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 September 30, 1996 Commission File No.0-18540
UNITED INCOME, INC.
(Exact Name of Registrant as specified in itsCharter)
OHIO 37-1224044
(State or other jurisdiction (I.R.S.Employer
incorporation or organization) IdentificationNo.)
P.O. Box 5147, Springfield, Illinois 62705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (217)786-4300
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 such shorterperiod 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 theRegistrant's
classes of common stock, as of the latest practicable date.
Shares outstanding at October 31, 1996:
19,887,572
Common stock, no par value per share
UNITED INCOME, INC.
(the "Company")
INDEX
Part I: Financial Information
Balance Sheets as of September 30, 1996 and
December 31, 1995 3
Statements of Operations for the nine months and three
months ended September 30, 1996 and 1995 4
Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 5
Notes to Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II: Other Information
Signatures 18
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED INCOME, INC.
Balance Sheet
September 30, December 31,
1996 1995
ASSETS
Cash and cash equivalents $ 410,431 $ 364,370
Mortgage loans 123,167 182,206
Notes receivable from affiliate 864,100 714,100
Accrued interest income 12,024 7,040
Indebtedness of affiliate, net 11,272 (87,869)
Property and equipment (net of $90,348 accumulated
depreciation in 1996 and $102,208 in 1995) 4,370 12,058
Investment in affiliates 11,381,526 11,985,958
Other assets (net of $136,757 accumulated
amortization in 1996 and $108,995 in 1995) 92,528 120,290
TOTAL ASSETS $ 12,899,418 $ 13,298,153
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 612 40,722
TOTAL LIABILITIES 902,912 943,022
Shareholders' equity:
Common stock - no par value, stated value
$.033 per share. 33,000,000 shares
authorized, 22,424,572 issued in 1996,
22,423,572 issued in 1995 740,010 739,977
Additional paid-in capital 14,634,122 14,633,455
Unrealized depreciation of investments
held for sale of affiliate (62,097) (236)
Accumulated deficit (3,231,808) (2,934,344)
TOTAL SHAREHOLDERS' EQUITY 12,080,227 12,438,852
Common stock in treasury, at cost
(2,537,000 shares) (83,721) (83,721)
TOTAL SHAREHOLDERS' EQUITY 11,996,506 12,355,131
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 12,899,418 $ 13,298,153
See accompanying notes.
3
UNITED INCOME, INC.
Statement of Operations
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
REVENUES:
Interest income $ 2,893 $ 4,064 $ 10,359 $ 12,778
Interest income
from affiliates 20,249 17,778 59,044 53,719
Service agreement
income from affiliates 406,952 494,867 1,403,010 1,529,396
Realized investment gains 2,599 0 2,599 0
Other income from
affiliates 24,022 23,322 100,424 101,424
456,715 540,031 1,575,436 1,697,317
EXPENSES:
Management fee
to affiliate 294,170 452,935 1,141,805 1,373,653
General expenses 12,045 12,243 78,363 82,458
Interest expense 20,866 22,384 63,161 66,545
327,081 487,562 1,283,329 1,522,656
Income before provision for
income taxes and equity income
(loss) of investees 129,634 52,469 292,107 174,661
Equity in income (loss)
of investees (713,362) 80,335 (589,571) (434,886)
Net income (loss) $ (583,728) $ 132,804 $ (297,464) $ (260,225)
Net income (loss)
per common share $ (0.03) $ 0.01 $ (0.01) $ (0.01)
Average common shares
outstanding 22,423,700 19,886,572 22,423,700 19,886,572
See accompanying notes.
4
UNITED INCOME, INC.
Statement of Cash Flows
September 30, September 30,
1996 1995
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (297,464) $ (260,225)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 34,285 40,101
Gain on payoff of mortgage loan (2,599) 0
Accretion of discount on mortgage loans (415) 0
Equity in loss of investees 589,571 434,886
Changes in assets and liabilities:
Change in accrued interest income (4,984) (1,796)
Change in indebtedness of affiliates (99,141) 46,887
Change in other liabilities (40,110) (14,282)
NET CASH PROVIDED BY OPERATING ACTIVITIES 179,143 245,571
Cash flows from investing activities:
Capital contribution to investee (47,000) (23,500)
Purchase of investments in affiliates 0 (26,091)
Change in notes receivable of affiliate (150,000) 0
Payments received on mortgage loans 62,053 2,809
Purchase of mortgage loan 0 (126,000)
Proceeds from sale of property and equipment 1,165 0
NET CASH USED IN INVESTING ACTIVITIES (133,782) (172,782)
Cash flows from financing activities:
Proceeds from sale of common stock 700 0
NET CASH PROVIDED BY FINANCING ACTIVITIES 700 0
Net increase in cash and cash equivalents 46,061 72,789
Cash and cash equivalents at beginning of period 364,370 230,266
Cash and cash equivalents at end of period $ 410,431 $ 303,055
See accompanying notes.
5
UNITED INCOME, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared byUnited Income,
Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the Companybelieves the
disclosures are adequate to make the information presented not be
misleading, it is suggested that these consolidated financialstatements be
read in conjunction with the consolidated financial statements and the
notes thereto presented in the Company's Annual Report on Form10-K filed
with the Securities and Exchange Commission for the year endedDecember 31,
1995.
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 yearor of the
Company's future financial condition.
At September 30, 1996, the affiliates of United Income, Inc., were as
depicted on the following organizational chart.
6
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1996
United Trust, (nc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 30% of United Income, Inc. ("UII").
UII 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
2. STOCK OPTION PLANS
The Company has a stock option plan under which certaindirectors, officers
and employees may be issued options to purchase up to 450,000 shares of
common stock at $.915 per share. Options become exercisable at 25%
annually beginning one year after date of grant and expire generally in
five years. In November 1992, 149,100 option shares weregranted. In
1995, 6,950 option shares were granted. In 1995, 500 optionshares were
exercised. At September 30, 1996, options for 155,550 shares were
exercisable and options for 293,950 shares were available forgrant. No
options have been exercised during 1996.
On January 15, 1991, the Company adopted an additionalNon-Qualified Stock
Option Plan under which certain employees and salespersonnel may be
granted options. The plan provides for the granting of up to 600,000
options at an exercise price of $.033 per share, and the optionsgenerally
expire five years from the date of grant. Options for 146,000shares of
common stock were granted in 1991, options for 19,000 shareswere granted
in 1993 and options for 4,300 shares were granted in 1995. AtSeptember
30, 1996, 166,000 of the granted optionshave been exercised, 3,300 options
have been granted and are exercisable, and 430,700 options areavailable
for grant.
3. LEGAL PROCEEDINGS OF AFFILIATES
During the third quarter of 1994, UG became aware that certain new
insurance business was being solicited by certain agents and issued to
individuals considered to be not insurable by Company standards. These
policies had a face amount of $22,700,000 and represented 1/2 of1% of the
insurance in force. Management's analysis indicates that the expected
death claims on the business in force to be adequatelycovered by the
mortality assumptions inherent in the calculation of statutoryreserves.
Nevertheless, management determined it was in the bestinterest of the
Company to repurchase as many of the policies as possible. AtSeptember
30, 1996, all of the original policies, with a total face amount of
$22,700,000, have been settled with the exception of oneremaining lawsuit
with a $100,000 original face amount still to be determined. There remains
$4,166,000 of insurance in force from reduced face amount policies issued
in certain instances as settlements. UG maintains reserves on these
policies in excess of 25% of the face amount of insurance. Through
September 30, 1996, the Company spent a total of $4,218,000 for the
repurchase of these policies and for the defense of relatedlitigation.
During 1996, the Company has been involved in the following litigation:
Freeman v. Universal Guaranty Life Insurance Company (U.S.D.C.,N.D.Ga,
1994, 1-94-CV-2593-RCF); Armstrong v. Universal Guaranty LifeInsurance
Company and James Melville (Circuit Court of Davidson County,Tenn., 1994,
94C3222); Armstrong v. Universal Guaranty Life Insurance Companyand James
Melville (Circuit Court of Davidson County, Tenn., 1994, 94C3720); Ridings
v. Universal Guaranty Life Insurance Company and James Melville (Circuit
Court of Davidson County, Tenn., 1994, 94C3221).
Four general agents of UG filed independent suits against UG inthe latter
part of September or early October 1994. Kathy Armstrong(3-94-1085),
another general agent, filed her suit on November 16, 1994. All of the
suits allege that the plaintiff was libeled by statements made in a letter
sent by UG. The letter was sent to persons who had been issued life
insurance policies by UG as the result of policy applicationssubmitted by
the five agents. Mr. Melville is a defendant in some of the suits because
he signed the letter as president of UG.
In addition to the defamation count, Mr. Freeman alleges that UG also
breached a contract by failing to pay his commissions forpolicies issued.
Mr. Freeman claims unpaid commissions of $65,000. In the libelclaim, Mr.
Freeman claims compensatory damages of over $5,000,000, punitivedamages of
over $3,000,000, costs, and litigation expenses. The other plaintiffs
request the award of unspecified compensatory damages andpunitive (or
special) damages as well as costs and attorney's fees. UGhas filed
Answers to all of these suits asserting various defensesand, where
appropriate, counterclaims. The Freeman suit went to trial inApril 1996.
The jury awarded Mr. Freeman $365,000 in general damages
8
and $700,000 in punitive damages. In May 1996, UG filed an appeal.
Jeffrey Ploskonka, Keith Bohn and Paul Phinney v. Universal Guaranty Life
Insurance Company (Circuit Court of the Seventh JudicialCircuit Sangamon
County, Illinois Case No.: 95-L-0213)
On March 9, 1995 a lawsuit was filed against UniversalGuaranty Life
Insurance on behalf of three insureds and a potential class of other
insureds. The Plaintiffs allege that UG violated the insurance contract in
attempting to cancel life insurance contracts. Additionally, the
Plaintiffs assert violations of Illinois law alleging vexations and
unreasonable insurance practices, breach of duty of good faithand fair
dealing, and that Illinois consumer fraud laws have beenviolated. The
Plaintiffs seek unspecified compensatory damages, injunctive relief,
attorneys' fees, statutory damages in an amount up to $25,000 punitive
damages of $1,000,000 and other equitable relief. UG filed anAnswer to
this lawsuit in May 1995, asserting various defenses and reserving the
right to assert counterclaims. UG has also filed motionsto dismiss
certain allegations and claims made in the lawsuit. In June 1995, the
court conditionally certified a class of non-settling insureds. This class
represents approximately $5,000,000 of insurance in force. UGhas reached
a tentative settlement of this suit. Pending approval of the court, UG
will issue a paid up policy to each class member equal to70% of the
original face amount and pay $600,000 to the class. Thethird quarter
financial statements include a charge to the income statement of$1,600,000
to life benefits and $600,000 to general expenses for this tentative
settlement.
Universal Guaranty Life Insurance Company v. Fred Boxley(United States
District Court, Middle District of Florida, Orlando Division,Civil Action
File No. 95-1145-CIV-ORL-19).
On October 9, 1995, UG filed the above named suit seekingrescission of two
life insurance policies issued to the Defendant with a total faceamount of
$100,000. The claims against the Defendant include fraud, breach of
fiduciary duty and material misrepresentation. The Defendanthas filed an
Answer and Counterclaims, alleging breach of contract and bad faith.
Motions for summary judgment filed by both parties are currently pending.
The case is currently scheduled for trial in January 1997.
The Company and its subsidiaries are named as defendants in anumber 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 theopinion that the
settlement of those actions will not have a material adverse effect on the
Company's financial position or results of operations.
The number of insurance companies that are under regulatorysupervision has
increased, and that increase is expected to result in an increase in
assessments by state guarantee funds to cover losses topolicyholders of
insolvent or rehabilitated companies. Those mandatoryassessments may be
partially recovered through a reduction in future premium taxes in some
states. For all assessment notifications received, the Companyhas accrued
for those assessments.
4. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for theCompany's
47% owned affiliate:
9
The following provides summarized financial information for theCompany's 47% owned
affiliate:
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
September 30, December 31,
ASSETS 1996 1995
Total investments $ 246,922,379 $ 244,815,985
Cash and cash equivalents 14,719,127 12,024,668
Reinsurance receivables 15,194,794 14,401,901
Cost of insurance acquired 49,541,246 53,115,987
Value of agency force acquired 6,249,176 6,485,733
Other assets 25,532,296 24,591,748
TOTAL ASSETS $ 358,159,018 $ 355,436,022
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 268,173,169 $ 261,796,945
Notes payable 20,339,853 21,463,328
Deferred income taxes 15,097,199 16,100,283
Other liabilities 5,847,828 5,478,001
TOTAL LIABILITIES 309,458,049 304,838,557
Minority interests in consolidated
subsidiaries 13,405,546 13,881,640
Shareholders's equity:
Common stock no par value.
Authorized 10,000 shares -
100 shares issued 45,826,705 45,726,705
Unrealized depreciation of
investments held for sale (132,121) (501)
Accumulated deficit (10,399,161) (9,010,379)
TOTAL SHAREHOLDERS' EQUITY 35,295,423 36,715,825
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 358,159,018 $ 355,436,022
10
The following provides summarized financial information for theCompany's 47% owned
affiliate:
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Premiums and other
considerations $ 7,348,199 $ 7,868,803 $24,343,885 $ 26,079,829
Net Investment income 4,002,258 3,757,605 11,907,152 11,464,379
Other (19,174) (111,539) (217,985) (77,471)
11,331,283 11,514,869 36,033,052 37,466,737
Benefits, claims and
settlement expenses 8,378,710 5,978,795 21,991,273 23,190,558
Commissions, DAC, cost of
insurance acquired and agency
force amortizations 1,734,048 3,044,057 6,600,518 8,355,119
Operating and interest
expenses 3,685,600 2,498,472 10,374,795 8,689,708
13,798,358 11,521,324 38,966,586 40,235,385
Net income (loss) before
income taxes and
minority interest (2,467,075) (6,455) (2,933,534) (2,768,648)
Credit for income taxes 327,798 249,408 1,122,683 1,355,338
Minority interest in
(income) loss of consolidated
subsidiaries 575,460 (116,202) 422,069 330,070
Net income (loss) $(1,563,817) $ 126,751 $(1,388,782) $(1,083,240)
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's
financial condition, changes in financial condition and results of
operations which reflect the performance of the Company. Theinformation
in the financial statements and related notes should be read inconjunction
with this section.
At September 30, 1996 and December 31, 1995, the balance sheet reflects
UII's 47% equity interest in United Trust Group, Inc. ("UTG"). The
statements of operations and statements of cash flows presentedinclude UII
and UII's equity share of UTG.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for cash is the payment ofoperating expenses
and interest on its convertible debentures. The Company currently has
$410,000 in cash and cash equivalents. The Company holds onemortgage loan
at September 30, 1996. Additionally, the Company holds notesreceivable
from affiliates of $864,000. Further sources of capitalresources will be
dependent upon dividends received from UTG.
The payment of cash dividends to shareholders by UTG is not legally
restricted. At September 30, 1996, substantially all of consolidated
shareholders' equity of UTG represents net assets of its subsidiaries. UTG
has no daily operations of its own. Before consolidation of its
subsidiaries, UTG holds approximately $10,040,000 in notesreceivable and
possesses liabilities of $10,040,000 in the form of notes payable. These
notes contain identical terms. Additionally, UTG has an investment in
subsidiaries of $37,000,000 and cash of $51,000. Management believes the
financial position of UTG is sufficient to meet its future needs.
The payment of cash dividends to shareholders by UII isnot legally
restricted. UG's dividend limitations are described below.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior yearstatutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1995, UG had a statutory gain from operations of $3,252,000.
At December 31, 1995, UG statutory capital and surplus amounted to
$7,274,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurancecommissioner
and are not restricted to a specific calculation as to amount.
Management believes that the overall sources of liquidityavailable to the
Company will be sufficient to satisfy its financial obligations.
RESULTS OF OPERATIONS
YEAR-TO-DATE 1996 COMPARED TO 1995:
(a) Revenues:
The Company's primary source of revenues is derived from servicefee income
which is provided via a service agreement with USA. The serviceagreement
between UII and USA is to provide USA with certain administrativeservices.
The fees are based on a percentage of premium revenue of USA. The
percentages are applied to both first year and renewal premiums at
different rates.
12
Interest income from affiliates is from notes receivable from anaffiliate.
The notes, representing debt of FCC, carry interest at a rate of 1% over
prime as published in the Wall Street Journal, payable quarterly.
Principal is due upon maturity, with $700,000 due on May 8, 2006, and
$150,000 due on June 1, 1999.
Interest income is derived from two sources, mortgage loans andcash and
cash equivalents. On July 15, 1996 one of the mortgages paid-off.
Currently, the Company owns one mortgage loan which is a first position
loan in good standing.
(b) Expenses:
The Company's source of expenses is derived from salaries, wages and
employee benefits, professional fees and other operating expenses
associated with the services to be provided by the Companypursuant to the
service agreement between the Company and USA.
Effective September 1, 1990, the Company entered into 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 betweenthe parties.
The fees are based on a percentage of the fees paid to UII by USA. The
Company has incurred $1,142,000 and $924,000 in service feeexpense in the
first nine months of 1996 and 1995, respectively.
Interest expense of $63,000 and $67,000 was incurred in the first nine
months of 1996 and 1995, 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 or (loss) of Investees:
Equity in income or (loss) of investees represents UII's 47%share of net
income or (loss) of UTG for the first nine months of 1996and 1995.
Following is a discussion of the operating results of UTG forthe first
nine months of 1996 compared to 1995. Please refer to Note fourof United
Income, Inc.'s Notes to Financial Statements for Condensed Financial
Statements of United Trust Group, Inc.
Premiums and other considerations, decreased 7% when comparingthe first
nine months of 1996 to the same period one year ago. Thedecrease is
primarily attributed to the reduction in new business production and the
change in products marketed. In 1995, the Company streamlined the product
portfolio, as well as restructured the marketing force. Thedecrease in
first year premium production is directly related to the Company's change
in distribution systems. The Company changed its focus from primarily a
broker agency distribution system to a captive agent system. Business
written by the broker agency force in recent years did not meet Company
expectations. With the change in focus of distributionsystems, most of
the broker agents were terminated.
Benefits, claims and settlement expenses, decreased 5% whencomparing the
first nine months of 1996 to the same period one year ago. Thedecrease is
attributed to the decrease in first year premium. Mortalitydecreased
approximately $176,000 in the first nine months of 1996 whencompared to
1995. Life benefits was negatively effected by $1,600,000charge for the
tentative settlement of a class action lawsuit. The lawsuit isdiscussed
in detail in Note three of the Notes to Financial Statements of United
Income, Inc.
Commissions, DAC, cost of insurance acquired and agency forceamortizations
decreased 21% in the first nine months of 1996 when compared to the same
period one year ago. The decrease is attributed to twofactors. The
decline in first year premium production and design of products that is
currently marketed. These new products pay lower first yearcommissions
than the products sold in prior periods. Also, the Companybenefited from
improved persistency.
13
Operating and interest expenses increased 19% in the first ninemonths of
1996 when compared to the same period one year ago. Theincrease was
caused by several factors. The primary factor for theincrease in
operating expenses is due to the decrease in production. Thedecrease in
production was discussed in the analysis of premium income. As such, the
Company was positioned to handle significantly more first yearproduction
than was produced by the agency force. The difference betweenthe policy
acquisition costs deferred in the first nine months of 1996compared to the
same period one year ago, effected the increase in operatingexpenses.
Another factor that caused the increase in operating expenses is directly
related to increased legal costs. During the third quarter of1994, UG
became aware that certain new insurance business was beingsolicited by
certain agents and issued to individuals considered to be notinsurable by
Company standards. As of September 30, 1996, all of theoriginal policies
with a total face amount of $22,700,000 have been settled with the
exception of one remaining lawsuit with a $100,000 originalface amount
still to be determined. The Company has reached a tentative settlement
with a class of non-settling insureds. Pending approval of the court, UG
will issue a paid up policy to each class member equal to70% of the
original face amount and pay $600,000 to the class. Thethird quarter
financial statements include a charge to the income statement of$1,600,000
to life benefits and $600,000 to general expenses for this tentative
settlement. The Company incurred legal costs of $711,000 and$596,000 in
the first nine months of 1996 and the first nine months of 1995,
respectively, for the legal defense of related litigation.
(d) Net loss:
The Company recorded a net loss of ($297,000) for the first ninemonths of
1996 compared to a net loss of ($260,000) for the same period oneyear ago.
Net loss is attributed primarily to the operating results of theCompany's
47% equity interest in UTG.
THIRD QUARTER 1996 COMPARED TO 1995:
(a) Revenues:
The Company's source of revenues is derived from service feeincome which
is provided via a service agreement with USA. The service agreement
between UII and USA is to provide USA with certain administrativeservices.
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.
Interest income from affiliates is from notes receivable from anaffiliate.
The notes, representing debt of FCC, were acquired from outside third
parties in December 1993, and carry interest at a rate of 1%above prime.
The Company received an additional note receivable for$150,000 during
first quarter 1996 with the same affiliate. Interest is calculated at a
rate of 1% above prime and is received quarterly.
Interest income is derived from two sources, mortgage loans and cash and
cash equivalents. On July 15, 1996 one of the mortgages paid-off.
Currently, the Company owns one mortgage loan which is a first position
loan in good standing.
(b) Expenses:
The Company's source of expenses is derived from salaries, wages and
employee benefits, professional fees and other operating expenses
associated with the services to be provided by the Companypursuant to the
service agreement between the Company and USA.
14
Effective September 1, 1990, the Company entered into asub-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 betweenthe parties.
The fees are based on a percentage of the fees paid to UII by USA. The
Company has incurred $294,000 and $303,000 in service fee expenseto UTI in
the third quarter of 1996 and 1995, respectively.
Interest expense of $20,000 and $22,000 was incurred in thethird quarter
of 1996 and 1995, respectively. The interest expense is directly
attributable to the convertible debentures. The Debenturesbear interest
at a variable rate equal to one percentage point above the prime rate
published in the Wall Street Journal from time to time.
(c) Equity in income or (loss) of Investees:
Equity in income or (loss) of investees represents UII's 47%share of net
income or (loss) of UTG for the third quarter of 1996 and 1995. Following
is a discussion of the operating results of UTG for thirdquarter 1996
compared to 1995. Please refer to Note four of United Income,Inc.'s Notes
to Financial Statements for Condensed Financial Statements of United Trust
Group, Inc.
Premiums and other considerations, decreased 7% when comparing third
quarter of 1996 to third quarter of 1995. The decrease is primarily
attributed to the reduction in new business production and thechange in
products marketed. In 1995, the Company streamlined the productportfolio,
as well as restructured the marketing force. The decrease infirst year
premium production is directly related to the Company's change in
distribution systems. The Company has changed its focus fromprimarily a
broker agency distribution system to a captive agent system. Business
written by the broker agency force in recent years did not meet Company
expectations. With the change in focus of distributionsystems, most of
the broker agents were terminated.
Benefits, claims and settlement expenses, increased 40% when comparing
third quarter of 1996 to the same period one year ago. Theincrease is
primarily the result of two factors. Mortality increasedapproximately
$924,000 in the third quarter of 1996 when compared to the thirdquarter of
1995. There was no one event or specific occurrence whichcaused this
increase. The other factor is a $1,600,000 charge for the tentative
settlement of a class action lawsuit. The lawsuit is discussed in detail
in Note three of the Notes to Financial Statements of UnitedIncome, Inc.
Commissions and amortization of deferred policy acquisition costsdecreased
43% in third quarter of 1996 compared to third quarter of 1995. The
decrease is attributed to two factors. The decline in firstyear premium
production and the design of products that are currently marketed. These
new products pay lower first year commissions than theproducts sold in
prior periods.
Operating expenses increased 48% in third quarterof 1996 compared to third
quarter of 1995. The increase was caused by several factors. One factor
for the increase in operating expenses is due to the decrease infirst year
premium production. The decrease in production wasdiscussed in the
analysis of premium income. As such, the Company was positionedto handle
significantly more first year production than was produced bythe agency
force. The difference between the policy acquisition costsdeferred in the
first nine months of 1996 compared to the same period oneyear ago,
effected the increase in operating expenses.
15
Another factor that caused the increase in operating expenses is directly
related to increased legal costs. During the third quarter of 1994, UG
became aware that certain new insurance business was beingsolicited by
certain agents and issued to individuals considered to be notinsurable by
Company standards. As of September 30, 1996, all of the original policies
with a total face amount of $22,700,000 have been settled with the
exception of one remaining lawsuit with a $100,000 originalface amount
still to be determined. The Company has reached a tentativesettlement
with a class of non-settling insureds. Pending approval of thecourt, UG
will issue a paid up policy to each class member equal to70% of the
original face amount and pay $600,000 to the class. Thethird quarter
financial statements include a charge to the income statement of$1,600,000
to life benefits and $600,000 to general expenses for this tentative
settlement. The Company incurred legal costs of $258,000 and$167,000 in
third quarter of 1996 and third quarter of 1995,respectively, for the
legal defense of related litigation.
(d) Net income (loss):
The Company recorded a net loss of ($584,000) for third quarter of 1996
compared to a net income of $133,000 for the same period one yearago. The
net income or (loss) is attributed primarily to the operatingresults of
the Company's 47% equity interest in UTG.
FINANCIAL CONDITION
The Company owns 47% equity interest in UTG which controls totalassets of
approximately $358,000,000. Summarized financial informationof UTG is
provided in Note four of the Notes to the Financial Statements.
FUTURE OUTLOOK
Factors expected to influence life insurance industry growthinclude: 1)
competitive pressure among the large number of existing firms; 2)
competition from financial service companies, as they seek to expand into
insurance products; 3) customers' changing needs for newtypes of
insurance products; 4) customers' lack of confidence in the entire
industry as a result of the recent highly visible failures; and 5)
uncertainty concerning the future regulation of the industry. Growth in
demand for insurance products will depend on demographicvariables such as
income growth, wealth accumulation, populations and workforcechanges.
16
PART II. OTHER INFORMATION
Omitted as the required information is inapplicable.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of1934, the
registrant has duly caused this report to be signed on itsbehalf by the
undersigned thereunto duly authorized.
UNITED INCOME, INC.
(Registrant)
Date: November 6, 1996 By /s/ THOMAS F. MORROW
Thomas F. Morrow, Chief Operating
Officer and Vice Chairman
Date: November 6, 1996 By /s/ JAMES E. MELVILLE
James E. Melville, Chief Financial
Officer and Senior Executive Vice
President
18