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, 1998 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 April 30, 1998:
1,391,919
Common stock, no par value per share
<PAGE>
UNITED INCOME, INC.
(The "Company")
TABLE OF CONTENTS
Part 1: Financial Information 3
Balance Sheets as of March 31, 1998 and December 31,
1997 3
Statements of Operations for the three months ended
March 31, 1998 and 1997 4
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 5
Notes to Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II - Other Information 15
Item 5. Other information 15
Item 6. Exhibits 15
Signatures 15
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<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED INCOME, INC.
Balance Sheet
March 31, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 734,827 $ 710,897
Mortgage loan 121,165 121,520
Notes receivable from affiliate 864,100 864,100
Accrued interest income 11,996 12,068
Property and equipment (net of accumulated
depreciation $93,910 and $93,648) 808 1,070
Investment in affiliates 10,959,408 11,060,682
Receivable from affiliate, net 85,476 23,192
Other assets (net of accumulated
amortization $148,064 and $138,810) 37,004 46,258
Total assets $ 12,814,784 $ 12,839,787
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 10,564 1,534
Total liabilities 912,864 903,834
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 appreciation (depreciation) of
investments held for sale of affiliate (158,813) (19,603)
Accumulated deficit (3,227,566) (3,332,743)
Total shareholders' equity 11,901,920 11,935,953
Total liabilities and
shareholders' equity $ 12,814,784 $ 12,839,787
</TABLE>
See accompanying notes
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<TABLE>
UNITED INCOME, INC.
Statement of Operations
Three Months Ended
March 31, March 31,
1998 1997
<S> <C> <C>
Revenues:
Interest income $ 11,551 $ 2,659
Interest income from affiliates 20,488 19,956
Service agreement income from affiliates 237,358 294,095
Other income from affiliates 17,954 25,947
287,351 342,657
Expenses:
Management fee to affiliate 142,415 226,457
Operating expenses 50,140 50,318
Interest expense 21,430 20,866
213,985 297,641
Income before provision for income
taxes and equity income of investees 73,366 45,016
Provision for income taxes 0 0
Equity in income of investees 31,811 10,556
Net income $ 105,177 $ 55,572
Basic earnings per share from continuing operations
and net income $ 0 $ 0
Diluted earnings per share from continuing operations
and net income $ 0 $ 0
</TABLE>
See accompanying notes.
4
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<TABLE>
UNITED INCOME, INC.
Statement of Cash Flows
March 31, March 31,
1998 1997
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 105,177 $ 55,572
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,516 9,639
Accretion of discount on mortgage loan (65) (67)
Equity in loss of investees (31,811) (10,556)
Changes in assets and liabilities:
Change in accrued interest income 72 62
Change in indebtedness of affiliates (62,284) 45,035
Change in other liabilities 9,030 8,573
Net cash provided by operating activities 29,635 108,258
Cash flows from investing activities:
Purchase of investments in affiliates (6,125) (10,409)
Payments received on mortgage loans 420 388
Net cash used in investing activities (5,705) (10,021)
Net increase in cash
and cash equivalents 23,930 98,237
Cash and cash equivalents
at beginning of period 710,897 439,676
Cash and cash equivalents
at end of period $ 734,827 $ 537,913
</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, 1997.
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, 1998, the affiliates of United Income, Inc., were as depicted
on the following organizational chart.
ORGANIZATIONAL CHART
AS OF MARCH 31, 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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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. In November 1992, 10,437 option shares were granted. At March
31, 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 the Company's stock option plan for the periods
ended March 31, 1998 and December 31, 1997, and changes during the periods
ending on those dates is presented below.
<TABLE>
March 31, 1998 December 31, 1997
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
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 13.07 10,437 13.07
Outstanding at
end of period 451 $ 13.07 451 $ 13.07
Options exercisable
at period end 451 $ 13.07 10,888 $ 13.07
</TABLE>
The following information applies to options outstanding at March 31,
1998:
Number outstanding 451
Exercise price $ 13.07
Remaining contractual life 3 years
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. 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 March 31, 1998. At March 31, 1998,
231 options have been granted and are exercisable. No options were
exercised during 1998 and 1997, respectively.
A summary of the status of the Company's stock option plan for the
periods ended March 31, 1998 and December 31, 1997, and changes during
the periods ending on those dates is presented below.
<TABLE>
March 31, 1998 December 31, 1997
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
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
</TABLE>
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The following information applies to options outstanding at March 31,
1998:
Number outstanding 231
Exercise price $ 0.47
Remaining contractual life 3 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 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. 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.
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 period ended March 31, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 105,177 1,391,919 $ 0.08
EFFECT OF DILUTIVE
SECURITIES
Convertible debentures 21,430 36,092
Options 231
DILUTED EPS
Income available to common
shareholders + assumed
conversions $ 126,607 1,428,242 $ 0.09
</TABLE>
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<TABLE>
For the period ended March 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 55,572 1,392,130 $ 0.04
EFFECT OF DILUTIVE
SECURITIES
Convertible debentures 20,866 36,092
Options 231
DILUTED EPS
Income available to common
shareholders + assumed
conversions $ 76,438 1,428,453 $ 0.05
</TABLE>
UII has stock options outstanding during the first 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.
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 sometime during the third quarter of 1998.
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. 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. The
transaction is not expected to be completed before July 31, 1998, and there
can be no assurance that the transaction will be completed.
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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. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
<TABLE>
The following provides summarized financial information for the Company's
50% or less owned affiliate:
March 31, December 31,
1998 1997
<S> <C> <C>
ASSETS
Total investments $ 214,990,531 $ 222,601,494
Cash and cash equivalents 24,681,509 15,763,639
Cost of insurance acquired 44,366,265 45,009,452
Other assets 64,436,093 64,576,450
TOTAL ASSETS $ 348,474,398 $ 347,951,035
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 268,916,182 $ 268,237,887
Notes payable 19,081,602 19,081,602
Deferred taxes 12,043,806 12,157,685
Other liabilities 4,378,095 4,053,293
TOTAL LIABILITIES 304,419,685 303,530,467
Minority interests in
consolidated subsidiaries 10,029,049 10,130,024
Shareholders' equity
Common stock no par value
Authorized 10,000 shares - 100 45,926,705 45,926,705
issued
Unrealized depreciation of
investment in stocks (337,899) (41,708)
Accumulated deficit (11,563,142) (11,594,453)
TOTAL SHAREHOLDERS' EQUITY 34,025,664 34,290,544
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 348,474,398 $ 347,951,035
</TABLE>
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<TABLE>
March 31, 1998 March 31, 1997
<S> <C> <C>
Premiums and policy fees, net
of reinsurance $ 7,231,481 $ 7,926,386
Net investment income 3,738,105 3,859,875
Other 111,132 (4,383)
11,080,718 11,781,878
Benefits, claims and
settlement expenses 6,827,040 7,718,015
Other expenses 4,307,528 4,555,517
11,134,568 12,273,532
Loss before income tax and
minority interest (53,850) (491,654)
Income tax credit 103,493 459,073
Minority interest in (income)
loss of consolidated subsidiaries (18,332) 9,016
Net income (loss) $ 31,311 $ (23,565)
</TABLE>
11
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At March 31, 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.
RESULTS OF OPERATIONS
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
(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 approximately $80,000 annually.
(b) EXPENSES
The Company has 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.
Interest expense of $21,430 and $20,866 was incurred in first quarter 1998
and 1997, 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 OF INVESTEES
Equity in income of investees represents UII's 47% share of the net loss of
UTG. Following is a discussion of the results of operations of UTG and its
consolidated subsidiaries ("UTG"):
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Revenues of UTG
Premiums and policy fee revenues, net of reinsurance premiums and
policy fees, decreased 9% when comparing 1998 to 1997. 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 Procedures ("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, negotiations are
progressing with a different unrelated party for the change in control
of UTI. Please refer to the Notes to the Consolidated Financial
Statements for additional information. The possible changes and
resulting uncertainties have hurt the insurance companies' ability to
recruit and maintain sales agents.
Net investment income decreased 3% when comparing 1998 to 1997. The
decrease in net investment income is due to the decrease in invested
assets. Although, net investment income decreased, overall investment
yields increased from 7% in 1997 to 7.3% in 1998. During the first
quarter of 1998, UTG had maturities of approximately $15,000,000 from
the fixed maturity portfolio. Of these maturities, approximately
$10,000,000 was reinvested in fixed maturities and the remaining funds
were placed in interest bearing cash equivalent accounts. UTG's
investment advisor is anticipating a favorable shift, in the near
future, of fixed maturity yields. The increase in cash is a short-
term fluctuation. UTG anticipates the purchase of additional long-
term fixed maturities in the near future.
The overall investment yields for 1998 and 1997, are 7.3% and 7%,
respectively. 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 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.
UTG had realized investment gains of $92,248 in the first quarter of
1998, compared to a realized investment loss of $6,136 in the first
quarter of 1997. The current quarter investment gain can be
attributed to a sale of real estate property for a profit of $82,024.
UTG had other gains and losses during the period that comprised the
remaining amount reported but were immaterial in nature on an
individual basis.
Expenses of UTG
Life benefits, net of reinsurance benefits and claims, decreased 12% in
1998 as compared to 1997. The decrease in premium revenues resulted in
lower benefit reserve increases in 1998. In addition, policyholder
benefits decreased due to a decrease in death benefit claims of
$607,000 from the prior period. There is no single event that caused
mortality to decrease. Policy claims vary from year to year and
therefore, fluctuations in mortality are to be expected and are not
considered unusual by management.
Operating expenses decreased 10% in 1998 compared to 1997. The
decrease in operating expenses is due to a 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.
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Net loss of UTG
UTG had a net income of $31,311 in 1998 compared to a net loss of
$(23,565) in 1997. The improvement is directly related to the decrease
in life benefits and operating expenses.
(d) NET INCOME
The Company recorded net income of $105,177 for the first quarter of 1998
compared to $55,572 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
The Company owns 47% equity interest in UTG, which controls total assets of
approximately $348,000,000
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
December 31, 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, insurance company dividend payments are
regulated by the state insurance department where the 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.
The Company currently has $734,827 in cash and cash equivalents. The
Company holds one mortgage loan. Operating activities of the Company
produced cash flows of $29,635 and $108,258 in the first quarter of 1998
and 1997, respectively. The Company had uses of cash from investing
activities of $5,705 and $10,021 in the first quarter of 1998 and 1997,
respectively.
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 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
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<PAGE>
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.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. In addition, the
Company does not believe that the regulatory initiatives currently under
consideration by various regulatory agencies will have a material adverse
impact on the Company. The Company is not aware of any material pending or
threatened regulatory action with respect to the Company or any of its
affiliates. The Company does 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 the
Company 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 the Company's
business/financial systems as well as products and services, if not
corrected.
The Company established a project to address year 2000 processing concerns
in September of 1996. In 1997 the Company completed the review of the
Company's internally and externally developed software, and made
corrections to all year 2000 non-compliant processing. The Company 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 the Company 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 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 sometime during the third quarter of 1998.
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. 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
15
<PAGE>
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. The
transaction is not expected to be completed before July 31, 1998, and there
can be no assurance that the transaction will be completed.
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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from any such statement due to the following important
factors, among other risks and uncertainties inherent in the company's
business:
1. Prevailing interest rate levels, which may affect the ability of the
company to sell its products, the market value of the company's
investments and the lapse ratio of the company's policies,
notwithstanding product design features intended to enhance
persistency of the company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the company's products.
4. Other factors affecting the performance of the company, including, but
not limited to, market conduct claims, insurance industry
insolvencies, stock market performance, and investment performance.
16
<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 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 sometime during the third quarter of 1998.
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. 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. The
transaction is not expected to be completed before July 31, 1998, and there
can be no assurance that the transaction will be completed.
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
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, 1997.
17
<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: May 12, 1998 By /s/ James E. Melville
James E. Melville
President, Chief Operating Officer
and Director
Date: May 12, 1998 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President and Chief
Financial Officer
18
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