FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 ------------------ Commission File No. 0-16867 UNITED TRUST GROUP, INC. (Exact name of registrant as specified in its charter) ILLINOIS 37-1172848 (State of incorporation) (I.R.S. Employer identification No.) 5250 SOUTH SIXTH STREET P.O. BOX 5147 SPRINGFIELD, IL 62703 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (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 [ ] At October 31, 2002 there were 3,481,970 shares of common stock of the registrant outstanding. UNITED TRUST GROUP, INC. AND SUBSIDIARIES (The "Company") TABLE OF CONTENTS Part 1. Financial Information................................................3 ITEM 1. FINANCIAL STATEMENTS...............................................3 Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001......................................................3 Consolidated Statements of Operations for the nine and three months ended September 30, 2002 and 2001...............................4 Consolidated Statement of Changes in Shareholders' Equity for the nine months ended September 30, 2002...................................5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001............................................6 Notes to Consolidated Financial Statements................................7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........19 ITEM 4. CONTROLS AND PROCEDURES ..........................................20 PART II. OTHER INFORMATION..................................................21 ITEM 1. LEGAL PROCEEDINGS.................................................21 ITEM 2. CHANGE IN SECURITIES..............................................21 ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............21 ITEM 5. OTHER INFORMATION.................................................21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................21 SIGNATURES....................................................................22 CERTIFICATIONS ...............................................................23 EXHIBIT INDEX.................................................................25 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) - --------------------------------------------------------------------------------------------------------------------- September 30, December 31, ASSETS 2002 2001* ----------------- ----------------- Investments: Fixed maturities at amortized cost (market $65,370,830 and $77,725,410) $ 62,752,005 $ 75,005,395 Investments held for sale: Fixed maturities, at market (cost $110,241,610 and $97,584,094) 113,997,268 98,628,440 Equity securities, at market (cost $4,122,887 and $3,937,812) 4,862,102 3,852,716 Mortgage loans on real estate at amortized cost 23,788,416 23,386,895 Investment real estate, at cost, net of accumulated depreciation 17,323,552 18,226,451 Policy loans 13,372,274 13,608,456 Short-term investments 426,173 581,382 ----------------- ----------------- 236,521,790 233,289,735 Cash and cash equivalents 15,753,940 15,477,348 Accrued investment income 2,470,596 3,002,860 Reinsurance receivables: Future policy benefits 33,283,285 33,776,688 Policy claims and other benefits 3,752,672 4,042,779 Cost of insurance acquired 24,112,755 33,666,336 Deferred policy acquisition costs 2,599,595 3,107,919 Costs in excess of net assets purchased, net of accumulated amortization 0 345,779 Property and equipment, net of accumulated depreciation 2,265,917 2,459,117 Income taxes receivable, current 231,758 215,865 Other assets 228,427 139,245 ----------------- ----------------- Total assets $ 321,220,735 $ 329,523,671 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits $ 235,015,786 $ 236,449,241 Policy claims and benefits payable 2,210,767 2,781,920 Other policyholder funds 1,179,580 1,255,990 Dividend and endowment accumulations 12,722,930 13,055,024 Income taxes payable: Deferred 11,854,167 13,569,523 Notes payable 4,508,797 4,400,670 Other liabilities 5,853,491 5,465,896 ----------------- ----------------- Total liabilities 273,345,518 276,978,264 ----------------- ----------------- Minority interests in consolidated subsidiaries 0 7,771,793 ----------------- ----------------- Shareholders' equity: Common stock - no par value, stated value $.02 per share Authorized 7,000,000 shares - 3,484,825 and 3,549,791 shares issued after deducting treasury shares of 140,202 and 75,236 69,697 70,996 Additional paid-in capital 42,323,860 42,789,636 Retained earnings 2,531,450 1,004,238 Accumulated other comprehensive income 2,950,210 908,744 ----------------- ----------------- Total shareholders' equity 47,875,217 44,773,614 ----------------- ----------------- Total liabilities and shareholders' equity $ 321,220,735 $ 329,523,671 ================= ================= * Balance sheet audited at 12/31/01 UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ---------------- ----------------- ----------------- ----------------- Revenues: Premiums and policy fees $ 4,458,645 $ 5,006,069 $ 14,408,541 $ 15,839,391 Reinsurance premiums and policy fees (732,822) (868,708) (2,017,573) (2,378,771) Net investment income 3,336,329 3,557,702 9,931,415 11,503,804 Realized investment gains and (losses), net 3,404 32,798 14,831 45,392 Other income 188,129 235,413 608,487 387,044 ---------------- ----------------- ----------------- ----------------- 7,253,685 7,963,274 22,945,701 25,396,860 Benefits and other expenses: Benefits, claims and settlement expenses: Life 5,436,371 4,719,889 15,847,861 15,043,502 Reinsurance benefits and claims (950,836) (732,664) (3,010,828) (2,038,346) Annuity 388,660 362,899 962,456 930,153 Dividends to policyholders 236,395 236,133 756,206 781,983 Commissions and amortization of deferred policy acquisition costs 128,619 123,480 624,730 876,835 Amortization of cost of insurance acquired 372,664 387,990 1,143,859 1,185,860 Operating expenses 1,441,502 1,573,817 4,621,069 4,856,690 Interest expense 71,230 108,018 204,834 244,438 ---------------- ----------------- ----------------- ----------------- 7,124,605 6,779,562 21,150,187 21,881,115 Income before income taxes, minority interest and equity in earnings of investees 129,080 1,183,712 1,795,514 3,515,745 Income tax (expense) credit 198,419 (383,753) (4,687) (1,087,195) Minority interest in income of consolidated subsidiaries 0 (154,086) (263,615) (463,527) ---------------- ----------------- ----------------- ----------------- Net income $ 327,499 $ 645,873 $ 1,527,212 $ 1,965,023 ================ ================= ================= ================= Basic earnings per share from continuing operations and net income $ 0.09 $ 0.18 $ 0.44 $ 0.52 ================ ================= ================= ================= Diluted earnings per share from continuing operations and net income $ 0.09 $ 0.18 $ 0.44 $ 0.52 ================ ================= ================= ================= Basic weighted average shares outstanding 3,488,731 3,565,462 3,505,647 3,793,886 ================ ================= ================= ================= Diluted weighted average shares outstanding 3,488,731 3,565,462 3,505,647 3,793,886 ================ ================= ================= ================= UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Equity For the nine months ended September 30, 2002 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------ Common stock Balance, beginning of year $ 70,996 Issued during year 0 Purchase treasury shares (1,299) ------------------ Balance, end of period 69,697 ------------------ Additional paid-in capital Balance, beginning of year 42,789,636 Issued during year 0 Purchase treasury shares (465,776) ------------------ Balance, end of period 42,323,860 ------------------ Retained earnings Balance, beginning of year 1,004,238 Net income 1,527,212 $ 1,527,212 ------------------ ------------------ Balance, end of period 2,531,450 ------------------ Accumulated other comprehensive income Balance, beginning of year 908,744 Other comprehensive income Unrealized holding gain on securities net of minority interest and reclassification adjustment 2,041,466 2,041,466 ------------------ ------------------ Comprehensive income $ 3,568,678 ================== Balance, end of period 2,950,210 ------------------ Total shareholders' equity, end of period $ 47,875,217 ================== UNITED TRUST GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) - ------------------------------------------------------------------------------------------------------------ Nine Months Ended September 30, September 30, 2002 2001 --------------- -------------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income $ 1,527,212 $ 1,965,023 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization/accretion of fixed maturities 343,663 87,998 Realized investment gains (14,831) (45,392) Policy acquisition costs deferred (55,000) (129,000) Amortization of deferred policy acquisition costs 563,324 639,933 Amortization of cost of insurance acquired 1,143,859 1,185,860 Amortization of costs in excess of net assets purchased 0 67,500 Depreciation 420,367 272,786 Minority interest 263,615 463,527 Change in accrued investment income 532,264 832,488 Change in reinsurance receivables 783,510 643,526 Change in policy liabilities and accruals (1,639,905) (1,251,478) Charges for mortality and administration of universal life and annuity products (6,549,405) (7,094,380) Interest credited to account balances 4,147,153 4,368,033 Change in income taxes payable (54,032) 1,076,855 Change in other assets and liabilities, net (627,362) (2,095,175) --------------- -------------- Net cash provided by operating activities 784,432 988,104 Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale 9,070,000 15,250,000 Fixed maturities matured 23,803,620 43,515,439 Equity securities 0 2,240,967 Mortgage loans 5,758,639 11,156,017 Real estate 913,978 1,334,693 Policy loans 2,323,496 2,281,517 Short-term 155,209 2,154,528 --------------- -------------- Total proceeds from investments sold and matured 42,024,942 77,933,161 Cost of investments acquired: Fixed maturities held for sale (30,562,133) (56,082,030) Fixed maturities (3,053,805) (1,124,925) Equity securities (185,075) (1,143,724) Mortgage loans (6,160,160) (6,654,908) Real estate (206,849) (250,781) Policy loans (2,087,314) (1,858,852) Short-term 0 (1,118,435) --------------- -------------- Total cost of investments acquired (42,255,336) (68,233,655) Purchase of property and equipment (22,043) (78,888) Sale of property and equipment 0 201,064 --------------- -------------- Net cash provided by (used in) investing activities (252,437) 9,821,682 Cash flows from financing activities: Policyholder contract deposits 7,835,749 8,751,698 Policyholder contract withdrawals (6,206,704) (7,276,743) Proceeds from line of credit 2,000,000 0 Purchase of treasury stock (467,075) (1,123,234) Purchase of stock of subsidiaries 0 (21,600) Payments from FCC merger (1,525,500) 0 Payments of principal on notes payable (1,891,873) 0 --------------- -------------- Net cash provided by (used in) financing activities (255,403) 330,121 --------------- -------------- Net increase in cash and cash equivalents 276,592 11,139,907 Cash and cash equivalents at beginning of period 15,477,348 15,065,076 --------------- -------------- Cash and cash equivalents at end of period $ 15,753,940 $ 26,204,983 =============== ============== UNITED TRUST GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying consolidated financial statements have been prepared by United Trust Group, Inc. ("UTG") and its consolidated 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, 2001. 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, 2002, consolidated subsidiaries of UTG were as depicted on the following organizational chart. In addition, this document may at times refer to Jesse Correll, the Company's Chairman and CEO, and his affiliated entities who own a majority of UTG's outstanding common stock. See note 9 to the consolidated financial statements regarding the June 12, 2002 merger of First Commonwealth Corporation, a former subsidiary of UTG ("FCC"), with and into UTG.
2. INVESTMENTS At September 30, 2002 and December 31, 2001, fixed maturities and fixed maturities held for sale represented 75% and 74% of total invested assets, respectively. As prescribed by the various state insurance department statutes and regulations applicable to UTG's insurance subsidiaries, the insurance companies' investment portfolio is required to be invested in investment grade securities to provide ample protection for policyholders. The insurance subsidiaries do not invest in so-called "junk bonds" or similar investments. As of September 30 2002, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets or shareholders' equity. The investments held for sale are carried at market value, with changes in market value directly charged to shareholders' equity. To provide additional flexibility and liquidity, the Company has categorized almost all fixed maturity investments acquired since 2000 as available for sale. 3. Notes Payable At September 30, 2002 and December 31, 2001, the Company had $4,508,797 and $4,400,670 in long-term debt outstanding, respectively. 09/30/02 12/31/01 ------------- ------------- Subordinated 20 yr. Notes 0 514,674 Other notes payable 3,108,797 3,885,996 Lines of credit 1,400,000 0 ------------- ------------- $ 4,508,797 $ 4,400,670 ============= ============= A. Subordinated debt The subordinated debt was incurred June 16, 1992 as a part of the acquisition of the now dissolved Commonwealth Industries Corporation. These notes bear interest at the variable rate of 1% under prime per annum (paid quarterly). In May 2002 a principal payment of $113,112 was made on the subordinated debt. On July 9, 2002, the remaining outstanding balance of $401,562 on these notes was paid. B. Other notes payable The other notes payable were incurred in April 2001 to facilitate the repurchase of common stock owned primarily by James E. Melville and Larry E. Ryherd, two former officers and directors of UTG, and members of their respective families. These notes bear interest at the fixed rate of 7% per annum (paid quarterly) with payments of principal to be made in five equal annual installments, the first principal payment of which, in the amount of $777,199, was made on March 31, 2002. The collective scheduled principal reductions on these notes for the next five years is as follows: Year Amount -------- ----------- 2002 $ 0 2003 777,199 2004 777,199 2005 777,199 2006 777,200 C. Lines of Credit On November 15, 2001, UTG was extended a $3,300,000 line of credit from the First National Bank of the Cumberlands located in Livingston, Tennessee. The First National Bank of the Cumberlands is owned by Millard V. Oakley, who is a director of UTG. The line of credit will expire one-year from the date of issue. The interest rate on the line of credit is variable and indexed to be the lowest of the U.S. prime rates as published in the money section of the Wall Street Journal, with any interest rate adjustments to be made monthly. At September 30, 2002, the interest rate was 4.75%, and the Company had outstanding borrowings of $1,000,000 attributable to this line of credit. Subsequent to September 30, 2002, the line of credit was repaid in the amount of $1,000,000. The draws on this line of credit were used to facilitate the payments due to the former shareholders of FCC as a result of, the June 12, 2002 merger of FCC with and into UTG, as further described in note 9 to the consolidated financial statements. UTG anticipates renewing this line of credit for an additional one-year term upon original maturity. On April 1, 2002, UTG was extended a $5,000,000 line of credit from an unaffiliated third party, Southwest Bank of St. Louis. The line of credit will expire one-year from the date of issue. As collateral for any draws under the line of credit, the former FCC, which has now merged into UTG, pledged 100% of the common stock of its insurance subsidiary UG. Borrowings under the line of credit will bear interest at the rate of 0.25% in excess of Southwest Bank of St. Louis' prime rate. At September 30, 2002, the interest rate on this line of credit was 5.00%, payable monthly, and the Company had outstanding borrowings of $400,000 attributable to this line of credit. Draws on this line of credit were used to retire the remaining subordinated debt, as described in note 3A above. Subsequent to September 30, 2002 the line of credit was repaid in the amount of $400,000. Borrowings made on the aforementioned lines of credit were repaid on October 22, 2002, facilitated by a dividend payment of $1,400,000 to UTG from its insurance subsidiary UG. 4. CAPITAL STOCK TRANSACTIONS A. Stock Repurchase Program On June 5, 2001, the Board of Directors of UTG authorized the repurchase from time to time in the open market or in privately negotiated transactions of up to $1 million of UTG's common stock. Repurchased shares under the program will be available for future issuance for general corporate purposes. Through October 31, 2002, UTG has spent $617,898 in the acquisition of 87,890 shares of its common stock under this program. B. Earnings Per Share Calculations Earnings per share are based on the weighted average number of common shares outstanding during each period, retroactively adjusted to give effect to all stock splits, in accordance with Statement of Financial Accounting Standards No. 128. At September 30, 2002 and September 30, 2001 diluted earnings per share were the same as basic earnings per share since the UTG had no dilutive instruments outstanding. C. Officer and Director Stock Purchase Program On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002, the shareholders of UTG approved, the United Trust Group, Inc. Employee and Director Stock Purchase Plan. The plan's purpose is to encourage ownership of UTG stock by eligible directors and employees of UTG and its subsidiaries by providing them with an opportunity to invest in shares of UTG common stock. The plan is administered by the Board of Directors of UTG. A total of 400,000 shares of common stock may be purchased under the plan, subject to appropriate adjustment for stock dividends, stock splits or similar recapitalizations resulting in a change in shares of UTG. The plan is not intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. At its September 2002 meeting, the Board of Directors of UTG approved initial offerings under the plan to qualified individuals totaling 367,000 shares, subject to the registration or qualification of the shares for sale under Federal or applicable state securities laws. These initial offers are expected to be made November 1, 2002, at which time each offeree has 30 days to accept the offer, execute the appropriate documents and pay for the shares to be acquired. At the end of the 30 day period, accepted offers expire. This initial offering is at a purchase price of $12.00 per share. Each participant under the plan must execute a "stock restriction and buy-sell agreement", which among other things provides UTG with a right of first refusal on any future sales of the shares acquired by the participant under this plan. The purchase price of shares repurchased under the stock restriction and buy-sell agreement shall be computed, on a per share basis, equal to the sum of (i) the original purchase price paid to acquire such shares from UTG and (ii) the consolidated statutory net earnings (loss) per share of such shares during the period from the end of the month next preceding the month in which such shares were acquired pursuant to the plan, to the end of the month next preceding the month in which the sale of such shares to UTG occurs. 5. 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 judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. The Company cannot predict the effect that these lawsuits may have on the Company in the future. Under the 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. Mandatory assessments may be partially recovered through a reduction in future premium tax in some states. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements, though the amount of any future assessments cannot be predicted with any degree of certainty. The State of Florida began an investigation of industrial life insurance policies in the fall of 1999 regarding policies with race-based premiums. This investigation has quickly spread to other states and to other types of small face amount policies and was expanded to consider the fairness of premiums for all small policies including policies which did not have race-based premiums. The NAIC historically has defined a "small face amount policy" as one with a face amount of $15,000 or less. Under current reviews, some states have increased this amount to policies of $25,000 or less. These states are attempting to force insurers to refund "excess premiums" to insureds or beneficiaries of insureds based on a prior settlement. The Company's insurance subsidiaries have no race-based premium products, but do have policies with face amounts under the above-scrutinized limitations. The outcome of this issue could be dramatic on the insurance industry as a whole as well as the Company itself. The Company will continue to monitor developments regarding this matter to determine to what extent, if any, the Company may be exposed. On November 20, 1998, First Southern Funding ("FSF"), an entity controlled by UTG's Chairman and Chief Executive Officer, Jesse T. Correll, and certain of its affiliates acquired 929,904 shares of common stock of UTG from UTG and certain UTG shareholders. As consideration for the shares, FSF paid UTG $10,999,995 and certain shareholders of UTG $999,990 in cash. Included in the stock acquisition agreement is an earnings covenant whereby UTG warrants UTG and its subsidiaries and affiliates will have future earnings of at least $30,000,000 for a five-year period beginning January 1, 1998. Such earnings are computed based on statutory results excluding inter-company activities such as inter-company dividends plus realized and unrealized gains and losses on real estate, mortgage loans and unaffiliated common stocks. At the end of the covenant period, an adjustment is to be made equal to the difference between the then market value and statutory carrying value of real estate still owned that existed at the beginning of the covenant period. Should UTG not meet the covenant requirements, any shortfall will first be reduced by the actual average tax rate for UTG for the period, then will be further reduced by one-half of the percentage, if any, representing UTG's ownership percentage of the insurance company subsidiaries. This result will then be reduced by $250,000. The remaining amount will be paid by UTG in the form of UTG common stock valued at $15.00 per share with a maximum number of shares to be issued of 500,000, though there is no limit on the number of shares that can be transferred to the extent that there are legal fees, settlements, damage payments or other losses as a result of certain legal actions taken. The price and number of shares shall be adjusted for any applicable stock splits, stock dividends or other recapitalizations. At September 30, 2002, the Company had total earnings of $17,124,763 applicable to this covenant. With three months remaining on the covenant, it appears highly unlikely that UTG will meet the earnings requirements, resulting in UTG being required to issue additional shares to FSF or its assigns. Combining current results with management's expectation for the remainder of 2002, it appears probable at this time that UTG will be required to issue 500,000 shares of its common stock by April 30, 2003 to satisfy this covenant. On June 10, 2002 UTG and Fiserv Life Insurance Solutions ("Fiserv LIS") of Cedar Rapids, Iowa formed an alliance between their respective organizations to provide third party administration (TPA) services to insurance companies seeking business process outsourcing solutions. (See note 11 to the consolidated financial statements). In connection with this alliance UTG paid a license fee to use "ID3" which is a software system owned by Fiserv LIS to administer an array of life, health and annuity products in the insurance industry. UTG additionally contracted with Fiserv LIS to provide data center operations for business administered by UTG on the "ID3" system. UTG intends to convert its existing business to "ID3" as soon as practical. UTG has committed to a five-year contract regarding software maintenance and data center operations through Fiserv LIS. UTG projects the costs associated with this contract, including the license fee, data center operations, to be approximately $420,000 per year once fully converted to the "ID3" system, though there can be no assurance actual costs incurred will not exceed that estimate. David A. Morlan, individually and on behalf of all others similarly situated v. Universal Guaranty Life Ins., United Trust Assurance Co., United Security Assurance Co., United Trust Group, Inc. and First Commonwealth Corporation, (United States District Court, S.D. III Civil No. 99-274-GPM). As previously reported in UTG's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and Quarterly Report on Form 10-Q for the quarterly periods ended March 31, 2002 and June 30, 2002, respectively, the above lawsuit was filed on April 21, 1999 by David Morlan and Louis Black in the Southern District of Illinois against Universal Guaranty Life Insurance Company ("UG") and United Trust Assurance Company ("UTAC") (merged into UG in 1992). After the lawsuit was filed, the plaintiffs, who were former insurance agents, amended their complaint, dropped Louis Black as a plaintiff, and added United Security Assurance Company ("USAC"), UTG and FCC as defendants. The plaintiffs are alleging that they were employees of UG, UTAC or USAC rather than independent contractors. The plaintiffs are seeking class action status and have asked to recover various employee benefits, costs and attorneys' fees, as well as monetary damages based on the defendants' alleged failure to withhold certain taxes. On September 18, 2001, the case was dismissed without prejudice because Morlan lacked standing to pursue the claims against defendants. The plaintiffs appealed the dismissal of the case to the United States Court of Appeals for the Seventh Circuit. On July 26, 2002, the Seventh Circuit ruled in favor of the plaintiffs and directed the district court to reinstate the class action. The Company's petition for rehearing was denied on August 20, 2002. The Company intends to file a petition for a writ of certiorari with the United States Supreme Court. In addition to the appeal, on December 10, 2001, a second action was filed entitled Julie Barrette Ahrens, David Dzuiban, William Milam, Dennis Schneiderman, individually and on behalf of all others similarly situated v Universal Guaranty Life, United Trust Assurance Company, United Security Assurance Company,United Trust Group, Inc and First Commonwealth Corporation (United States District Court for the Southern District of Illinois.; Case No: 01-4314-JPG). The plaintiffs voluntarily dismissed the second action. The Company continues to believe that it has meritorious grounds to defend the lawsuit, and it intends to defend the cases vigorously. It believes that the defense and ultimate resolution of these lawsuits should not have a material adverse effect upon the business, results of operations or financial condition of the Company. Nevertheless, if the plaintiffs' lawsuits were to be successful, it is likely that such resolution would have a material adverse effect on the Company's business, results of operations and financial condition. At September 30, 2002, the Company maintains a liability of $250,000 to cover estimated legal expenses associated with the defense of this matter. UTG and its subsidiaries are named as defendants in a number of general legal actions arising as a part of the ordinary course of business relating primarily to 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. 6. Other Cash Flow Disclosure On a cash basis, the Company paid $190,379 and $205,414 in interest expense during the first nine months of 2002 and 2001, respectively. The Company paid $45,290 and $60,636 in federal income tax during the first nine months of 2002 and 2001, respectively. As of September 30, 2002, the Company has $954,500 that has not been disbursed to former minority shareholders of FCC in connection with FCC's merger with and into UTG as further described in note 9 to the consolidated financial statements. 7. CONCENTRATION OF CREDIT RISK The Company maintains cash balances in financial institutions that at times may exceed federally insured limits. The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of UTG, and its largest shareholder, Chairman and CEO, Jesse Correll. The Company holds approximately $5,000,000 for which there are no pledges or guarantees outside FDIC insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. 8. COMPREHENSIVE INCOME Tax Before-Tax (Expense) Net of Tax September 30, 2002 Amount or Benefit Amount --------------------------------------------- ---------------- ------------------ --------------- Unrealized holding gains during Period $ 3,142,406 $ (1,099,842) $ 2,042,564 Less: reclassification adjustment for gains realized in net income (1,689) 591 (1,098) ---------------- ------------------ --------------- Net unrealized gains 3,140,717 (1,099,251) 2,041,466 ---------------- ------------------ --------------- Other comprehensive income $ 3,140,717 $ (1,099,251) $ 2,041,466 ================ ================== =============== 9. MERGER OF UNITED TRUST GROUP, INC. AND FIRST COMMONWEALTH CORPORATION On May 21, 2002, at a special meeting of shareholders, the shareholders of FCC, then an 82% owned subsidiary of UTG, voted on and approved that certain Agreement and Plan of Reorganization and related Plan of Merger, each dated as of June 5, 2001, between UTG, and FCC (collectively, the "Merger Agreement"), and the merger contemplated thereby in which FCC would be merged with and into UTG, with UTG being the surviving corporation of the merger. The merger became effective on June 12, 2002. Pursuant to the terms and conditions of the Merger Agreement, each share of FCC stock outstanding at the effective time of the merger (other than shares held by UTG or shares held in treasury by FCC or by any of its subsidiaries) was at such time automatically converted into the right to receive $250 in cash per share. This allowed UTG to acquire the remaining common shares (approximately 18%) of FCC that UTG did not own prior to the effective time of the merger. The purchase price in the merger is comprised of the following components: Investments $ 41,475,198 Cash and cash equivalents 2,020,960 Accrued investment income 493,609 Reinsurance receivables 6,784,813 Cost of insurance acquired (1,371,740) Property and equipment 424,217 Other assets 314,974 ------------------ Total assets 50,142,031 Policy liabilities and accruals (45,981,006) Income taxes payable - current and deferred 1,063,735 Notes payable (1,958,373) Other liabilities (786,387) ------------------ Net purchase price $ 2,480,000 ================== The following table summarizes certain unaudited operating results of UTG as though the merger transaction had taken place at the beginning of the reporting periods ending on September 30, 2002 and December 31, 2001, respectively. September December 31, 2001 30, 2002 -------------------- -------------------- Total revenues $ 22,909,741 $ 33,329,372 Total benefits and other expenses $ 21,150,187 $ 28,912,280 Operating income $ 1,759,554 $ 4,417,092 Net Income $ 1,491,252 $ 3,274,486 Basic earnings per share $ 0.43 $ 0.86 Diluted earnings per share $ 0.43 $ 0.86 10. PROPOSED CHARTER SALES OF SUBSIDIARIES The Company has listed for sale the Charter (state licenses) of APPL. To accommodate such a sale, APPL has entered into a 100% coinsurance agreement effective October 1, 2002, with UG, whereby APPL will cede and UG will assume all policies in force of APPL as of the effective date of the agreement. The agreement was approved by the Ohio Department of Insurance pursuant to regulatory requirements. Following the implementation of the coinsurance agreement, UG will proceed with an assumption reinsurance of these policies. Assumption reinsurance transfers all financial responsibility under the policies to UG as though UG had originally issued the policies. Under the coinsurance arrangement, UG has primary responsibility for the policies, but APPL remains contingently liable for the policies. Although an outside third party has expressed interest in acquiring the APPL Charter, no formal agreements have been entered into and no commitments by either party have been made or signed at this time. The sale of the APPL Charter would require regulatory approval prior to any sale or transfer of the APPL charter. The Company has also been attempting to sell the ABE Charter. Because of the lack of interest expressed in the ABE Charter (which only includes six state licenses), the ABE Board determined at its September 2002 meeting that the sale of the ABE Charter was not likely. As such, the ABE and UG Boards approved a merger transaction, whereby ABE would be merged with and into UG. The Boards empowered certain officers of ABE and UG to execute any documents necessary to complete the merger. The merger will require the approval of the insurance departments of the States of Ohio and Illinois prior to completion. The merger is expected to be completed sometime in early 2003. 11. UTG alliance with fiserv LIS On June 10, 2002 UTG and Fiserv LIS formed an alliance between their respective organizations to provide third party administration (TPA) services to insurance companies seeking business process outsourcing solutions. Fiserv LIS will be responsible for the marketing and sales function for the alliance, as well as providing the operations processing service for UTG. UTG will staff the administration effort. To facilitate the alliance, UTG plans to convert its existing business and TPA clients to "ID3", a software system owned by Fiserv LIS to administer an array of life, health and annuity products in the insurance industry. Fiserv LIS is a unit of Fiserv, Inc. (Nasdaq: FISV) which is an independent, full-service provider of integrated data processing and information management systems to the financial industry, headquartered in Brookfield, Wisconsin. 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 consolidated results of operations, financial condition and liquidity and capital resources. This analysis should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this report. The Company reports financial results on a consolidated basis. The consolidated financial statements include the accounts of UTG and its subsidiaries at September 30, 2002. 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, insurance regulatory initiatives and developments, stock market performance, an unfavorable outcome in pending litigation, and investment performance. Results of Operations - --------------------- (a) Revenues Premiums and policy fee revenues, net of reinsurance premiums and policy fees, decreased 8% when comparing the first nine months of 2002 to the same period in 2001, and decreased 10% for the 2002 third quarter compared with the 2001 third quarter. The Company currently writes little new business. A majority of the new business currently written is universal life insurance. Collected premiums on universal life and interest sensitive products is not reflected in premiums and policy revenues because accounting principles generally accepted in the United States of America requires that premiums collected on these types of products be treated as deposit liabilities rather than revenue. Unless the Company acquires a block of in-force business or significantly increases its marketing of traditional business, management expects premium revenue to continue to decline at a rate consistent with prior experience. During 2001, the Company implemented a conservation effort in an attempt to improve the persistency rate of Company policies. Several of the customer service representatives of the Company have become licensed insurance agents, allowing them to offer other products within the Company's portfolio to existing customers. Additionally, stronger efforts have been made in policy retention through more personal contact with the customer including telephone calls to discuss alternatives and reasons for a customer's request to surrender their policy. Previously, the Company's agency force was primarily responsible for conservation efforts. With the decline in the number of agents, the Company's ability to reach these customers diminished, making conservation efforts difficult. The conservation efforts described above are relatively new, but early results are generally positive. Management will continue to monitor these efforts and make adjustments as seen appropriate to enhance the future success of the program. The Company is currently exploring the introduction of a new product to be specifically used by the licensed customer service representatives as an alternative for the customer in the conservation efforts. The new product has yet to be marketed as of September 30, 2002. The Company hopes to start marketing the product during the first quarter of 2003. The success of the new product will depend on the its competitiveness and profitability. Net investment income decreased 14% when comparing the first nine months of 2002 to the same period in 2001, and decreased 6% for the 2002 third quarter compared with the 2001 third quarter. The national prime rate ranged from a high of 9.50% to a low of 6.00% during the first nine months of 2001, and was 4.75% during the first nine months of 2002. This resulted in lower earnings on short-term funds as well as on longer-term investments acquired. Should this economic climate continue net investment income may continue to decline, as the Company, along with others in the insurance industry, seeks adequate returns on investments, while staying within the conservative investment guidelines set forth by insurance regulators. 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 Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads, ranging from 1% to 2%. 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 the Company currently has in force and will write in the future. At the March 2001 Board of Directors meeting, the Boards of the insurance subsidiaries lowered crediting rates one-half percent on all products that could be lowered. With this reduction, the vast majority of the Company's rate-adjustable products are now at their guaranteed minimum rates, and as such, cannot be lowered any further. At the March 2002 Board of Directors meeting, the Boards of the insurance subsidiaries lowered all remaining rate-adjustable products to their guaranteed minimum rates. The guaranteed minimum crediting rates on these products range from 3% to 5.5%. These adjustments were in response to the continued declines in interest rates in the marketplace describe above. Policy interest crediting rate changes become effective on an individual policy basis on the next policy anniversary. If interest rates continue to decline, the company won't be able to lower rates and both net investment income and net income will be impacted negatively. On June 1, 2001, the Company began performing administrative work as a third party administrator ("TPA") for an unaffiliated life insurance company. The business being administered is a closed block with approximately 260,000 policies, a majority of which are paid up. The Company receives monthly fees based on policy in force counts and certain other activity indicators such as number of premium collections performed. During the first nine months of 2002, and during the third quarter of 2002, the Company received $392,503, and $120,881 for this work, respectively. These TPA revenue fees are included in the line item "other income" on the Company's consolidated statements of operations. The Company intends to pursue other TPA arrangements, and has recently entered into an alliance with Fiserv Life Insurance Solutions (Fiserv LIS), to provide TPA services to insurance companies seeking business process outsourcing solutions. Fiserv LIS will be responsible for the marketing and sales function for the alliance, as well as providing the datacenter operations. UTG will staff the administration effort. Although still in its early stages, management believes this alliance with Fiserv LIS positions the Company to generate additional revenues by utilizing the Company's current excess capacity and administrative services. (b) Expenses Benefits, claims and settlement expenses net of reinsurance benefits and claims, decreased 1% in the first nine months of 2002 compared to the same period in 2001, and increased 11% for the 2002 third quarter compared with the 2001 third quarter. Death benefit claims were approximately $745,000 and $590,000 more in the first nine months of 2002 and for the third quarter of 2002 as compared to the same periods in 2001, respectively. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by management. A review of the death claims register for the applicable periods revealed nothing unusual or out of the ordinary in the view of management. Policy surrender benefits decreased approximately $2,000,000 in the first nine months of 2002 compared to the same period in 2001. Stronger efforts have been made in policy retention through more personal contact with our customers including telephone calls to discuss alternatives and reasons for a request to surrender their policy. The short-term impact of such fewer policy surrenders is negligible since a reserve for future policy benefits payable is held which is, at a minimum, equal to or even greater than the cash surrender value of a policy. The benefit of fewer policy surrenders is primarily received over a longer time period through the retention of the Company's asset base. Commissions and amortization of deferred policy acquisition costs decreased 29% for the first nine months of 2002 when compared to the same period in 2001, and increased slightly for the 2002 third quarter compared with the 2001 third quarter. The most significant factor in the year-to-date decrease is attributable to the Company paying fewer commissions, since the Company writes very little new business and renewal premiums on existing business continue to decline. Another factor of the decrease is attributable to normal amortization of the deferred policy acquisition costs asset. The Company reviews the recoverability of the asset based on current trends and known events compared to the assumptions used in the establishment of the original asset. No impairments were recorded in either of the periods reported. The third quarter comparison reflects the fact that first year policy premiums received have been declining to a very immaterial level. Operating expenses decreased 5% for the first nine months of 2002 when compared to the same period in 2001, and decreased 8% for the 2002 third quarter compared with the 2001 third quarter. During 2001, the Company transferred all remaining functions of its insurance subsidiary APPL from Huntington, West Virginia to the Springfield, Illinois location, and sold the West Virginia property. The closing of the Huntington office has resulted in an approximately $400,000 reduction to operating expenses in 2002. During the current year the Company changed health insurance coverage on its employees. This change reduced 2002 operating expenses approximately $75,000, while maintaining similar coverage amounts. Additional expense reductions have been made in the normal course of business, as the Company continually monitors expenditures looking for savings opportunities. The aforementioned expense reductions have been partially offset by increased operating costs attributable to the Company's conversion of its existing business and TPA clients to "ID3", a software system owned by Fiserv LIS (see note 11 to the consolidated financial statements). Conversion costs to date include fees for initial licensing, consultation, and training. (c) Net income The Company had a net income of $1,527,212 in the first nine months of 2002 compared to net income of $1,965,023 for the same period in 2001 and net income of $327,499 in the third quarter of 2002 as compared to $645,873 for the third quarter of 2001. The decrease in net income can be attributed to declining premium revenues, a significant decrease in net investment income, and increased death benefits. Financial Condition - ------------------- Total shareholders' equity increased approximately $3,100,000 at September 30, 2002 compared to December 31, 2001. The increase was attributable to net income of approximately $1,500,000 and unrealized gains on investments of approximately $2,000,000, partially offset by cost of purchasing treasury shares of approximately $400,000. With the June 12, 2002 merger of the former FCC with and into UTG (see note 9 to the consolidated financial statements), the Company now owns 100% of all its consolidated subsidiaries, eliminating the minority interest liability. Investments represent approximately 74% and 71% of total assets at September 30, 2002 and December 31, 2001, respectively. Accordingly, investments are the largest asset group of the Company. The Company's insurance subsidiaries are regulated by insurance statutes and regulations as to the type of investments that they are permitted to make and the amount of funds that may be used for any one type of investment. In light of these statutes and regulations, the majority of the Company's investment portfolio is invested in high quality, low risk investments. The Company does not own any "junk bonds" or similar investments. As of September 30, 2002, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets or shareholders' equity of the Company. The Company has identified securities it may sell and classified them as "investments held for sale". Investments held for sale are carried at market, with changes in market value charged directly to shareholders' equity. To provide additional flexibility and liquidity, the Company has categorized almost all fixed maturity investments acquired since 2000 as available for sale. Liquidity and Capital Resources - ------------------------------- The Company has three principal needs for cash - the insurance companies' contractual obligations to policyholders, the payment of operating expenses and the servicing of its long-term debt. Cash and cash equivalents as a percentage of total assets were approximately 5% as of September 30, 2002, and December 31, 2001, respectively. Fixed maturities as a percentage of total invested assets were approximately 75% and 74% as of September 30, 2002 and December 31, 2001, respectively. Future policy benefits are primarily long-term in nature and therefore, the Company's investments are predominantly in long-term fixed maturity investments such as bonds and mortgage loans which provide sufficient return to cover these obligations. The Company has the ability and intent to hold these investments to maturity; consequently, the Company's investment in long-term fixed maturities held to maturity is reported in the financial statements at their amortized cost. However, to provide additional flexibility and liquidity, the Company has categorized almost all fixed maturity investments acquired since 2000 as available for sale. The investments held for sale are carried at market value, with changes in market value directly charged to shareholders' equity. Many of the Company's products contain surrender charges and other features which reward persistency and penalize the early withdrawal of funds. With respect to such products, surrender charges are generally sufficient to cover the Company's unamortized deferred policy acquisition costs with respect to the policy being surrendered. Net cash provided by operating activities was $784,432 and $988,104 for the nine month periods ending September 30, 2002 and September 30, 2001, respectively. The net cash provided by operating activities plus net policyholder contract deposits after the payment of policyholder withdrawals equaled $2,413,477 for the first nine months of 2002 and $2,463,059 for the same period in 2001. Management utilizes this measurement of cash flows as an indicator of the performance of the Company's insurance operations, since reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows. Net cash provided by (used in) investing activities was $(252,437) and $9,821,682, for the nine month periods ending September 30, 2002 and September 30, 2001, respectively. The timings of maturities and fewer repurchase opportunities at attractive yields resulted in the higher amount of cash provided by investing activities in the first nine months of 2001. The most significant aspect of cash provided by (used in) investing activities, are the fixed maturity transactions. Fixed maturities account for 80% and 84% of the total cost of investments acquired in the first nine months of 2002 and for the same period in 2001, respectively. The Company has not directed its investable funds to so-called "junk bonds" or similar investments. Management expects to continue investing primarily in fixed maturity investments over the short-term. Net cash provided by (used in) financing activities was $(255,403) and $330,121 for the nine month periods ending September 30, 2002 and September 30, 2001, respectively. Policyholder contract deposits decreased 10% in the first nine months of 2002 compared to the same period in 2001. Policyholder contract withdrawals decreased 15% in the first nine months of 2002 compared to the same period in 2001. In addition, as of September 30, 2002, the Company had purchased $467,075 in treasury stock under its stock repurchase program, and paid former FCC shareholders $1,525,500 pursuant to the merger of FCC with and into UTG on June 12, 2002. At September 30, 2002, the Company had a total of $4,508,797 in long-term debt outstanding. $3,108,797 is debt relating to the April 2001 purchase by UTG of the common stock owned primarily by James E. Melville and Larry E. Ryherd, two former officers and directors of the Company, and members of their respective families. Future principal payments of $777,199 are due annually over the next four years at an interest rate of 7% per annum (annual payments due April 12). At September 30, 2002 the Company had borrowings of $1,000,000 on a line of credit from the First National Bank of the Cumberlands at a floating rate equal to prime which is currently 4.75%. Subsequent to September 30, 2002, the line of credit was repaid in the amount of $1,000,000. The draws on this line of credit were being used to facilitate the payment due to former FCC shareholders, following the June 12, 2002 merger of FCC with and into UTG. At September 30, 2002 the Company had borrowings of $400,000 on a line of credit from Southwest Bank of St. Louis. Borrowings under this line of credit bear interest at the rate of .25% in excess of Southwest Bank of St. Louis' prime rate. Subsequent to September 30, 2002 the line of credit was repaid in the amount of $400,000. Borrowings made on both the aforementioned lines of credit were repaid using a $1,400,000 dividend payment made to UTG from its insurance subsidiary UG on October 22, 2002. Also during the third quarter of 2002 the balance of the subordinated debt was retired with a $401,562 principal payment made on July 9, 2002 (see note 3 to the consolidated financial statements). In addition to debt repayments, UTG projects costs attributable to the Company's conversion of its existing business and TPA clients to "ID3", a software system owned by Fiserv LIS (see note 11 to the consolidated financial statements) to be approximately $420,000 per year once fully converted to the "ID3" system. At September 30, 2002, the Company has a remaining liability to shareholders of the former FCC of approximately $950,000. This liability is to individual shareholders who have not yet returned their FCC stock certificates and letters of transmittal to the Company to claim their payment of $250 for each share of FCC common stock they owned prior to the effective date of the merger of FCC with and into UTG on June 12, 2002. Management believes overall sources of cash available are more than adequate to service the Company's debt and commitments. These sources include current cash balances of UTG, expected future operating cashflows and existing lines of credit. UTG is a holding company and pays the operating expenses for itself and its subsidiaries. Funds required to meet its expenses are primarily provided through the receipt of management fees from its subsidiaries. At September 30, 2002, substantially all of the consolidated shareholders' equity represents net assets of its subsidiaries and receivables from its subsidiaries. The Company's insurance subsidiaries have maintained adequate statutory capital and surplus and have not used surplus relief or financial reinsurance, which have come under scrutiny by many state insurance departments. 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. UTG is the parent of UG. UG's dividend limitations are described below. Ohio domiciled insurance companies such as UG 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, 2001, UG had a statutory gain from operations of $2,212,215. At December 31, 2001, UG's statutory capital and surplus amounted to $16,105,265. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. UG paid an ordinary dividend of $800,000 in April of 2002, and paid an ordinary dividend of $1,400,000 in October of 2002. Management believes the overall sources of liquidity available will be sufficient to satisfy the Company's financial obligations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk relates, broadly, to changes in the value of financial instruments that arise from adverse movements in interest rates, equity prices and foreign exchange rates. The Company is exposed principally to changes in interest rates which affect the market prices of its fixed maturities available for sale and its variable rate debt outstanding. The Company's exposure to equity prices and foreign currency exchange rates is immaterial. The information is presented in U.S. Dollars, the Company's reporting currency. Interest rate risk - ------------------ The Company could experience economic losses if it were required to liquidate fixed income securities available for sale during periods of rising and/or volatile interest rates. The Company attempts to mitigate its exposure to adverse interest rate movements through a staggering of the maturities of its fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Tabular presentation - -------------------- The following table provides information about the Company's long term debt that is sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by; expected maturity dates. The Company has no derivative financial instruments or interest rate swap contracts. - ------------------------------------------------------------------------------------------------------------------------ September 30, 2002 - ------------------------------------------------------------------------------------------------------------------------ Expected maturity date - ------------------------------------------------------------------------------------------------------------------------ 2002 2003 2004 2005 2006 Thereafter Total Fair value - ------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- --------------- Long term debt - ------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- --------------- Fixed rate 0 777,199 777,199 777,199 777,200 0 3,108,797 3,241,765 - ------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- --------------- Avg. int. rate 0 7.0% 7.0% 7.0% 7.0% 0 7.0% - ------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- --------------- Variable rate 1,400,000 0 0 0 0 0 1,400,000 1,400,000 - ------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- --------------- Avg. int. rate 4.82% 0 0 0 0 0 4.82% - ------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- --------------- ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the filing date of this quarterly report, an evaluation was performed under the supervision and with the participation of the Company's management, including the President and Chief Executive Officer (the "CEO") and the Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective in alerting them on a timely basis to material information relating to the Company required to be included in the Company's periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation. PART II. OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. See the Morlan and related case discussion in note 5 to the consolidated financial statements, which is incorporated herein by reference ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE ITEM 5. OTHER INFORMATION. NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description 4.1 UTG's Agreement pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K with respect to long-term debt instruments (incorporated by reference to Exhibit 4.1 to Form 10-Q of the Company for the quarter ended June 30, 2002). 10.1 United Trust Group, Inc. Employee and Director Stock Purchase Plan and form of related Stock Restriction and Buy-Sell Agreement (incorporated by reference to Exhibits 99.1 and 99.2 to the S-8 Registration Statement filed by UTG on October 9, 2002) (Commission No. 333-100454). 99.1 Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to 18 U.S.C. Section 1350 99.2 Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to 18 U.S.C. Section 1350 (b) Reports on Form 8-K No reports on Form 8-K were filed by UTG during the quarterly period ended September 30, 2002. 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 TRUST GROUP, INC. ------------------------ (Registrant) Date: November 11, 2002 By /s/ Randall L. Attkisson Randall L. Attkisson President, Chief Operating Officer and Director Date: November 11, 2002 By /s/ Theodore C. Miller Theodore C. Miller Senior Vice President and Chief Financial Officer CERTIFICATIONS - -------------- I, Jesse T. Correll, Chairman of the Board and Chief Executive Officer of United Trust Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant, United Trust Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2002 By /s/ Jesse T. Correll Chairman of the Board and Chief Executive Officer CERTIFICATIONS - -------------- I, Theodore C. Miller, Senior Vice President, Corporate Secretary and Chief Financial Officer of United Trust Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant, United Trust Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2002 By /s/ Theodore C. Miller Senior Vice President, Corporate Secretary and Chief Financial Officer EXHIBIT INDEX Exhibit Number Description 4.1 UTG's Agreement pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K with respect to long-term debt instruments (incorporated by reference to Exhibit 4.1 to Form 10-Q of the Company for the quarter ended June 30, 2002). 10.2 United Trust Group, Inc. Employee and Director Stock Purchase Plan and form of related Stock Restriction and Buy-Sell Agreement (incorporated by reference to Exhibits 99.1 and 99.2 to the S-8 Registration Statement filed by UTG on October 9, 2002) (Commission No. 333-100454). 99.1 Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to 18 U.S.C. Section 1350 99.2 Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to 18 U.S.C. Section 1350