common stock at March 31, 1999 was approximately 27.8%.
Equity in Net Income of Investees was $16.3 million and $15.2 million for the
three months ended March 31, 1999 and 1998, respectively. Equity in Net Income
of Investees for the three months ended March 31, 1999 included income of $3.4
million resulting from Unitrin's proportionate share of UNOVA's gain on sale of
its headquarters building. Equity in Net Income of Investees for the three
months ended March 31, 1998 included income of $4.9 million resulting from the
Company's investment in Western Atlas Inc. ("Western Atlas"). In August 1998,
the Company exchanged its investment in Western Atlas for common stock in Baker
Hughes Incorporated ("Baker Hughes") upon the acquisition of Western Atlas by
Baker Hughes in a merger transaction. As a result of the merger, Unitrin owns
less than 20% of Baker Hughes and the equity method no longer applies.
Note 5 -- Other Comprehensive Income and Supplemental Cash Flow Information
Other Comprehensive Income related to the Company's investments in Fixed
Maturities and Equity Securities for the three months ended March 31, 1999 and
1998 was:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
March 31, March 31,
(Dollars in Millions) 1999 1998
- ------------------------------------------------------------------------------ ----------------- -----------------
<S> <C> <C>
Increase (Decrease) in Unrealized Gains, Net of
Reclassification Adjustment for Gains Included in Net Income $163.2 $(66.4)
Effect of Income Taxes (57.2) 22.7
----------------- -----------------
Increase (Decrease) in Accumulated Other Comprehensive Income $106.0 $(43.7)
================= =================
</TABLE>
The Company's Investments in Investees are accounted for under the equity method
of accounting and, accordingly, changes in the fair value of the Company's
investments in Investees are excluded from the determination of Total
Comprehensive Income and Other Comprehensive Income under SFAS No. 130. Total
Comprehensive Income for the three months ended March 31, 1999 and 1998 was
$158.2 million and $32.3 million, respectively.
5
<PAGE>
Note 6 -- Business Segments
Segment Revenues and Operating Profit for the three months ended March 31, 1999
and 1998 were:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
March 31, March 31,
(Dollars in Millions) 1999 1998
- ---------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Revenues:
Property and Casualty Insurance:
Premiums $146.3 $170.9
Net Investment Income 12.9 11.1
---------------- -----------------
Total Property and Casualty Insurance 159.2 182.0
---------------- -----------------
Life and Health Insurance:
Premiums 177.9 119.0
Net Investment Income 36.5 30.5
---------------- -----------------
Total Life and Health Insurance 214.4 149.5
---------------- -----------------
Consumer Finance 29.1 28.3
---------------- -----------------
Total Segment Revenues 402.7 359.8
---------------- -----------------
Net Gains on Sales of Investments 24.3 60.9
Other 0.4 0.2
---------------- -----------------
Total Revenues $427.4 $420.9
================ =================
Income before Income Taxes and
Equity in Net Income of Investees:
Property and Casualty Insurance $ 14.1 $ 18.8
Life and Health Insurance 12.5 7.5
Consumer Finance 5.0 5.9
---------------- -----------------
Total Segment Operating Profit 31.6 32.2
---------------- -----------------
Net Gains on Sales of Investments 24.3 60.9
Other Income, Net (1.9) (0.6)
---------------- -----------------
Income before Income Taxes and
Equity in Net Income of Investees $ 54.0 $ 92.5
================ =================
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Property and Casualty Insurance
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
March 31, March 31,
(Dollars in Millions) 1999 1998
- ------------------------------------ ------------- -------------
<S> <C> <C>
Premiums $146.3 $170.9
Net Investment Income 12.9 11.1
------------- -------------
Total Revenues $159.2 $182.0
============= =============
Operating Profit $ 14.1 $ 18.8
============= =============
</TABLE>
Premiums in the Property and Casualty Insurance segment decreased by $24.6
million for the three months ended March 31, 1999, compared to the same period
in 1998 due primarily to lower volume, partially the result of management
actions taken to reduce exposures on certain classes of business. The Company
anticipates that the impact of these actions on Premiums will continue in 1999.
Operating Profit in the Property and Casualty Insurance segment decreased by
$4.7 million due primarily to higher storm damage and the effects of lower
premium volume, partially offset by the effects of reduced exposure on certain
classes of business and lower expense related to Year 2000 remediation projects.
On February 10, 1999, the Company entered into a definitive agreement with Fund
American Enterprises Holdings, Inc. ("Fund American") under which the Company
will acquire Fund American's subsidiary, Valley Group, Inc. ("Valley Group"),
and its principal subsidiaries (Valley Insurance Company, Charter Indemnity
Company and White Mountains Insurance Company) in a cash transaction. The
purchase price is estimated to be $139 million assuming payment of a special
dividend by Valley Group to Fund American of approximately $81 million prior to
closing. The transaction, including the payment of the special dividend, is
subject to insurance department approvals and the satisfaction of other
customary closing conditions. In 1998, Valley Group had consolidated annual
statutory premium revenues of approximately $160 million. The acquisition will
be accounted for under the purchase method and, accordingly, the operations of
Valley Group and its subsidiaries will be included in the Company's financial
statements from the date of acquisition. The Company expects the acquisition to
be completed in the second quarter of 1999.
Life and Health Insurance
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
March 31, March 31,
(Dollars in Millions) 1998 1998
- ------------------------------------ ------------ --------------
<S> <C> <C>
Premiums $177.9 $119.0
Net Investment Income 36.5 30.5
------------ --------------
Total Revenues $214.4 $149.5
============ ==============
Operating Profit $ 12.5 $ 7.5
============ ==============
</TABLE>
Premiums in the Life and Health Insurance segment increased by $58.9 million for
the three months ended March 31, 1999, compared to the same period in 1998 due
primarily to premiums resulting from the June 1998 acquisition of The Reliable
Life Insurance Company and the September 1998 acquisition of Reserve National
Insurance Company and its parent NationalCare Insurance Company. Operating
Profit in the Life and Health Insurance segment increased by $5.0 million due
primarily to the acquisition of Reliable Life.
7
<PAGE>
Consumer Finance
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
March 31, March 31,
(Dollars in Millions) 1999 1998
- ------------------------------------ ------------ -------------
<S> <C> <C>
Revenues $29.1 $28.3
============ =============
Operating Profit $ 5.0 $ 5.9
============ =============
</TABLE>
Revenues in the Consumer Finance segment increased by $0.8 million for the three
months ended March 31, 1999, compared to the same period in 1998 as a result of
a higher level of loans outstanding. Operating Profit in the Consumer Finance
segment decreased by $0.9 million due primarily to higher operating expenses
partially the result of conversion costs associated with Year 2000.
Net Gains on Sales of Investments
Net Gains on Sales of Investments were $24.3 million and $60.9 million for the
three months ended March 31, 1999 and 1998, respectively. In the first quarter
of 1999, the Company sold a portion of its investment in Baker Hughes
Incorporated ("Baker Hughes") common stock at a pre-tax gain of $24.5 million.
The first quarter of 1998 included gains primarily resulting from the
disposition of the Company's investment in ITT Corporation ("ITT") common stock
in connection with the acquisition of ITT by Starwood Hotels & Resorts
Worldwide, Inc. and the redemption of the Company's investment in Navistar
International Corporation $6.00 Cumulative Convertible Preferred Stock, Series
G. The Company cannot anticipate when or if similar investment gains or losses
may occur in the future.
Equity in Net Income of Investees
Equity in Net Income of Investees was $16.3 million and $15.2 million for the
three months ended March 31, 1999 and 1998, respectively. Equity in Net Income
of Investees for the three months ended March 31, 1999 included income of $3.4
million resulting from Unitrin's proportionate share of UNOVA's gain on sale of
its headquarters building. Equity in Net Income of Investees for the three
months ended March 31, 1998 included income of $4.9 million resulting from the
Company's investment in Western Atlas Inc. ("Western Atlas"). In August 1998,
the Company exchanged its investment in Western Atlas for common stock in Baker
Hughes upon the acquisition of Western Atlas by Baker Hughes in a merger
transaction. As a result of the merger, Unitrin owns less than 20% of Baker
Hughes and the equity method no longer applies.
Other Items
Other Income, Net decreased by $1.3 million for the three months ended March 31,
1999, compared to same period in 1998 due primarily to higher net corporate
interest expense.
During the first three months of 1999, the Company repurchased 2,823,480 shares
of its common stock (adjusted for the Company's 2-for-1 stock split) in open
market transactions at an aggregate cost of $94.8 million. The repurchases were
made with general corporate funds. At March 31, 1999, the Company had
approximately 6.9 million shares remaining under the existing Board of Directors
repurchase authorizations.
At March 31, 1999, the unused commitment under the Company's revolving credit
facility was $295.0 million. In addition, for the remainder of 1999, the
Company's subsidiaries would be able to pay approximately $624.9 million in
dividends to the Company without prior regulatory approval.
Year 2000
The Year 2000 issue (i.e. the ability of computer systems to accurately identify
and process dates beginning with the year 2000 and beyond) affects virtually all
companies and organizations. Most of the Company's computer systems are already
Year 2000 compliant. However, certain of the Company's computer systems use only
two digits to identify a year in a date field. For example, the year 2000 would
be represented in these systems as "00," but in many cases might be interpreted
by the computer as "1900" rather than "2000," thereby potentially resulting in
processing errors.
8
<PAGE>
Year 2000 - continued
The ability to process information in a timely and accurate manner is vital to
the Company's data-intensive insurance and consumer finance businesses. The
Company recognizes that the computer systems used by these businesses must be
Year 2000 compliant by December 31, 1999 and, in some instances, well in advance
of that date. To meet this challenge, the Company and its subsidiaries have
instituted a four-phase Year 2000 program:
1) Assessment -- Identifying all hardware, software and key service
providers posing a Year 2000 exposure and the prioritizing of related Year
2000 projects;
2) Remediation and Conversion -- Procuring replacement Year 2000 compliant
hardware or software (including improvements in functionality in addition
to being Year 2000 compliant) or modifying existing software to be Year
2000 compliant;
3) Validation -- Testing and certification, including review of documented
remediation work and test results by technical project teams and key users,
of all such critical hardware and software;
4) Production -- Installing and placing into production all such critical
new or remediated hardware and software.
Each of the Company's business segments is responsible for developing and
implementing detailed project plans to address its Year 2000 exposure. Each
business segment's progress is monitored and reviewed by the Company's Year 2000
Certification Team. The Company's Year 2000 Certification Team is comprised of
senior members of the Company Information Systems Audit Group and Data Systems
Group and reports to the Company's senior management and Board of Directors on a
regular basis. In addition, the Company's insurance subsidiaries are subject to
oversight by state insurance regulatory bodies and its consumer finance
subsidiary is subject to oversight by the FDIC.
Each of the Company's business segments has completed the Assessment Phase and
is in varying stages of completion for the remaining phases. The Company's
Property and Casualty Insurance segment has substantially completed all four
phases for both its mission critical projects and non-mission critical projects.
For purposes of this Year 2000 discussion, the term "mission critical" refers to
key business functions, such as the processing of business transactions,
regulatory compliance and archival of important records, upon which the Company
is materially dependent.
The Company's Life and Health Insurance segment has completed all four phases
for 90% of both its mission critical projects and non-mission critical projects.
Approximately 10% of the Life and Health Insurance segment's mission critical
projects are in the Remediation and Conversion Phase. The Life and Health
Insurance segment is comprised primarily of three separate business units
operating in different geographical regions and offering similar insurance
policies using employee-agents. Each business unit has its unique set of mission
critical applications which it uses to process transactions. Should one or two
of these business units not achieve Year 2000 compliance, the Company
contingently plans to transfer the processing of that business unit's
transactions to another of the Life and Health Insurance segment's business
units and process transactions manually until the transfer is complete.
The Company's Consumer Finance segment outsources its mission critical data
processing to Fiserv, Inc. ("Fiserv"). As a provider of third party data
processing services to the banking and financial services industry, Fiserv and
the data processing services it provides are subject to limited oversight by the
FDIC. In March of 1999, the Consumer Finance segment migrated from its former
Fiserv system to another system that Fiserv has represented to be Year 2000
compliant. The Consumer Finance segment has reviewed Fiserv's Year 2000 testing
documentation, the reports of an independent auditing concern engaged to review
Fiserv's Year 2000 testing and the reports of certain regulatory agencies,
including the FDIC, covering Fiserv's Year 2000 program. Accordingly, the
Consumer Finance segment has completed all four phases for its mission critical
applications. Fiserv has recently developed certain non-mission critical
applications for the Consumer Finance segment. The final versions of these
applications are scheduled to be placed into production in June 1999. The
Consumer Finance segment plans to test these non-mission critical applications
no later than September 30, 1999. In addition to these reviews and tests, the
Consumer Finance segment has developed a contingency plan to off-load all
customer loan and deposit records prior to January 1, 2000 and process customer
loans and deposits manually at its branch offices in the event of a Year 2000
failure.
The Company has not identified any Year 2000 problems associated with non-
information technology systems (e.g., telephone systems, elevators, etc.) that
have not either been remediated or replaced, or scheduled to be remediated or
replaced prior to January 1, 2000, or which are likely to pose any material
risks to the Company's operations.
9
<PAGE>
Year 2000 - continued
The Company is also reviewing the Year 2000 issue with key service providers,
including banks, brokers and investment custodians, and continually updating its
risk assessment, readiness evaluation, action plans and contingency plans
related to these service providers. In addition, the Company is reviewing the
Year 2000 issue as it relates to its investee companies (Curtiss-Wright, Litton
and UNOVA; the "Investees") as well as its significant investment in Baker
Hughes by reviewing public disclosures concerning Year 2000 readiness made by
such companies. The Company has no representatives on any of the Investees' or
Baker Hughes' boards of directors and does not otherwise participate in the
management of the Investees or Baker Hughes. Accordingly, the Company does not
possess any non-public information concerning, assumes no responsibility for,
and has no contingency plans for, Year 2000 compliance by the Investees or Baker
Hughes.
The goal of the Company is for its Consumer Finance segment to complete testing
of Fiserv's non-mission critical applications and be substantially Year 2000
compliant by September 30, 1999, and for its Life and Health Insurance segment
to be substantially Year 2000 compliant by April 30, 1999. However, there can be
no assurances that this goal will be met. If one or more of the Company's
business segments, key service providers, investee companies or Baker Hughes
fails to make its computer systems Year 2000 compliant by the necessary dates,
notwithstanding contingency plans currently contemplated, such failure could
materially adversely affect the Company's operations and financial results. Each
of the Company's three business segments depends heavily on its computer systems
to manage its operations. The Company believes that the most reasonably likely
worst case scenario would consist of a combination of Year 2000 failures,
including but not limited to the failures discussed above, in the Company's
mission critical systems, coupled with Year 2000 failures at one or more of the
Investees or Baker Hughes. In such a scenario, the Company might be forced to
rely on the manual processing of transactions, or, if feasible, to shift
processing to other Company systems or third party data processing vendors,
which in either case would likely have a material adverse effect on costs and
produce an increased probability of errors and potential legal exposures
resulting from such errors. Such a scenario could also result in the loss of
revenues, the extent of which is not estimable. In addition, Year 2000 failures
at one or more Investees or Baker Hughes could materially affect their earnings,
and therefore adversely affect the earnings of the Company and the Company's
carrying value of its investment in these companies.
Incremental expense recognized directly related to rewriting and testing
existing applications or converting to new Year 2000 compliant applications
totaled $1.8 million and $2.4 million for the three months ended March 31, 1999
and 1998, respectively. Total incremental expense recognized since inception of
the Company's Year 2000 program directly related to rewriting and testing
existing applications or converting to new Year 2000 compliant applications
totaled $25.5 million through March 31, 1999. The Company estimates that the
incremental expense necessary to complete its Year 2000 program and directly
related to rewriting and testing existing applications or converting to new Year
2000 compliant applications will be approximately $0.6 million for the remainder
of 1999. In addition to the above incremental expenses, upon completion of the
Company's Year 2000 program, the Company estimates that it will have made
capital expenditures, which will be expensed over the useful lives of the assets
to which they relate, totaling approximately $16 million to replace existing
hardware or software.
NOTE: The foregoing discussion on Year 2000 issues shall be considered "Year
2000 Readiness Disclosure" for purposes of the Year 2000 Information and
Readiness Disclosure Act.
Accounting Changes
Effective January 1, 1999, the Company prospectively adopted Statement of
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP No. 98-1 requires the Company to
capitalize qualifying computer software costs incurred during the application
development stage. The effect of adoption was not material.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") SFAS No. 133, "Accounting for
Derivatives Instruments and for Hedging Activities." SFAS No. 133 requires all
derivatives to be recorded on the balance sheet at fair value and establishes
"special accounting" for the following three different types of hedges: hedges
of changes in the fair value of assets, liabilities or firm commitments; hedges
of the variable cash flows of forecasted transactions; and hedges of foreign
currency exposures of net investments in foreign operations. SFAS No. 133 is
effective for years beginning after June 15, 1999, with earlier adoption
permitted. The Company believes that the effect of adoption of SFAS No. 133
will not be material.
10
<PAGE>
Caution Regarding Forward-Looking Statements
Management's Discussion and Analysis of Results of Operations and Financial
Condition and the accompanying Condensed Consolidated Financial Statements
(including the notes thereto) contain forward-looking statements, which usually
include words such as "believe(s)," "goal(s)," "target(s)," "estimate(s),"
"anticipate(s)" and similar expressions. Readers are cautioned not to place
undue reliance on such statements, which speak only as of the date of this
Quarterly Report. Forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
contemplated in such statements. Such risks and uncertainties include, but are
not limited to, those described under this Item 2 above, changes in economic
factors (such as interest rates), changes in competitive conditions (including
availability of labor with required technical or other skills), the number and
severity of insurance claims (including those associated with catastrophe
losses), governmental actions (including new laws or regulations or court
decisions interpreting existing laws and regulations) and adverse judgments in
litigation to which the Company or its subsidiaries are parties. No assurances
can be given that the results contemplated in any forward-looking statements
will be achieved. The Company assumes no obligation to release publicly any
revisions to any forward-looking statements as a result of events or
developments subsequent to the date of this Quarterly Report.
11
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C> <C>
(a) Exhibits.
2 Stock Acquisition Agreement dated as of February 10, 1999 by and between Unitrin, Inc.
and Fund American Enterprises Holdings, Inc. (Incorporated herein by reference to
Exhibit 2 to the Company's Annual Report on Form 10-K for the year ended December 31,
1998.)
3.1 Certificate of Incorporation (Incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form 10 dated February 15, 1990.)
3.2 Amended and Restated By-Laws (Incorporated herein by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.)
4 Rights Agreement between the Company and First Chicago Trust Company of New York, as
rights agent, dated as of August 3, 1994 (Incorporated herein by reference to Exhibit 1
to the Company's Registration Statement on Form 8-A dated August 3, 1994.)
10.1 Unitrin, Inc. 1990 Stock Option Plan as amended and restated (Incorporated herein by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.)
10.2 Unitrin, Inc. 1997 Stock Option Plan (Incorporated herein by reference to Exhibit A of
the Company's Proxy Statement, dated April 9, 1997, in connection with Company's annual
meeting of shareholders.)
10.3 Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan (Incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995.)
10.4 Unitrin, Inc. Pension Equalization Plan (Incorporated herein by reference to Exhibit
10.4 to Company's Annual Report on Form 10-K for the year ended December 31, 1994.)
10.5 Unitrin is a party to individual severance agreements (the form of which is incorporated
herein by reference to Exhibit 10.5 to the Company's 1994 Annual Report on Form 10-K),
with following executive officers:
Richard C. Vie (Chairman, President and Chief Executive Officer)
David F. Bengston (Vice President)
James W. Burkett (Vice President)
Eric J. Draut (Senior Vice President, Treasurer & Chief Financial Officer)
Thomas H. Maloney (Vice President)
Scott Renwick (General Counsel and Secretary)
Donald G. Southwell (Senior Vice President)
(Note: Each of the foregoing agreements is identical except that the severance
compensation multiple is 2.99 for Mr. Vie and 2.0 for the other executive officers. The
term of these agreements has been extended by action of Unitrin's board of directors
through January 1, 2000.)
10.6 Severance Compensation Plan After Change of Control (Incorporated herein by reference
to Exhibit 10.6 to the Company's 1994 Annual Report on Form 10-K; the term of this plan
has been extended by Unitrin's board of directors through January 1, 2000.)
10.7 1998 Bonus Plan for Senior Executives (Incorporated herein by reference to Exhibit A of
the Company's Proxy Statement, dated April 9, 1998, in connection with Company's annual
meeting of shareholders.)
10.8 Amended and Restated Credit Agreement, dated September 17, 1997 among Unitrin, Inc., the
Lenders party thereto, and NationsBank of Texas, N.A. as Administrative Agent
(Incorporated herein by reference to Exhibit 10.7 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.)
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999.
12
<PAGE>
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.
Unitrin, Inc.
Date: April 23, 1999 /s/ Richard C. Vie
-------------------------------------------
Richard C. Vie
Chairman, President
and Chief Executive Officer
Date: April 23, 1999 /s/ Richard Roeske
-------------------------------------------
Richard Roeske
Corporate Controller
(Principal Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<DEBT-HELD-FOR-SALE> 2,597,300 2,330,800
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 797,700 177,200
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 4,306,000 3,406,000
<CASH> 6,400 19,700
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 0 0
<TOTAL-ASSETS> 5,969,600 4,846,500
<POLICY-LOSSES> 2,531,900 2,038,700
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 51,100 5,900
0 0
0 0
<COMMON> 7,300 7,600
<OTHER-SE> 1,853,200 1,532,500
<TOTAL-LIABILITY-AND-EQUITY> 5,969,600 4,846,500
324,200 289,900
<INVESTMENT-INCOME> 49,800 41,800
<INVESTMENT-GAINS> 24,300 60,900
<OTHER-INCOME> 29,100 28,300
<BENEFITS> 209,500 183,700
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 163,900<F1> 144,700<F3>
<INCOME-PRETAX> 54,000 92,500
<INCOME-TAX> 18,100 31,700
<INCOME-CONTINUING> 52,200<F2> 76,000<F4>
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 52,200 76,000
<EPS-PRIMARY> 0.70 1.01
<EPS-DILUTED> 0.70 1.00
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
<FN>
<F1> 1999 Includes Consumer Finance Expenses of $24.0 million and other
Expenses of $4.0 million.
<F2> 1999 Includes Equity in Net Income of Investees of $16.3 million.
<F3> 1998 Includes Consumer Finance Expenses of $23.4 million and Other
Expenses of $2.8 million.
<F4> 1998 Includes Equity in Net Income of Investees of $15.2 million.
</FN>
</TABLE>
