SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997 Commission File No. 0-18540
UNITED INCOME, INC.
(Exact Name of Registrant as specified in its Charter)
5250 South Sixth Street
P.O. Box 5147
Springfield, IL 62705
Address of principal executive offices, including zip code
Ohio 37-1224044
(State or other jurisdiction (IRS Employer
Incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (217) 241-6300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
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 July 31, 1997:
1,391,919
Common stock, no par value per share
<PAGE>
UNITED INCOME, INC.
(The "Company")
TABLE OF CONTENTS
Part I. Financial Information 3
Balance Sheets as of June 30, 1997 and December 31, 1996 3
Statements of Operations for the six months and three months
ended June 30, 1997 and 1996 4
Statements of Cash Flows for the six months ended June 30,
1997 and 1996 5
Notes to Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Part II - Other Information 15
Item 5. Other information 15
Item 6. Exhibits 15
Signatures 16
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED INCOME, INC.
Balance Sheet
June 30, December 31,
1997 1996
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 594,428 $ 439,676
Mortgage loan 122,202 122,853
Notes receivable from affiliate 864,100 864,100
Accrued interest income 11,710 11,784
Property and equipment (net of accumulated
depreciation $92,899 and $92,140) 1,819 2,578
Investment in affiliates 11,409,311 11,324,947
Receivable from (indebtedness to) affiliate (22,173) 31,837
Other assets (net of accumulated
amortization $120,302 and $101,794) 64,766 83,274
TOTAL ASSETS $ 13,046,163 $ 12,881,049
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 908 1,273
TOTAL LIABILITIES 903,208 1,903,573
Shareholders' equity:
Common stock - no par value, stated value
$.033 per share. Authorized 2,310,001
shares - 1,391,919 and 1,392,130 shares
issued after deducting treasury shares
of 177,590 and 177,590 45,934 45,940
Additional paid-in capital 15,242,349 15,244,471
Unrealized depreciation of investments
held for sale of affiliate (32,414) (59,508)
Accumulated deficit (3,112,914) (3,253,427)
TOTAL SHAREHOLDERS' EQUITY 12,142,955 11,977,476
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 13,046,163 $ 12,881,049
</TABLE>
See accompanying notes
3
<PAGE>
<TABLE>
UNITED INCOME, INC.
Statement of Operations
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Interest income $ 2,680 $ 3,793 $ 5,339 $ 7,466
Interest income from
affiliates 20,171 20,717 40,127 38,795
Service agreement income
from affiliates 287,596 459,454 581,691 996,058
Other income from affiliates 23,214 51,130 49,161 76,402
333,661 535,094 676,318 1,118,721
Expenses:
Management fee to affiliate 247,558 425,672 474,015 847,635
Operating expenses 9,682 14,514 60,000 66,318
Interest expense 21,430 20,865 42,296 42,295
278,670 461,051 576,311 956,248
Income before provision for
income taxes and equity
income of investees 54,991 74,043 100,007 162,473
Provision for income taxes 0 0 0 0
Equity in income (loss)
of investees 29,950 (23,248) 40,506 123,791
Net income $ 84,941 $ 50,795 $ 140,513 $ 286,264
Net income per common share $ 0.06 $ 0.04 $ 0.10 $ 0.21
Weighted average common
shares outstanding 1,392,019 1,392,060 1,392,074 1,392,060
</TABLE>
See accompanying notes
4
<PAGE>
<TABLE>
UNITED INCOME, INC.
Statement of Cash Flows
June 30, June 30,
1997 1996
<S> <C> <C>
Decrease in cash and cash equivalents
Cash flows from operating activities:
Net income $ 140,513 $ 286,264
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,267 22,953
Accretion of discount on mortgage loan (133) (330)
Equity in (income) loss of investees (40,506) (123,791)
Changes in assets and liabilities:
Change in accrued interest income 74 (21,111)
Change in indebtedness of affiliates 54,010 3,107
Change in other liabilities (364) (38,463)
NET CASH PROVIDED BY OPERATING ACTIVITIES 172,861 128,629
Cash flows from investing activities:
Capital contribution to investee 0 (47,000)
Payment for fractional shares from reverse stock split (2,128) 0
Purchase of investments in affiliates (16,765) 0
Issuance of notes receivable from affiliate 0 (150,000)
Payments received on mortgage loan 784 3,552
NET CASH USED IN INVESTING ACTIVITIES (18,109) (193,448)
Net decrease in cash and cash equivalents 154,752 (64,819)
Cash and cash equivalents at beginning of period 439,676 364,370
Cash and cash equivalents at end of period $ 594,428 $ 299,551
</TABLE>
See accompanying notes
5
<PAGE>
UNITED INCOME, INC.
NOTES TO FINANCIAL STATEMENTS
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 financial statements be read in conjunction with the 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, 1996.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary for
a fair presentation of the results of operations for the periods presented.
Operating results for interim periods are not necessarily indicative of
operating results to be expected for the year or of the Company's future
financial condition.
At June 30, 1997, the affiliates of United Income, Inc., were as depicted on
the following organizational chart.
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 29.9% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79.3% of First Commonwealth Corporation ("FCC")
and FCC owns 100% of Universal Guaranty Life Insurance Company ("UG"). UG
owns 100% of United Security Assurance Company ("USA"). USA owns 83.9% of
Appalachian Life Insurance Company ("APPL") and APPL owns 100% of Abraham
Lincoln Insurance Company ("ABE").
6
<PAGE>
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 31,500 shares of common
stock at $13.07 per share. Options become exercisable at 25% annually
beginning one year after date of grant and expire generally in five years.
At June 30, 1997, options for 10,850 shares were exercisable and options for
20,576 shares were available for grant. No options have been exercised during
1997.
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 42,000 options at an
exercise price of $.47 per share. The options generally expire five years
from the date of grant. A total of 11,620 option shares have been granted and
exercised as of June 30, 1997. At June 30, 1997, 231 options have been
granted and are exercisable. No options have been exercised during 1997.
3. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts which
have been returned against life and health insurers in the jurisdictions in
which the Company does business involving the insurers' sales practices,
alleged agent misconduct, failure to properly supervise agents, and other
matters. Some of the lawsuits have resulted in the award of substantial
judgements against the insurer, including material amounts of punitive
damages. In some states, juries have substantial discretion in awarding
punitive damages in these circumstances.
Under insurance guaranty fund laws in most states, insurance companies doing
business in a participating state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although the Company cannot predict the amount of any future assessments, most
insurance guaranty fund laws currently provide that an assessment may be
excused or deferred if it would threaten an insurer's financial strength.
Those mandatory assessments may be partially recovered through a reduction in
future premium taxes in some states. The Company does not believe such
assessments will be materially different from amounts already provided for in
the financial statements.
The Company and its affiliates are named as defendants in a number of legal
actions arising primarily from claims made under insurance policies. These
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.
4. TERMINATION OF AGREEMENT REGARDING PENDING CHANGE IN CONTROL OF
UNITED INCOME, INC.
On April 14, 1997, United Trust, Inc. and United Income, Inc. formally
terminated their stock purchase agreement contract with LaSalle Group, Inc.
("LaSalle"), whereby LaSalle was to acquire certain authorized but unissued
shares of UTI and UII and additional outstanding shares in privately
negotiated transactions so that LaSalle would own not less than 51% of the
outstanding common stock of UTI and indirectly control 51% of UII.
LaSalle had not performed its obligations under the terms of the contract, and
the Company felt it should be free to negotiate with other interested parties
in becoming an equity partner.
5. REVERSE STOCK SPLIT
On May 13, 1997, the Company effected a 1 for 14.2857 reverse stock split.
Fractional shares received a cash payment on the basis of $.70 for each old
share. Prior period numbers have been restated to give effect of the reverse
split.
7
<PAGE>
6. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for the Company's 47%
owned affiliate:
<TABLE>
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
ASSETS June 30, December 31,
1997 1996
<S> <C> <C>
Total investments $227,886,583 $223,964,687
Cash and cash equivalents 12,512,609 16,903,789
Reinsurance receivables 41,719,929 42,601,137
Cost of insurance acquired 46,417,227 47,536,812
Deferred policy acquisition costs 11,421,038 11,325,356
Other assets 10,333,529 12,667,841
TOTAL ASSETS $350,290,915 $354,999,622
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $268,906,743 $268,771,766
Notes payable 19,081,601 19,839,853
Deferred income taxes 11,594,166 11,591,086
Other liabilities 5,235,291 6,335,866
TOTAL LIABILITIES 304,817,801 306,538,571
Minority interests in
consolidated subsidiaries 10,282,665 13,332,034
Shareholders' equity:
Common stock no par value.
Authorized 10,000 shares -
100 shares issued 45,926,705 45,926,705
Unrealized depreciation of
investments held for sale (68,966) (126,612)
Accumulated deficit (10,667,290) (10,671,076)
TOTAL SHAREHOLDERS' EQUITY 35,190,449 35,129,017
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $350,290,915 $354,999,622
</TABLE>
8
<PAGE>
<TABLE>
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Premium and other
considerations $ 7,808,782 $ 8,514,175 $15,735,168 $16,995,686
Net investment income 3,839,519 3,930,487 7,699,394 7,904,894
Other 39,586 (257,585) 35,203 (198,811)
11,687,887 12,187,077 23,469,765 24,701,769
Benefits, claims and
settlement expenses 6,861,699 7,083,803 14,579,714 13,612,563
Commissions, DAC, and
cost of insurance
acquired amortizations 1,174,116 2,298,549 2,844,970 4,866,470
Operating and interest
expenses 3,084,239 3,072,535 5,968,902 6,689,195
11,120,054 12,454,887 23,393,586 25,168,228
Net income (loss) before
income taxes and
minority interest 567,833 (267,810) 76,179 (466,459)
Credit (provision) for
income taxes (477,295) 182,695 (18,222) 794,885
Minority interest in
(income) loss of
consolidated subsidiaries (63,187) (8,525) (54,171) (153,391)
Net income (loss) $ 27,351 $ (93,640) $ 3,786 $ 175,035
</TABLE>
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this section is to discuss and analyze the Company's 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 June 30, 1997 and December 31, 1996, 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
UII's cash flow is dependent on revenues from a management agreement with USA
and its earnings received on invested assets and cash balances. At June 30,
1997, substantially all of the shareholders' equity represents investment in
affiliates. UII does not have significant day to day operations of its own.
Cash requirements of UII primarily relate to the payment of interest on its
convertible debentures and expenses related to maintaining the Company as a
corporation in good standing with the various regulatory bodies which govern
corporations in the jurisdictions where the Company does business. The payment
of cash dividends to shareholders is not legally restricted. However, the
state insurance department regulates insurance company dividend payments where
the company is domiciled. 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, 1996,
UG had a statutory gain from operations of $8,006,000. At December 31, 1996,
UG statutory capital and surplus amounted to $10,227,000. Extraordinary
dividends (amounts in excess of ordinary dividend limitations) require prior
approval of the insurance commissioner and are not restricted to a specific
calculation.
The Company currently has $594,000 in cash and cash equivalents. The Company
holds one mortgage loan. Operating activities of the Company produced cash
flows of $173,000 and $129,000 in the first six months of 1997 and 1996,
respectively. The Company had uses of cash from investing activities of
$18,000 and $193,000 in the first six months of 1997 and 1996, respectively.
The Company had a use of cash of $2,000 from financing activities related to
the purchase of fractional shares in connection with the reverse stock split
in 1997. The Company had no financing activities in 1996.
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and First
of America Bank - Southeast Michigan, N.A., as trustee. The Debentures are
general unsecured obligations of UII, subordinate in right of payment to any
existing or future senior debt of UII. The Debentures are exchangeable and
transferable, and are convertible at any time prior to March 31, 1999 into
UII's common stock at a conversion price of $25.00 per share, subject to
adjustment in certain events. The Debentures bear interest from March 31,
1994, payable quarterly, at a variable rate equal to one percentage point above
the prime rate published in the Wall Street Journal from time to time. On or
after March 31, 1999, the Debentures will be redeemable at UII's option, in
whole or in part, at redemption prices declining from 103% of their principal
amount. No sinking fund will be established to redeem the Debentures. The
Debentures will mature on March 31, 2004. The Debentures are not listed on any
national securities exchange or the NASDAQ National Market System.
Management believes the overall sources of liquidity available to the Company
will be more than sufficient to satisfy its financial obligations.
10
<PAGE>
RESULTS OF OPERATIONS
YEAR-TO-DATE 1997 COMPARED TO 1996:
(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.
The Company holds $864,100 of notes receivable from affiliates. The notes
receivable from affiliates consists of three separate notes. The $700,000
note bears interest at the rate of 1% above the variable per annum rate of
interest most recently published by the Wall Street Journal as the prime rate.
Interest is payable quarterly with principal due at maturity on May 8, 2006.
In February 1996, FCC borrowed an additional $150,000 from UII to provide
additional cash for liquidity. The note bears interest at the rate of 1% over
prime as published in the Wall Street Journal, with interest payments due
quarterly and principal due upon maturity of the note on June 1, 1999. The
remaining $14,100 are 20 year notes of UTG with interest at 8.5% payable
semi-annually. At current interest levels, the notes will generate income of
approximately $80,000 annually.
(b) EXPENSES
The Company has a sub-contract service agreement with 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 $474,000 and $848,000 in service fee expense in the first six months
of 1997 and 1996, respectively.
Interest expense of $42,000 was incurred in the first six months of 1997 and
1996. 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 quarter of 1997 and 1996. Following is a
discussion of the operating results of UTG for first six months of 1997 compared
to 1996. Please refer to Note 6 of United Income, Inc.'s Notes to Financial
Statements for Condensed Financial Statements of United Trust Group, Inc.
REVENUES OF UTG
Premium income, net of reinsurance premium, decreased 7% when comparing the
first six months of 1997 to the first six months of 1996. The Company's
primary product is the "Century 2000" universal life insurance product.
Universal life and interest sensitive life insurance products contribute
only the risk charge to premium income, however traditional insurance
products contribute all monies received to premium income. Since the
Company does not actively market traditional life insurance products, it is
expected that premium income will continue to decrease in future periods as
a result of expected lapses of business in force.
Net investment income decreased 3% when comparing the first six months of
1997 to 1996. The decrease is the result of a smaller invested asset base
from one year ago. During the fourth quarter 1996, the Company transferred
approximately $22,000,000 in assets as part of a coinsurance agreement with
First International Life Insurance Company ("FILIC"). The overall annualized
investment yields for the first six months of 1997 and 1996 are 7.2% and
7.0%, respectively. The improvement in investment yield is primarily
attributed to the fixed maturity portfolio. The Company has invested excess
cash and financing activities generated through sales of universal life
insurance products.
11
<PAGE>
The Company's investments are generally managed to match related insurance
and policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates is 1%
on the "Century 2000" universal life insurance product, the Company's primary
product. The Company monitors investment yields, and when necessary adjusts
credited interest rates on its insurance products to preserve targeted
spreads. It is expected that the monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on insurance policies the Company has in force and will
write in the future.
EXPENSES OF UTG
Benefits, claims and settlement expenses, increased 7% in the first six
months of 1997 compared to 1996. The increase in benefits is attributed to
an increase in mortality. Mortality increased 21% in the first six months
of 1997 compared to 1996. There is no single event that caused mortality to
increase. Policy claims vary from year to year and therefore, fluctuations
in mortality are to be expected and are not considered unusual by
management. The Company experienced a decline of 33% in dollar volume of
new business production. This decline results in less of an increase in
reserves from new business as compared to the previous year.
Commissions, DAC and cost of insurance acquired amortizations decreased
$2,022,000 for the first six months of 1997 compared to the first six months
of 1996. The decrease is attributed to the coinsurance agreement with First
International Life Insurance Company ("FILIC") as of September 30, 1996.
Under the terms of the agreement, UG ceded to FILIC substantially all of its
paid-up life insurance policies. Paid-up life insurance generally refers to
a non-premium paying life insurance policy. Cost of insurance acquired is
amortized in relation to expected future profits, including direct
charge-offs for any excess of the unamortized asset over the projected
future profits. The Company did not have any charge-offs during the periods
covered by this report.
Operating expenses decreased 11% when comparing the first six months of
1997 to the first six months of 1996. The decrease in operating expenses is
attributed to the settlement of certain litigation in the fourth quarter of
1996. The Company incurred elevated legal fees in the previous year due to
the litigation. Operating expenses were further reduced from a
restructuring of the home office personnel completed in late 1996.
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinanced debt bears interest to a rate equal to the "base rate" plus
nine-sixteenths of one percent. Prior to refinancing, the interest rate was
equal to the base rate plus one percent. The decrease in interest rate and
principal reductions made during the last year provided the decrease in
interest expense for the first six months of 1997.
NET INCOME (LOSS) OF UTG
The Company had net income of $4,000 for the first six months of 1997
compared to $175,000 for the first six months of 1996. The decline in net
income for the current period is primarily due to the increase in mortality.
(d) NET INCOME
The Company recorded net income of $141,000 for the first six months of 1997
compared to net income of $286,000 for the same period one year ago. The net
income is attributed primarily to the operating results of the Company's 47%
equity interest in UTG.
SECOND QUARTER 1997 COMPARED TO 1996:
(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.
12
<PAGE>
The Company holds $864,100 of notes receivable from affiliates. The notes
receivable from affiliates consists of three separate notes. The $700,000
note bears interest at the rate of 1% above the variable per annum rate of
interest most recently published by the Wall Street Journal as the prime rate.
Interest is payable quarterly with principal due at maturity on May 8, 2006.
In February 1996, FCC borrowed an additional $150,000 from UII to provide
additional cash for liquidity. The note bears interest at the rate of 1% over
prime as published in the Wall Street Journal, with interest payments due
quarterly and principal due upon maturity of the note on June 1, 1999. The
remaining $14,100 are 20 year notes of UTG with interest at 8.5% payable
semi-annually. At current interest levels, the notes will generate income of
approximately $80,000 annually.
(b) EXPENSES
The Company has a sub-contract service agreement with 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 $248,000 and $426,000 in service fee expense in the second quarter
of 1997 and 1996, respectively.
Interest expense of $21,000 was incurred in the second quarter of 1997 and
1996. 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 second quarter of 1997 and 1996. Following is
a discussion of the operating results of UTG for the second quarter of 1997
compared to 1996. Please refer to Note 6 of United Income, Inc.'s Notes to
Financial Statements for Condensed Financial Statements of United Trust Group,
Inc.
REVENUES OF UTG
Premium and other considerations decreased 8% when comparing second quarter
of 1997 to second quarter of 1996. The Company's primary product is the
"Century 2000" universal life insurance product. Universal life and
interest sensitive life insurance products contribute only the risk charge
to premium income, however traditional insurance products contribute all
monies received to premium income. Since the Company does not actively
market traditional life insurance products, it is expected that premium
income will continue to decrease in future periods as a result of expected
lapses of business in force.
Net investment income decreased 2% when comparing second quarter of 1997
to 1996. The decrease is the result of a smaller invested asset base from
one year ago. During the fourth quarter 1996, the Company transferred
approximately $22,000,000 in assets as part of a coinsurance agreement with
First International Life Insurance Company ("FILIC").
The Company's investments are generally managed to match related insurance
and policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates is 1%
on the "Century 2000" universal life insurance product, the Company's primary
product. The Company monitors investment yields, and when necessary adjusts
credited interest rates on its insurance products to preserve targeted
spreads. It is expected that the monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on insurance policies the Company has in force and will
write in the future.
EXPENSES OF UTG
Benefits, claims and settlement expenses decreased 3% in the second quarter
of 1997 compared to 1996. The decrease in benefits is due to the decrease in
new business production. Although life benefits decreased, mortality
increased $137,000 in second quarter of 1997 compared to 1996. There is no
single
13
<PAGE>
event that caused mortality to increase. Policy claims vary from year to
year and therefore, fluctuations in mortality are to be expected and are not
considered unusual by management.
Commissions, DAC and cost of insurance acquired amortizations decreased
$1,124,000 for the second quarter of 1997 compared to second quarter of
1996. The decrease is attributed to the coinsurance agreement with First
International Life Insurance Company ("FILIC") as of September 30, 1996.
Under the terms of the agreement, UG ceded to FILIC substantially all of its
paid-up life insurance policies. Paid-up life insurance generally refers to
a non-premium paying life insurance policy. Cost of insurance acquired is
amortized in relation to expected future profits, including direct
charge-offs for any excess of the unamortized asset over the projected
future profits. The Company did not have any charge-offs during the periods
covered by this report.
NET INCOME (LOSS) OF UTG
The Company had net income of $102,000 for the second quarter of 1997
compared to $9,000 for second quarter of 1996. The improvement in net
income is due to the decrease in amortization of cost of insurance acquired.
(d) NET INCOME
The Company recorded net income of $27,000 for the second quarter 1997 compared
to a net loss of ($94,000) for the same period one year ago. The net income is
attributed 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 $350,000,000. Summarized financial information of UTG is
provided in Note 6 of the Notes to the Financial Statements.
FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection with the
development and sale of its products, the Company encounters significant
competition from other insurance companies, many of which have financial
resources or ratings greater than those of the Company.
The insurance industry is a mature industry. In recent years, the industry
has experienced virtually no growth in life insurance sales, though the aging
population has increased the demand for retirement savings products.
Management believes that the Company's ability to compete is dependent upon,
among other things, its ability to attract and retain agents to market its
insurance products and its ability to develop competitive and profitable
products.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of Merger,
UTI would be the surviving entity with UTI issuing one share of its stock
(after its reverse stock split of one share for each ten shares) for each share
held by UII shareholders (after its reverse stock split of one share for every
14.2857 shares).
UTI stock currently trades on NASDAQ. The reverse stock split increased the
price at which the Company's stock trades, enabling it to meet new NASDAQ
requirements regarding eligibility to remain listed.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any other
significant holdings or business dealings. The Board of Directors of each
company thus concluded a merger of the two companies would be in the best
interests of the shareholders. The merger will result in certain cost savings,
primarily related to costs associated with maintaining a corporation in good
standing in the states in which it transacts business.
ITEM 6. EXHIBITS
The Company hereby incorporates by reference the exhibits as reflected in the
Index to Exhibits of the Company's Form 10-K for the year ended December 31,
1996.
15
<PAGE>
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: August 13, 1997 By JAMES E. MELVILLE
James E. Melville
Senior Executive Vice
President and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<DEBT-HELD-FOR-SALE> 0 0
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 122,202 178,984
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 122,202 178,984
<CASH> 594,428 299,551
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 0 0
<TOTAL-ASSETS> 13,046,163 13,581,968
<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> 45,934 45,938
<OTHER-SE> 12,097,021 12,540,495
<TOTAL-LIABILITY-AND-EQUITY> 13,046,163 13,581,968
0 0
<INVESTMENT-INCOME> 5,339 7,466
<INVESTMENT-GAINS> 0 0
<OTHER-INCOME> 670,979 1,111,255
<BENEFITS> 0 0
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 576,311 956,248
<INCOME-PRETAX> 100,007 162,473
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 100,007 162,473
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 140,513 286,264
<EPS-PRIMARY> 0.10 0.21
<EPS-DILUTED> 0.10 0.21
<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>
