UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-18540
UNITED INCOME, INC.
-------------------
(Exact name of registrant as specified in its charter)
Ohio 37-1224044
---- ----------
(State or other jurisdiction of (I.R.S. 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 April
30, 1999, 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 March 31, 1999 and December 31, 1998.................3
Statements of Operations for the three months ended
March 31, 1999 and 1998.................................................4
Statement of Shareholders'Equity for the Period ended March 31, 1999......5
Statements of Cash Flows for the three months ended
March 31, 1999 and 1998.................................................6
Notes to Financial Statements.............................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AN
RESULTS OF OPERATIONS.............................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........17
PART II. OTHER INFORMATION...................................................19
ITEM 1. LEGAL PROCEEDINGS.................................................19
ITEM 2. CHANGE 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..........................................................19
SIGNATURES....................................................................20
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED INCOME, INC.
<TABLE>
<CAPTION>
Balance Sheet
- ---------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
---------------- -----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 426,994 $ 368,692
Mortgage loans 169,663 170,052
Notes receivable from affiliate 1,364,100 1,364,100
Accrued interest income 14,634 13,629
Property and equipment (net of accumulated
depreciation $50,143 and $50,038) 339 444
Investment in affiliates 10,681,758 10,697,626
Receivable from affiliate, net 0 22,244
Other assets (net of accumulated
amortization $185,068 and $175,826) 0 9,242
================= =================
Total assets $ 12,657,488 $ 12,646,029
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Notes payable $ 902,300 $ 902,300
Payable to affiliates, net 106 0
Other liabilities 7,928 22,209
----------------- -----------------
Total liabilities 910,334 924,509
----------------- -----------------
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
Accumulated deficit (3,340,124) (3,385,700)
Unrealized depreciation of investments
held for sale of affiliate (201,021) (181,079)
----------------- -----------------
Total shareholders' equity 11,747,154 11,721,520
----------------- -----------------
Total liabilities and shareholders' equity $ 12,657,488 $ 12,646,029
================= =================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
UNITED INCOME, INC.
Statement of Operations
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Revenues:
Interest income $ 8,083 $ 11,551
Interest income from affiliates 28,312 20,488
Service agreement income from affiliates 225,385 237,358
Other income from affiliates 14,251 17,954
Other income 218 0
----------------- -----------------
276,249 287,351
Expenses:
Management fee to affiliate 165,231 142,415
Operating expenses 49,778 50,140
Interest expense 19,738 21,430
----------------- -----------------
234,747 213,985
Income before provision for income
taxes and equity income of investees 41,502 73,366
Provision for income taxes 0 0
Equity in income of investees 4,074 31,811
----------------- -----------------
Net income $ 45,576 $ 105,177
================= =================
Basic earnings per share from continuing operations
and net income $ 0.03 $ 0.08
================= =================
Diluted earnings per share from continuing operations
and net income $ 0.03 $ 0.09
================= =================
Basic weighted average shares outstanding 1,391,919 1,391,919
================= =================
Diluted weighted average shares outstanding 1,392,150 1,428,242
================= =================
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
UNITED INCOME, INC.
Statement of Changes in Shareholders' Equity
For the Period ended March 31,1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock
Balance, beginning of year $ 45,934
Issued during year 0
Purchase treasury stock 0
------------------
Balance, end of period 45,934
------------------
Additional paid-in capital
Balance, beginning of year 15,242,365
Issued during year 0
Purchase treasury stock 0
------------------
Balance, end of period 15,242,365
------------------
Accumulated deficit
Balance, beginning of year (3,385,700)
Net income 45,576 $ 45,576
------------------ ------------------
Balance, end of period (3,340,124)
------------------
Accumulated other comprehensive income
Balance, beginning of year (181,079)
Unrealized depreciation on securities (19,942)
Foreign currency translation adjustments 0
Minimum pension liability adjustment 0
------------------
Other comprehensive income (19,942) (19,942)
------------------ ------------------
Comprehensive income $ 25,634
==================
Balance, end of period (201,021)
------------------
Total shareholder's equity, end of period $ 11,747,154
==================
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
UNITED INCOME, INC.
Statement of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 45,576 $ 105,177
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,346 9,516
Accretion of discount on mortgage loan (65) (65)
Equity in income of investees (4,074) (31,811)
Changes in assets and liabilities:
Change in accrued interest income (1,005) 72
Change in indebtedness of affiliates 22,350 (62,284)
Change in other liabilities (14,280) 9,030
---------------- ----------------
Net cash provided by operating activities 57,848 29,635
Cash flows from investing activities:
Purchase of investments in affiliates 0 (6,125)
Payments received on mortgage loans 454 420
---------------- ----------------
Net cash provided by (used in) investing activities 454 (5,705)
Net increase in cash and cash equivalents 58,302 23,930
Cash and cash equivalents at beginning of period 368,692 710,897
---------------- ----------------
Cash and cash equivalents at end of period $ 426,994 $ 734,827
================ ================
</TABLE>
See accompanying notes.
6
<PAGE>
UNITED INCOME, INC.
Notes to Financial Statements
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by United
Income Inc. pursuant to the rules and regulations of the Securities and Exchange
Commission. Although UII believes the disclosures are adequate to make the
information presented not be misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto presented in UII's Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the year ended December
31, 1998.
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 March 31, 1999, the affiliates of United Income Inc. were as depicted on the
following organizational chart.
ORGANIZATIONAL CHART AS OF MARCH 31, 1999
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").
7
<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 March 31, 1999, options for 451 shares
were exercisable and options for 20,576 shares were available for grant. No
options were exercised during 1999.
A summary of the status of UII's stock option plan for the periods ended March
31, 1999 and December 31, 1998, and changes during the periods ending on those
dates is presented below.
<TABLE>
<CAPTION>
March 30, 1999 December 31, 1998
-------------- -----------------
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of period 451 $ 13.07 451 $ 13.07
Granted 0 0.00 0 0.00
Exercised 0 0.00 0 0.00 Forfeited
Forfeited 0 0 0 13.07
---------- ---------
Outstanding at end of period 451 $ 13.07 451 $ 13.07
========== =========
Options exercisable at period end 451 $ 13.07 451 $ 13.07
</TABLE>
The following information applies to options outstanding at March 31, 1999:
Number outstanding 451
Exercise price $ 13.07
Remaining contractual life 2 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, 1999. At March 31, 1999, 231 options have been granted and are
exercisable. No options were exercised during 1999 and 1998, respectively.
A summary of the status of the Company's stock option plan for the periods
ended March 31, 1999 and December 31, 1998, and changes during the periods
ending on those dates is presented below.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
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>
8
<PAGE>
The following information applies to options outstanding at March 31, 1999:
Number outstanding 231
Exercise price $ 0.47
Remaining contractual life 2 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 does 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's liabilities. Management is of the opinion
that the settlement of those actions will not have a material adverse effect on
UII'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>
<CAPTION>
For the period ended March 31, 1999
--------------- ------ ------------------ ---- -----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $ 45,576 1,391,919 $ 0.03
=================
Effect of Dilutive Securities
Options 231
--------------- ------------------
Diluted EPS
Income available to common shareholders $
and assumed conversions 45,576 1,392,150 $ 0.03
=============== ================== =================
</TABLE>
9
<TABLE>
<CAPTION>
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 and $
assumed conversions 126,607 1,428,242 $ 0.09
=============== ================== =================
</TABLE>
UII has stock options outstanding during the first quarter of 1999 and 1998 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. On March 31, 1999, the conversion privilege of the convertible
debentures expired. As such, as of the expiration date of the conversion
privilege, thses securities are no longer considered a dilutive instrument for
the calculation of diluted EPS.
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. At the time the decision to merge was made,
neither UTI nor UII had 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 will
occur as soon as practical following regulatory approval.
10
<PAGE>
6. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for UII's 50% or less
owned affiliate:
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
------------------ ------------------
<S> <C> <C>
Total investments $ 219,489,279 $ 216,247,582
Cash and cash equivalents 21,097,511 25,867,577
Cost of insurance acquired 42,149,654 42,673,693
Other assets 57,809,668 57,499,087
------------------ ------------------
Total assets $ 340,546,112 $ 342,287,939
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 266,871,346 $ 268,054,867
Notes payable 17,559,482 17,559,482
Deferred taxes 7,304,137 7,543,678
Other liabilities 5,779,395 6,055,611
------------------ ------------------
Total liabilities 297,514,360 299,213,638
------------------ ------------------
Minority interests in consolidated subsidiaries 9,768,391 9,749,693
------------------ ------------------
Shareholders' equity
Common stock no par value 46,577,216 46,577,216
Authorized 10,000 shares - 100 issued
Accumulated other comprehensive income (427,704) (385,275)
Accumulated deficit (12,886,151) (12,867,333)
------------------ ------------------
Total shareholders' equity 33,263,361 33,324,608
------------------ ------------------
Total liabilities and shareholders' equity $ 340,546,112 $ 342,287,939
================== ==================
March 31, March 31,
1999 1998
------------------ -------------------
Premium and policy fees, net of reinsurance $ 6,007,511 $ 7,231,481
Net investment income 3,649,708 3,738,105
Other 45,020 111,132
------------------ -------------------
9,702,239 11,080,718
Benefits, claims and settlement expenses 6,115,079 6,827,040
Other expenses 3,708,749 4,307,528
------------------ -------------------
9,823,828 11,134,568
Loss before income tax and
minority interest (121,589) (53,850)
Income tax credit 132,644 103,493
Minority interest in (income) loss
of consolidated subsidiaries (29,873) (18,332)
------------------ -------------------
Net income (loss) $ (18,818) $ 31,311
================== ===================
</TABLE>
11
<PAGE>
7. ACCOUNTING AND LEGAL DEVELOPMENTS
The FASB has issued SFAS 133 entitled, Accounting for Derivative Instruments and
hedging Activities, which is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a specific type of exposure
hedge. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. The adoption
of SFAS 133 is not expected to have a material effect on our financial position
or results of operations, since UII has no derivative or hedging type
investments.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
At March 31, 1999 and December 31, 1998, 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 or any of its officers, directors or employees is qualified by
the fact that actual results of UII may differ materially from any such
statement due to the following important factors, among other risks and
uncertainties inherent in UII'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.
RESULTS OF OPERATIONS
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
(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. Pursuant to the terms of the agreement, USA pays UII monthly fees
equal to 22% of the amount of collected first year statutory premiums, 20% in
second year and 6% of the renewal premiums in years three and after.
UII holds $1,364,100 of notes receivable from affiliates. The notes receivable
from affiliates consists of four 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. In December 1998, FCC
borrowed an additional $500,000 from UII to further reduce outside debt. The
note bears interest at the rate of 7.5%, with interest payments due quarterly
and principal due upon maturity of the note on March 31, 2004. At current
interest levels, the notes will generate approximately $122,000 in interest
earnings annually.
13
<PAGE>
(b) Expenses
UII 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 $19,738 and $21,430 was incurred in first quarter 1999 and
1998, 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. At March 31, 1999, the conversion privilege expired with no
conversions exercised.
(c) Equity in income of investees
Equity in income of investees represents UII's 47% share of the net loss of UTG.
Please refer to Note 6 of the Notes to the Financial Statements for summarized
financial information of UTG. Following is a discussion of the results of
operations of UTG and its consolidated subsidiaries ("UTG"):
Revenues of UTG
---------------
Premiums and policy fee revenues, net of reinsurance premiums and
policy fees, decreased 17% when comparing 1999 to 1998. 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.
During 1998, the Boards of UG and USA approved a permanent premium
reduction on certain of its participating products in force commonly
referred to as the initial contract and the presidents plan. The
premium reduction was generally 20% with 35% used on initial contract
plans of UG with original issue ages less than 56 years old. The
dividends were also reduced, and the net effect to the policyholder was
a slightly lower net premium. This change became effective with the
1999 policy anniversary. This action was taken by the Boards to ensure
these policyholders will be protected in future periods from potential
dividend reductions at least to the extent of the permanent premium
reduction amount. By reducing the required premium payment, it makes
replacement activity by other insurance companies more difficult as
ongoing premium payments are compared from the current policy to a
potential replacement policy. This premium reduction accounted for
approximately 12% of the total premium revenue decline. A corresponding
decline is reflected in the policy benefits line item dividends to
policyholders.
Net investment income decreased 2% when comparing 1999 to 1998. During
September and October of 1998, the national prime rate declined three
quarters of one percent (.75%). This decline reduced yields on
investments available in the marketplace in which UTG invests,
primarily fixed maturities. Approximately 10.5% of the total fixed
maturity portfolio will mature during 1999, with another 47.2% maturing
in the next two to five years. If interest rates remain at current
levels, investment income will continue to decline as these maturities
are reinvested at current market rates.
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. At the March 1999 Board of Directors meeting, the Board
lowered crediting rates one half percent on all products that could be
lowered. This adjustment was in response to continued
14
<PAGE>
declines in interest rates in the marketplace. The change will result
in interest crediting reductions of approximately $600,000 per year.
policy interest crediting rate changes become effective on an
individual policy basis on the next policy anniversary. Therefore, it
will take a full year from the time the change is determined for the
full impact of such change to be realized.
Expenses of UTG
---------------
Benefits claims and settlement expenses, decreased 10% in 1999 as
compared to 1998. The decrease in premium revenues from normal policy
terminations resulted in lower benefit reserve increases in the current
period. Dividends to policyholders decreased $659,000 from first
quarter 1998. The decrease is primarily the result of the permanent
premium reduction voted by the Boards of UG and USA on certain
participating policies. The dividend reduction is offset by a decline
in premium revenues. See above discussion in revenues of UTG for
additional information relative to this event. Policyholder benefits
increased due to an increase in death benefit claims of $518,000 from
the prior period. 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. At the March 1999 Board of Directors meeting,
the Board lowered crediting rates one half percent on all products that
could be lowered. This adjustment was in response to continued declines
in interest rates in the marketplace. The change will result in
interest crediting reductions of approximately $600,000 per year.
Policy interest crediting rate changes become effective on an
individual policy basis on the next policy anniversary. Therefore, it
will take a full year from the time the change is determined for the
full impact of such change to be realized.
Other expenses decreased 14% in 1999 compared to 1998. The decrease in
operating expenses is due to the decrease in salaries from normal
attrition. In most instances, the workload was absorbed into the
remaining workforce. First year sales production has shown a declining
trend in the last three years. UTG has tried a variety of solutions to
bolster new sales production including additional training, home office
assistance in providing leads on prospective clients and a review of
current product offerings. First year production in the first quarter
of 1999 resulted in cash received from new sales of only 54% of that
received in first quarter 1998, or $560,000 less. With continued
declining new business, costs associated with supporting new business,
primarily salary costs, as a percentage of new business received
continued to grow. In March of 1999, UTG determined it could no longer
continue to support these fixed costs in light of the new business
trend and no indication it would reverse any time soon. It was
determined these fixed costs should be reduced to be commensurate with
the level of new sales production activity currently being experienced.
As such, in March seven employees of UTG (approximately 8% of the total
staff), were terminated due to lack of business activity. An accrual of
$68,000 was established in first quarter 1999 for unpaid severances
provided the terminated employees. This action will result in future
expense savings of approximately $275,000 per year.
Net loss of UTG
---------------
UTG had a net loss of ($18,818) in 1999 compared to net income of
$31,311 in 1998. The decline is primarily related to increased death
claims partially offset by reduced policy reserve increases.
(d) Net income
The Company recorded net income of $45,576 for the first quarter of 1999
compared to $105,177 for the same period one-year ago. The decline in net income
is the result of a combination of increased management fees to affiliates and a
decrease in income from earnings of UTG.
FINANCIAL CONDITION
UII owns 47% equity interest in UTG, which controls total assets of
approximately $342,000,000.
15
<PAGE>
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 March 31, 1999,
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, 1998, UG
had a statutory gain from operations of $3,266,000. At December 31, 1998, UG's
statutory capital and surplus amounted to $15,281,000. 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 $426,994 in cash and cash equivalents. UII holds two mortgage
loans. Operating activities of UII produced cash flows of $57,848 and $29,635 in
the first quarter of 1999 and 1998, respectively. UII had uses of cash from
investing activities of $5,705 in the first quarter of 1998 compared to cash
provided by investing activities of $454 in 1999.
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 (now National City Bank Illinois/Michigan).
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.
At March 31, 1999, the conversion privilege expired, with no conversion
privileges exercised.
UII is not aware of any litigation that will have a material adverse effect on
the financial position of UII. In addition, UII does not believe that the
regulatory initiatives currently under consideration by various regulatory
agencies will have a material adverse impact on UII. UII is not aware of any
material pending or threatened regulatory action with respect to UII or any of
its affiliates. UII 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 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
16
<PAGE>
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 is being performed to monitor continuing compliance. By
addressing year 2000 compliance in a timely manner, compliance has been 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. At the time the decision to merge was made,
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 will
occur as soon as practical following regulatory approval.
ACCOUNTING AND LEGAL DEVELOPMENTS
The FASB has issued SFAS 133 entitled, Accounting for Derivative Instruments and
hedging Activities, which is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a specific type of exposure
hedge. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. The adoption
of SFAS 133 is not expected to have a material effect on our financial position
or results of operations, since UII has no derivative or hedging type
investments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk relates, broadly, to changes in the value of financial instruments
that arise from adverse movements in interest rates, equity prices and foreign
exchange rates. UII is exposed principally to changes in interest rates which
affect its variable rate debt outstanding. UII's exposure to equity prices and
foreign currency exchange rates is immaterial.
Interest rate risk
UII has $902,300 of outstanding notes payable which have a variable rate of
interest tied to the current prime interest rate. Changes in the prime interest
rate affect the operating results of UII through the amount of interest expense
it must pay on this debt. UII has substantially mitigated these effects through
$850,000 of holdings of notes receivable from affiliates which also bear
interest rates tied to the current prime interest rate. Thus, as
17
<PAGE>
interest expense increases or decreases from changes in the prime interest rate,
interest income also changes in a similar manner.
Tabular presentation
The following table provides information about UII's long term debt that is
sensitive to changes in interest rates. The table presents principal cash flows
and related weighted average interest rates by; expected maturity dates. UII has
no derivative financial instruments or interest rate swap contracts.
<TABLE>
<CAPTION>
March 31, 1999
Expected maturity date
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 Thereafter Total Fair value
Long term debt
Fixed rate 0 0 0 0 0 0 0 0
Avg. int. rate 0 0 0 0 0 0 0
Variable rate 0 0 0 0 0 902,300 902,300 902,300
Avg. int. rate 0 0 0 0 0 8.75% 8.75%
</TABLE>
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGE IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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. At the time the decision to merge was made,
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 will
occur as soon as practical following regulatory approval.
ITEM 6. EXHIBITS
UII hereby incorporates by reference the exhibits as reflected in the Index to
Exhibits of UII's Form 10-K for the year ended December 31, 1998.
19
<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, 1999 By /s/James E. Melville
- -------------------- --------------------
James E. Melville
President, Chief Operating Officer
and Director
Date: May 12, 1999 By /s/Theodore C. Miller
- -------------------- ---------------------
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 170,245,912
<EQUITIES> 0
<MORTGAGE> 169,663
<REAL-ESTATE> 0
<TOTAL-INVEST> 169,663
<CASH> 426,994
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 12,657,488
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 902,300
0
0
<COMMON> 45,934
<OTHER-SE> 11,701,220
<TOTAL-LIABILITY-AND-EQUITY> 12,657,488
0
<INVESTMENT-INCOME> 8,083
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 268,166
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 234,747
<INCOME-PRETAX> 41,502
<INCOME-TAX> 0
<INCOME-CONTINUING> 45,576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,576
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
