UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 2)
(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, 1998
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, 1998, was 1,391,919
1
<PAGE>
UNITED INCOME, INC.
(The "Company")
Form 10-Q/A
This amendment includes all the information from the original filing and
the amended information. The amendment includes the addition of the
financial schedule "Consolidated Statement of Changes in Shareholders'
Equity". This amendment has been prepared to include the new information
presented in gray shading on the hard copy and in all caps on the
electronic filing under EDGAR.
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
Statement of Changes in Shareholders' Equity for the
period ended March 31, 1998 5
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 6
Notes to Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II - Other Information 20
Item 5. Other information 20
Item 6. Exhibits 20
Signatures 21
2
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PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED INCOME, INC.
Balance Sheet
March 31, December 31,
1998 1997
<TABLE>
<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.
3
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UNITED INCOME, INC.
Statement of Operations
Three Months Ended
March 31, March 31,
1998 1997
<TABLE>
<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 $ 0.08 $ 0.04
Diluted earnings per share from
continuing operations and net
income $ 0.09 $ 0.05
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING 1,391,919 1,392,130
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 1,428,242 1,428,453
</TABLE>
See accompanying notes.
4
<PAGE>
UNITED INCOME, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED MARCH 31,1998
<TABLE>
<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
RETAINED EARNINGS (ACCUMULATED DEFICIT)
BALANCE, BEGINNING OF YEAR (3,332,743)
NET INCOME 105,177 $ 105,177
BALANCE, END OF PERIOD (3,227,566)
ACCUMULATED OTHER COMPREHENSIVE INCOME
BALANCE, BEGINNING OF YEAR (19,603)
UNREALIZED DEPRECIATION ON SECURITIES (139,210)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 0
MINIMUM PENSION LIABILITY ADJUSTMENT 0
OTHER COMPREHENSIVE INCOME (139,210) (139,210)
COMPREHENSIVE INCOME $ (34,033)
BALANCE, END OF PERIOD (158,813)
TOTAL SHAREHOLDER'S EQUITY, END OF PERIOD $ 11,901,920
</TABLE>
See accompanying notes.
5
<PAGE>
UNITED INCOME, INC.
Statement of Cash Flows
Three Months Ended
March 31, March 31,
1998 1997
<TABLE>
<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.
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. (the "Company") ted subsidiaries ("Company") pursuant to
the rules and regulations of the Securities and Exchange Commission.
Although the Company believes the disclosures are adequate to make the
information presented not be misleading, it is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto presented in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 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").
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, 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
March 31, 1998 and December 31, 1997, and changes during the periods ending
on those dates is presented below.
March 30, 1998 December 31, 1997
Exercise Exercise
Shares Price Shares Price
<TABLE>
<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 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
</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 June 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 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.
March 31, 1998 December 31, 1997
Exercise Exercise
Shares Price Shares Price
<TABLE>
<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,
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 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. 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 is 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.
For the period ended March 31, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<TABLE>
<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 126,607 1,428,242 $ 0.09
conversions
</TABLE>
9
<PAGE>
For the period ended March 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<TABLE>
(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 and assumed
conversions 76,438 1,428,242 $ 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. 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. The
transaction is expected to be completed before July 31, 1998, and there can
be no assurance that the transaction will be completed.
10
<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.
7. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for the Company's
50% or less owned affiliate:
March 31, December 31,
1998 1997
<TABLE>
<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 45,926,705 45,926,705
Authorized 10,000 shares - 100
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>
11
<PAGE>
March 31, March 31,
1998 1997
<TABLE>
<S> <C> <C>
Premium 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>
8. ACCOUNTING AND LEGAL DEVELOPMENTS
THE FASB HAS ISSUED SFAS 130 ENTITLED REPORTING COMPREHENSIVE INCOME, WHICH
IS EFFECTIVE FOR FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNING AFTER
DECEMBER 15, 1997. SFAS 130 ESTABLISHES STANDARDS FOR REPORTING AND
PRESENTATION OF COMPREHENSIVE INCOME AND ITS COMPONENTS IN A FULL SET OF
FINANCIAL STATEMENTS. COMPREHENSIVE INCOME INCLUDES ALL CHANGES IN
SHAREHOLDERS' EQUITY, EXCEPT THOSE ARISING FROM TRANSACTIONS WITH
SHAREHOLDERS, AND INCLUDES NET INCOME AND NET UNREALIZED GAINS (LOSSES) ON
SECURITIES. SFAS 130 WAS ADOPTED AS OF JANUARY 1, 1998. ADOPTING THE NEW
STANDARD REQUIRED US TO MAKE ADDITIONAL DISCLOSURES IN THE FINANCIAL
STATEMENTS, BUT DID NOT AFFECT THE COMPANY'S FINANCIAL POSITION OR RESULTS
OF OPERATIONS.
ALL ITEMS OF OTHER COMPREHENSIVE INCOME REFLECT NO RELATED TAX EFFECT,
SINCE THE COMPANY HAS AN ALLOWANCE AGAINST THE COLLECTION OF ANY FUTURE TAX
BENEFITS. IN ADDITION, THERE WAS NO SALE OR LIQUIDATION OF INVESTMENTS
REQUIRING A RECLASSIFICATION ADJUSTMENT FOR THE PERIOD PRESENTED.
THE FASB HAS ISSUED SFAS 131 ENTITLED, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, WHICH IS EFFECTIVE FOR FINANCIAL
STATEMENTS FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997. SFAS 131
REQUIRES THAT A PUBLIC BUSINESS ENTERPRISE REPORT FINANCIAL AND DESCRIPTIVE
INFORMATION ABOUT ITS REPORTABLE OPERATING SEGMENTS. OPERATING SEGMENTS
ARE COMPONENTS OF AN ENTERPRISE ABOUT WHICH SEPARATE FINANCIAL INFORMATION
IS AVAILABLE THAT IS EVALUATED REGULARLY IN DECIDING HOW TO ALLOCATE
RESOURCES AND IN ASSESSING PERFORMANCE. SFAS 131 WAS ADOPTED AS OF JANUARY
1, 1998. ADOPTING THE NEW STANDARD HAD NO AFFECT THE COMPANY'S FINANCIAL
POSITION OR RESULTS OF OPERATIONS, SINCE THE COMPANY HAS NO REPORTABLE
OPERATING SEGMENTS.
THE FASB HAS ISSUED SFAS 132 ENTITLED, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS, WHICH IS EFFECTIVE FOR
FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997.
SFAS 132 REVISES CURRENT DISCLOSURE REQUIREMENTS FOR EMPLOYER PROVIDED POST-
RETIREMENT BENEFITS. THE STATEMENT DOES NOT CHANGE RETIREMENT MEASUREMENT
OR RECOGNITION ISSUES. . SFAS 132 WAS ADOPTED AS OF JANUARY 1, 1998.
ADOPTING THE NEW STANDARD HAD NO AFFECT ON OUR FINANCIAL POSITION OR
RESULTS OF OPERATIONS, SINCE THE COMPANY HAS NO PENSION PLAN OR OTHER
OBLIGATION FOR POST-RETIREMENT BENEFITS.
12
<PAGE>
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 THE COMPANY HAS NO DERIVATIVE OR HEDGING TYPE
INVESTMENTS.
13
<PAGE>
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.
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 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"):
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.
14
<PAGE>
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 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 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, the Company 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 nvestment 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 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.
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. UII recorded net
income of $225,221 for second quarter of 1998 compared to $84,941 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.
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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 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.
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 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.
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.
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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.
The Company established a project to address year 2000 processing concerns
in September of 1996. In 1997 the Company completed the review of
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. 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. 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.
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<PAGE>
ACCOUNTING AND LEGAL DEVELOPMENTS
THE FASB HAS ISSUED SFAS 130 ENTITLED REPORTING COMPREHENSIVE INCOME, WHICH
IS EFFECTIVE FOR FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNING AFTER
DECEMBER 15, 1997. SFAS 130 ESTABLISHES STANDARDS FOR REPORTING AND
PRESENTATION OF COMPREHENSIVE INCOME AND ITS COMPONENTS IN A FULL SET OF
FINANCIAL STATEMENTS. COMPREHENSIVE INCOME INCLUDES ALL CHANGES IN
SHAREHOLDERS' EQUITY, EXCEPT THOSE ARISING FROM TRANSACTIONS WITH
SHAREHOLDERS, AND INCLUDES NET INCOME AND NET UNREALIZED GAINS (LOSSES) ON
SECURITIES. SFAS 130 WAS ADOPTED AS OF JANUARY 1, 1998. ADOPTING THE NEW
STANDARD REQUIRED US TO MAKE ADDITIONAL DISCLOSURES IN THE FINANCIAL
STATEMENTS, BUT DID NOT AFFECT THE COMPANY'S FINANCIAL POSITION OR RESULTS
OF OPERATIONS.
ALL ITEMS OF OTHER COMPREHENSIVE INCOME REFLECT NO RELATED TAX EFFECT,
SINCE THE COMPANY HAS AN ALLOWANCE AGAINST THE COLLECTION OF ANY FUTURE TAX
BENEFITS. IN ADDITION, THERE WAS NO SALE OR LIQUIDATION OF INVESTMENTS
REQUIRING A RECLASSIFICATION ADJUSTMENT FOR THE PERIOD PRESENTED.
THE FASB HAS ISSUED SFAS 131 ENTITLED, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, WHICH IS EFFECTIVE FOR FINANCIAL
STATEMENTS FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997. SFAS 131
REQUIRES THAT A PUBLIC BUSINESS ENTERPRISE REPORT FINANCIAL AND DESCRIPTIVE
INFORMATION ABOUT ITS REPORTABLE OPERATING SEGMENTS. OPERATING SEGMENTS
ARE COMPONENTS OF AN ENTERPRISE ABOUT WHICH SEPARATE FINANCIAL INFORMATION
IS AVAILABLE THAT IS EVALUATED REGULARLY IN DECIDING HOW TO ALLOCATE
RESOURCES AND IN ASSESSING PERFORMANCE. SFAS 131 WAS ADOPTED AS OF JANUARY
1, 1998. ADOPTING THE NEW STANDARD HAD NO AFFECT THE COMPANY'S FINANCIAL
POSITION OR RESULTS OF OPERATIONS, SINCE THE COMPANY HAS NO REPORTABLE
OPERATING SEGMENTS.
THE FASB HAS ISSUED SFAS 132 ENTITLED, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS, WHICH IS EFFECTIVE FOR
FINANCIAL STATEMENTS FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997.
SFAS 132 REVISES CURRENT DISCLOSURE REQUIREMENTS FOR EMPLOYER PROVIDED POST-
RETIREMENT BENEFITS. THE STATEMENT DOES NOT CHANGE RETIREMENT MEASUREMENT
OR RECOGNITION ISSUES. . SFAS 132 WAS ADOPTED AS OF JANUARY 1, 1998.
ADOPTING THE NEW STANDARD HAD NO AFFECT ON OUR FINANCIAL POSITION OR
RESULTS OF OPERATIONS, SINCE THE COMPANY HAS NO PENSION PLAN OR OTHER
OBLIGATION FOR POST-RETIREMENT BENEFITS.
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 THE COMPANY HAS NO DERIVATIVE OR HEDGING TYPE
INVESTMENTS.
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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.
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<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. 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. 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.
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SIGNATURES
The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of its March 31, 1998 filing of
Form 10-Q as set forth on the index page:
Each amendment as shown on the index page is amended to replace
the existing item, statement or exhibit reflected in the March 31,
1998 Form 10-Q filing.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED INCOME, INC.
(Registrant)
Date: January 15, 1999 By /s/ James E. Melville
James E. Melville
President, Chief Operating Officer
and Director
Date: January 15, 1999 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
21
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