SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1996 Commission File No. 0-18540
UNITED INCOME, INC.
(Exact Name of Registrant as specified in its Charter)
Ohio 37-1224044
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 5147, Springfield, Illinois 62705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (217) 786-4300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
Shares outstanding at April 30, 1996: 19,886,572
Common stock, no par value per share
<PAGE>
UNITED INCOME, INC.
(the "Company")
INDEX
Part I: Financial Information
Balance Sheets - March 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . 3
Statements of Operations for the three
months ended March 31, 1996 and 1995. . . . . . . . . . 4
Statements of Cash Flows for the three months
ended March 31, 1996 and 1995 . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 12
Part II: Other Information
Signatures . . . . . . . . . . . . . . . . . . . . . 16
2
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<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED INCOME, INC.
Balance Sheets
March 31, December 31,
1996 1995
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 235,366 $ 364,370
Mortgage loans 181,224 182,206
Accrued interest income 8,346 7,040
Notes receivable from affiliate 864,100 714,100
Property and equipment (net of accumulated
depreciation $104,432 and $102,208) 9,834 12,058
Investment in affiliates 12,106,099 11,985,958
Other assets (net of accumulated
amortization $118,249 and $108,995) 111,036 120,290
Total assets $ 13,516,005 $ 13,386,022
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Indebtedness of affiliate 48,153 87,869
Other liabilities 1,849 40,722
Total liabilities 952,302 1,030,891
Shareholders' equity:
Common stock - no par value, stated
value $.033 per share. 33,000,000
shares authorized, 22,423,572 issued in 1996,
22,423,572 issued in 1995 739,977 739,977
Additional paid-in capital 14,633,455 14,633,455
Unrealized depreciation of equity
securities and investments held
for sale of affiliate (27,133) (236)
Accumulated deficit (2,698,875) (2,934,344)
12,647,424 12,438,852
Common stock in treasury, at cost
(2,537,000 shares) (83,721) (83,721)
Total shareholders' equity 12,563,703 12,355,131
Total liabilities and
shareholders' equity $ 13,516,005 $ 13,386,022
</TABLE>
See accompanying notes.
3
<PAGE>
UNITED INCOME, INC.
Statements of Operations
Three Months Ended
March 31,
1996 1995
<TABLE>
<S> <C> <C>
Revenues:
Interest income from affiliates $ 18,078 $ 18,554
Net investment income 3,673 4,988
Service agreement income 536,604 505,118
Other income from affiliates 25,272 41,624
583,627 570,284
Expenses:
Management fee to affiliate 421,963 437,041
Operating expenses 51,804 46,264
Interest expense 21,430 21,485
495,197 504,790
Income before provision for income
taxes and equity income of investees 88,430 65,494
Equity in income of investees 147,039 72,258
Net income $ 235,469 $ 137,752
Net income per common share $ 0.01 $ 0.01
Average common shares outstanding 19,886,572 19,886,572
</TABLE>
See accompanying notes.
4
<PAGE>
UNITED INCOME, INC.
Statements of Cash Flows
<TABLE>
March 31, March 31,
1996 1995
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 235,469 $ 137,752
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 11,478 14,269
Accretion of discount on mortgage loans (165) (171)
Equity in gain of investees (147,039 (72,258)
Changes in assets and liabilities:
Change in accrued investment and
interest income (1,306) (19,681)
Change in indebtedness of affiliates (39,716) (25,113)
Change in other liabilities (38,873) (5,227)
Net cash provided by operating activities 19,848 29,571
Cash flows from investing activities:
Capital contribution to investee 0 (23,500)
Purchase of investments in affiliates 0 (17,297)
Change in notes receivable from affiliate (150,000) 0
Payments received on mortgage loans 1,148 1,144
Purchase of mortgage loan 0 (126,000)
Net cash provided by (used in) investing activities (148,852) (165,653)
Net increase in cash and cash equivalents (129,004) (136,082)
Cash and cash equivalents at beginning of period 364,370 230,266
Cash and cash equivalents at end of period $ 235,366 $ 94,184
</TABLE>
See accompanying notes.
5
<PAGE>
UNITED INCOME, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared by United Income,
Inc. (the "Company") pursuant to the rules and regulations of the Securities
and Exchange Commission. Although the Company believes the disclosures are
adequate to make the information presented not be misleading, it is suggested
that these consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto presented in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1995.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary for a
fair presentation of the results of operations for the periods presented.
Operating results for interim periods are not necessarily indicative of
operating results to be expected for the year or of the Company's future
financial condition.
At March 31, 1996, the affiliates of United Income, Inc., were as depicted on
the following organizational chart.
6
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ORGANIZATIONAL CHART
AS OF MARCH 31, 1996
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns 53%
of United Trust Group ("UTG") and 30% of United Income, Inc. ("UII"). UII
owns 47% of UTG. UTG owns 72% of First Commonwealth Corporation ("FCC"). FCC
owns 100% of Universal Guaranty Life Insurance Company ("UG"). UG owns 100%
of United Security Assurance Company ("USA"). USA owns 84% of Appalachian
Life Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln
Insurance Company ("ABE").
7
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2. STOCK OPTION PLANS
The Company has a stock option plan under which certain directors, officers
and employees may be issued options to purchase up to 450,000 shares of common
stock at $.915 per share. Options become exercisable at 25% annually
beginning one year after date of grant and expire generally in five years. In
November 1992, 149,100 option shares were granted. At March 31, 1996, options
for 149,100 shares were exercisable and options for 300,900 shares were
available for grant. No options have been exercised during 1996.
On January 15, 1991, the Company adopted an additional Non-Qualified Stock
Option Plan under which certain employees and sales personnel may be granted
options. The plan provides for the granting of up to 600,000 options at an
exercise price of $.033 per share, and the options generally expire five years
from the date of grant. Options for 146,000 shares of common stock were
granted in 1991, and options for 19,000 shares were granted in 1993. All
options granted have been exercised. No options were exercised during 1996.
At March 31, 1996, no options were exercisable and options for 435,000 were
available for grant.
3. LEGAL PROCEEDINGS OF AFFILIATES
During the third quarter of 1994, UG became aware that an insurance product
was being solicited by certain agents and issued to individuals considered to
be not insurable by Company standards. These policies had a face amount of
$22,700,000 and represent 1/2 of 1% of the insurance in force of the Company.
Management's analysis indicates that the expected death claims on the business
in force to be adequately covered by the mortality assumptions inherent in the
calculation of statutory reserves. Nevertheless, management has determined it
is in the best interest of the Company to repurchase as many of the policies
as possible. As of March 31, 1996, there remained approximately $5,738,000 of
the original face amount which have not been settled. The Company will
continue its efforts to repurchase as many of the policies as possible and
regularly apprise the Ohio Department of Insurance regarding the status of
this situation. Through March 31, 1996, the Company spent a total of
$2,968,000 for the purchase of these policies and legal costs.
The Company is currently involved in the following litigation: Freeman v.
Universal Guaranty Life Insurance Company (U.S.D.C.,N.D.Ga, 1994, 1-94-CV-
2593-RCF); Armstrong v. Universal Guaranty Life Insurance Company and James
Melville (Circuit Court of Davidson County, Tenn., 1994, 94C3222); Armstrong
v. Universal Guaranty Life Insurance Company and James Melville (Circuit Court
of Davidson County, Tenn., 1994, 94C3720); Ridings v. Universal Guaranty Life
Insurance Company and James Melville (Circuit Court of Davidson County, Tenn.,
1994, 94C3221); Ronald L. Mekkes, Jr. v. Universal Guaranty Life Insurance
Company and James Melville, (Circuit Court of Kent County, Michigan, 1995, 95-
1073-NZ).
Four general agents of UG filed independent suits against UG in the latter
part of September or early October 1994. In February 1996, the Ronald L.
Mekkes, Jr. suit was dismissed with prejudice. Kathy Armstrong (3-94-1085),
another general agent, filed her suit on November 16, 1994. All of the suits
allege that the plaintiff was libeled by statements made in a letter sent by
UG. The letter was sent to persons who had been issued life insurance
policies by UG as the result of policy applications submitted by the five
8
<PAGE>
agents. Mr. Melville is a defendant in some of the suits because he signed
the letter as president of UG.
In addition to the defamation count, Mr. Freeman alleges that UG breached a
contract by failing to pay his commissions for policies issued. Mr. Freeman
claims unpaid commissions of $65,000. In the libel claim, Mr. Freeman claims
compensatory damages of over $5,000,000, punitive damages of over $3,000,000,
costs, and litigation expenses. The other plaintiffs request the award of
unspecified compensatory damages and punitive (or special) damages as well as
costs and attorney's fees. UG has filed Answers to all of these suits
asserting various defenses and, where appropriate, counterclaims. The Freeman
suit went to trial in April 1996. The jury awarded Mr. Freeman $365,000 in
general damages and $700,000 in punitive damages. The Company plans to file
an appeal. UG believes the ultimate settlement of these lawsuits will not
have a material impact on the financial statements and intends to defend these
suits vigorously.
Jeffrey Ploskonka, Keith Bohn and Paul Phinney v. Universal Guaranty Life
Insurance Company (Circuit Court of the Seventh Judicial Circuit Sangamon
County, Illinois Case No.: 95-L-0213)
On March 9, 1995 a lawsuit was filed against Universal Guaranty Life Insurance
Company on behalf of three insureds and a potential class of other insureds.
The Plaintiffs allege that UG violated the insurance contract in attempting to
cancel life insurance contracts. Additionally, the Plaintiffs assert
violations of Illinois law alleging vexations and unreasonable insurance
practices, breach of duty of good faith and fair dealing, and that Illinois
consumer fraud laws have been violated. The Plaintiffs seek unspecified
compensatory damages, injunctive relief, attorneys' fees, statutory damages in
an amount up to $25,000, punitive damages of $1,000,000, and other equitable
relief. UG filed an Answer to this lawsuit in May 1995, asserting various
defenses and reserving the right to assert counterclaims. UG has also filed
motions to dismiss certain allegations and claims made in the lawsuit. UG
believes it has no liability to any of the plaintiffs, or other potential
class members, and intends to defend the lawsuit vigorously. In June 1995,
the court conditionally certified a class of non-settling insureds.
The Company and its affiliates are named as defendants in a number of legal
actions arising primarily from claims made under insurance policies. Those
actions have been considered in establishing the Company's liabilities.
Management and its legal counsel are of the opinion that the settlement of
those actions will not have a material adverse effect on the Company's
financial position or results of operations.
9
<PAGE>
4. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for the Company's
50% or less owned subsidiary:
March 31, December 31,
ASSETS 1996 1995
Total investments $ 243,098,497 $ 244,815,985
Cash and cash equivalents 14,711,660 12,024,668
Cost of insurance acquired 51,790,526 53,115,987
Deferred policy acquisition costs 11,503,885 11,436,728
Value of agency force 6,405,123 6,485,733
Other assets 27,744,442 27,556,921
Total assets $ 355,254,133 $ 355,436,022
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 262,378,283 $ 261,796,945
Notes payable 20,361,836 21,463,328
Deferred taxes 15,638,043 16,100,283
Other liabilities 5,946,802 5,478,001
Total liabilities 304,324,964 304,838,557
Minority interests in
consolidated subsidiaries 14,001,897 13,881,640
Shareholders' equity
Common stock no par value.
Authorized 10,000 shares -
100 shares issued 45,726,705 45,726,705
Unrealized depreciation of
investments in stocks (57,729) (501)
Accumulated deficit (8,741,704) (9,010,379)
Total shareholders' equity 36,927,272 36,715,825
Total liabilities &
shareholders' equity $ 355,254,133 $ 355,436,022
10
<PAGE>
March 31, March 31,
1996 1995
Premiums $ 7,637,503 $ 8,703,332
Net investment income 3,974,407 3,857,562
Other 902,782 824,583
12,514,692 13,385,477
Benefits, claims and settlement expenses 6,528,760 8,097,830
Commissions, DPAC, cost of insurance
acquired and agency force amortizations 2,567,921 2,451,030
Operating and interest expenses 3,616,660 3,449,062
12,713,341 13,997,922
Income (loss) before income tax and
minority interest (198,649) (612,445)
Credit for income taxes 612,190 730,843
Minority interest in income of
consolidated subsidiaries (144,866) (22,790)
Net income $ 268,675 $ 95,608
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's financial
condition, changes in financial condition and results of operations which
reflect the performance of the Company. The information in the financial
statements and related notes should be read in conjunction with this section.
At March 31, 1996 and December 31, 1995, the balance sheet reflects UII's 47%
equity interest in United Trust Group, Inc. ("UTG"). The statements of
operations and statements of cash flows presented include UII and UII's equity
share of UTG.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for cash is the payment of operating expenses and
interest on its convertible debentures. The Company currently has $235,000 in
cash and cash equivalents. The Company holds two mortgage loans at March 31,
1996. Additionally, the Company holds notes receivable from affiliates of
$864,000. There were no financing activities in the current or prior period
presented. Further sources of capital resources will be dependent upon
dividends received from UTG.
The payment of cash dividends to shareholders by UTG is not legally
restricted. At March 31, 1996, substantially all of consolidated
shareholders' equity of UTG represents net assets of its subsidiaries. UTG
has no daily operations of its own. Before consolidation of its subsidiaries,
UTG holds approximately $10,040,000 in notes receivable and possesses
liabilities of $10,040,000 in the form of notes payable. These notes contain
identical terms. Additionally, UTG has an investment in subsidiaries of
$37,000,000 and cash of $35,000. Management believes the financial position
of UTG is sufficient to meet its future needs.
The payment of cash dividends to shareholders by UII is not legally
restricted. UG's dividend limitations are described below.
Ohio domiciled insurance companies require five days prior notification to the
insurance commissioner for the payment of an ordinary dividend. Ordinary
dividends are defined as the greater of: a) prior year statutory earnings or
b) 10% of statutory capital and surplus. For the year ended December 31,
1995, UG had a statutory gain from operations of $3,252,000. At December 31,
1995, UG statutory capital and surplus amounted to $7,274,000. Extraordinary
dividends (amounts in excess of ordinary dividend limitations) require prior
approval of the insurance commissioner and are not restricted to a specific
calculation as to amount.
Management believes that the overall sources of liquidity available to the
Company will be sufficient to satisfy its financial obligations.
12
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RESULTS OF OPERATIONS
First quarter 1996 compared to 1995:
(a) Revenues:
The Company's source of revenues is derived from service fee income which is
provided via a service agreement with USA. The service agreement between UII
and USA is to provide USA with certain administrative services. The fees are
based on a percentage of premium revenue of USA. The percentages are applied
to both first year and renewal premiums at different rates.
Interest income from affiliates is from notes receivable from an affiliate.
The notes, representing senior debt of FCC, were acquired from outside third
parties in December 1993, and carry interest at a rate of 1% above prime. The
Company received an additional note receivable for $150,000 during first
quarter 1996 with the same affiliate. Interest is calculated at a rate of 1%
above prime and is received quarterly. The note matures in 1999.
Net investment income is derived from two mortgage loans and from cash and
cash equivalents. The mortgage loans are first position mortgage loans in
good standing.
(b) Expenses:
The Company's source of expenses is derived from salaries, wages and employee
benefits, professional fees and other operating expenses associated with the
services to be provided by the Company pursuant to the service agreement
between the Company and USA.
Effective September 1, 1990, the Company entered into a sub-contract service
agreement with United Trust, Inc. ("UTI") for certain administrative services.
Through its facilities and personnel, UTI performs such services as may be
mutually agreed upon between the parties. The fees are based on a percentage
of the fees paid to UII by USA. The Company has incurred $422,000 and
$437,000 in service fee expense to UTI in the first three months of 1996 and
1995, respectively.
Interest expense of $21,000 and $21,000 was incurred in the first three months
of 1996 and 1995, respectively. The interest expense is directly attributable
to the convertible debentures. The Debentures bear interest at a variable
rate equal to one percentage point above the prime rate published in the Wall
Street Journal from time to time.
(c) Equity in income or (loss) of Investees:
Equity in income or (loss) of investees represents UII's 47% share of net
income or (loss) of UTG for the first three months of 1996 and 1995.
Following is a discussion of the more significant operating result differences
of UTG for first quarter 1996 compared to 1995.
13
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Premium income, net of reinsurance premium, decreased 12% when comparing first
quarter of 1996 to first quarter of 1995. The decrease is primarily
attributed to the reduction in new business production and the change in
products marketed. In 1995, the Company has streamlined the product
portfolio, as well as restructured the marketing force. The decrease in first
year premium production is directly related to the Company's change in
distribution systems. The Company has changed its focus from primarily a
broker agency distribution system to a captive agent system. Business written
by the broker agency force in recent years did not meet Company expectations.
With the change in focus of distribution systems, most of the broker agents
were terminated.
The change in marketing strategy from traditional life insurance products to
universal life insurance products had a significant impact on new business
production. As a result of the change in marketing strategy the agency force
went through a restructure and retraining process. Cash collected from the
universal life and interest sensitive products contribute only the risk charge
to premium income, however traditional insurance products contribute monies
received to premium income. One factor that has had a positive impact on
premium income is the improvement of persistency. Persistency is a measure of
insurance in force retained in relation to the previous year.
Life benefits, net of reinsurance benefits and claims, decreased 25% when
comparing first quarter of 1996 to the same period one year ago. The decrease
is related to the decrease in first year premium production. Another factor
that has caused life benefits to decrease is that during 1994, the Company
lowered its crediting rates on interest sensitive products in response to
financial market conditions. This action will facilitate the appropriate
spreads between investment returns and credited interest rates. It takes
approximately one year to fully realize a change in credited rates since a
change becomes effective on each policy's next anniversary.
(d) Net income:
The Company recorded a net income of $235,000 for the first three months of
1996 compared to net income of $138,000 for the same period one year ago. The
net income is attributable primarily to the operating results of the Company's
47% equity interest in UTG.
FINANCIAL CONDITION
The Company owns 47% equity interest in UTG which controls total assets of
approximately $355,000,000. Summarized financial information of UTG are shown
in note 4 of this filing.
FUTURE OUTLOOK
Factors expected to influence life insurance industry growth include: 1)
competitive pressure among the large number of existing firms; 2)
competition from financial service companies, as they seek to expand into
insurance products; 3) customers' changing needs for new types of insurance
products; 4) customers' lack of confidence in the entire industry as a
result of the recent highly visible failures; and 5) uncertainty concerning
the future regulation of the industry. Growth in demand for insurance
products will depend on demographic variables such as income growth, wealth
accumulation, populations and workforce changes.
14
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PART II. OTHER INFORMATION
Omitted as the required information is inapplicable.
15
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED INCOME, INC.
(Registrant)
Date May 10, 1996 By /s/ Thomas F. Morrow
Thomas F. Morrow, Chief Operating
Officer and Vice Chairman
Date May 10, 1996 By /s/ James E. Melville
James E. Melville, Chief Financial
Officer and Senior Executive Vice
President
16
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<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<DEBT-HELD-FOR-SALE> 0 0
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 181,224 182,206
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 181,224 182,206
<CASH> 235,366 364,370
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 0 0
<TOTAL-ASSETS> 13,516,005 13,386,022
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 902,300 902,300
0 0
0 0
<COMMON> 739,977 739,977
<OTHER-SE> 11,823,726 11,615,154
<TOTAL-LIABILITY-AND-EQUITY> 13,516,005 13,386,022
0 0
<INVESTMENT-INCOME> 21,751 23,542
<INVESTMENT-GAINS> 0 0
<OTHER-INCOME> 561,876 546,472
<BENEFITS> 0 0
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 0 0
<INCOME-PRETAX> 88,430 65,494
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 88,430 65,494
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 235,469 137,752
<EPS-PRIMARY> .01 .01
<EPS-DILUTED> .01 .01
<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
</TABLE>
