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, 1997 Commission File No. 0-18540
UNITED INCOME, INC.
(Exact Name of Registrant as specified in its Charter)
5250 South Sixth Street
P.O. Box 5147 Springfield, IL 62705
Address of principal executive offices, including zip code
Ohio 37-1224044
State or other jurisdiction (IRS Employer
(Incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (217) 241-6300
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Shares outstanding at October 31, 1997:
1,391,919
Common stock, no par value per share
UNITED INCOME, INC.
(The "Company")
TABLE OF CONTENTS
Part I - Financial Information 3
Balance Sheets as of September 30, 1997 and
December 31, 1996 3
Statements of Operations for the nine months and
three months ended September 30, 1997 and 1996 4
Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 5
Notes to Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II - Other Information 15
Item 5. Other information 15
Item 6. Exhibits 15
Signatures 16
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED INCOME, INC.
Balance Sheet
September 30, December 31,
1997 1996
ASSETS
Cash and cash equivalents $ 654,097 $ 439,676
Mortgage loan 121,865 122,853
Notes receivable from affiliate 864,100 864,100
Accrued interest income 12,308 11,784
Property and equipment (net of accumulated
depreciation $93,273 and $92,140) 1,445 2,578
Investment in affiliates 11,323,300 11,324,947
Receivable from (indebtedness to) affiliate, net 6,630 31,837
Other assets (net of accumulated
amortization $129,556 and $101,794) 55,512 83,274
TOTAL ASSETS $ 13,039,257 $ 12,881,049
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 221 1,273
TOTAL LIABILITIES 902,521 903,573
Shareholders' equity:
Common stock - no par value, stated value
$.033 per share. Authorized 2,310,001 shares -
1,391,919 and 1,392,130 shares issued after
deducting treasury shares of 177,590 and 177,590 45,934 45,940
Additional paid-in capital 15,242,365 15,244,471
Unrealized appreciation (depreciation)
of investments held for sale of affiliate 98,203 (59,508)
Accumulated deficit (3,249,766) (3,253,427)
TOTAL SHAREHOLDERS' EQUITY 12,136,736 11,977,476
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,039,257 $ 12,881,049
3
UNITED INCOME, INC.
Statement of Operations
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
Revenues:
Interest income $ 10,806 $ 2,893 $ 16,145 $ 10,359
Interest income
from affiliates 21,521 20,249 61,648 59,044
Service agreement income
from affiliates 213,518 406,952 795,209 1,403,010
Realized investment gains 0 2,599 0 2,599
Other income from
affiliates 20,971 24,022 70,132 100,424
266,816 456,715 943,134 1,575,436
Expenses:
Management fee
to affiliate 153,111 294,170 627,126 1,141,805
Operating expenses 9,912 12,045 69,912 78,363
Interest expense 21,429 20,866 63,725 63,161
184,452 327,081 760,763 1,283,329
Income before provision
for income taxes and equity
income of investees 82,364 129,634 182,371 292,107
Provision for income taxes 0 0 0 0
Equity in loss
of investees (219,216) (713,362) (178,710) (589,571)
Net income (loss) $ (136,852)$ (583,728) $ 3,661 $ (297,464)
Net income (loss)
per common share $ (0.10)$ (0.42) $ 0.00 $ (0.21)
Weighted average common
shares outstanding 1,391,919 1,392,130 1,392,022 1,392,130
4
UNITED INCOME, INC.
Statement of Cash Flows
September 30, September 30,
1997 1996
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ 3,661 $ (297,464)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 28,895 34,285
Gain on payoff of mortgage loan 0 (2,599)
Accretion of discount on mortgage loan (200) (415)
Equity in loss of investees 178,710 589,571
Changes in assets and liabilities:
Change in accrued interest income (524) (4,984)
Change in indebtedness of affiliates 25,207 (99,141)
Change in other liabilities (1,051) (40,110)
Net cash provided by operating activities 234,698 179,143
Cash flows from investing activities:
Capital contribution to investee 0 (47,000)
Purchase of investments in affiliates (19,353) 0
Issuance of notes receivable from affiliate 0 (150,000)
Payments received on mortgage loans 1,188 62,053
Proceeds from sale of property and equipment 0 1,165
Net cash used in investing activities (18,165) (133,782)
Cash flows from financing activities:
Proceeds from sale of common stock 0 700
Payment for fractional shares from
reverse stock split (2,112) 0
Net cash provided by (used in) financing activities (2,112) 700
Net increase (decrease) in cash and cash equivalents 214,421 46,061
Cash and cash equivalents at beginning of period 439,676 364,370
Cash and cash equivalents at end of period $ 654,097 $ 410,431
5
UNITED INCOME, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared by United
Income, Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the Company believes the
disclosures are adequate to make the information presented not be
misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and the notes thereto
presented in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31,
1996.
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 September 30, 1997, the affiliates of United Income, Inc., were as
depicted on the following organizational chart.
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 33.3% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79.4% of First Commonwealth Corporation
("FCC") and FCC owns 100% of Universal Guaranty Life Insurance Company
("UG"). UG owns 100% of United Security Assurance Company ("USA"). USA
owns 83.9% of Appalachian Life Insurance Company ("APPL") and APPL owns
100% of Abraham Lincoln Insurance Company ("ABE").
6
2. STOCK OPTION PLANS
The Company has a stock option plan under which certain directors,
officers and employees may be issued options to purchase up to 31,500
shares of common stock at $13.07 per share. Options become
exercisable at 25% annually beginning one year after date of grant and
expire generally in five years. At September 30, 1997, options for
10,850 shares were exercisable and options for 20,576 shares were
available for grant. No options have been exercised during 1997.
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. A total of 11,620 option shares
have been granted and exercised as of September 30, 1997. At September
30, 1997, 231 options have been granted and are exercisable. No options
have been exercised during 1997.
3. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the
insurers' sales practices, alleged agent misconduct, failure to
properly supervise agents, and other matters. Some of the lawsuits have
resulted in the award of substantial judgements against the insurer,
including material amounts of punitive damages. In some states,
juries have substantial discretion in awarding punitive damages in
these circumstances.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to
prescribed limits for policyholder losses incurred by insolvent or
failed insurance companies. Although the Company cannot predict the
amount of any future assessments, most insurance guaranty fund laws
currently provide that an assessment may be excused or deferred if it
would threaten an insurer's financial strength. Those mandatory
assessments may be partially recovered through a reduction in future
premium taxes in some states. The Company does not believe such
assessments will be materially different from amounts already provided for
in the financial statements.
The Company and its affiliates are named as defendants in a number of
legal actions arising primarily from claims made under insurance
policies. These actions have been considered in establishing the
Company's liabilities. Management and its legal counsel are of the
opinion that the settlement of those actions will not have a material
adverse effect on the Company's financial position or results of
operations.
4. TERMINATION OF AGREEMENT REGARDING PENDING CHANGE IN CONTROL OF UNITED
INCOME, INC.
On April 14, 1997, United Trust, Inc. and United Income, Inc. formally
terminated their stock purchase agreement contract with LaSalle Group, Inc.
("LaSalle"), whereby LaSalle was to acquire certain authorized but
unissued shares of UTI and UII and additional outstanding shares in
privately negotiated transactions so that LaSalle would own not less
than 51% of the outstanding common stock of UTI and indirectly control
51% of UII.
LaSalle had not performed its obligations under the terms of the
contract, and the Company felt it should be free to negotiate with
other interested parties in becoming an equity partner.
5. REVERSE STOCK SPLIT
On May 13, 1997, the Company effected a 1 for 14.2857 reverse stock
split. Fractional shares received a cash payment on the basis of $.70 for
each old share. Prior period numbers have been restated to give effect of
the reverse split.
7
6. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for the
Company's 47% owned affiliate:
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
September December
ASSETS 30, 31,
1997 1996
Total investments $ 229,449,482 $ 223,964,687
Cash and cash equivalents 11,073,530 16,903,789
Reinsurance receivables 41,614,177 42,601,137
Cost of insurance acquired 45,772,916 47,536,812
Deferred policy acquisition costs 10,897,379 11,325,356
Other assets 10,351,202 12,667,841
Total assets $ 349,158,686 $ 354,999,622
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 268,844,424 $ 268,771,766
Notes payable 19,081,603 19,839,853
Deferred income taxes 11,472,715 11,591,086
Other liabilities 4,567,201 6,335,866
Total liabilities 303,965,943 306,538,571
Minority interests in consolidated subsidiaries 10,236,828 13,332,034
Shareholders' equity:
Common stock no par value.
Authorized 10,000 shares - 100
shares issued 45,926,705 45,926,705
Unrealized appreciation (depreciation)
of investments held for sale 208,944 (126,612)
Accumulated deficit (11,179,734) (10,671,076)
Total shareholders' equity 34,955,915 35,129,017
Total liabilities and shareholders'
equity $ 349,158,686 $ 354,999,622
8
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Premium and other
considerations $ 6,639,394 $ 7,348,199 $ 22,374,562 $ 24,343,885
Net investment income 3,691,584 4,002,258 11,390,978 11,907,152
Other (114,869) (19,174) (79,666) (217,985)
10,216,109 11,331,283 33,685,874 36,033,052
Benefits, claims and
Settlement Expenses 6,467,739 8,378,710 21,047,453 21,991,273
Commissions, DAC, and
cost of insurance
acquired amortizations 1,727,317 1,734,048 4,572,287 6,600,518
Operating and interest
expenses 2,778,435 3,685,600 8,747,337 10,374,795
10,973,491 13,798,358 34,367,077 38,966,586
Net income (loss)
before income taxes
and minority interest (757,382) (2,467,075) (681,203) (2,933,534)
Credit (provision) for
income taxes 131,893 327,798 113,671 1,122,683
Minority interest in
(income) loss of
consolidated subsidiaries 113,045 575,460 58,874 422,069
Net income (loss) $ (512,444) $ (1,563,817) $ (508,658) $(1,083,240)
9
ITEM 2.
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. The
information in the financial statements and related notes should be read
in conjunction with this section.
At September 30, 1997 and December 31, 1996, the balance sheet
reflects UII's 47% equity interest in United Trust Group, Inc.
("UTG"). The statements of operations and statements of cash flows
presented include UII and UII's equity share of UTG.
LIQUIDITY AND CAPITAL RESOURCES
UII's cash flow is dependent on revenues from a management agreement with
USA and its earnings received on invested assets and cash balances.
At September 30, 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, the state insurance department regulates insurance
company dividend payments where the company is domiciled. 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 year statutory earnings or b) 10% of statutory capital and surplus.
For the year ended December 31, 1996, UG had a statutory gain from
operations of $8,006,000. At December 31, 1996, UG statutory
capital and surplus amounted to $10,227,000. 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 $654,000 in cash and cash equivalents. The
Company holds one mortgage loan. Operating activities of the Company
produced cash flows of $235,000 and $179,000 in the first nine months of
1997 and 1996, respectively. The Company had uses of cash from
investing activities of $18,000 and $134,000 in the first nine months of
1997 and 1996, respectively. The Company had a use of cash of $2,000
from financing activities related to the purchase of fractional shares in
connection with the reverse stock split in 1997.
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and
First of America Bank - Southeast Michigan, N.A., as trustee. The
Debentures are general unsecured obligations of UII, subordinate in
right of payment to any existing or future senior debt of UII. The
Debentures are exchangeable and transferable, and are convertible at any
time prior to March 31, 1999 into UII's common stock at a
conversion price of $25.00 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.
Management believes the overall sources of liquidity available to the
Company will be more than sufficient to satisfy its financial
obligations.
10
RESULTS OF OPERATIONS
YEAR-TO-DATE 1997 COMPARED TO 1996:
(a) REVENUES
The Company's source of revenues is derived from service fee income,
which is provided via a service agreement with USA. The service
agreement between UII and USA is to provide USA with certain
administrative services. The fees are based on a percentage of
premium revenue of USA. The percentages are applied to both first year
and renewal premiums at different rates.
The Company holds $864,100 of notes receivable from affiliates. The notes
receivable from affiliates consists of three separate notes. The
$700,000 note bears interest at the rate of 1% above the variable per
annum rate of interest most recently published by the Wall Street Journal
as the prime rate. Interest is payable quarterly with principal
due at maturity on May 8, 2006. In February 1996, FCC borrowed an
additional $150,000 from UII to provide additional cash for liquidity.
The note bears interest at the rate of 1% over prime as published in the
Wall Street Journal, with interest payments due quarterly and principal
due upon maturity of the note on June 1, 1999. The remaining $14,100 are
20 year notes of UTG with interest at 8.5% payable semi-annually. At current
interest levels, the notes will generate income of approximately $80,000
annually.
(b) EXPENSES
The Company has a sub-contract service agreement with 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. The Company has incurred $627,000 and $1,142,000 in service fee expense
in the first nine months of 1997 and 1996, respectively.
Interest expense of $63,000 was incurred in the first nine months of 1997
and 1996. 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 1997 and 1996.
Following is a discussion of the operating results of UTG for the first
nine months of 1997 compared to 1996. Please refer to Note 6of United
Income, Inc.'s Notes to Financial Statements for Condensed Financial
Statements of United Trust Group, Inc.
REVENUES OF UTG
Premium income, net of reinsurance premium, decreased 7% when
comparing the first six months of 1997 to the first six months of
1996. The Company's primary product is the "Century 2000" universal life
insurance product. Universal life and interest sensitive life insurance
products contribute only the risk charge to premium income, however
traditional insurance products contribute all monies received to
premium income. Since the Company does not actively market
traditional life insurance products, it is expected that premium
income will continue to decrease in future periods as a result of
expected lapses of business in force.
Net investment income decreased 3% when comparing the first six
months of 1997 to 1996. The decrease is the result of a smaller
invested asset base from one year ago. During the fourth quarter
1996, the Company transferred approximately $22,000,000 in assets as part
of a coinsurance agreement with First International Life Insurance
Company ("FILIC"). The overall annualized investment yields for the
first six months of 1997 and 1996 are 7.2% and 7.0%, respectively. The
improvement in investment yield is primarily attributed to the
fixed maturity portfolio. The Company has invested excess cash
and financing activities generated through sales of universal life
insurance products.
11
The Company'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, the Company's primary product. The
Company monitors investment yields, and when necessary adjusts credited
interest rates on its insurance products to preserve targeted
spreads. It is expected that the monitoring of the interest
spreads by management will provide the necessary margin to adequately
provide for associated costs on insurance policies the Company has in
force and will write in the future.
EXPENSES OF UTG
Benefits, claims and settlement expenses, increased 7% in the first six
months of 1997 compared to 1996. The increase in benefits is
attributed to an increase in mortality. Mortality increased 21% in the
first six months of 1997 compared to 1996. 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. The Company experienced a
decline of 33% in dollar volume of new business production. This
decline results in less of an increase in reserves from new business as
compared to the previous year.
Commissions, DAC and cost of insurance acquired amortizations
decreased $2,022,000 for the first six months of 1997 compared to the
first six months of 1996. The decrease is attributed to the
coinsurance agreement with First International Life Insurance
Company ("FILIC") as of September 30, 1996. Under the terms of the
agreement, UG ceded to FILIC substantially all of its paid-up life
insurance policies. Paid-up life insurance generally refers to a non-
premium paying life insurance policy. Cost of insurance acquired
is amortized in relation to expected future profits, including
direct charge-offs for any excess of the unamortized asset over the
projected future profits. The Company did not have any charge-offs
during the periods covered by this report.
Operating expenses decreased 11% when comparing the first six months of
1997 to the first six months of 1996. The decrease in operating expenses
is attributed to the settlement of certain litigation in the fourth
quarter of 1996. The Company incurred elevated legal fees in the
previous year due to the litigation. Operating expenses were further
reduced from a restructuring of the home office personnel completed
in late 1996.
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinanced debt bears interest to a rate equal to the "base rate" plus
nine-sixteenths of one percent. Prior to refinancing, the interest
rate was equal to the base rate plus one percent. The decrease in
interest rate and principal reductions made during the last year
provided the decrease in interest expense for the first six months of
1997.
NET INCOME (LOSS) OF UTG
The Company had net income of $4,000 for the first nine months of 1997
compared to $175,000 for the first nine months of 1996. The decline in
net income for the current period is primarily due to the increase in
mortality.
(d) NET INCOME
The Company recorded net income of $4,000 for the first nine months of 1997
compared to a net loss of $(297,000) for the same period one year ago.
The net income is attributed primarily to service agreement income,
partially offset by the operating results of the Company's 47% equity
interest in UTG.
THIRD QUARTER 1997 COMPARED TO 1996:
(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.
12
The Company holds $864,100 of notes receivable from affiliates. The notes
receivable from affiliates consists of three separate notes. The
$700,000 note bears interest at the rate of 1% above the variable per
annum rate of interest most recently published by the Wall Street Journal
as the prime rate. Interest is payable quarterly with principal
due at maturity on May 8, 2006. In February 1996, FCC borrowed an
additional $150,000 from UII to provide additional cash for liquidity.
The note bears interest at the rate of 1% over prime as published in the
Wall Street Journal, with interest payments due quarterly and principal
due upon maturity of the note on June 1, 1999. The remaining $14,100 are
20 year notes of UTG with interest at 8.5% payable semi-annually. At
current interest levels, the notes will generate income of approximately
$80,000 annually.
(b) EXPENSES
The Company has a sub-contract service agreement with 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. The Company has incurred $153,000 and $294,000 in service fee expense
in the third quarter of 1997 and 1996, respectively.
Interest expense of $21,000 was incurred in the third quarter of 1997 and
1996. 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 third quarter of 1997 and 1996. Following
is a discussion of the operating results of UTG for the third quarter
of 1997 compared to 1996. Please refer to Note 6 of United Income,
Inc.'s Notes to Financial Statements for Condensed Financial Statements
of United Trust Group, Inc.
REVENUES OF UTG
Premium and other considerations decreased 8% when comparing second
quarter of 1997 to second quarter of 1996. The Company's primary
product is the "Century 2000" universal life insurance product.
Universal life and interest sensitive life insurance products
contribute only the risk charge to premium income, however
traditional insurance products contribute all monies received to
premium income. Since the Company does not actively market
traditional life insurance products, it is expected that premium
income will continue to decrease in future periods as a result of
expected lapses of business in force.
Net investment income decreased 2% when comparing second quarter of 1997
to 1996. The decrease is the result of a smaller invested asset
base from one year ago. During the fourth quarter 1996, the Company
transferred approximately $22,000,000 in assets as part of a coinsurance
agreement with First International Life Insurance Company
("FILIC").
The Company'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, the Company's primary product. The
Company monitors investment yields, and when necessary adjusts credited
interest rates on its insurance products to preserve targeted
spreads. It is expected that the monitoring of the interest
spreads by management will provide the necessary margin to adequately
provide for associated costs on insurance policies the Company has in
force and will write in the future.
EXPENSES OF UTG
Benefits, claims and settlement expenses decreased 3% in the second
quarter of 1997 compared to 1996. The decrease in benefits is due to the
decrease in new business production. Although life benefits
decreased, mortality increased $137,000 in second quarter of 1997
compared to 1996. There is no single event that caused mortality to
13
increase. Policy claims vary from year to year and therefore,
fluctuations in mortality are to be expected and are not considered
unusual by management.
Commissions, DAC and cost of insurance acquired amortizations
decreased $1,124,000 for the second quarter of 1997 compared to
second quarter of 1996. The decrease is attributed to the
coinsurance agreement with First International Life Insurance
Company ("FILIC") as of September 30, 1996. Under the terms of the
agreement, UG ceded to FILIC substantially all of its paid-up life
insurance policies. Paid-up life insurance generally refers to a non-
premium paying life insurance policy. Cost of insurance acquired
is amortized in relation to expected future profits, including
direct charge-offs for any excess of the unamortized asset over the
projected future profits. The Company did not have any charge-offs
during the periods covered by this report.
NET INCOME (LOSS) OF UTG
The Company had net income of $102,000 for second quarter of 1997
compared to $9,000 for second quarter of 1996. The improvement in net
income is due to the decrease in amortization of cost of insurance
acquired.
(d) NET INCOME
The Company recorded a net loss of $137,000 for the third quarter 1997
compared to a net loss of ($84,000) for the same period one year ago. The
net loss is attributed primarily to the operating results of the Company's
47% equity interest in UTG.
FINANCIAL CONDITION
The Company owns 47% equity interest in UTG, which controls total
assets of approximately $349,000,000. Summarized financial
information of UTG is provided in Note 6 of the Notes to the Financial
Statements.
FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection with
the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which have
financial resources or ratings greater than those of the Company.
The insurance industry is a mature industry. In recent years, the
industry has experienced virtually no growth in life insurance sales,
though the aging population has increased the demand for retirement
savings products. Management believes that the Company's ability to
compete is dependent upon, among other things, its ability to attract and
retain agents to market its insurance products and its ability to develop
competitive and profitable products.
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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 (after its reverse stock split of one share for each
ten shares) for each share held by UII shareholders (after its reverse
stock split of one share for every 14.2857 shares).
UTI stock currently trades on NASDAQ. The reverse stock split
increased the price at which the Company's stock trades, enabling it to
meet new NASDAQ requirements regarding eligibility to remain listed.
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.
ITEM 6. EXHIBITS
Exhibit
Number
10 (a) Employment agreement dated as of July 31, 1997, between
Larry E. Ryherd and First Commonwealth Corporation.
10 (b) Employment agreement dated as of July 31, 1997, between
James E. Melville and First Commonwealth Corporation.
10 (c) Employment agreement dated as of July 31, 1997, between
George E. Francis and First Commonwealth Corporation.
Agreements containing the same terms and conditions
excepting title and current salary were also entered into
by Joseph H. Metzger, Brad M. Wilson, Theodore C. Miller,
Michael K. Borden, and Patricia G. Fowler.
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, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED INCOME, INC.
(Registrant)
Date: November 12, 1997 By /s/ James E. Melville
James E. Melville
President, Chief Operating
Officer and Director
Date: November 12, 1997 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President and Chief
Financial Officer
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