UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-18540
UNITED INCOME, INC.
(Exact name of registrant as specified in its charter)
Ohio 37-1224044
(State or other jurisdiction (IRS Employer
incorporation or organization) Identification No.)
5250 South Sixth Street
P.O. Box 5147
Springfield, IL 62705
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (217) 241-6300
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No
[]
The number of shares outstanding of the registrant's common stock as of October
31, 1998, was 1,391,919.
1
<PAGE> UNITED INCOME, INC.
(The "Company")
TABLE OF CONTENTS
Part 1: Financial Information 3
Item 1: Financial Statements 3
Balance Sheets as of September 30, 1998 and December 31, 1997 3
Statements of Operations for the nine and three months ended September
30, 1998 and 1997 4
Statements of Cash Flows for the nine months ended September 30, 1998
and 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part II - Other Information 19
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED INCOME, INC.
BALANCE SHEET
September 30, December 31,
1998 1997
ASSETS
Cash and cash equivalents $ 740,511 $ 710,897
Mortgage loans 170,431 121,520
Notes receivable from affiliate 864,100 864,100
Accrued interest income 13,713 12,068
Property and equipment (net of accumulated
depreciation $94,170 and $93,648) 548 1,070
Investment in affiliates 11,458,930 11,060,682
Receivable from affiliates 33,789 23,192
Other assets (net of accumulated
amortization $166,572 and $138,810) 18,496 46,258
TOTAL ASSETS $ 13,300,518 $ 12,839,787
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 2,072 1,534
TOTAL LIABILITIES 904,372 903,834
Shareholders' equity:
Common stock - no par value,
stated value $.033 per share.
Authorized 2,310,001 shares -
1,391,919 and 1,391,919 shares
issued after deducting treasury
shares of 177,590 and 177,590 45,934 45,934
Additional paid-in capital 15,242,365 15,242,365
Unrealized depreciation of investments
held for sale of affiliate (218,107) (19,603)
Accumulated deficit (2,674,046) (3,332,743)
TOTAL SHAREHOLDERS' EQUITY 12,396,146 11,935,953
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 13,300,518 $ 12,839,787
See accompanying notes.
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<PAGE>
UNITED INCOME, INC.
STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1998 1997 1998 1997
Revenues:
Interest income $ 12,285 $ 10,806 $ 36,056 $ 16,145
Interest income from affiliates 20,972 21,521 62,168 61,648
Service agreement income
from affiliates 227,868 213,518 662,807 795,209
Other income from affiliates 15,279 20,971 53,195 70,132
276,404 266,816 814,226 943,134
Expenses:
Management fee to affiliates 139,022 153,111 397,663 627,126
Operating expenses 10,444 9,912 70,787 69,912
Interest expense 21,430 21,429 64,289 63,725
170,896 184,452 532,739 760,763
Income before provision for income
taxes and equity income
of investees 105,508 82,364 281,487 182,371
Provision for income taxes 0 0 0 0
Equity in income (loss) of investee 222,791 (219,216) 377,210 (178,710)
Net income (loss) $ 328,299 $ (136,852)$ 658,697 $ 3,661
Basic earnings per share
from continuing operations
and net income (loss) $ 0.24 $ (0.10)$ 0.47 $ 0.00
Diluted earnings per share
from continuing operations
and net income (loss) $ 0.24 $ (0.10)$ 0.51 $ 0.05
Basic weighted average
shares outstanding 1,391,919 1,391,919 1,391,919 1,392,022
Diluted weighted average
shares outstanding 1,428,242 1,391,919 1,428,242 1,428,345
See accompanying notes.
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<PAGE>
UNITED INCOME, INC.
STATEMENT OF CASH FLOWS
Sept 30, Sept 30,
1998 1997
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 658,697 $ 3,661
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 28,284 28,895
Accretion of discount on mortgage loan (196) (200)
Equity in (income) loss of investees (377,210) 178,710
Changes in assets and liabilities:
Change in accrued interest income (1,645) (524)
Change in indebtedness of affiliates (10,597) 25,207
Change in other liabilities 538 (1,051)
NET CASH PROVIDED BY OPERATING ACTIVITIES 297,871 234,698
Cash flows from investing activities:
Purchase of investments in affiliates (30,909) (19,353)
Purchase of note receivable (188,633) 0
Issuance of mortgage loan (50,000) 0
Payments received on mortgage loans 1,285 1,188
NET CASH USED IN INVESTING ACTIVITIES (268,257) (18,165)
Cash flows from financing activities:
Payment for fractional shares from reverse st 0 (2,112)
NET CASH USED IN FINANCING ACTIVITIES 0 (2,112)
Net increase in cash and cash equivalents 29,614 214,421
Cash and cash equivalents at beginning of period 710,897 439,676
Cash and cash equivalents at end of period $ 740,511 $ 654,097
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. ("UII") pursuant to the rules and regulations of the Securities and
Exchange Commission. Although UII and its affiliates believe 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 UII's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1997.
The information furnished reflects, in the opinion of UII, 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 UII's future financial
condition.
At September 30, 1998, the affiliates of United Income, Inc., were as
depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1998
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). 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").
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<PAGE>
2. STOCK OPTION PLANS
UII 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.
In November 1992, 10,437 option shares were granted. At September 30,
1998, options for 451 shares were exercisable and options for 20,576 shares
were available for grant. No options were exercised during 1998.
A summary of the status of UII's stock option plan for the periods ended
September 30, 1998 and December 31, 1997, and changes during the periods
ending on those dates is presented below.
September 30, 1998 December 31, 1997
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of period 451 $ 13.07 10,888 $ 13.07
Granted 0 0.00 0 0.00
Exercised 0 0.00 0 0.00
Forfeited 0 0 10,437 13.07
Outstanding at end of period 451 $ 13.07 451 $ 13.07
Options exercisable at period end 451 $ 13.07 451 $ 13.07
The following information applies to options outstanding at September 30,
1998:
Number outstanding 451
Exercise price $ 13.07
Remaining contractual life 2.25 years
On January 15, 1991, UII 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. Options for 10,220 shares of common stock were
granted in 1991, options for 1,330 shares were granted in 1993 and options
for 301 shares were granted in 1995. A total of 11,620 option shares have
been exercised as of September 30, 1998. At September 30, 1998, 231
options have been granted and are exercisable. No options were exercised
during 1998 and 1997, respectively.
A summary of the status of UII's stock option plan for the periods ended
September 30, 1998 and December 31, 1997, and changes during the periods
ending on those dates is presented below.
September 30, 1998 December 31, 1997
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of period 231 $ 0.47 231 $ 0.47
Granted 0 0.00 0 0.00
Exercised 0 0.00 0 0.00
Forfeited 0 0.00 0 0.00
Outstanding at end of period 231 $ 0.47 231 $ 0.47
Options exercisable at period end 231 $ 0.47 231 $ 0.47
Fair value of options granted
during the year $ 0.00 $ 0.00
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<PAGE>
The following information applies to options outstanding at September 30,
1998:
Number outstanding 231
Exercise price $ 0.47
Remaining contractual life 2.25 years
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 UII and its affiliates do 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 UII and its affiliates 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. UII
and its affiliates do not believe such assessments will be materially
different from amounts already provided for in the financial statements.
UII 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 UII and its affiliates liabilities.
Management is of the opinion that the settlement of those actions will not
have a material adverse effect on UII and its affiliates financial position
or results of operations.
4. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations as presented on the income statement.
<TABLE>
For the YTD period ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 658,697 1,391,919 $ 0.47
EFFECT OF DILUTIVE SECURITIES
Convertible debentures 64,289 36,092
Options 231
DILUTED EPS
Income available to common
shareholders and assumed
conversions $ 722,986 1,428,242 $ 0.51
</TABLE>
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<PAGE>
<TABLE>
For the third quarter ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 328,299 1,391,919 $ 0.24
EFFECT OF DILUTIVE SECURITIES
Convertible debentures 21,430 36,092
Options 231
DILUTED EPS
Income available to common
shareholders and assumed
conversions $ 349,729 1,428,242 $ 0.24
</TABLE>
<TABLE>
For the YTD period ended September 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 3,661 1,392,022 $ 0.00
EFFECT OF DILUTIVE SECURITIES
Convertible debentures 63,725 36,092
Options 231
DILUTED EPS
Income available to common
shareholders and assumed
conversions $ 67,386 1,428,345 $ 0.05
</TABLE>
<TABLE>
For the third quarter ended September 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ (136,852) 1,391,919 $ (0.10)
EFFECT OF DILUTIVE SECURITIES
0 0
DILUTED EPS
Income available to common
shareholders and assumed
conversions $ (136,852) 1,391,919 $ (0.10)
</TABLE>
UII has stock options outstanding during the third quarter of 1998 and 1997
for 451 shares of common stock at $13.07 per share that were not included
in the computation of diluted EPS because the exercise price was greater
than the average market price of the common shares. Due to the limited
trading of the stock of UII, market price is assumed to be equal to book
value for purposes of this calculation.
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<PAGE>
Due to the reported net loss for third quarter 1997, diluted EPS is the
same as basic EPS. Had UII reported a net gain, convertible debentures for
36,092 shares and options for 231 shares would have been included in the
diluted EPS calculation.
5. 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 for each share held by UII shareholders.
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.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
6. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds which are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter 1998. There can be no assurance that the transaction will
be completed. The pending change in control of UTI is not contingent upon
the merger of UTI and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
7. OTHER CASH FLOW DISCLOSURE
On a cash basis, UII paid $64,289 and $63,725 in interest expense through
the third quarter of 1998 and 1997, respectively. UII paid $0 and $0 of
federal income tax through the third quarter of 1998 and 1997,
respectively.
UII acquired for $188,633 a note receivable from an outside party which was
payable by UTG. Immediately upon acquisition of the note, it was
contributed to UTG as a capital contribution.
10
<PAGE>
8. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for UII's 50% or
less owned affiliate:
<TABLE>
September 30, December 30,
ASSETS 1998 1997
<S> <C> <C>
Total investments $ 211,685,442 $ 222,601,494
Cash and cash equivalents 28,107,672 15,763,639
Cost of insurance acquired 43,198,363 45,009,452
Other assets 63,284,969 64,576,450
TOTAL ASSETS $ 346,276,446 $ 347,951,035
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 267,501,535 $ 268,237,887
Notes payable 18,172,839 19,081,602
Deferred taxes 11,060,688 12,157,685
Other liabilities 4,370,834 4,053,293
TOTAL LIABILITIES 301,105,896 303,530,467
Minority interests in
consolidated subsidiaries 10,198,661 10,130,024
Shareholders' equity
Common stock no par value 46,577,216 45,926,705
Authorized 10,000 shares - 100
issued
Unrealized depreciation of
investments in stocks (464,056) (41,708)
Accumulated deficit (11,141,271) (11,594,453)
TOTAL SHAREHOLDERS' EQUITY 34,971,889 34,290,544
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 346,276,446 $ 347,951,035
</TABLE>
11
<PAGE>
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Premium and policy fees,
net of reinsurance $ 6,243,869 $ 6,639,394 $ 20,586,429 $ 22,374,562
Net investment income 3,804,066 3,691,584 11,339,547 11,390,978
Other (415,552) (114,869) (775,915) (79,666)
9,632,383 10,216,109 31,150,061 33,685,874
Benefits, claims and
settlement expenses 6,217,272 6,467,739 19,331,772 21,047,453
Other expenses 3,672,468 4,505,752 12,175,402 13,319,624
9,889,740 10,973,491 31,507,174 34,367,077
Income (loss)before income
tax and minority interest (257,357) (757,382) (357,113) (681,203)
Income tax (provision)
credit 845,835 131,893 1,044,373 113,671
Minority interest income
of consolidated subsidiaries
(141,938) 113,045 (234,076) 58,874
Net income (loss) $ 446,540 $ (512,444) $ 453,184 $ (508,658)
</TABLE>
12
<PAGE>
UNITED INCOME, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
At September 30, 1998 and December 31, 1997, the balance sheet reflects the
assets and liabilities of UII and its 47% equity interest in UTG. The
statements of operations and statements of cash flows presented include the
operating results of UII.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by UII and its affiliates or any of its officers,
directors or employees is qualified by the fact that actual results of UII
and its affiliates may differ materially from any such statement due to the
following important factors, among other risks and uncertainties inherent
in the business of UII and its affiliates:
1. Prevailing interest rate levels, which may affect the ability of UII
and its affiliates to sell its products, the market value of UII and
its affiliates investments and the lapse ratio of UII and its
affiliates policies, notwithstanding product design features intended
to enhance persistency of UII and its affiliates products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of UII and its affiliates products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for UII and its affiliates products.
4. Other factors affecting the performance of UII and its affiliates,
including, but not limited to, market conduct claims, insurance
industry insolvencies, stock market performance, and investment
performance.
RESULTS OF OPERATIONS
(A) REVENUES
UII's primary source of revenues is derived from service fee income, which
is provided via a service agreement with USA. The agreement was originally
established upon the formation of USA, which was a 100% owned subsidiary of
UII. Changes in the affiliate structure have resulted in USA no longer
being a direct subsidiary of UII, though still a member of the same
affiliated group. The original service agreement has remained in place
without modification. 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. Under the current structure, FCC pays all
general operating expenses of the affiliated group. FCC then receives
management and service fees from the various affiliates, including UTI and
UII.
UII 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 approximately $80,000 in interest income annually.
Interest income increased significantly when comparing the three and nine
months ended September 30, 1998 to the same periods one-year ago. The
increase in interest income is due to the increase in yield on UII's cash
and cash equivalent accounts. The increase in yield is directly related to
a change in banking relationships of UII. UII was able to obtain preferred
interest rates in conjunction with the financing of FCC's senior debt by
First of America Bank.
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<PAGE>
(B) EXPENSES
UII's primary source of expenses is derived from management fee expense,
which is derived from an agreement with UTI. The agreement between UII and
UTI was originally established upon the formation of USA, which was a 100%
owned subsidiary of UII. Changes in the affiliate structure have resulted
in USA no longer being a direct subsidiary of UII, though still a member of
the same affiliated group. The original management agreement has remained
in place without modification. The calculation of the management fee from
UII to UTI is 60% of the revenues derived from UII's service agreement with
USA. Under the current structure, FCC pays all general operating expenses
of the affiliated group. FCC then receives management and service fees
from the various affiliates, including UTI and UII.
Management fee incurred to UTI is comprised of $397,663 and $447,126 for
nine months ended September 30, 1998 and 1997, respectively and $139,022
and $128,111 for the three months ended September 30, 1998 and 1997,
respectively. Management fee incurred to FCC is comprised of $0 and
$180,000 for the nine months ended September 30, 1998 and 1997,
respectively and $0 and $25,000 for the three months ended September 30,
1998 and 1997, respectively.
Operating expenses consist primarily of governmental fees and other
expenses associated with maintaining a corporation in good standing with
various regulatory authorities. UII is a holding company and does not have
significant day to day operations of its own.
Interest expense increased slightly when comparing the first nine months of
1998 to the same period one-year ago. 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 OF INVESTEES
Equity in income of investees represents UII's 47% share of the net income
of UTG. Following is a discussion of the results of operations of UTG and
its consolidated subsidiaries ("UTG"):
Revenues of UTG
Premium and policy fees, net of reinsurance decreased 6% and 8% when
comparing the three and nine months ended September 30, 1998 to the
same periods in 1997, respectively. UTG currently writes
little new traditional business, consequently, traditional premiums
will decrease as the amount of traditional business in-force
decreases. Collected premiums on universal life and interest
sensitive products is not reflected in premiums and policy revenues
because Generally Accepted Accounting Principles ("GAAP") requires
that premiums collected on these types of products be treated as
deposit liabilities rather than revenue. Unless UTG acquires
a block of in-force business or marketing changes its focus to
traditional business, premium revenue will continue to decline.
Another cause for the decrease in premium revenues is related to the
potential change in control of UTI over the last two years to two
different parties. During September of 1996, it was announced that
control of UTI would pass to an unrelated party, but the change in
control did not materialize. At this writing, a contract is pending
with First Southern Funding "FSF" (FSF is an affiliate of First
Southern Bancorp, Inc., a bank holding company) for the change in
control of UTI. The possible changes and resulting uncertainties have
hurt the insurance companies' ability to recruit and maintain sales
agents. However, management believes the affiliation with FSF will
facilitate long-term growth opportunities. The expected long-term
benefits to UTI are an increase in capital, which will enable UTI
and its affiliates to pursue further growth through acquisitions.
Nationally there is a trend toward consolidation of the financial
service industry with proposed legislation to remove barriers between
banks and insurance companies.
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<PAGE>
Net investment income increased 3% when comparing the three months
ended September 30, 1998 to the same period one year-ago. The
increase in the current quarter is due to several factors. The
improvement in cash flow from operations compared to the previous
year. The companies changed banks during 1997, which provided an
improvement in yield on cash balances. Another factor that
contributed to the increase is the investment of funds in mortgage
loans. A higher percentage of investments acquired have been directed
to mortgage loans compared to previous periods. These loans provide
an investment yield, which are approximately 3% above the yield that
can be obtained from quality fixed maturities currently available.
Net investment income decreased slightly when comparing the nine
months ended September 30, 1998 to the same period one year ago. The
decrease in net investment income is due to the decrease in invested
assets. The decrease in invested assets and the increase in cash and
cash equivalents is a short-term fluctuation as management positions
UTG for the pending change in control of UTI. The effects of
lost investment revenue are partially offset by the factors discussed
in the above quarterly comparison of investment income.
UTG'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, which currently is the UTG's primary sales
product. UTG monitors investment yields, and when necessary
adjusts credited interest rates on its insurance products to preserve
targeted interest spreads. It is expected that monitoring of the
interest spreads by management will provide the necessary margin to
adequately provide for associated costs on the insurance policies UTG
currently has in force and will write in the future. At the
September 1998 board of directors meeting it was deemed necessary to
reduce interest crediting rates one half of a percentage point on
certain products. This decision was prompted by the overall decline
in market interest rates. The change in credited interest rates
affects approximately $60,000,000 of policy liabilities. The expected
savings to UTG will be approximately $300,000 per year. The
change in credited interest rates is not immediate. The change is
effective on the anniversary of the policy.
Expenses of UTG
Benefits, claims and settlement expenses decreased 8% and 4% for the
nine and three months ended September 30, 1998 as compared to the same
periods one year-ago, respectively. The decrease in life benefits net
of reinsurance is due to the decrease in premium revenues that
resulted in lower benefit reserve increases. In addition,
policyholder benefits decreased due to a decrease in death benefit
claims of $1,059,000 for the nine months ended September 30, 1998
compared to the same period one year-ago. Policyholder benefits
increased due to an increase in death benefit claims of $270,000 for
the three months ended September 30, 1998 compared to the same period
one year-ago. There is no single event that caused death benefits to
increase or decrease. Death claims vary from period to period and
therefore, fluctuations in death benefits are to be expected and are
not considered unusual by management.
In future periods, benefits should decrease due to the reduction in
credited interest rates. At the September 1998 board of directors
meeting it was deemed necessary to reduce interest crediting rates one
half of a percentage point on certain products. This decision was
prompted by the overall decline in market interest rates. The change
in credited interest rates affects approximately $60,000,000 of policy
liabilities. The expected savings to UTG will be
approximately $300,000 per year. The change in credited interest
rates is not immediate. The change is effective on the anniversary of
the policy.
Other expenses decreased 9% and 18% for the nine and three months
ended September 30, 1998 as compared to the same periods one year-ago,
respectively. The decrease in other expenses is due to the decrease
in salaries. The decrease in salaries is due to a 10% reduction in
staff compared to the previous year, including the retirement of an
executive officer. Interest expense decreased 10% for the nine months
ended September 30, 1998 as compared to the same period one year-ago.
The decrease in interest expense is due to the decrease in notes
payable.
15
<PAGE>
In future periods, interest expense is expected to decrease due to
scheduled principal reductions of notes payable. On November 8, 1998,
FCC prepaid $500,000 of the 1999 principal payment due on the
senior debt. In October 1998, the base interest rate of variable rate
debt decreased one half of one percentage point. This decrease
affects approximately $10,961,000 of the outstanding notes payable as
of September 30, 1998. The base rate is defined as the floating
daily, variable rate of interest determined and announced by First of
America Bank.
(D) NET INCOME
UII recorded net income of $658,697 for the first nine months of 1998
compared to $3,661 for the same period one-year ago. UII recorded net
income of $328,299 for third quarter of 1998 compared to $(136,852) for the
same period one-year ago. The improvement in net income is the result of a
combination of improved operating results of UII and improved earnings of
UTG.
FINANCIAL CONDITION
UII owns 47% equity interest in UTG, which controls total assets of
approximately $346,000,000
LIQUIDITY AND CAPITAL RESOURCES
Since UII is a holding company, funds required to meet its debt service
requirements and other expenses are primarily provided by its affiliates.
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
September 30, 1998, 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 UII as a corporation in good standing with the various
regulatory bodies which govern corporations in the jurisdictions where UII
does business. The payment of cash dividends to shareholders is not
legally restricted. However, insurance company dividend payments are
regulated by the state insurance department where the insurance company is
domiciled. UTI is the ultimate parent of UG through ownership of several
intermediary holding companies. UG can not pay a dividend directly to UII
due to the ownership structure. Please refer to Note 1 of the Notes to the
Financial Statements. UG's dividend limitations are described below
without effect of the ownership structure.
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, 1997, UG had a statutory gain from operations of $1,779,000.
At December 31, 1997, UG statutory capital and surplus amounted to
$10,997,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
UII currently has $740,511 in cash and cash equivalents. UII holds two
mortgage loans. Operating activities of UII produced cash flows of
$297,871 and $234,698 for the nine months ended September 30, 1998 and
1997, respectively. UII had uses of cash from investing activities of
$268,257 and $18,165 for the nine months ended September 30, 1998 and 1997,
respectively.
UTI and UII acquired a 53% and 47%, respectively interest in a note
receivable from an outside party which was payable by UTG. Immediately
upon acquisition of the note, UTI and UII contributed their interest in the
note to UTG as a capital contribution. UTG did not have the cash available
to acquire the note the directly. UTI, UII and UTG
16
<PAGE>
deemed the retirement of this debt advantageous in relation to the
interest earned from cash versus interest costs of the debt.
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between UII 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 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.
UII and its affiliates are not aware of any litigation that will have a
material adverse effect on the financial position of UII and its
affiliates. In addition, UII and its affiliates do not believe that the
regulatory initiatives currently under consideration by various regulatory
agencies will have a material adverse impact on UII and its affiliates.
UII and its affiliates are not aware of any material pending or threatened
regulatory action with respect to UII or any of its affiliates. UII and
its affiliates do not believe that any insurance guaranty fund assessments
will be materially different from amounts already provided for in the
financial statements.
Management believes that the overall sources of liquidity available to UII
will be more than sufficient to satisfy its financial obligations.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results. This could have a significant effect on UII and its affiliates
business/financial systems as well as products and services, if not
corrected.
UII and its affiliates established a project to address year 2000
processing concerns in September of 1996. In 1997 UII and it affiliates
completed the review of internally and externally developed software, and
made corrections to all year 2000 non-compliant processing. UII and its
affiliates also secured verification of current and future year 2000
compliance from all major external software vendors. In December of 1997,
a separate computer operating environment was established with the system
dates advanced to December of 1999. A parallel model office was
established with all dates in the data advanced to December of 1999.
Parallel model office processing is being performed using dates from
December of 1999 to January of 2001, to insure all year 2000 processing
errors have been corrected. Testing was completed by the end of the first
quarter of 1998. Periodic regression testing will be performed to monitor
continuing compliance. By addressing year 2000 compliance in a timely
manner, compliance will be achieved using existing staff and without
significant impact on UII and its affiliates operationally or financially.
PROPOSED MERGER
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 for each share held by UII shareholders.
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
17
<PAGE>
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.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
PENDING CHANGE IN CONTROL OF UNITED TRUST INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds which are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter 1998, and there can be no assurance that the transaction
will be completed. The pending change in control of UTI is not contingent
upon the merger of UTI and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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 for each share held by UII shareholders.
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.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur during the first quarter of 1999. The proposed merger
is not contingent upon the pending change in control of UTI.
Pending Change in Control of United Trust Inc.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Mr. Jesse T. Correll who signed the
initial letter of intent with UTI dated February 19, 1998, is the majority
shareholder of FSF. Under the terms of the FSF Agreement, FSF will buy
473,523 authorized but unissued shares of UTI common stock for $15.00 a
share and will also buy 389,715 shares of UTI common stock that UTI
purchased during the last year in private transactions at the average price
UTI paid for such stock, plus interest, or approximately $10.00 per share.
FSF will also purchase 66,667 shares of UTI common stock and $2,560,000 of
face amount convertible bonds which are due and payable on any change in
control of UTI, in private transactions, primarily from officers of UTI.
In addition, FSF will be granted a three year option to purchase up to
1,450,000 shares of UTI common stock for $15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. Two of the
three states in which regulatory approval is required have granted such
approval. The third state (West Virginia) is expected to approve by the
end of November. The transaction is expected to be completed during the
fourth quarter 1998. There can be no assurance that the transaction will
be completed. The pending change in control of UTI is not contingent upon
the merger of UTI and UII.
19
<PAGE>
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (filed only electronically with the SEC)
(b) Reports on Form 8-K
No reports of Form 8-K were filed during the quarter.
20
<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: November 12, 1998 By /s/ James E. Melville
James E. Melville
President, Chief Operating Officer
and Director
Date: November 12, 1998 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President and Chief
Financial Officer
21
<PAGE>
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