UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________ Commission File Number 0-16867 UNITED TRUST GROUP, INC. (Exact name of registrant as specified in its charter) ILLINOIS 37-1172848 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5250 South Sixth Street, Springfield, IL 62703 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (217) 241-6300 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock, stated value $ .02 per share 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10- K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes [ ] No [X] As of June 30, 2004, shares of the Registrant's common stock held by non-affiliates (based upon the price of the last sale of $ 5.50 per share), had an aggregate market value of approximately $ 7,256,893. At March 22, 2005 the Registrant had 3,955,355 outstanding shares of Common Stock, stated value $ .02 per share. DOCUMENTS INCORPORATED BY REFERENCE: None UNITED TRUST GROUP, INC. FORM 10-K YEAR ENDED DECEMBER 31, 2004 TABLE OF CONTENTS PART I.........................................................................3 ITEM 1. BUSINESS..........................................................3 ITEM 2. PROPERTIES.......................................................15 ITEM 3. LEGAL PROCEEDINGS................................................15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............15 PART II.......................................................................16 ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS..........................................16 ITEM 6. SELECTED FINANCIAL DATA..........................................17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................18 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .....28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................30 ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................................61 ITEM 9A. CONTROLS AND PROCEDURES..........................................61 PART III......................................................................63 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF UTG..........................63 ITEM 11. EXECUTIVE COMPENSATION...........................................65 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...68 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................71 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES...........................72 PART IV.......................................................................73 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..74 PART I ITEM 1. BUSINESS FORWARD-LOOKING INFORMATION 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 those projected in forward-looking statements. Additional information concerning factors that could cause actual results to differ from those in the forward-looking statements is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations." OVERVIEW United Trust Group, Inc. (the "Registrant") was incorporated in 1984, under the laws of the State of Illinois to serve as an insurance holding company. The Registrant and its subsidiaries (the "Company") have only one significant industry segment - insurance. The Company's dominant business is individual life insurance, which includes the servicing of existing insurance business in force, the solicitation of new individual life insurance, the acquisition of other companies in the insurance business, and the administration processing of life insurance business for other entities. At December 31, 2004, significant majority-owned subsidiaries of the Registrant were as depicted on the following organizational chart:
This document at times will refer to the Registrant's largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll. Mr. Correll holds a majority ownership of First Southern Funding LLC, a Kentucky corporation, (FSF) and First Southern Bancorp, Inc. (FSBI), a financial services holding company. FSBI operates through four 100% owned subsidiary banks including First Southern National Bank (FSNB). Banking activities are conducted through multiple locations within 10 counties in the state of Kentucky. Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG's largest shareholder through his ownership control of FSF, FSBI and affiliates. At December 31, 2004, Mr. Correll owns or controls directly and indirectly approximately 66% of UTG's outstanding stock. UTG is a life insurance holding company. The focus of UTG is the acquisition of other companies in similar lines of business and management of the insurance subsidiary. UTG has no activities outside the life insurance focus. The UTG companies became members of the same affiliated group through a history of acquisitions in which life insurance companies were involved. UG is a wholly owned life insurance subsidiary of UTG, which operates in the individual life insurance business. The primary focus of the insurance company has been the servicing of existing insurance business in force and the solicitation of new insurance business. In addition, UG provides insurance administrative services for other non-related entities. REC is a wholly owned subsidiary of UTG, which was incorporated under the laws of the State of Delaware on June 1, 1971, for the purpose of dealing and brokering in securities. REC acts as an agent for its customers by placing orders of mutual funds and variable annuity contracts which are placed in the customers' names, the mutual fund shares and variable annuity accumulation units are held by the respective custodians, and the only financial involvement of REC is through receipt of commission (load). REC functions at a minimum broker-dealer level. It does not maintain any of its customer accounts nor receives customer funds directly. Operating activity of REC accounts for less than $ 28,000 of earnings annually. NORTH PLAZA is a wholly owned subsidiary of UG, which owns for investment purposes, a shopping center in Somerset, Kentucky, approximately 14,000 acres of timberland in Kentucky, and a 50% partnership interest in an additional 11,000 acres of Kentucky timberland. Operating activity of North Plaza accounts for less than $ 100,000 of earnings annually. The timberland is harvested and in various stages of maturity. The property is carried at approximately $ 7,400,000. HAMPSHIRE PLAZA is a 67% owned subsidiary of UG, which owns for investment purposes, a property consisting of a 254,228 square foot office tower, and 72,382 square foot attached retail plaza totaling 326,610 square feet along with an attached 349 space parking garage, in New Hampshire. In 2004, the Company obtained new lease agreements whereby approximately 58% of the building is now leased. At December 31, 2004, the property was carried at approximately $ 13,400,000. Operating activity of Hampshire Plaza accounted for approximately $ 547,000 of income in the current year. HP GARAGE is a 67% owned subsidiary of UG, which owns for investment purposes, a property consisting of a 578 space parking garage, in New Hampshire. Operating activity of HP Garage accounted for approximately $ 68,000 of earnings in the current year. HISTORY UTG was incorporated December 14, 1984, as an Illinois corporation. The original name was United Trust, Inc. (UTI). The name was changed in 1999 following a merger with United Income Inc. (UII). During its first two and one-half years, UTG was engaged in an intrastate public offering of its securities, raising over $ 12,000,000 net of offering costs. In 1986, UTG formed a life insurance subsidiary and by 1987 began selling life insurance products. Over the next several years, UTG acquired several additional holding and life insurance companies. UTG has taken several steps to streamline and simplify the corporate structure following the acquisitions, including dissolution of intermediate holding companies and mergers of several life insurance companies. In March 2005, UTG's Board of Directors adopted a proposal to change the state of incorporation of UTG from Illinois to Delaware by merging UTG with and into a wholly-owned Delaware subsidiary (the "reincorporation merger"). The Board of Directors and management of UTG believe that reincorporation in Delaware would be beneficial to the Company because Delaware corporate law is more comprehensive, widely used and extensively interpreted than other state corporate laws, including Illinois corporate law. The reincorporation merger would effect only a change in UTG's legal domicile and certain other changes of a legal nature. It would not result in any change in UTG's business, management, fiscal year, assets or liabilities or location of its principal facilities. The Board of Directors intends to submit the reincorporation proposal to its shareholders for approval at the 2005 annual meeting of shareholders to be held on June 15, 2005. If approved by shareholders, UTG expects that the reincorporation merger would be effected as soon as reasonably practicable following the annual meeting. PRODUCTS UG's current product portfolio consists of a limited number of life insurance product offerings, with a goal of enough variety to provide for the needs of the general public and existing policyholders. The products are designed to be competitive in the marketplace. Historically, UG's primary universal life insurance product was referred to as the "UL90A". It was issued for ages 0 - 65 and had a minimum face amount of $ 25,000. The administrative load is based on the issue age, sex and rating class of the policy. Policy fees vary from $ 1 per month in the first year to $ 4 per month in the second and third years and $ 3 per month each year thereafter. The UL90A currently credits 4.5% interest with a 4.5% guaranteed interest rate. Partial withdrawals, subject to a remaining minimum $ 500 cash surrender value and a $ 25 fee, are allowed once a year after the first duration. Policy loans are available at 7.4% interest in advance. The policy's accumulated fund will be credited the guaranteed interest rate in relation to the amount of the policy loan. Surrender charges are based on a percentage of target premiums starting at 120% for years 1-5 then grading downward to zero in year 15. This policy contains a guaranteed interest credit bonus for the long-term policyholder. From years 10 through 20, additional interest bonuses can be earned if certain criteria are met, primarily relating to the total amount of premiums paid and amount of accumulated value, with a total in the twentieth year of 1.375%. The bonus is credited from the policy issue date and is contractually guaranteed. In 2003 UG replaced its "Century 2000" product with a new universal life contract; the "Legacy" product. This product was designed for use with several distribution channels including the Company's own internal agents, bank agent/employees and through personally producing general agents "PPGA". Similar to the UL90A, this policy is issued for ages 0 - 65, in face amounts with a minimum of $ 25,000. But unlike the Century 2000 this product was designed with level commissions. The Legacy product has a current declared interest rate of 4.0%, which is equal to its guaranteed rate. After five years the guaranteed rate drops to 3.0%. During the first five years the policy fee will be $ 6.00 per month on face amounts less than $ 50,000 and $ 5.00 per month for larger amounts. After the first five years the Company may increase this rate but not more than $ 8.00 per month. The policy has other loads that vary based upon issue age and risk classification. Partial withdrawals, subject to a remaining minimum $ 500 cash surrender value and a $ 25 fee, are allowed once a year after the first duration. Policy loans are available at 7.4% interest in advance. The policy's accumulated fund will be credited the guaranteed interest rate in relation to the amount of the policy loan. Surrender charges are based on a percentage of target premiums starting at 100% for years 1 and 2 then grading downward to zero in year 5. Also available are a number of traditional whole life policies. The Company's Ten Pay Whole Life Insurance product has a level face amount. The level premium is payable for the first ten policy years. This policy is available for issue ages 0-65, and has a minimum face amount of $10,000. This policy can be used in conversion situations, where it is available up to age 75 and at a minimum face amount of $5,000. There is no policy fee. The Preferred Whole Life Insurance product also has a level face amount and level premium, although the premiums are payable for life on this product. Issue ages are 0-65 and the minimum face amount is $25,000. There is no policy fee. Unlike the Ten Pay, this product has several optional riders available: Accidental Death rider, Children's Term Insurance rider, Terminal Illness rider and/or Waiver of Premium rider. The Tradition is a fixed premium whole life insurance policy. Premiums are level and payable for life. Issue ages are 0-80. The minimum face amount is the greater of $10,000 or the amount of coverage provided by a $100 annual premium. There is a $30 policy fee. This product has the same optional riders as the Preferred Whole Life, listed above. Our newest product is called Kid Kare. This is a single premium level term policy to age 21. A face amount of $5,000 can be purchased for a single premium of $250, and a $10,000 face amount requires a premium of $500. The policy is issued from ages 0-15 and has conversion privileges at age 21. There is no policy fee. The Horizon Annuity completes our product portfolio. This product is issued to ages 0-80. The minimum annual premium in the first year is $2,000, with premiums being optional in all other years. There is a maintenance fee of $18 beginning in the second policy year. This fee is waived if the annuity value is at least $2,000. This policy has a decreasing surrender charge for the first five years of the contract. Products currently in development include a decreasing term policy and a level term policy. The decreasing term policy will be convertible to age 65 or the policy anniversary prior to expiry. Terms of 10, 15, 20 25 and 30 years will be available. Each term period has it's own issue age criteria. The level term policy will be renewable to age 70 and convertible to age 65. Issue ages for the level term policy will be 18-60. The Company's actual experience for earned interest, persistency and mortality varies from the assumptions applied to pricing and for determining premiums. Accordingly, differences between the Company's actual experience and those assumptions applied may impact the profitability of the Company. The Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads. Credited rates are reviewed and established by the Board of Directors of UG. Currently, all crediting rates have been reduced to the respective product guaranteed interest rate. The Company has a variety of policies in force different from those being marketed. Interest sensitive products, including universal life and excess interest whole life ("fixed premium UL"), account for 59% of the insurance in force. Approximately 20% of the insurance in force is participating business, which represents policies under which the policyowner shares in the insurance company's statutory divisible surplus. The Company's average persistency rate for its policies in force for 2004 and 2003 has been 94.6% and 94.9%, respectively. Interest sensitive life insurance products have characteristics similar to annuities with respect to the crediting of a current rate of interest at or above a guaranteed minimum rate and the use of surrender charges to discourage premature withdrawal of cash values. Universal life insurance policies also involve variable premium charges against the policyholder's account balance for the cost of insurance and administrative expenses. Interest-sensitive whole-life products generally have fixed premiums. Interest-sensitive life insurance products are designed with a combination of front-end loads, periodic variable charges, and back-end loads or surrender charges. Traditional life insurance products have premiums and benefits predetermined at issue; the premiums are set at levels that are designed to exceed expected policyholder benefits and insurance company expenses. Participating business is traditional life insurance with the added feature that the policyholder may share in the divisible surplus of the insurance company through policyholder dividend. This dividend is set annually by the Board of Directors of UG and is completely discretionary. MARKETING The Company has not actively marketed life products in the past several years. Management currently places little emphasis on new business production, believing resources could be better utilized in other ways. Current sales primarily represent sales to existing customers through additional insurance needs or conservation efforts. In 2001, the Company increased its emphasis on policy retention in an attempt to improve current persistency levels. In this regard, several of the home office staff have become licensed insurance agents enabling them broader abilities when dealing with the customer in regard to his/her existing policies and possible alternatives. The conservation efforts described above have been generally positive. Management will continue to monitor these efforts and make adjustments as seen appropriate to enhance the future success of the program. At year-end 2004, the Company retired its universal life product commonly referred to as the UL90A. This product had been offered since 1990. Sales of this product have been extremely low in recent periods. Management concluded the product had run its life cycle and discontinued its offering. The Company has introduced new and updated products in recent periods including the Horizon Annuity, the Legacy and Kid Kare. The company is currently working on development of a level term and decreasing term product. Management has no current plans to increase marketing efforts. New product development is anticipated to be utilized in conservation efforts and sales to existing customers. Such sales are not expected to be material. Excluding licensed home office personnel, UG has 15 general agents. UG primarily markets its products in the Midwest region with most sales in the states of Ohio, Illinois and West Virginia. UG is licensed to sell life insurance in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin. In 2004, $ 17,161,576 of total direct premium was collected by the insurance subsidiary. Ohio accounted for 27%, Illinois accounted for 19%, and West Virginia accounted for 11% of total direct premiums collected. No other state accounted for more than 5% of direct premiums collected. UNDERWRITING The underwriting procedures of the insurance subsidiary are established by management. Insurance policies are issued by the Company based upon underwriting practices established for each market in which the Company operates. Most policies are individually underwritten. Applications for insurance are reviewed to determine additional information required to make an underwriting decision, which depends on the amount of insurance applied for and the applicant's age and medical history. Additional information may include inspection reports, medical examinations, and statements from doctors who have treated the applicant in the past and, where indicated, special medical tests. After reviewing the information collected, the Company either issues the policy as applied for, with an extra premium charge because of unfavorable factors, or rejects the application. Substandard risks may be referred to reinsurers for full or partial reinsurance of the substandard risk. The Company requires blood samples to be drawn with individual insurance applications for coverage over $ 45,000 (age 46 and above) or $ 95,000 (ages 16-45). Blood samples are tested for a wide range of chemical values and are screened for antibodies to the HIV virus. Applications also contain questions permitted by law regarding the HIV virus, which must be answered by the proposed insureds. RESERVES The applicable insurance laws under which the insurance subsidiary operates require that the insurance company report policy reserves as liabilities to meet future obligations on the policies in force. These reserves are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated in accordance with applicable law to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain mortality tables and interest rates. The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method. These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiary's experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations. The Company makes these assumptions at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2% to 6% for life insurance and 3.0% to 9.25% for annuities. Benefit reserves for traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term. Policy benefit claims are charged to expense in the period that the claims are incurred. Current mortality rate assumptions are based on 1975-80 select and ultimate tables. Withdrawal rate assumptions are based upon Linton B or Linton C, which are industry standard actuarial tables for forecasting assumed policy lapse rates. Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances. Interest crediting rates for universal life and interest sensitive products range from 4.0% to 5.5% for the years ended December 31, 2004, 2003 and 2002. REINSURANCE As is customary in the insurance industry, the insurance subsidiary of the Company cedes insurance to, and assumes insurance from, other insurance companies under reinsurance agreements. Reinsurance agreements are intended to limit a life insurer's maximum loss on a large or unusually hazardous risk or to obtain a greater diversification of risk. The ceding insurance company remains primarily liable with respect to ceded insurance should any reinsurer be unable to meet the obligations assumed by it. However, it is the practice of insurers to reduce their exposure to loss to the extent that they have been reinsured with other insurance companies. The Company sets a limit on the amount of insurance retained on the life of any one person. The Company will not retain more than $ 125,000, including accidental death benefits, on any one life. At December 31, 2004, the Company had gross insurance in force of $ 3.141 billion of which approximately $ 531 million was ceded to reinsurers. The Company's reinsured business is ceded to numerous reinsurers. The Company monitors the solvency of its reinsurers in seeking to minimize the risk of loss in the event of a failure by one of the parties. The primary reinsurers of the Company are large, well capitalized entities. Currently, the Company is utilizing reinsurance agreements with Generali USA Life Reassurance Company, (Generali) and Swiss Re Life and Health America Incorporated (SWISS RE). Generali and SWISS RE currenty hold an "A" (Excellent), and "A+" (Superior) rating, respectively, from A.M. Best, an industry rating company. The reinsurance agreements were effective December 1, 1993, and covered most new business of the Company. The agreements are a yearly renewable term (YRT) treaty where the Company cedes amounts above its retention limit of $ 100,000 with a minimum cession of $ 25,000. In addition to the above reinsurance agreements, the Company entered into reinsurance agreements with Optimum Re Insurance Company (Optimum) during 2004 to provide reinsurance on new products released for sale in 2004. The agreements are yearly renewable term (YRT) treaties where the Company cedes amounts above its retention limit of $100,000 with a minimum cession of $25,000 as has been a Company practice for the last several years with its reinsurers. Also, effective January 1, 2005, Optimum became the reinsurer of 100% of the accidental death benefits (ADB) in force of the Company. Previously, Generali provided this coverage. This coverage is renewable annually at the Company's option. Optimum specializes in reinsurance agreements with small to mid-size carriers such as the Company. Optimum currently holds an "A" (Excellent) rating from A.M. Best. UG entered a coinsurance agreement with Park Avenue Life Insurance Company (PALIC) as of September 30, 1996. Under the terms of the agreement, UG ceded to PALIC substantially all of its paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. PALIC and its ultimate parent The Guardian Life Insurance Company of America (Guardian), currently hold an "A" (Excellent), and "A+" (Superior) rating, respectively, from A.M. Best, an industry rating company. The PALIC agreement accounts for approximately 68% of the reinsurance reserve credit, as of December 31, 2004. On September 30, 1998, UG entered into a coinsurance agreement with The Independent Order of Vikings, an Illinois fraternal benefit society (IOV). Under the terms of the agreement, UG agreed to assume, on a coinsurance basis, 25% of the reserves and liabilities arising from all in-force insurance contracts issued by the IOV to its members. At December 31, 2004, the IOV insurance in-force was approximately $ 1,686,000, with reserves being held on that amount of approximately $ 393,000. On June 1, 2000, UG assumed an already existing coinsurance agreement, dated January 1, 1992, between Lancaster Life Reinsurance Company, an Arizona corporation (LLRC) and Investors Heritage Life Insurance Company, a corporation organized under the laws of the Commonwealth of Kentucky (IHL). Under the terms of the agreement, LLRC agreed to assume from IHL a 90% quota share of new issues of credit life and accident and health policies that have been written on or after January 1, 1992 through various branches of the First Southern National Bank. The maximum amount of credit life insurance that can be assumed on any one individual's life is $ 15,000. UG assumed all the rights and obligations formerly held by LLRC as the reinsurer in the agreement. LLRC liquidated its charter immediately following the transfer. At December 31, 2004, IHL has insurance in-force of approximately $ 2,295,000, with reserves being held on that amount of approximately $ 33,000. The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 2004, 2003 and 2002 was as follows: Shown in thousands --------------------------------------------------------- 2004 2003 2002 Premiums Premiums Premiums Earned Earned Earned ---------------- ---------------- ---------------- Direct $ 17,238 $ 18,087 $ 18,597 Assumed 38 34 96 Ceded (3,036) (2,896) (2,701) ---------------- ---------------- ---------------- Net premiums $ 14,240 $ 15,225 $ 15,992 ================ ================ ================ INVESTMENTS Investment income represents a significant portion of the Company's total income. Investments are subject to applicable state insurance laws and regulations, which limit the concentration of investments in any one category or class and further limit the investment in any one issuer. Generally, these limitations are imposed as a percentage of statutory assets or percentage of statutory capital and surplus of each company. The following table reflects net investment income by type of investment. December 31, ---------------------------------------------------------- 2004 2003 2002 --------------- ---------------- ---------------- Fixed maturities and fixed maturities held for sale $ 7,060,761 $ 8,418,969 $ 10,302,735 Equity securities 657,609 456,361 131,778 Mortgage loans 1,209,358 1,522,700 1,749,935 Real estate 5,335,530 2,832,171 3,261,043 Policy loans 918,562 949,770 965,227 Short-term investments 80,241 11,161 26,522 Cash 111,986 137,478 211,293 --------------- ---------------- ---------------- Total consolidated investment income 15,374,047 14,328,610 16,648,533 Investment expenses (4,953,161) (4,058,110) (3,133,731) ---------------- ---------------- ---------------- Consolidated net investment income $ 10,420,886 $ 10,270,500 $ 13,514,802 =============== ================ ================ At December 31, 2004, the Company had a total of $ 805,787 in investment real estate, which did not produce income during 2004. The following table summarizes the Company's fixed maturities distribution at December 31, 2004 and 2003 by ratings category as issued by Standard and Poor's, a leading ratings analyst. Fixed Maturities Rating % of Portfolio ---------------------- 2004 2003 ---------- ---------- Investment Grade AAA 82% 82% AA 1% 1% A 13% 12% BBB 4% 4% Below investment grade 0% 1% ---------- ---------- 100% 100% ========== ========== The following table summarizes the Company's fixed maturities and fixed maturities held for sale by major classification. Carrying Value -------------------------------------------------- 2004 2003 -------------------- -------------------- U.S. government and government agencies $ 49,434,111 $ 42,023,692 States, municipalities and political subdivisions 2,625,737 6,520,332 Collateralized mortgage obligations 79,701,893 89,195,177 Public utilities 0 5,397,880 Corporate 28,405,561 22,977,808 -------------------- -------------------- $ 160,167,302 $ 166,114,889 ==================== ==================== The following table shows the composition, average maturity and yield of the Company's investment portfolio at December 31, 2004. Average Carrying Average Average Investments Value Maturity Yield ----------------------------------- ---------------- ------------------ ------------ Fixed maturities and fixed maturities held for sale $ 163,141,096 5 years 4.33% Equity securities 20,880,669 Not applicable 3.15% Mortgage Loans 23,719,192 5 years 5.10% Investment real estate 26,458,953 Not applicable 20.17% Policy loans 13,035,574 Not applicable 7.05% Short-term investments 37,083 Not applicable 8.25% Cash and cash equivalents 10,304,600 On demand 1.84% ---------------- Total Investments and Cash and cash equivalents $ 257,577,167 4.05% ================ At December 31, 2004, fixed maturities and fixed maturities held for sale have a combined market value of $ 160,291,675. Fixed maturities held to maturity are carried at amortized cost. Management has the ability and intent to hold these securities until maturity. Fixed maturities held for sale are carried at market. The Company holds $ 39,489 in short-term investments. Management monitors its investment maturities, which in their opinion is sufficient to meet the Company's cash requirements. Fixed maturities of $ 9,016,462 mature in one year and $ 55,006,074 mature in two to five years. The Company holds $ 20,722,415 in mortgage loans, which represents approximately 7% of the total assets. All mortgage loans are first position loans. Before a new loan is issued, the applicant is subject to certain criteria set forth by Company management to ensure quality control. These criteria include, but are not limited to, a credit report, personal financial information such as outstanding debt, sources of income, and personal equity. Loans issued are limited to no more than 80% of the appraised value of the property and must be first position against the collateral. The Company has one mortgage loan in the process of foreclosure, with a balance due of $ 1,401,345 at December 31, 2004. The Company has no loans under a repayment plan or restructuring. Letters are sent to each mortgagee when the loan becomes 30 days or more delinquent. Loans 90 days or more delinquent are placed on a non-performing status and classified as delinquent loans. Reserves for loan losses are established based on management's analysis of the loan balances compared to the expected realizable value should foreclosure take place. Loans are placed on a non-accrual status based on a quarterly analysis of the likelihood of repayment. All delinquent and troubled loans held by the Company are loans, which were held in portfolios by acquired companies at the time of acquisition. Management believes the current internal controls surrounding the mortgage loan selection process provide a quality portfolio with minimal risk of foreclosure and/or negative financial impact. The Company has in place a monitoring system to provide management with information regarding potential troubled loans. Management is provided with a monthly listing of loans that are 30 days or more past due along with a brief description of what steps are being taken to resolve the delinquency. Quarterly, coinciding with external financial reporting, the Company determines how each delinquent loan should be classified. All loans 90 days or more past due are classified as delinquent. Each delinquent loan is reviewed to determine the classification and status the loan should be given. Interest accruals are analyzed based on the likelihood of repayment. In no event will interest continue to accrue when accrued interest along with the outstanding principal exceeds the net realizable value of the property. The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status. In the past few years the Company has invested more of its funds in mortgage loans. This is the result of increased mortgage opportunities available through FSNB, an affiliate of Mr. Jesse T. Correll. Mr. Correll is the CEO and Chairman of the Board of Directors of UTG and is, directly and through his affiliates, its largest shareholder. FSNB has been able to provide the Company with expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market. During 2004, 2003 and 2002 the Company issued approximately $ 2,627,000, $ 11,405,000 and $ 6,920,000 in new mortgage loans, respectively. These new loans were originated through FSNB and funded by the Company through participation agreements with FSNB. FSNB services all the mortgage loans of the Company. The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $ 45,468, $ 63,214 and $ 70,140 in servicing fees and $ 0, $ 13,821 and $ 35,127 in origination fees to FSNB during 2004, 2003 and 2002, respectively. A mortgage loan reserve is established and adjusted based on management's quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value. In addition, the Company also attempts to ensure that current and adequate insurance on the properties underlying the mortgages is being maintained. The Company requires proof of insurance on each loan and further requires to be shown as a lien holder on the policy so that any change in coverage status is reported to the Company. Proof of payment of real estate taxes is another monitoring technique utilized by the Company. Management believes a change in insurance status or non-payments of real estate taxes are indicators that a loan is potentially troubled. Correspondence with the mortgagee is performed to determine the reasons for either of these events occurring. The following table shows a distribution of the Company's mortgage loans by type. Mortgage Loans Amount % of Total - ------------------------------------------------------ ---------------- ------------- Commercial - insured or guaranteed $ 3,832,838 19% Commercial - all other 16,807,574 81% Residential - insured or guaranteed 53,210 0% Residential - all other 28,793 0% The following table shows a geographic distribution of the Company's mortgage loan portfolio and investment real estate. Mortgage Real Loans Estate ------------ ---------- Alabama 15% 0% Colorado 15% 0% Illinois 7% 3% Indiana 3% 0% Kentucky 40% 36% New Hampshire 0% 61% Texas 20% 0% Virginia 0% 0% ------------ ---------- Total 100% 100% ============ ========== The following table summarizes delinquent mortgage loan holdings of the Company. Delinquent 90 days or more 2004 2003 2002 - ----------------------------------- ------------- ------------- ------------- Non-accrual status $ 167,148 $ 179,204 $ 171,300 Other 0 0 0 Reserve on delinquent Loans (120,000) (120,000) (120,000) ------------- ------------- ------------- Total delinquent $ 47,148 $ 59,204 $ 51,300 ============= ============= ============= Interest income past due (delinquent loans) $ 0 $ 0 $ 0 ============= ============= ============= In process of restructuring $ 0 $ 0 $ 0 Restructuring on other than market terms 0 0 0 Other potential problem Loans 0 0 1,709 ------------- ------------- ------------- Total problem loans $ 0 $ 0 $ 1,709 ============= ============= ============= Interest income foregone (restructured loans) $ 0 $ 0 $ 0 ============= ============= ============= In process of foreclosure $ 1,401,345 $ 1,423,804 $ 0 ------------- ------------- ------------- Total foreclosed loans $ 1,401,345 $ 1,423,804 $ 0 ============= ============= ============= Interest income foregone (restructured loans) $ 0 $ 0 $ 0 ============= ============= ============= See Item 2, Properties, for description of real estate holdings. COMPETITION The insurance business is a highly competitive industry and there are a number of other companies, both stock and mutual, doing business in areas where the Company operates. Many of these competing insurers are larger, have more diversified and established lines of insurance coverage, have substantially greater financial resources and brand recognition, as well as a greater number of agents. Other significant competitive factors in the insurance industry include policyholder benefits, service to policyholders, and premium rates. The Company has not placed an emphasis on new business production. Costs associated with supporting new business can be significant. In recent years, the insurance industry as a whole has experienced a decline in the total number of agents who sell insurance products; therefore competition has intensified for top producing sales agents. The relatively small size of the Company, and the resulting limitations, has made it challenging to compete in this area. The number of agents marketing the Company's products has reduced to a negligible number. The Company performs administrative work as a third party administrator (TPA) for unaffiliated life insurance companies. During the year ended 2004, the Company obtained an additional contract for these services, which should provide approximately $ 360,000 additional annual revenues. These TPA revenue fees are included in the line item "other income" on the Company's consolidated statements of operations. The Company intends to continue to pursue other TPA arrangements through its alliance with Fiserv Life Insurance Solutions (Fiserv). Through this alliance, the Company provides TPA services to insurance companies seeking business process outsourcing solutions. Fiserv is responsible for the marketing and sales function for the alliance, as well as providing the datacenter operations. UTG staffs the administration effort. Management believes this alliance with Fiserv positions the Company to generate additional revenues by utilizing the Company's current excess capacity and administrative services. Fiserv 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. The Company has considered the feasibility of a marketing opportunity with First Southern National Bank (FSNB) an affiliate of UTG's largest shareholder. Management has considered various products including annuity type products, mortgage protection products and existing insurance products, as a possibility to market to all banking customers. This marketing opportunity has potential and is believed to be a viable niche. The Company has recently designed the "Horizon" annuity product as well as the "Legacy" life product, which are both to be used in marketing efforts by FSNB. The introduction of these new products is currently not expected to produce significant premium writings. GOVERNMENT REGULATION Insurance companies are subject to regulation and supervision in all the states where they do business. Generally the state supervisory agencies have broad administrative powers relating to granting and revoking licenses to transact business , license agents, approving forms of policies used, regulating trade practices and market conduct, the form and content of required financial statements, reserve requirements, permitted investments, approval of dividends and in general, the conduct of all insurance activities. Insurance regulation is concerned primarily with the protection of policyholders. The Company cannot predict the impact of any future proposals, regulations or market conduct investigations. UG is domiciled in the state of Ohio. Insurance companies must also file detailed annual reports on a statutory accounting basis with the state supervisory agencies where each does business; (see Note 6 to the consolidated financial statements) regarding statutory equity and income from operations. These agencies may examine the business and accounts at any time. Under the rules of the National Association of Insurance Commissioners (NAIC) and state laws, the supervisory agencies of one or more states examine a company periodically, usually at three to five year intervals. Most states also have insurance holding company statutes, which require registration and periodic reporting by insurance companies controlled by other corporations licensed to transact business within their respective jurisdictions. The insurance subsidiary is subject to such legislation and registered as controlled insurers in those jurisdictions in which such registration is required. Statutes vary from state to state but typically require periodic disclosure, concerning the corporation that controls the registered insurers and all subsidiaries of such corporation. In addition, prior notice to, or approval by, the state insurance commission of material transactions with affiliates, including transfers of assets, reinsurance agreements, management agreements (see Note 9 to the consolidated financial statements), and payment of dividends (see Note 2 to the consolidated financial statements) in excess of specified amounts by the insurance subsidiary, within the holding company system, are required. Risk-based capital requirements and state guaranty fund laws are discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". EMPLOYEES At December 31, 2004, UTG and its subsidiaries had 52 full-time equivalent employees. UTG's operations are headquartered in Springfield, Illinois. ITEM 2. PROPERTIES The following table shows a breakout of property, net of accumulated depreciation, owned and occupied by the Company and the distribution of real estate by type. Property owned Amount % of Total Home Office $ 1,758,587 6% Investment real estate Commercial 27,386,294 91% Residential development 805,787 3% 28,192,081 94% Grand total $ 29,950,668 100% Total investment real estate holdings represent approximately 9% of the total assets of the Company net of accumulated depreciation of $ 2,872,199 and $ 1,729,001 at year-end 2004 and 2003 respectively. The Company owns an office complex in Springfield, Illinois, which houses the primary insurance operations. The office buildings in this complex contain 57,000 square feet of office and warehouse space, and are carried at $ 1,758,587. Currently, the facilities occupied by the Company are adequate relative to the Company's present operations. Commercial property mainly consists of North Plaza, Hampshire Plaza and Hampshire Plaza Garage. See Item 1, "Business" for additional information regarding descriptions and operating results of these properties. Residential development property is primarily located in Springfield, Illinois, and consists of two parcels. The Company has no current plans to further develop these parcels. The properties are located in a growing area of the community and are currently being marketed for sale. ITEM 3. LEGAL PROCEEDINGS In the normal course of business the Company is involved from time to time in various legal actions and other state and federal proceedings. There were no proceedings pending as of December 31, 2004. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of UTG's shareholders during the fourth quarter of 2004. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Registrant is a public company whose common stock is traded in the over-the-counter market. Over-the-counter quotations can be obtained with the UTGI.OB stock symbol. The following table shows the high and low bid quotations for each quarterly period during the past two years, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The quotations below were acquired from the NASDAQ web site, which also provides quotes for over-the-counter traded securities such as UTG. 2004 2003 PERIOD High Low High Low First quarter 6.250 5.550 7.000 6.800 Second quarter 6.250 5.500 8.000 6.850 Third quarter 5.600 5.100 7.150 6.700 Fourth quarter 6.000 5.100 7.490 5.800 UTG has not declared or paid any dividends on its common stock in the past two fiscal years, and has no current plans to pay dividends on its common stock as it intends to retain all earnings for investment in and growth of the Company's business. See Note 2 in the accompanying consolidated financial statements for information regarding dividend restrictions, including applicable restrictions on the ability of the Company's life insurance subsidiary to pay dividends up to the Registrant. As of March 22, 2005 there were 9,306 record holders of UTG common stock. The following table reflects the Company's Employee and Director Stock Purchase Plan Information: - --------------------------------- ------------------------------ ------------------------------- ------------------------------ Plan category Number of securities to be Weighted-average exercise Number of securities issued upon exercise of price of outstanding options, remaining available for outstanding options, warrants and rights future issuance under warrants and rights employee and director stock purchase plans (excluding securities reflected in column (a)) (a) (b) (c) - --------------------------------- ------------------------------ ------------------------------- ------------------------------ Employee and Director Stock Purchase plans approved by security holders 310,123 0 0 - --------------------------------- ------------------------------ ------------------------------- ------------------------------ Employee and Director Stock Purchase plans not approved by security holders 0 0 0 - --------------------------------- ------------------------------ ------------------------------- ------------------------------ Total 0 0 310,123 - --------------------------------- ------------------------------ ------------------------------- ------------------------------ 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 allows for the issuance of up to 400,000 shares of UTG common stock. The plan's purpose is to encourage ownership of UTG stock by eligible directors and employees of UTG and its subsidiary 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. During 2004 and 2003, the Board of Directors of UTG approved offerings under the plan to qualified individuals. For the years ended December 31, 2004 and 2003, four individuals purchased 14,440 and eight individuals purchased 58,891 shares of UTG common stock, respectively. Each participant under the plan executed 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. At December 31, 2004, UTG had 89,877 shares outstanding that were issued under this program with a value of $ 11.63 per share pursuant to the above formula. The Company has no other stock plans. ITEM 6. SELECTED FINANCIAL DATA The following selected historical consolidated financial data should be read in conjunction with "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," "Item 8 - Financial Statements and Supplementary Data" and other financial information included elsewhere in this Form 10-K. FINANCIAL HIGHLIGHTS (000's omitted, except per share data) 2004 2003 2002 2001 2000 ------------- ----------- ----------- ------------ ------------ Premium income net of reinsurance $ 14,140 $ 15,023 $ 15,832 $ 17,141 $ 19,490 Total revenues $ 25,467 $ 26,488 $ 30,177 $ 33,313 $ 35,747 Net income (loss)* $ (276) $ (6,396) $ 1,339 $ 2,308 $ (696) Basic income (loss) per share $ (0.07) $ (1.67) $ 0.38 $ 0.62 $ (0.17) Total assets $ 317,868 $ 311,557 $ 320,494 $ 328,939 $ 333,035 Total long-term debt $ 0 $ 2,290 $ 2,995 $ 4,401 $ 1,817 Dividends paid per share NONE NONE NONE NONE NONE * Includes equity earnings of investees. ITEM 7. 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 for the three years ended December 31, 2004. This analysis should be read in conjunction with the consolidated financial statements and related notes, which appear elsewhere in this Form 10-K. The Company reports financial results on a consolidated basis. The consolidated financial statements include the accounts of UTG and its subsidiaries at December 31, 2004. 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. Critical Accounting Policies General We have identified the accounting policies below as critical to the understanding of our results of operations and our financial position. The application of these critical accounting policies in preparing our financial statement requires management to use significant judgments and estimates concerning future results or other developments including the likelihood, timing or amount of one or more future transactions or amounts. Actual results may differ from these estimates under different assumptions or conditions. On an on-going basis, we evaluate our estimates, assumptions and judgments based upon historical experience and various other information that we believe to be reasonable under the circumstances. For a detailed discussion of other significant accounting policies, see Note 1 to the consolidated financial statements. DAC and Cost of Insurance Acquired Deferred acquisition costs (DAC) and cost ofinsurance acquired reflect our expectations about the future experience of the existing business in-force. The primary assumptions regarding future experience that can affect the carrying value of DAC and cost of insurance acquired balances include mortality, interest spreads and policy lapse rates. Significant changes in these assumptions can impact amortization of DAC and cost of insurance acquired in both the current and future periods, which is reflected in earnings. Investments We regularly monitor our investment portfolio to ensure that investments that may be other than temporarily impaired are identified in a timely manner and properly valued, and that any impairments are charged against earnings in the proper period. Valuing our investment portfolio involves a variety of assumptions and estimates, particularly for investments that are not actively traded. We rely on external pricing sources for highly liquid publicly traded securities. Many judgments are involved in timely identifying and valuing securities, including potentially impaired securities. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events which affect one or more companies, industry sectors or countries could result in write downs in future periods for impairments that are deemed other than temporary. Results of Operations (a) Revenues Premiums and policy fee revenues, net of reinsurance premiums and policy fees, decreased 6% when comparing 2004 to 2003 and 5% from 2003 to 2002. The Company continues to write very little new business, as Management places modest emphasis on new business production. Unless the Company acquires a block of in-force business, management expects premium revenue to continue to decline at a rate consistent with prior experience. The Company's average persistency rate for all policies in force for 2004, 2003 and 2002 was approximately 94.6%, 94.9%, and 93.6%, respectively. Persistency is a measure of insurance in force retained in relation to the previous year. The Company's primary source of new business production comes from the conservation effort implemented several years ago. This effort was an attempt to improve the persistency rate of insurance company's policies. Several of the customer service representatives of the Company are also 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, their ability to reach these customers diminished, making conservation efforts difficult. The conservation efforts described above have been generally positive. Management will continue to monitor these efforts and make adjustments as seen appropriate to enhance the future success of the program. In 2003, the Company replaced its original universal life product with a new universal life contract referred to as "the Legacy". This product was designed for use with several distribution channels including the Company's own internal agents, bank agent/employees and through personally producing general agents "PPGA". In addition, the Company has introduced other new and updated products in recent periods including the Horizon Annuity and Kid Kare (as single premium, child term policy). The company is currently working on development of a level term and decreasing term product. Management has no current plans to increase marketing efforts. New product development is anticipated to be utilized in conservation efforts and sales to existing customers. Such sales are not expected to be material. The Company has considered the feasibility of a marketing opportunity with First Southern National Bank (FSNB) an affiliate of UTG's largest shareholder, Chairman and CEO, Mr. Jesse T. Correll. Management has considered various products including annuity type products, mortgage protection products and existing insurance products, as potential products that could be marketed to banking customers. This marketing opportunity has potential and is believed to be a viable niche. This potential is in the very early states of consideration. Management will proceed cautiously and may even determine not to proceed. The introduction of new products is not expected to produce significant premium writings. The Company is currently looking at other types of products to compliment the existing offerings. Net investment income increased 1% when comparing 2004 to 2003 and decreased 24% when comparing 2003 to 2002. The overall gross investment yields for 2004, 2003 and 2002, are 6.06%, 5.73% and 6.66%, respectively. The decline in investment yield during 2003 was directly affected by the decline in the national prime rate, which was 4.00% at December 31, 2003. The national prime rate increased to 5.25% at December 31, 2004; however, the lower yield in recent years has resulted in reduced earnings on short-term funds as well as on longer-term investments acquired during the reporting period. Through this period, Management shortened the length of the Company's portfolio and maintained a conservative investment philosophy. As such, following an analysis of current holdings during the first half of 2004, the Company liquidated approximately $ 39,000,000 of its collateralized mortgage obligation and mortgage backed bond portfolio in order to limit its interest rate and extension risk. In addition, there were $ 48,000,000 in bonds that matured or were called during 2004. The result of these transactions caused an excess of cash invested in short-term money market funds during parts of 2004. The Company began reinvesting this cash during the second quarter primarily in governmental and agency bonds at current lower yields. Although this hurts investment earnings in the short run, the Company has not had to write off any investment losses due to excessive risk. Many insurance companies have suffered significant losses in their investment portfolios as a result of corporate defaults and bankruptcies in the last few years; however, because of the Company's conservative investment philosophy the Company has so far avoided such significant losses. The Company's corporate holdings are relatively small compared to the insurance industry. Recent periods investments acquired include a very limited amount in corporate securities. In addition to the changing interest rate environment, the Company benefited from improved earnings on its real estate investment in Hampshire Plaza. New tenant leases during the year resulted in an increase in earnings on this investment, with 2004 being the first year of ownership to show positive results. The property is expected to continue showing positive results in future periods. This parcel was acquired two years ago with an original projection of two years of unprofitable results. Actual results have been better than originally projected as a result of leasing vacant space quicker. This property reflected an increase in investment income of approximately $992,000 in 2004 as compared to 2003. 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%. In previous years, the Board of Directors lowered crediting rates to their guaranteed minimum rates, and as such, cannot lower them any further. These adjustments were in response to the continued declines in interest rates in the marketplace described above. Policy interest crediting rate changes and expense load changes become effective on an individual policy basis on the next policy anniversary. Therefore, it takes a full year from the time the change was determined for the full impact of such change to be realized. If interest rates decline in the future, the Company won't be able to lower rates and both net investment income and net income will be impacted negatively. Realized investment gains, net of realized losses, were $ (20,648), $ 485,436 and $ 13,634 in 2004, 2003 and 2002, respectively. As previously discussed, the Company sold several of its collateralized mortgage obligation bonds during 2004 and realized a nominal net loss on these securities. The primary source for the 2003 gain is from the sale of two investments. The Company sold one common stock holding, realizing a gain of $ 165,262 and one real estate holding, realizing a gain of $ 211,352. During 2002, the modest realized gain consisted primarily of real estate sales on residential development property the Company owned in Springfield, Illinois. The Company performs administrative work as a third party administrator (TPA) for unaffiliated life insurance companies. The Company receives monthly fees based on policy in force counts and certain other activity indicators, such as number of premium collections performed, or services performed. The Company entered into a new contract mid-year 2004, which should provide approximately $ 360,000 additional annual revenues. For the years ended 2004, 2003 and 2002, the Company received $ 719,053, $ 571,298, and $ 521,782 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 continue to pursue other TPA arrangements, through an alliance with Fiserv (Fiserv) to insurance companies seeking business process outsourcing solutions. Fiserv 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. Management believes this alliance with Fiserv positions the Company to generate additional revenues by utilizing the Company's current excess capacity and administrative services. Fiserv 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. Management believes this area is a growing market and the Company is well positioned to serve this market. (b) Expenses Benefits, claims and settlement expenses net of reinsurance benefits and claims, decreased $ 2,307,898 from 2003 to 2004 and increased $ 1,631,372 from 2002 to 2003. The significant fluctuations between the three years relates primarily to changes in the Company's policyholder reserves, or future policy benefits. Reserves are calculated on an individual policy basis and generally increase over the life of the policy as a result of additional premium payments and acknowledgement of increased risk as the insured continues to age. Fluctuations in death claim experience from year to year also typically have a significant impact on variances in this line item. Death claims were approximately $240,000 less in 2004 as compared to 2003. Direct (prior to reinsurance) death claims were approximately $ 1,024,000 less in 2004 than in 2003. There is no single event that caused the mortality variances. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by management. Policy surrender benefits decreased approximately $ 546,000 during the year 2004 compared to the same period in 2003 and $ 980,000 during the year 2003 compared to the same period in 2002. As discussed above, stronger efforts have been made in policy retention through more personal contact with 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 and generally greater than the cash surrender value of a policy. Therefore, a decline in current period surrenders results in an overall increase in the policy benefits number in the current period. 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 1% in 2004 compared to 2003 and decreased 60% in 2003 compared to 2002. The most significant factor in the continuing 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 any of the three periods reported. Net amortization of cost of insurance acquired increased 10% in 2004 compared to 2003 and decreased 12% in 2003 compared to 2002. Cost of insurance acquired is established when an insurance company is acquired. The Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. Cost of insurance acquired is comprised of individual life insurance products including whole life, interest sensitive whole life and universal life insurance products. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates utilized in the amortization calculation are 9% on approximately 25% of the balance and 15% on the remaining balance. The interest rates vary due to risk analysis performed at the time of acquisition on the business acquired. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force. Persistency is a measure of insurance in force retained in relation to the previous year. The Company's average persistency rate for all policies in force for 2004, 2003 and 2002 has been approximately 94.6%, 94.9% and 93.6%, respectively. Based on the projected future profits of the insurance in-force during 2003, the Company wrote off an additional $ 5,000,000 of cost of insurance acquired. This write-off is primarily the result of continued tightening of interest rate spreads of the Company. The Company continues to analyze these projections to determine the adequacy of present values assigned to future cash flows. Operating expenses decreased 30% in 2004 compared to 2003 and increased 29% in 2003 compared to 2002. During 2003, the Company paid $ 1,950,000 in settlement of a lawsuit. In addition, the Company maintained a $ 75,000 accrual during 2004 to cover expected future costs regarding this matter. Additional expense reductions have been made in the normal course of business, as the Company continually monitors expenditures looking for savings opportunities. These expense reductions have been partially offset by increased operating costs of approximately $ 285,000 attributable to the Company's conversion of its existing business and TPA clients to "ID3", a software system owned by Fiserv and utilized by the Company. Conversion costs to date include fees for initial licensing, consultation, and training. Interest expense declined 52% comparing 2004 to 2003 and 38% comparing 2003 to 2002. The Company repaid $ 2,289,776, $ 705,499 and $ 1,405,395 in outside debt in 2004, 2003 and 2002 respectively, through operating cash flows and dividends received from its subsidiary UG. At December 31, 2004, UTG had no debt outstanding for the first time since 1992. Deferred taxes are established to recognize future tax effects attributable to temporary differences between the financial statements and the tax return. As these differences are realized in the financial statement or tax return, the deferred income tax established on the difference is recognized in the financial statements as an income tax expense or credit. (c) Net income (loss) The Company had a net income (loss) of $ (275,617), $ (6,396,490), and $ 1,338,795 in 2004, 2003 and 2002 respectively. Significant one-time charges and accruals to operating expenses, combined with an additional write-off of cost of insurance acquired and lower interest rates during 2003 as previously described, were the primary differences in the 2004 to 2003 results. The Company continues to monitor and adjust those items within its control. Financial Condition (a) Assets Investments are the largest asset group of the Company. The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments it is 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, and the Company's business and investment strategy, the Company generally seeks to invest in United States government and government agency securities and other high quality low risk investments. Many insurance companies have suffered significant losses in their investment portfolios in the last couple of years; however, because of the Company's conservative investment philosophy the Company has so far largely avoided such significant losses. The Company has not written off any investment losses in these turbulent economic times. At December 31, 2004, 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 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 in recent periods as available for sale. The following table summarizes the Company's fixed maturities distribution at December 31, 2004 and 2003 by ratings category as issued by Standard and Poor's, a leading ratings analyst. Fixed Maturities Rating % of Portfolio ---------------------- 2004 2003 ---------- ---------- Investment Grade AAA 82% 82% AA 1% 1% A 13% 12% BBB 4% 4% Below investment grade 0% 1% ---------- ---------- 100% 100% ========== ========== In previous years the Company has invested more of its funds in mortgage loans. This is the result of increased mortgage opportunities available through FSNB, an affiliate of Mr. Jesse T. Correll. Mr. Correll is the CEO and Chairman of the Board of Directors of UTG, and directly and indirectly through affiliates, its largest shareholder. FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market. During 2004, 2003 and 2002 the Company issued approximately $ 2,627,000, $ 11,405,000 and $ 6,920,000 respectively, in new mortgage loans. These new loans were originated through FSNB and funded by the Company through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $ 45,468, $ 63,214 and $ 70,140 in servicing fees and $ 0, $ 13,821 and $ 35,127 in origination fees to FSNB during 2004, 2003 and 2002, respectively. The Company anticipates these opportunities to continue to be available and will pursue those investments that provide attractive yields. Total investment real estate holdings represent approximately 9% and 8% of the total assets of the Company, net of accumulated depreciation, at year-end 2004 and 2003 respectively. Total investment real estate is separated into commercial and residential categories. Policy loans remained consistent for the periods presented. Industry experience for policy loans indicates that few policy loans are ever repaid by the policyholder, other than through termination of the policy. Policy loans are systematically reviewed to ensure that no individual policy loan exceeds the underlying cash value of the policy. Deferred policy acquisition costs decreased 21% in 2004 compared to 2003. Deferred policy acquisition costs, which vary with, and are primarily related to producing new business, are referred to as DAC. DAC consists primarily of commissions and certain costs of policy issuance and underwriting, net of fees charged to the policy in excess of ultimate fees charged. To the extent these costs are recoverable from future profits, the Company defers these costs and amortizes them with interest in relation to the present value of expected gross profits from the contracts, discounted using the interest rate credited by the policy. The Company had $ 5,000 in policy acquisition costs deferred, $ 10,000 in interest accretion and $ 447,380 in amortization in 2004, and had $ 61,000 in policy acquisition costs deferred, $ 17,000 in interest accretion and $ 417,844 in amortization in 2003. Cost of insurance acquired decreased 13% in 2004 compared to 2003. When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. In 2004 and 2003 amortization decreased the asset by $ 1,869,135 and $ 1,695,328, respectively. In 2003, the balance was reduced by an additional $ 5,000,000 as a direct charge-off of unamortized asset over the projected future profits. Also, the balance was reduced $ 8,409,722 in 2002 as a result of the valuation adjustment attributable to the acquisition of the minority positions of FCC through its merger with and into UTG. (b) Liabilities Total liabilities increased less than 1% in 2004 compared to 2003. Policy liabilities and accruals, which represented 94% and 95% of total liabilities at year end 2004 and 2003, respectively, decreased slightly during the current year. The decrease is attributable to a decrease in the outstanding policy benefit claims at the end of the year. The Company had $ 0 and $ 2,289,776 in outstanding notes payable as of December 31, 2004 and 2003, respectively. The Company has two lines of credit available for operating liquidity or acquisitions of additional lines of business. The Company's long-term debt is discussed in more detail in Note 11 to the consolidated financial statements, which is incorporated herein by this reference. (c) Shareholders' Equity Total shareholders' equity increased 12% in 2004 compared to 2003. This is primarily due to significant increases in the unrealized gains on the Company's equity investments. Unrealized gains increased by $ 5,112,145 during 2004. This increase in unrealized gains is partially offset by the net loss from operations during the year of $ (275,617). Other factors that impacted shareholders' equity included issuance of shares from an employee and director stock purchase plan which was approved and implemented in 2002 of $ 167,360 and treasury shares purchased and retirements totaling $ (299,057). The Company's current and merged insurance subsidiaries are assessed contributions by life and health guaranty associations in almost all states to indemnify policyholders of failed companies. In several states the company may reduce premium taxes paid to recover a portion of assessments paid to the states' guaranty fund association. This right of "offset" may come under review by the various states, and the company cannot predict whether and to what extent legislative initiatives may affect this right to offset. In addition, some state guaranty associations have adjusted the basis by which they assess the cost of insolvencies to individual companies. The Company believes that its reserve for future guaranty fund assessments is sufficient to provide for assessments related to known insolvencies. This reserve is based upon management's current expectation of the availability of this right of offset, known insolvencies and state guaranty fund assessment bases. However, changes in the basis whereby assessments are charged to individual companies and changes in the availability of the right to offset assessments against premium tax payments could materially affect the Company's results. Each year, the NAIC calculates financial ratio results (commonly referred to as IRIS ratios) for each insurance company. These ratios compare key financial data pertaining to the statutory balance sheet and income statement. The results are then compared to pre-established normal ranges determined by the NAIC. Results outside the range typically require explanation to the domiciliary insurance department. At year-end 2004, UG had four ratios outside the normal range. These ratios are discussed in more detail in the Regulatory Environment discussion included in this Item 7. Liquidity and Capital Resources The Company has two principal needs for cash - the insurance companies' contractual obligations to policyholders and the payment of operating expenses. Cash and cash equivalents as a percentage of total assets were 4% and 3% as of December 31, 2004 and 2003, respectively. Fixed maturities as a percentage of total invested assets were 50% and 68% as of December 31, 2004 and 2003, respectively. The Company's investments are predominantly in fixed maturity investments such as bonds and mortgage loans, which provide sufficient return to cover future obligations. The Company carries certain of its fixed maturity holdings as held to maturity which are reported in the financial statements at their amortized cost. 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. Cash provided by (used in) operating activities was $ (45,950), $ (933,048) and $ 467,034 in 2004, 2003 and 2002, respectively. Reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows. The net cash provided by operating activities plus policyholder contract deposits less policyholder contract withdrawals equaled $ 1,754,504 in 2004, $ 1,504,703 in 2003 and $ 2,798,799 in 2002. Management utilizes this measurement of cash flows as an indicator of the performance of the Company's insurance operations. Cash provided by (used in) investing activities was $ 3,776,714, $ (15,846,714) and $ 7,833,788 for 2004, 2003 and 2002, respectively. The most significant aspect of cash provided by (used in) investing activities is the fixed maturity transactions. Fixed maturities account for 82%, 82% and 78% of the total cost of investments acquired in 2004, 2003 and 2002, respectively. Net cash provided by (used in) financing activities was $ (621,019), $ 1,487,041 and $ (473,692) for 2004, 2003 and 2002, respectively. The Company paid off the remaining balance of its outstanding debt in 2004. Such payments are included within this category. In addition, in 2001 the Board of Directors of the Company authorized a repurchase program of UTG's common stock and the purchase of stock is still pursued as it becomes available. In addition, in 2002 this category includes payments made to former FCC shareholders for shares they owned prior to the merger of FCC into UTG. Policyholder contract deposits decreased 5% in 2004 compared to 2003 and 8% in 2003 compared to 2002. The decrease in policyholder contract deposits relates to the declining in force business of the Company. New premium production of interest sensitive type policies has been negligible in recent periods. Management anticipates continued moderate declines in contract deposits. Policyholder contract withdrawals have increased 2% in 2004 compared to 2003 and decreased 11% in 2003 compared to 2002. The change in policyholder contract withdrawals is not attributable to any one significant event. Factors that influence policyholder contract withdrawals are fluctuation of interest rates, competition and other economic factors. During 2004, the Company paid in full the remaining debt owed to two former officers and directors of the Company and their respective families as a result of an April 2001 stock purchase transaction. These notes were paid from a draw on a line of credit, which was also repaid in 2004. As of December 31, 2004, the Company has no outstanding notes payable. The Company has two lines of credit available for future use. The Company has a $ 3,300,000 line of credit (LOC) available from the First National Bank of the Cumberlands (FNBC) located in Livingston, Tennessee. The interest rate on the LOC is variable and indexed to be the lowest of the U.S. prime rates as published in the Wall Street Journal, with any interest rate adjustments to be made monthly. At December 31, 2004, the Company had no outstanding borrowings attributable to this LOC. During 2004 and 2003, the Company had no borrowings against this LOC. During 2002 the Company had total borrowings of $ 1,600,000 on this LOC, which were all repaid during the year. The second LOC available to the Company is a $ 5,000,000 line of credit (LOC) extended from Southwest Bank of St. Louis. As collateral for any draws under the line of credit, the Company pledged 100% of the common stock of its insurance subsidiary UG. Borrowings under the LOC bear interest at the rate of 0.25% in excess of Southwest Bank of St. Louis' prime rate. At December 31, 2004, the Company had no outstanding borrowings attributable to this LOC. During 2004, the Company had total borrowings of $ 2,275,000, which were repaid during the year. In addition, during 2002 the Company had total borrowings of $ 400,000 on this LOC which were all repaid during the year. During 2002, UTG and Fiserv formed an alliance between their respective organizations to provide third party administration (TPA) services to insurance companies seeking business process outsourcing solutions. Fiserv will be responsible for the marketing and sales function for the alliance, as well as providing the operations processing service for the Company. The Company will staff the administration effort. To facilitate the alliance, the Company has converted part of its existing business and all TPA clients to "ID3", a software system owned by Fiserv to administer an array of life, health and annuity products in the insurance industry. Fiserv 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. In addition, the Company entered into a five-year contract with Fiserv for services related to their purchase of the "ID3" software system. Under the contract, the Company is required to pay $ 12,000 per month in software maintenance costs and a monthly fee for offsite data center costs, based on the number and type of policies being administered the ID3 software system for a five-year period from the date of the signing. On November 20, 1998, FSF and 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 was an earnings covenant whereby UTG warrants UTG and its subsidiaries and affiliates would have future earnings of at least $ 30,000,000 for a five-year period beginning January 1, 1998. Such earnings were 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 was 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. If UTG did not meet the covenant requirements, any shortfall would first be reduced by the actual average tax rate for UTG for the period, and 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 would then be reduced by $ 250,000. The remaining amount would 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. However, there was to be no limit to the number of shares transferred to the extent that there are legal fees, settlements, damage payments or other losses as a result of certain legal action taken. The price and number of shares was adjusted for any applicable stock splits, stock dividends or other recapitalizations. For the five-year period starting January 1, 1998 and ending December 31, 2003, the Company had total earnings of $ 17,011,307 applicable to this covenant. Therefore, UTG did not meet the earnings requirements stipulated, and during 2003, UTG was required to issue 500,000 additional shares to FSF or its assigns. UTG is a holding company that has no day-to-day operations of its own. Funds required to meet its expenses, generally costs associated with maintaining the Company in good standing with states in which it does business, are primarily provided by its subsidiaries. On a parent only basis, UTG's cash flow is dependent on management fees received from its insurance subsidiary and earnings received on cash balances. On December 31, 2004, substantially all of the consolidated shareholders equity represents net assets of its subsidiary. The Company's insurance subsidiary has maintained adequate statutory capital and surplus and has 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. UG is an Ohio domiciled insurance company, which requires 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. At December 31, 2004 UG statutory shareholders' equity was $ 21,860,401. At December 31, 2004, UG statutory loss from operations was $ (762,152). 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 a dividend of $ 2,275,000 to UTG in 2004, of which $ 974,180 was considered to be an extraordinary dividend. Management believes the overall sources of liquidity available will be sufficient to satisfy its financial obligations. REGULATORY ENVIRONMENT In March 2005, UTG's Board of Directors adopted a proposal to change the state of incorporation of UTG from Illinois to Delaware by merging UTG with and into a wholly-owned Delaware subsidiary (the "reincorporation merger"). The Board of Directors and management of UTG believe that reincorporation in Delaware would be beneficial to the Company because Delaware corporate law is more comprehensive, widely used and extensively interpreted than other state corporate laws, including Illinois corporate law. The reincorporation merger would effect only a change in UTG's legal domicile and certain other changes of a legal nature. It would not result in any change in UTG's business, management, fiscal year, assets or liabilities or location of its principal facilities. The Board of Directors intends to submit the reincorporation proposal to its shareholders for approval at the 2005 annual meeting of shareholders to be held on June 15, 2005. If approved by shareholders, UTG expects that the reincorporation merger would be effected as soon as reasonably practicable following the annual meeting. The Company's current and merged insurance subsidiaries are assessed contributions by life and health guaranty associations in almost all states to indemnify policyholders of failed companies. In several states the company may reduce premium taxes paid to recover a portion of assessments paid to the states' guaranty fund association. This right of "offset" may come under review by the various states, and the company cannot predict whether and to what extent legislative initiatives may affect this right to offset. In addition, some state guaranty associations have adjusted the basis by which they assess the cost of insolvencies to individual companies. The Company believes that its reserve for future guaranty fund assessments is sufficient to provide for assessments related to known insolvencies. This reserve is based upon management's current expectation of the availability of this right of offset, known insolvencies and state guaranty fund assessment bases. However, changes in the basis whereby assessments are charged to individual companies and changes in the availability of the right to offset assessments against premium tax payments could materially affect the company's results. Currently, UG, the insurance subsidiary, is subject to government regulation in each of the states in which it conducts business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including the power to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus; and (x) regulate the type and amount of permitted investments. Insurance regulation is concerned primarily with the protection of policyholders. The Company cannot predict the impact of any future proposals, regulations or market conduct investigations. UG is domiciled in the state of Ohio. The insurance regulatory framework continues to be scrutinized by various states, the federal government and the National Association of Insurance Commissioners (NAIC). The NAIC is an association whose membership consists of the insurance commissioners or their designees of the various states. The NAIC has no direct regulatory authority over insurance companies. However, its primary purpose is to provide a more consistent method of regulation and reporting from state to state. This is accomplished through the issuance of model regulations, which can be adopted by individual states unmodified, modified to meet the state's own needs or requirements, or dismissed entirely. Most states also have insurance holding company statutes, which require registration and periodic reporting by insurance companies controlled by other corporations licensed to transact business within their respective jurisdictions. The insurance subsidiary is subject to such legislation and registered as controlled insurers in those jurisdictions in which such registration is required. Statutes vary from state to state but typically require periodic disclosure, concerning the corporation that controls the registered insurers and all subsidiaries of such corporation. In addition, prior notice to, or approval by, the state insurance commission of material intercorporate transfers of assets, reinsurance agreements, management agreements (see Note 9 to the consolidated financial statements), and payment of dividends (see Note 2 to the consolidated financial statements) in excess of specified amounts by the insurance subsidiary, within the holding company system, are required. Each year, the NAIC calculates financial ratio results (commonly referred to as IRIS ratios) for each company. These ratios compare various financial information, pertaining to the statutory balance sheet and income statement. The results are then compared to pre-established normal ranges determined by the NAIC. Results outside the range typically require explanation to the domiciliary insurance department. At year-end 2004, UG had four ratios outside the normal range. Each of the ratios outside the normal range was anticipated by Management, based upon the operating results of the Company. The first ratio addresses significant variations in capital of the life company. The variance from normal was the result of the contribution of capital, North Plaza of Somerset, to the insurance company from its parent. The second ratio compares net income with total income, including realized capital gains and losses. Any ratio that results in a negative value will be considered outside the normal range. As expected with the current year loss by the insurance subsidiary, this ratio was outside the normal range. The third ratio was slightly outside the normal range, as it relates to net investment income. As discussed in previous sections of this report, investment income has been hindered by declining interest rates in recent years and the average life of the investment portfolio. The fourth ratio outside the normal range relates to the current year change in premium. As previously discussed, premium revenues have declined in recent periods. In addition to this factor, the Company paid additional reinsurance premiums during the current year that were due in previous periods. The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The risk-based capital (RBC) formula measures the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that will supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the insurance company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Insurance companies below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows: Ratio of Total Adjusted Capital to Authorized Control Level RBC Regulatory Event (Less Than or Equal to) Company action level 2* Regulatory action level 1.5 Authorized control level 1 Mandatory control level 0.7 * Or, 2.5 with negative trend. At December 31, 2004, the insurance subsidiary has a ratio that is in excess of 4, which is 400% of the authorized control level; accordingly, the insurance subsidiary meets the RBC requirements. On July 30, 2002, President Bush signed into law the "SARBANES-OXLEY" Act of 2002 ("the Act"). This Law, enacted in response to several high-profile business failures, was developed to provide meaningful reforms that protect the public interest and restore confidence in the reporting practices of publicly traded companies. The implications of the Act to public companies, (which includes UTG) are vast, widespread, and evolving. Many of the new requirements will not take effect or full effect until after calendar-year-end companies have completed their 2004 annual reports. The Company has implemented requirements affecting the current reporting period, and is continually monitoring, evaluating, and planning implementation of requirements that will need to be taken into account in future reporting periods. ACCOUNTING AND LEGAL DEVELOPMENTS The Financial Accounting Standards Board ("FASB") has issued Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits (an amendment of FASB Statements 87, 88 and 106). Statement No. 132 was developed to address concerns of users of financial statements regarding their need for more information about pension plan assets, obligations, benefit payment, contributions and net benefit costs. This statement was effective at the beginning of the first interim period beginning after December 15, 2003. The adoption of Statement 132 (revised 2003) did not affect the Company's financial position or results of operations, since the Company has no such plans that meet the provisions of this statement. The Financial Accounting Standards Board ("FASB") has issued Statement No. 151, Inventory Costs--an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. The adoption of Statement 151 does not currently affect the Company's financial position or results of operations, since the Company has no inventory costs that meet the provisions of this statement. The Financial Accounting Standards Board ("FASB") has issued Statement No. 152, Accounting for Real Estate Time-Sharing Transactions. Statement No. 152 amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. Statement No. 152 also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. The adoption of Statement 152 does not currently affect the Company's financial position or results of operations, since the Company has no real estate interests that meet the provisions of this statement. The Financial Accounting Standards Board ("FASB") has issued Statement No. 153, Exchanges of Nonmonetary Assets. Statement No. 153 amends APB Opinion No. 29, Accounting for Nonmonetary Transactions, to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. This statement is effective for financial statements for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company's will account for all future nonmonetary asset exchanges in accordance with the requirements of Statement No. 153. The Financial Accounting Standards Board ("FASB") has issued Statement No. 123 (revised 2004), Share Based Payment. Statement No. 123 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company's will account for all future share based payments in accordance with the requirements of Statement No. 123. ITEM 7A. 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. 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 staggering 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 Company does not have long-term debt that is sensitive to changes in interest rates or derivative financial instruments or interest rate swap contracts. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Listed below are the financial statements included in this Part of the Annual Report on SEC Form 10-K: Page No. UNITED TRUST GROUP, INC. AND CONSOLIDATED SUBSIDIARIES Independent Auditors' Report for the years ended December 31, 2004, 2003, 2002.................................31 Consolidated Balance Sheets..................................................32 Consolidated Statements of Operations........................................33 Consolidated Statements of Shareholders' Equity..............................34 Consolidated Statements of Cash Flows........................................35 Notes to Consolidated Financial Statements............................... 36-60 Independent Auditors' Report Board of Directors and Shareholders UNITED TRUST GROUP, INC. We have audited the accompanying consolidated balance sheets of UNITED TRUST GROUP, INC. (an Illinois corporation) and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UNITED TRUST GROUP, INC. and subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. We have also audited Schedule I as of December 31, 2004, and Schedules II, IV and V as of December 31, 2004 and 2003, of UNITED TRUST GROUP, INC. and subsidiaries and Schedules II, IV and V for each of the three years in the period then ended. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein. KERBER, ECK & BRAECKEL LLP Springfield, Illinois March 11, 2005 UNITED TRUST GROUP, INC. CONSOLIDATED BALANCE SHEETS As of December 31, 2004 and 2003 ASSETS 2004 2003 --------------- --------------- Investments: Fixed maturities held to maturity, at amortized cost (market $12,097,708 and $27,440,277) $ 11,973,415 $ 26,724,507 Investments held for sale: Fixed maturities, at market (cost $147,217,453 and $139,248,547) 148,193,887 139,390,382 Equity securities, at market (cost $15,216,214 and $7,209,443) 24,399,172 9,362,165 Mortgage loans on real estate at amortized cost 20,722,415 26,715,968 Investment real estate, at cost, net of accumulated depreciation 28,192,081 24,725,824 Policy loans 12,844,748 13,226,399 Short-term investments 39,489 34,677 --------------- --------------- 246,365,207 240,179,922 Cash and cash equivalents 11,859,472 8,749,727 Securities of affiliate 4,000,000 4,000,000 Accrued investment income 1,678,393 1,961,552 Reinsurance receivables: Future policy benefits 32,422,529 32,789,725 Policy claims and other benefits 3,959,569 4,120,299 Cost of insurance acquired 12,747,532 14,616,667 Deferred policy acquisition costs 1,685,263 2,122,643 Property and equipment, net of accumulated depreciation 2,172,636 2,450,109 Income taxes receivable, current 181,683 212,197 Other assets 795,800 354,292 --------------- --------------- Total assets $ 317,868,084 $ 311,557,133 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits $ 235,592,973 $ 236,192,132 Policy claims and benefits payable 1,879,566 2,541,735 Other policyholder funds 1,323,668 1,038,063 Dividend and endowment accumulations 12,526,390 12,626,515 Deferred income taxes 8,561,010 6,763,648 Notes payable 0 2,289,776 Other liabilities 7,405,434 5,557,215 --------------- --------------- Total liabilities 267,289,041 267,009,084 Minority interests in consolidated subsidiaries 6,127,938 4,851,410 Shareholders' equity: Common stock - no par value, stated value $.02 per share. Authorized 7,000,000 shares - 3,965,533 and 4,004,666 shares issued and outstanding after deducting treasury shares of 227,709 and 174,136 79,315 80,008 Additional paid-in capital 42,590,820 42,672,189 Accumulated deficit (4,897,572) (4,621,955) Accumulated other comprehensive income 6,678,542 1,566,397 --------------- --------------- Total shareholders' equity 44,451,105 39,696,639 --------------- --------------- Total liabilities and shareholders' equity $ 317,868,084 $ 311,557,133 =============== =============== See accompanying notes. UNITED TRUST GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three Years Ended December 31, 2004 2004 2003 2002 --------------- ---------------- ---------------- Revenues: Premiums and policy fees $ 17,275,708 $ 18,121,018 $ 18,693,022 Reinsurance premiums and policy fees (3,135,279) (3,097,980) (2,861,445) Net investment income 10,420,886 10,270,500 13,514,802 Realized investment gains (losses), net (20,648) 485,436 13,634 Other income 926,212 709,384 817,186 --------------- ---------------- ---------------- 25,466,879 26,488,358 30,177,199 Benefits and other expenses: Benefits, claims and settlement expenses: Life 18,942,272 22,175,842 20,393,044 Reinsurance benefits and claims (2,268,869) (3,194,541) (3,043,115) Annuity 1,111,998 1,122,707 1,151,973 Dividends to policyholders 980,306 966,668 984,346 Commissions and amortization of deferred policy acquisition costs 309,776 311,939 785,861 Amortization of cost of insurance acquired 1,869,135 6,695,328 1,515,450 Operating expenses 5,312,747 7,566,780 5,876,456 Interest expense 77,453 162,179 263,441 --------------- ---------------- ---------------- 26,334,818 35,806,902 27,927,456 --------------- ---------------- ---------------- Income (loss) before income taxes and minority interest (867,939) (9,318,544) 2,249,743 Income tax benefit (expense) 797,716 2,699,493 (479,355) Minority interest in (income) loss of consolidated subsidiaries (205,394) 222,561 (431,593) --------------- ---------------- ---------------- Net income (loss) $ (275,617) $ (6,396,490)$ 1,338,795 =============== ================ ================ Basic income (loss) per share from continuing operations and net income (loss) $ (0.07) $ (1.67)$ 0.38 =============== ================ ================ Diluted income (loss) per share from continuing operations and net income (loss) $ (0.07) $ (1.67)$ 0.33 =============== ================ ================ Basic weighted average shares outstanding 3,986,731 3,839,947 3,505,424 =============== ================ ================ Diluted weighted average shares outstanding 3,986,731 3,839,947 4,005,424 =============== ================ ================ See accompanying notes. UNITED TRUST GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Years Ended December 31, 2004 2004 2003 2002 -------------------------- ------------------------- ------------ Common stock Balance, beginning of year $ 80,008 $ 70,726 $ 70,996 Issued during year 289 10,331 1,177 Treasury shares acquired (1,066) (532) (1,447) Reclassification under FAS 150 84 0 0 Retired during year 0 (433) 0 Cumulative change in accounting principal 0 (84) 0 ------------ ----------- ----------- Balance, end of year $ 79,315 $ 80,008 $ 70,726 ============ =========== =========== Additional paid-in capital Balance, beginning of year $ 42,672,189 $ 42,976,344 $ 42,789,636 Issued during year 167,071 185,574 705,514 Treasury shares acquired (297,991) (181,817) (518,806) Reclassification under FAS 150 49,551 0 0 Retired during year 0 (258,361) 0 Cumulative change in accounting principal 0 (49,551) 0 ------------ ----------- ----------- Balance, end of year $ 42,590,820 $ 42,672,189 $ 42,976,344 ============ =========== =========== Retained earnings (accumulated deficit) Balance, beginning of year $ (4,621,955) $ 1,774,535 $ 435,740 Net income (loss) (275,617) $ (275,617) (6,396,490) $ (6,396,490) 1,338,795 $ 1,338,795 ------------ ----------- ----------- Balance, end of year $ (4,897,572) $ (4,621,955) $ 1,774,535 ============ =========== =========== Accumulated other comprehensive income Balance, beginning of year $ 1,566,397 $ 2,771,941 $ 908,744 Other comprehensive income (loss) Unrealized holding gain (loss) on securities net of minority interest and reclassification adjustment and taxes 5,112,145 5,112,145 (1,205,544) (1,205,544) 1,863,197 1,863,197 ------------ ----------- ----------- ------------ ----------- ----------- Comprehensive income (loss) $ 4,836,528 $ (7,602,034) $ 3,201,992 =========== ============ =========== Balance, end of year $ 6,678,542 $ 1,566,397 $ 2,771,941 ============ =========== =========== Total shareholders' equity, end of year $ 44,451,105 $ 39,696,639 $ 47,593,546 ============ =========== =========== See accompanying notes. UNITED TRUST GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Years Ended December 31, 2004 2004 2003 2002 --------------- --------------- -------------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income (loss) $ (275,617) $ (6,396,490) $ 1,338,795 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities net of changes in assets and liabilities resulting from the sales and purchases of subsidiaries: Amortization/accretion of fixed maturities 604,608 978,307 513,308 Realized investment (gains) losses, net 20,648 (485,436) (13,634) Amortization of deferred policy acquisition costs 442,380 400,844 714,432 Amortization of cost of insurance acquired 1,869,135 6,695,328 1,515,450 Depreciation 1,617,116 1,052,964 835,538 Minority interest 205,394 (222,561) 431,593 Charges for mortality and administration of universal life and annuity products (9,281,555) (9,083,778) (8,660,548) Interest credited to account balances 5,332,145 5,478,488 5,468,318 Policy acquisition costs deferred (5,000) (61,000) (69,000) Change in accrued investment income 283,159 491,288 550,020 Change in reinsurance receivables 527,926 (100,703) 1,010,146 Change in policy liabilities and accruals 1,073,108 3,163,696 (2,279,449) Change in income taxes payable (924,815) (2,877,425) 413,476 Change in other assets and liabilities, net (1,534,582) 33,430 (1,301,411) --------------- --------------- -------------- Net cash provided by (used in) operating activities (45,950) (933,048) 467,034 --------------- --------------- -------------- Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale 70,893,152 73,314,066 29,748,521 Fixed maturities matured 16,098,477 36,065,715 19,957,888 Equity securities 25,569 167,734 0 Mortgage loans 8,620,093 8,494,201 6,472,013 Real estate 314,157 1,096,759 1,179,931 Policy loans 2,757,989 2,619,463 3,112,687 Short-term 350,000 350,000 203,706 --------------- --------------- -------------- Total proceeds from investments sold and matured 99,059,437 122,107,938 60,674,746 Cost of investments acquired: Fixed maturities held for sale (76,377,916) (108,410,675) (37,341,428) Fixed maturities (1,513,700) (4,283,413) (3,973,623) Equity securities (8,033,052) (7,089,857) (185,075) Mortgage loans (2,626,540) (11,405,342) (6,889,945) Real estate (3,981,568) (3,722,406) (1,575,713) Policy loans (2,376,338) (2,499,358) (2,850,735) Short-term (353,061) (7,001) 0 --------------- --------------- -------------- Total cost of investments acquired (95,262,175) (137,418,052) (52,816,519) Purchase of property and equipment (20,548) (536,600) (24,439) --------------- --------------- -------------- Net cash provided by (used in) investing activities 3,776,714 (15,846,714) 7,833,788 --------------- --------------- -------------- Cash flows from financing activities: Policyholder contract deposits 9,015,637 9,505,436 10,291,519 Policyholder contract withdrawals (7,215,183) (7,067,658) (7,959,754) Payments of principal on notes payable (4,564,776) (705,499) (3,405,395) Proceeds from line of credit 2,275,000 0 2,000,000 Payments from FCC merger 0 0 (1,586,500) Issuance of common stock 167,360 195,906 706,691 Purchase of treasury stock (299,057) (441,144) (520,253) --------------- --------------- -------------- Net cash provided by (used in) financing activities (621,019) 1,487,041 (473,692) --------------- --------------- -------------- Net increase (decrease) in cash and cash equivalents 3,109,745 (15,292,721) 7,827,130 Cash and cash equivalents at beginning of year 8,749,727 24,042,448 16,215,318 --------------- --------------- -------------- Cash and cash equivalents at end of year $ 11,859,472 $ 8,749,727 $ 24,042,448 =============== =============== ============== See accompanying notes. UNITED TRUST GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. ORGANIZATION - At December 31, 2004, the significant majority-owned subsidiaries of UNITED TRUST GROUP, INC., were as depicted on the following organizational chart.
The Company's significant accounting policies, consistently applied in the preparation of the accompanying consolidated financial statements, are summarized as follows. B. NATURE OF OPERATIONS - United Trust Group, Inc., is an insurance holding company, which sells individual life insurance products through its subsidiary. The Company's principal market is the Midwestern United States. The Company's dominant business is individual life insurance which includes the servicing of existing insurance business in force, the solicitation of new individual life insurance and the acquisition of other companies in the insurance business. C. BUSINESS SEGMENTS - The Company has only one significant business segment - insurance. D. BASIS OF PRESENTATION - The financial statements of United Trust Group, Inc., and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America which differ from statutory accounting practices permitted by insurance regulatory authorities. E. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Registrant and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. F. INVESTMENTS - Investments are shown on the following bases: Fixed maturities held to maturity - at cost, adjusted for amortization of premium or discount and other-than-temporary market value declines. The amortized cost of such investments differs from their market values; however, the Company has the ability and intent to hold these investments to maturity, at which time the full face value is expected to be realized. Investments held for sale - at current market value, unrealized appreciation or depreciation is charged directly to shareholders' equity. Mortgage loans on real estate - at unpaid balances, adjusted for amortization of premium or discount, less allowance for possible losses. Real estate - investment real estate at cost less allowance for depreciation and, as appropriate, provisions for possible losses. Accumulated depreciation on investment real estate was $ 2,491,205 and $ 1,200,454 as of December 31, 2004 and 2003, respectively. Policy loans - at unpaid balances including accumulated interest but not in excess of the cash surrender value. Short-term investments - at cost, which approximates current market value. Realized gains and losses on sales of investments are recognized in net income on the specific identification basis. Unrealized gains and losses on investments carried at market value are recognized in other comprehensive income on the specific identification basis. G. CASH EQUIVALENTS - The Company considers certificates of deposit and other short-term instruments with an original purchased maturity of three months or less cash equivalents. H. REINSURANCE - In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts. The Company retains a maximum of $ 125,000 of coverage per individual life. Amounts paid, or deemed to have been paid, for reinsurance contracts are recorded as reinsurance receivables. Reinsurance receivables are recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. I. FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method. These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiary's experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations. The Company makes these assumptions at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2% to 6% for life insurance and 3.0% to 9.25% for annuities. Benefit reserves for traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term. Policy benefit claims are charged to expense in the period that the claims are incurred. Current mortality rate assumptions are based on 1975-80 select and ultimate tables. Withdrawal rate assumptions are based upon Linton B or Linton C, which are industry standard actuarial tables for forecasting assumed policy lapse rates. Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances. Interest crediting rates for universal life and interest sensitive products range from 4.0% to 5.5% for the years ended December 31, 2004, 2003 and 2002, respectively. J. POLICY AND CONTRACT CLAIMS - Policy and contract claims include provisions for reported claims in process of settlement, valued in accordance with the terms of the policies and contracts, as well as provisions for claims incurred and unreported based on prior experience of the Company. Incurred but not reported claims were $ 899,126 and $ 920,656 as of December 31, 2004 and 2003, respectively. K. COST OF INSURANCE ACQUIRED - When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. The Company utilized 9% discount rate on approximately 25% of the business and 15% discount rate on approximately 75% of the business. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates utilized in the amortization calculation are 9% on approximately 25% of the balance and 15% on the remaining balance. The interest rates vary due to differences in the blocks of business. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. 2004 2003 2002 ---------------- ----------------- ---------------- Cost of insurance acquired, beginning of year $ 14,616,667 $ 21,311,995 $ 31,237,167 Interest accretion 4,002,245 4,370,526 4,570,678 Amortization (5,871,380) (6,065,854) (6,086,128) ---------------- ----------------- ---------------- Net amortization (1,869,135) (1,695,328) (1,515,450) Impairment loss 0 (5,000,000) 0 Revaluation adjustment from UTG/FCC merger 0 0 (8,409,722) ---------------- ----------------- ---------------- Cost of insurance acquired, end of year $ 12,747,532 $ 14,616,667 $ 21,311,995 ================ ================= ================ Cost of insurance acquired was tested for impairment as part of the regular reporting process. Due to a decline in projected future cash flows from the business and lower current investment yields, a revision of the estimated fair value of the cost of insurance acquired was considered necessary in 2003. This revision resulted in a $ 5,000,000 impairment loss. The fair value of the cost of insurance acquired was estimated using the expected present value of future cash flows. The impairment loss is included in the consolidated statements of operations under the caption of amortization of cost of insurance acquired. Estimated net amortization expense of cost of insurance acquired for the next five years is as follows: Interest Net Accretion Amortization Amortization 2005 $ 3,875,000 $ 6,084,000 $ 2,209,000 2006 3,560,000 6,422,000 2,862,000 2007 3,145,000 5,994,000 2,849,000 2008 2,730,000 5,256,000 2,526,000 2009 2,360,000 4,482,000 2,122,000 L. DEFERRED POLICY ACQUISITION COSTS - Commissions and other costs (salaries of certain employees involved in the underwriting and policy issue functions and medical and inspection fees) of acquiring life insurance products that vary with and are primarily related to the production of new business have been deferred. Traditional life insurance acquisition costs are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For universal life insurance and interest sensitive life insurance products, acquisition costs are being amortized generally in proportion to the present value of expected gross profits from surrender charges and investment, mortality, and expense margins. Under SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," the Company makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from initial assumptions. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. The following table summarizes deferred policy acquisition costs and related data for the years shown. 2004 2003 2002 ---------------- ----------------- ---------------- Deferred, beginning of year $ 2,122,643 $ 2,462,487 $ 3,107,919 Acquisition costs deferred: Commissions 0 56,000 49,000 Other expenses 5,000 5,000 20,000 ---------------- ----------------- ---------------- Total Interest accretion 10,000 17,000 55,000 Amortization charged to income (452,380) (417,844) (769,432) ---------------- ----------------- ---------------- Net amortization ---------------- ----------------- ---------------- Change for the year (437,380) (339,844) (645,432) ---------------- ----------------- ---------------- Deferred, end of year $ 1,685,263 $ 2,122,643 $ 2,462,487 ================ ================= ================ Estimated net amortization expense of deferred policy acquisition costs for the next five years is as follows: Interest Net Accretion Amortization Amortization -------------- --------------- ---------------- 2005 12,000 280,000 268,000 2006 10,000 245,000 235,000 2007 9,000 219,000 210,000 2008 7,000 207,000 200,000 2009 6,000 180,000 174,000 M. PROPERTY AND EQUIPMENT - Company-occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $ 6,336,241 and $ 6,038,220 at December 31, 2004 and 2003, respectively. Depreciation is computed on a straight-line basis for financial reporting purposes using estimated useful lives of three to thirty years. Depreciation expense was $ 298,021, $ 149,664, and $ 280,148 for the years ended December 31, 2004, 2003, and 2002, respectively. N. INCOME TAXES - Income taxes are reported under Statement of Financial Accounting Standards Number 109. Deferred income taxes are recorded to reflect the tax consequences on future periods of differences between the tax bases of assets and liabilities and their financial reporting amounts at the end of each such period. O. EARNINGS PER SHARE - Earnings per share (EPS) are reported under Statement of Financial Accounting Standards Number 128. The objective of both basic EPS and diluted EPS is to measure the performance of an entity over the reporting period. Basic EPS is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator also is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares. P. TREASURY SHARES - The Company holds 227,709 and 174,136 shares of common stock as treasury shares with a cost basis of $ 1,675,097 and $ 1,376,039 at December 31, 2004 and 2003, respectively. Q. RECOGNITION OF REVENUES AND RELATED EXPENSES - Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits, consist principally of whole life insurance policies, and certain annuities with life contingencies are recognized as revenues when due. Limited payment life insurance policies defer gross premiums received in excess of net premiums, which is then recognized in income in a constant relationship with insurance in force. Accident and health insurance premiums are recognized as revenue pro rata over the terms of the policies. Benefits and related expenses associated with the premiums earned are charged to expense proportionately over the lives of the policies through a provision for future policy benefit liabilities and through deferral and amortization of deferred policy acquisition costs. For universal life and investment products, generally there is no requirement for payment of premium other than to maintain account values at a level sufficient to pay mortality and expense charges. Consequently, premiums for universal life policies and investment products are not reported as revenue, but as deposits. Policy fee revenue for universal life policies and investment products consists of charges for the cost of insurance and policy administration fees assessed during the period. Expenses include interest credited to policy account balances and benefit claims incurred in excess of policy account balances. R. PARTICIPATING INSURANCE - Participating business represents 20% of the ordinary life insurance in force at December 31, 2004 and 2003, respectively. Premium income from participating business represents 22%, 23%, and 25% of total premiums for the years ended December 31, 2004, 2003 and 2002, respectively. The amount of dividends to be paid is determined annually by the respective insurance subsidiary's Board of Directors. Earnings allocable to participating policyholders are based on legal requirements that vary by state. S. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the 2004 presentation. Such reclassifications had no effect on previously reported net income or shareholders' equity. T. USE OF ESTIMATES - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. SHAREHOLDER DIVIDEND RESTRICTION At December 31, 2004, substantially all of consolidated shareholders' equity represents net assets of UTG's subsidiaries. The payment of cash dividends to shareholders by UTG 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, 2004, UG had a statutory loss from operations of $ 762,152. At December 31, 2004, UG's statutory capital and surplus amounted to $ 21,860,401. 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 a dividend of $ 2,275,000 to UTG in 2004, of which $ 974,180 was considered to be an extraordinary dividend. 3. INCOME TAXES Until 1984, the insurance company was taxed under the provisions of the Life Insurance Company Income Tax Act of 1959 as amended by the Tax Equity and Fiscal Responsibility Act of 1982. These laws were superseded by the Deficit Reduction Act of 1984. All of these laws are based primarily upon statutory results with certain special deductions and other items available only to life insurance companies. Under the provision of the pre-1984 life insurance company income tax regulations, a portion of "gain from operations" of a life insurance company was not subject to current taxation but was accumulated, for tax purposes, in a special tax memorandum account designated as "policyholders' surplus account". Federal income taxes will become payable on this account at the then current tax rate when and if distributions to shareholders, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income maintained in the "shareholders surplus account". At December 31, 2004, the balances of the shareholders' surplus account and the untaxed balance for UG were $ 27,099,356 and $ 4,363,821, respectively. The payment of taxes on this income is not anticipated; and, accordingly, no deferred taxes have been established. The life insurance company and the non-insurance companies of the group file separate federal income tax returns. Life insurance company taxation is based primarily upon statutory results with certain special deductions and other items available only to life insurance companies. Income tax expense (benefit) consists of the following components: 2004 2003 2002 --------------- ---------------- --------------- Current tax expense $ 147,358 $ 197,732 $ 7,893 Deferred tax (benefit) expense (945,074) (2,897,225) 471,462 ---------------- ----------------- ---------------- $ (797,716) $ (2,699,493) $ 479,355 ================ ================= ================ The Company's life insurance subsidiary has net operating loss carryforwards for federal income tax purposes expiring as follows: UG ------------- 2014 965,080 2016 1,806 2017 5,078 2018 2,992,288 2019 2,101,569 ------------- TOTAL $ 6,065,821 ============= The Company has established a deferred tax asset of $ 2,123,037 for its operating loss carryforwards and has established no allowance in the current or prior years. UG has a net operating loss carryforward of $ 6,065,821 at December 31, 2004. UG must average taxable income of approximately $ 404,388 over the next 15 years to fully realize its net operating loss carryforward. Management believes future earnings of UG will be sufficient to fully utilize the net operating loss carryforwards. Therefore, management has established no allowance for potential uncollectibility of its loss carryforwards in the current year. The following table shows the reconciliation of net income to taxable income of UTG: 2004 2003 2002 --------------- --------------- ---------------- Net income (loss) $ (275,617)$ (6,396,490)$ 1,338,795 Federal income tax provision 105,098 263,992 327,472 Loss (gain) of subsidiaries 803,662 6,723,981 (700,226) --------------- --------------- ---------------- Taxable income $ 633,143 $ 591,483 $ 966,041 =============== =============== ================ The expense or (credit) for income differed from the amounts computed by applying the applicable United States statutory rate of 35% before income taxes as a result of the following differences: 2004 2003 2002 --------------- --------------- ---------------- Tax computed at statutory rate $ (303,779) $ (3,183,594) $ 728,618 Changes in taxes due to: Current year expense previously deducted 0 175,000 0 Tax reserve adjustment (202,225) 150,831 123,512 Benefit of prior losses 0 0 (309,710) Dividend received deduction (161,114) 0 0 Tax deferred acquisition costs (134,324) 0 0 Other 3,726 158,270 (63,065) --------------- --------------- ---------------- Income tax expense (benefit) $ (797,716) $ (2,699,493) $ 479,355 =============== =============== ================ The following table summarizes the major components that comprise the deferred tax liability as reflected in the balance sheets: 2004 2003 ---------------- --------------- Investments $ 5,289,610 $ 2,514,031 Cost of insurance acquired 4,461,636 5,115,833 Deferred policy acquisition costs 589,842 742,925 Management/consulting fees (289,877) (304,038) Future policy benefits (646,374) (1,145,126) Gain on sale of subsidiary 2,312,483 2,312,483 Net operating loss carryforward (2,123,037) (1,304,864) Federal tax DAC (1,033,272) (1,167,596) ---------------- --------------- Deferred tax liability $ 8,561,010 $ 6,763,648 ================ =============== 4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN A. NET INVESTMENT INCOME - The following table reflects net investment income by type of investment: December 31, ---------------------------------------------------------- 2004 2003 2002 --------------- ---------------- ---------------- Fixed maturities and fixed maturities held for sale $ 7,060,761 $ 8,418,969 $ 10,302,735 Equity securities 657,609 456,361 131,778 Mortgage loans 1,209,358 1,522,700 1,749,935 Real estate 5,335,530 2,832,171 3,261,043 Policy loans 918,562 949,770 965,227 Short-term investments 80,241 11,161 26,522 Cash 111,986 137,478 211,293 --------------- ---------------- ---------------- Total consolidated investment income 15,374,047 14,328,610 16,648,533 Investment expenses (4,953,161) (4,058,110) (3,133,731) ---------------- ---------------- ---------------- Consolidated net investment income $ 10,420,886 $ 10,270,500 $ 13,514,802 =============== ================ ================ At December 31, 2004, the Company had a total of $ 805,787 in investment real estate, which did not produce income during 2004. The following table summarizes the Company's fixed maturity holdings and investments held for sale by major classifications: Carrying Value ---------------------------------------- 2004 2003 --------------- -------------- Investments held for sale: Fixed maturities U.S. Government, government agencies and authorities $ 41,632,843 $ 31,347,586 State, municipalities and political subdivisions 177,444 177,963 Collateralized mortgage obligations 79,643,440 89,117,375 All other corporate bonds 26,740,160 18,747,458 --------------- -------------- $ 148,193,887 $ 139,390,382 =============== ============== Equity securities Banks, trust and insurance companies $ 19,706,511 $ 1,517,159 Industrial and miscellaneous 4,692,661 7,845,006 --------------- -------------- $ 24,399,172 $ 9,362,165 =============== ============== Carrying Value ---------------------------------------- 2004 2003 --------------- -------------- Fixed maturities held to maturity: U.S. Government, government agencies and authorities $ 7,801,268 $ 10,676,106 State, municipalities and political subdivisions 2,448,293 6,342,369 Collateralized mortgage obligations 58,453 77,802 Public utilities 0 5,397,880 All other corporate bonds 1,665,401 4,230,350 --------------- -------------- $ 11,973,415 $ 26,724,507 =============== ============== Securities of affiliate $ 4,000,000 $ 4,000,000 =============== ============== By insurance statute, the majority of the Company's investment portfolio is invested in investment grade securities to provide ample protection for policyholders. Below investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. Debt securities classified as below-investment grade are those that receive a Standard & Poor's rating of BB or below. The following table summarizes securities held, at amortized cost, that are below investment grade by major classification: Below Investment Grade Investments 2004 2003 ----------------------------- -------------- ------------ Public Utilities $ 0 $ 1,001,673 CMO 15,764 24,984 Corporate 2,123,028 1,818,673 ------------- ------------ Total $ 2,138,792 $ 2,845,330 ============= ============ B. INVESTMENT SECURITIES The amortized cost and estimated market values of investments in securities including investments held for sale are as follows: Cost or Gross Gross Estimated Amortized Unrealized Unrealized Market 2004 Cost Gains Losses Value - ------------------------------------ -------------- ------------- --------------- -------------- Investments held for sale: Fixed maturities U.S. Government and govt. agencies and authorities $ 41,377,077 $ 384,193 $ (128,427) $ 41,632,843 States, municipalities and political subdivisions 162,025 15,419 0 177,444 Collateralized mortgage obligations 79,634,753 459,508 (450,821) 79,643,440 Public utilities 0 0 0 0 All other corporate bonds 26,043,598 792,693 (96,131) 26,740,160 -------------- ------------- --------------- -------------- 147,217,453 1,651,813 (675,379) 148,193,887 Equity securities 15,216,214 10,214,201 (1,031,243) 24,399,172 -------------- ------------- --------------- -------------- Total $ 162,433,667 $ 11,866,014 $ (1,706,622) $ 172,593,059 ============== ============= =============== ============== Fixed maturities held to maturity: U.S. Government and govt. agencies and authorities $ 7,801,268 $ 43,237 $ (40,910) $ 7,803,595 States, municipalities and political subdivisions 2,448,293 116,815 0 2,565,108 Collateralized mortgage obligations 58,453 661 (1,343) 57,771 Public utilities 0 0 0 0 All other corporate bonds 1,665,401 26,833 (20,920) 1,671,314 -------------- ------------- --------------- -------------- Total $ 11,973,415 $ 187,546 $ (63,173) $ 12,097,788 ============== ============= =============== ============== Securities of affiliate $ 4,000,000 $ 0 $ 0 $ 4,000,000 ============== ============= =============== ============== Cost or Gross Gross Estimated Amortized Unrealized Unrealized Market 2003 Cost Gains Losses Value - ------------------------------------ -------------- ------------- --------------- -------------- Investments held for sale: Fixed maturities U.S. Government and govt. agencies and authorities $ 30,850,682 $ 642,756 $ (145,852) $ 31,347,586 States, municipalities and political subdivisions 160,271 17,692 0 177,963 Collateralized mortgage obligations 90,353,657 429,542 (1,665,824) 89,117,375 Public utilities 0 0 0 0 All other corporate bonds 17,883,937 886,396 (22,875) 18,747,458 -------------- ------------- --------------- -------------- 139,248,547 1,976,386 (1,834,551) 139,390,382 Equity securities 7,209,443 2,152,722 0 9,362,165 -------------- ------------- --------------- -------------- Total $ 146,457,990 $ 4,129,708 $ (1,834,551) $ 148,752,757 ============== ============= =============== ============== Fixed maturities held to maturity: U.S. Government and govt. agencies and authorities $ 10,676,106 $ 229,788 $ 0 $ 10,905,894 States, municipalities and political subdivisions 6,342,369 231,132 (12,919) 6,560,582 Collateralized mortgage obligations 77,802 875 (444) 78,233 Public utilities 5,397,880 100,056 0 5,497,936 All other corporate bonds 4,230,350 188,071 (20,789) 4,397,632 -------------- ------------- --------------- -------------- Total $ 26,724,507 $ 749,922 $ (34,152) $ 27,440,277 ============== ============= =============== ============== Securities of affiliate $ 4,000,000 $ 0 $ 0 $ 4,000,000 ============== ============= =============== ============== The amortized cost and estimated market value of debt securities at December 31, 2004, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Fixed Maturities Held for Sale Estimated Amortized Market December 31, 2004 Cost Value - --------------------------------------------- -------------- -------------- Due in one year or less $ 3,974,952 $ 4,016,732 Due after one year through five years 49,501,280 50,431,776 Due after five years through ten years 7,018,679 7,085,760 Due after ten years 7,087,789 7,016,180 Collateralized mortgage obligations 79,634,753 79,643,439 -------------- -------------- Total $ 147,217,453 $ 148,193,887 ============== ============== Estimated Fixed Maturities Held to Maturity Amortized Market December 31, 2004 Cost Value - --------------------------------------------- -------------- -------------- Due in one year or less $ 5,041,510 $ 5,075,216 Due after one year through five years 5,504,794 5,534,706 Due after five years through ten years 751,410 771,845 Due after ten years 617,248 658,250 Collateralized mortgage obligations 58,453 57,771 -------------- -------------- Total $ 11,973,415 $ 12,097,788 ============== ============== An analysis of sales, maturities and principal repayments of the Company's fixed maturities portfolio for the years ended December 31, 2004, 2003 and 2002 is as follows: Cost or Gross Gross Proceeds Amortized Realized Realized From Year ended December 31, 2004 Cost Gains Losses Sale - ------------------------------------- --------------- ------------- --------------- --------------- Scheduled principal repayments, Calls and tenders: Held for sale $ 25,119,862 $ 8,062 $ (2,098) $ 25,125,826 Held to maturity 16,099,278 0 (801) 16,098,477 Sales: Held for sale 45,840,981 278,896 (352,551) 45,767,326 Held to maturity 0 0 0 0 --------------- ------------- --------------- --------------- Total $ 87,060,121 $ 286,958 $ (355,450) $ 86,991,629 =============== ============= =============== =============== Cost or Gross Gross Proceeds Amortized Realized Realized From Year ended December 31, 2003 Cost Gains Losses Sale - ------------------------------------- --------------- ------------- --------------- --------------- Scheduled principal repayments, Calls and tenders: Held for sale $ 60,702,967 $ 2,283 $ (13,872) $ 60,691,378 Held to maturity 30,923,388 0 (227) 30,923,161 Sales: Held for sale 12,863,340 0 (240,652) 12,622,688 Held to maturity 4,825,213 319,980 (2,639) 5,142,554 --------------- ------------- --------------- --------------- Total $ 109,314,908 $ 322,263 $ (257,390) $ 109,379,781 =============== ============= =============== =============== Cost or Gross Gross Proceeds Amortized Realized Realized From Year ended December 31, 2002 Cost Gains Losses Sale - ------------------------------------- --------------- ------------- --------------- --------------- Scheduled principal repayments, Calls and tenders: Held for sale $ 29,746,832 $ 1,689 $ 0 $ 29,748,521 Held to maturity 20,071,850 7,782 (6,744) 20,072,888 Sales: Held for sale 0 0 0 0 Held to maturity 0 0 0 0 --------------- ------------- --------------- --------------- Total $ 49,818,682 $ 9,471 $ (6,744) $ 49,821,409 =============== ============= =============== =============== Annually, the Company completes an analysis of sales of securities held to maturity to further assess the issuer's creditworthiness of fixed maturity holdings. Based on this analysis, certain issues were sold that had been classified as held to maturity. The Company considers these transactions rare and non recurring. C. INVESTMENTS ON DEPOSIT - At December 31, 2004, investments carried at approximately $ 5,939,498 were on deposit with various state insurance departments. 5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS The financial statements include various estimated fair value information at December 31, 2004 and 2003, as required by Statement of Financial Accounting Standards 107, Disclosure about Fair Value of Financial Instruments (SFAS 107). Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instrument required to be valued by SFAS 107 for which it is practicable to estimate that value: (a) Cash and Cash equivalents The carrying amount in the financial statements approximates fair value because of the relatively short period of time between the origination of the instruments and their expected realization. (b) Fixed maturities and investments held for sale Quoted market prices, if available, are used to determine the fair value. If quoted market prices are not available, management estimates the fair value based on the quoted market price of a financial instrument with similar characteristics. (c) Mortgage loans on real estate The fair values of mortgage loans are estimated using discounted cash flow analyses and interest rates being offered for similar loans to borrowers with similar credit ratings. (d) Policy loans It is not practical to estimate the fair value of policy loans as they have no stated maturity and their rates are set at a fixed spread to related policy liability rates. Policy loans are carried at the aggregate unpaid principal balances in the consolidated balance sheets, and earn interest at rates ranging from 4% to 8%. Individual policy liabilities in all cases equal or exceed outstanding policy loan balances. (e) Short-term investments For short-term instruments, the carrying amount is a reasonable estimate of fair value. Short-term instruments represent collateral loans and certificates of deposit with various banks that are protected under FDIC. (f) Notes payable For borrowings subject to floating rates of interest, carrying value is a reasonable estimate of fair value. For fixed rate borrowings fair value was determined based on the borrowing rates currently available to the Company for loans with similar terms and average maturities. The estimated fair values of the Company's financial instruments required to be valued by SFAS 107 are as follows as of December 31: 2004 2003 ------------------------------------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair Assets Amount Value Amount Value -------------- -------------- --------------- --------------- Fixed maturities $ 11,973,415 $ 12,097,788 $ 26,724,507 $ 27,440,277 Fixed maturities held for sale 148,193,887 148,193,887 139,390,382 139,390,382 Equity securities 20,399,172 20,399,172 9,362,165 9,362,165 Securities of affiliate 4,000,000 4,000,000 4,000,000 4,000,000 Mortgage loans on real estate 20,722,415 20,816,955 26,715,968 26,853,183 Investment in real estate 28,192,081 28,192,081 24,725,824 24,725,824 Policy loans 12,844,748 12,844,748 13,226,399 13,226,399 Short-term investments 39,489 39,489 34,677 34,677 Liabilities Notes payable 0 0 2,289,776 2,390,810 6. STATUTORY EQUITY AND INCOME FROM OPERATIONS The Company's insurance subsidiary is domiciled in Ohio and prepares its statutory-based financial statements in accordance with accounting practices prescribed or permitted by the Ohio insurance department. These principles differ significantly from accounting principles generally accepted in the United States of America. "Prescribed" statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, from company to company within a state, and may change in the future. UG's total statutory shareholders' equity was $ 21,860,401 and $ 13,008,198 at December 31, 2004 and 2003, respectively. The Company's life insurance subsidiary reported a statutory operating income (loss) before taxes (exclusive of intercompany dividends) of approximately $ (762,000), $ (1,461,000) and $ 2,700,000 for 2004, 2003 and 2002, respectively. 7. REINSURANCE As is customary in the insurance industry, the insurance subsidiary of the Company cedes insurance to, and assumes insurance from, other insurance companies under reinsurance agreements. Reinsurance agreements are intended to limit a life insurer's maximum loss on a large or unusually hazardous risk or to obtain a greater diversification of risk. The ceding insurance company remains primarily liable with respect to ceded insurance should any reinsurer be unable to meet the obligations assumed by it. However, it is the practice of insurers to reduce their exposure to loss to the extent that they have been reinsured with other insurance companies. The Company sets a limit on the amount of insurance retained on the life of any one person. The Company will not retain more than $ 125,000, including accidental death benefits, on any one life. At December 31, 2004, the Company had gross insurance in force of $ 3.141 billion of which approximately $ 531 million was ceded to reinsurers. The Company's reinsured business is ceded to numerous reinsurers. The Company monitors the solvency of its reinsurers in seeking to minimize the risk of loss in the event of a failure by one of the parties. The primary reinsurers of the Company are large, well capitalized entities. Currently, the Company is utilizing reinsurance agreements with Generali USA Life Reassurance Company, (Generali) and Swiss Re Life and Health America Incorporated (SWISS RE). Generali and SWISS RE currenty hold an "A" (Excellent), and "A+" (Superior) rating, respectively, from A.M. Best, an industry rating company. The reinsurance agreements were effective December 1, 1993, and cover most new business of the Company. The agreements are a yearly renewable term (YRT) treaty where the Company cedes amounts above its retention limit of $ 100,000 with a minimum cession of $ 25,000. In addition to the above reinsurance agreements, the Company entered into reinsurance agreements with Optimum Re Insurance Company (Optimum) during 2004 to provide reinsurance on new products released for sale in 2004. The agreements are yearly renewable term (YRT) treaties where the Company cedes amounts above its retention limit of $100,000 with a minimum cession of $25,000 as has been a Company practice for the last several years with its reinsurers. Also, effective January 1, 2005, Optimum became the reinsurer of 100% of the accidental death benefits (ADB) in force of the Company. Previously, Generali provided this coverage. This coverage is renewable annually at the Company's option. Optimum specializes in reinsurance agreements with small to mid-size carriers such as the Company. Optimum currently holds an "A-" (Excellent) rating from A.M. Best. UG entered a coinsurance agreement with Park Avenue Life Insurance Company (PALIC) as of September 30, 1996. Under the terms of the agreement, UG ceded to PALIC substantially all of its paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. PALIC and its ultimate parent The Guardian Life Insurance Company of America (Guardian), currently hold an "A" (Excellent), and "A+" (Superior) rating, respectively, from A.M. Best, an industry rating company. The PALIC agreement accounts for approximately 68% of the reinsurance reserve credit, as of December 31, 2004. On September 30, 1998, UG entered into a coinsurance agreement with The Independent Order of Vikings, an Illinois fraternal benefit society (IOV). Under the terms of the agreement, UG agreed to assume, on a coinsurance basis, 25% of the reserves and liabilities arising from all in-force insurance contracts issued by the IOV to its members. At December 31, 2004, the IOV insurance in-force was approximately $ 1,686,000, with reserves being held on that amount of approximately $ 393,000. On June 1, 2000, UG assumed an already existing coinsurance agreement, dated January 1, 1992, between Lancaster Life Reinsurance Company (LLRC), an Arizona corporation and Investors Heritage Life Insurance Company (IHL), a corporation organized under the laws of the Commonwealth of Kentucky. Under the terms of the agreement, LLRC agreed to assume from IHL a 90% quota share of new issues of credit life and accident and health policies that have been written on or after January 1, 1992 through various branches of the First Southern National Bank. The maximum amount of credit life insurance that can be assumed on any one individual's life is $ 15,000. UG assumed all the rights and obligations formerly held by LLRC as the reinsurer in the agreement. LLRC liquidated its charter immediately following the transfer. At December 31, 2004, IHL has insurance in-force of approximately $ 2,295,000, with reserves being held on that amount of approximately $ 33,000. The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 2004, 2003 and 2002 was as follows: Shown in thousands ----------------------------------------------------- 2004 2003 2002 Premiums Premiums Premiums Earned Earned Earned ---------------- ---------------- ---------------- Direct $ 17,238 $ 18,087 $ 18,597 Assumed 38 34 96 Ceded (3,036) (2,896) (2,701) ---------------- ---------------- ---------------- Net premiums $ 14,240 $ 15,225 $ 15,992 ================ ================ ================ 8. 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. 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 Company has no control over such assessments. On June 10, 2002 UTG and Fiserv formed an alliance between their respective organizations to provide third party administration (TPA) services to insurance companies seeking business process outsourcing solutions. Fiserv will be responsible for the marketing and sales function for the alliance, as well as providing the operations processing service for the Company. The Company will staff the administration effort. To facilitate the alliance, the Company plans to convert its existing business and TPA clients to "ID3", a software system owned by Fiserv to administer an array of life, health and annuity products in the insurance industry. Fiserv 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. In June 2002, the Company entered into a five-year contract with Fiserv for services related to its purchase of the "ID3" software system. Under the contract, the Company is required to pay $ 12,000 per month in software maintenance costs and $ 5,000 per month in offsite data center costs for a five-year period from the date of the signing. On April 25, 2003 the Company entered into an agreement with Fiserv for the conversion of the two TPA client companies to the "ID3" system. The conversion was successfully completed in December 2003 utilizing Company personnel with onsite training and guidance provided by Fiserv. During 2004, the Company began the conversion of the remaining insurance business to the "ID3" software system and successfully completed the first phase of this project. The remaining blocks of business will be completed during 2005. In the normal course of business the Company is involved from time to time in various legal actions and other state and federal proceedings. There were no proceedings pending or threatened as of December 31, 2004. 9. RELATED PARTY TRANSACTIONS On September 1, 2004, UTG contributed the common stock of its wholly-owned subsidiary, North Plaza, to its life insurance subsidiary, UG. The contribution, which received prior approval by the regulatory authorities, increased the capital of the life insurance subsidiary by $ 7,857,794. On February 20, 2003, UG purchased $ 4,000,000 of a trust preferred security offering issued by FSBI. The security has a mandatory redemption after 30 years with a call provision after 5 years. The security pays a quarterly dividend at a fixed rate of 6.515%. The Company received $ 264,842 and $ 226,104 of dividends in 2004 and 2003, respectively. On June 18, 2003, UG entered into a lease agreement with Bandyco, LLC, an affiliated entity, for a one-sixth interest in an aircraft. Bandyco, LLC is affiliated with Ward F. Correll, who is a director of the Company. The lease term is for a period of five years at a total cost of $ 523,831 per year. The Company is responsible for its share of annual non-operational costs, in addition to the operational costs as are billable for specific use. On November 6, 2003, UG purchased real estate at a cost of $ 2,220,256 from an outside third party through the formation of an LLC in which UG is a two-thirds owner. The other one-third partner is Millard V. Oakley, who is a former Director of UTG. Hampshire Plaza Garage is a 578 space parking garage located in New Hampshire. 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 (See Note 10.A. to the consolidated financial statements). On November 20, 1998, FSF and 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 (See Note 10.C. to the consolidated financial statements). At the March 2003 Board of Directors meeting, the Appalachian Life Insurance Company (APPL) and UG Boards reaffirmed the merger of APPL with and into UG and approved the final merger documents. Upon receiving the necessary regulatory approvals, the merger of Abraham Lincoln Insurance Company (ABE) and APPL with and into UG was consummated effective July 1, 2003. ABE and APPL were each 100% owned subsidiaries of UG prior to the merger. Management of the Company believes the completion of the mergers will provide the Company with additional cost savings. These cost savings result from streamlining the Company's operations and organizational structure from three life insurance subsidiaries to one life insurance subsidiary, UG. Thus, the Company will further improve administrative efficiency. On January 1, 1993, UTG entered an agreement with UG pursuant to which UTG provided management services necessary for UG to carry on its business. UG paid $ 5,625,451, $ 5,906,406 and $ 3,025,194 to UTG in 2004, 2003 and 2002, respectively, under this arrangement. ABE paid fees to FCC pursuant to a cost sharing and management fee agreement. FCC provided management services for ABE to carry on its business. The agreement required ABE to pay a percentage of the actual expenses incurred by FCC based on certain activity indicators of ABE business to the business of all the insurance company subsidiaries plus a management fee based on a percentage of the actual expenses allocated to ABE. ABE paid fees of $ 188,494 in 2002 under this agreement. ABE paid fees of $ 165,269 and $ 170,729 in 2003 and 2002, respectively, to UTG under this agreement. APPL had a management fee agreement with FCC whereby FCC provided certain administrative duties, primarily data processing and investment advice. APPL paid fees of $ 222,000 during 2002 to FCC under this agreement. APPL paid fees of $ 222,000 and $ 222,000 to UTG during 2003 and 2002, respectively, under this agreement. Respective domiciliary insurance departments have approved the agreements of the insurance companies and it is Management's opinion that where applicable, costs have been allocated fairly and such allocations are based upon accounting principles generally accepted in the United States of America. Since the Company's affiliation with FSF, UG has acquired mortgage loans through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. UG pays a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $ 45,468, $ 63,214 and $ 70,140 in servicing fees and $ 0, $ 13,821 and $ 35,127 in origination fees to FSNB during 2004, 2003 and 2002, respectively. The Company reimbursed expenses incurred by Mr. Jesse T. Correll and Mr. Randall L. Attkisson relating to travel and other costs incurred on behalf of or relating to the Company. The Company paid $ 50,098, $ 20,238 and $ 74,621 in 2004, 2003 and 2002, respectively to First Southern Bancorp, Inc. in reimbursement of such costs. In addition, beginning in 2001, the Company began reimbursing FSBI a portion of salaries and pension costs for Mr. Correll and Mr. Attkisson. The reimbursement was approved by the UTG Board of Directors and totaled $ 160,440, $ 151,440 and $ 169,651 in 2004, 2003 and 2002, respectively, which included salaries and other benefits. 10. CAPITAL STOCK TRANSACTIONS A. EMPLOYEE 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. During 2004 and 2003, the Board of Directors of UTG approved offerings under the plan to qualified individuals. For the years ended December 31, 2004 and 2003, four individuals purchased 14,440 and eight individuals purchased 58,891 shares of UTG common stock, respectively. Each participant under the plan executed 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. At December 31, 2004, UTG had 89,877 shares outstanding that were issued under this program with a value of $ 11.63 per share pursuant to the above formula. B. STOCK REPURCHASE PROGRAM On June 5, 2001, the Board of Directors of UTG authorized the repurchase in the open market or in privately negotiated transactions of up to $ 1 million of UTG's common stock. On June 16, 2004, an additional $ 1 million was authorized for repurchasing shares. Repurchased shares are available for future issuance for general corporate purposes. Through February 24, 2005, UTG has spent $ 1,181,691 in the acquisition of 181,316 shares under this program. C. SHARES ACQUIRED BY FSF AND AFFILIATES WITH OPTIONS GRANTED On November 20, 1998, FSF and 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 was an earnings covenant whereby UTG warranted UTG and its subsidiaries and affiliates would have future earnings of at least $ 30,000,000 for a five-year period beginning January 1, 1998. Such earnings were 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 was 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. If UTG did not meet the covenant requirements, any shortfall would first be reduced by the actual average tax rate for UTG for the period, and then would be further reduced by one-half of the percentage, if any, representing UTG's ownership percentage of the insurance company subsidiaries. This result would then be reduced by $ 250,000. The remaining amount would 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. However, there was to be no limit to the number of shares transferred to the extent that there were legal fees, settlements, damage payments or other losses as a result of certain legal action taken. The price and number of shares was adjusted for any applicable stock splits, stock dividends or other recapitalizations. For the five-year period starting January 1, 1998 and ending December 31, 2003, the Company had total earnings of $ 17,011,307 applicable to this covenant. Therefore, UTG did not meet the earnings requirements stipulated, and during 2003, UTG was required to issue 500,000 additional shares to FSF or its assigns. D. EARNINGS PER SHARE CALCULATIONS The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations as presented on the income statement. For the year ended December 31, 2004 ---------------- ----- ------------------ ---- ----------------- Income(Loss) Shares Per-Share (Numerator) (Denominator) Amount ---------------- ------------------ ----------------- Basic EPS Income available to common shareholders $ (275,619) 3,986,731 $ (.07) ================= Effect of Dilutive Securities Options 0 0 ---------------- ------------------ Diluted EPS Income available to common shareholders and $ assumed conversions (275,619) 3,986,731 $ (0.07) ================ ================== ================= For the year ended December 31, 2003 ------------------ --- ------------------ ---- ----------------- Income (Loss) Shares Per-Share (Numerator) (Denominator) Amount ------------------ ------------------ ----------------- Basic EPS Income available to common shareholders $ (6,396,490) 3,839,947 $ (1.67) ================= Effect of Dilutive Securities Options 0 0 ------------------ ------------------ Diluted EPS Income available to common shareholders and $ assumed conversions (6,396,490) 3,839,947 $ (1.67) ================== ================== ================= For the year ended December 31, 2002 --------------- ------ ------------------ ---- ----------------- Income Shares Per-Share (Numerator) (Denominator) Amount --------------- ------------------ ----------------- Basic EPS Income available to common shareholders $ 1,338,795 3,505,424 $ 0.38 ================= Effect of Dilutive Securities Earnings covenant 0 500,000 Options 0 0 --------------- ------------------ Diluted EPS Income available to common shareholders and $ assumed conversions 1,338,795 4,005,424 $ 0.33 =============== ================== ================= In accordance with Statement of Financial Accounting Standards No. 128, the computation of diluted earnings per share is the same as basic earnings per share for the years ending December 31, 2004 and 2003, since the Company had a loss from continuing operation for the year presented, and any assumed conversion, exercise, or contingent issuance of securities would have an antidilutive effect on earnings per share. At December 31, 2002, UTG had an obligation to issue to FSF or its assigns 500,000 shares of UTG common stock, as the result of a failed earnings covenant (See note 10.C. to the consolidated financial statements). As such, the computation of diluted earnings per share differs from basic earnings per share for the year ending December 31, 2002. 11. NOTES PAYABLE At December 31, 2004, the Company had no long-term debt outstanding. At December 31, 2003, the Company had $ 2,289,776 in long-term debt outstanding. The notes payable were incurred in April 2001 to facilitate the repurchase of common stock owned primarily by two former Officers and Directors of UTG, and members of their respective families. These notes bore interest at the fixed rate of 7% per annum (paid quarterly) with payments of principal to be made in five equal installments. UTG has paid the entire principal balance on these notes. During 2001, UTG was extended a $ 3,300,000 line of credit (LOC) from the First National Bank of the Cumberlands (FNBC) located in Livingston, Tennessee. The LOC was for a one-year term from the date of issue. Upon maturity the Company has renewed the LOC for an additional one-year term. The interest rate on the LOC is variable and indexed to be the lowest of the U.S. prime rates as published in the Wall Street Journal, with any interest rate adjustments to be made monthly. No borrowings were incurred during 2004 and 2003. During 2002, UTG was extended a $ 5,000,000 line of credit (LOC) from Southwest Bank of St. Louis. The LOC expired one year from the date of issue and has been renewed for an additional term. As collateral for any draws under the line of credit, UTG pledged 100% of the common stock of its insurance subsidiary, UG. Borrowings under the LOC will bear interest at the rate of 0.25% in excess of Southwest Bank of St. Louis' prime rate. At December 31, 2004 and 2003, the Company had no outstanding borrowings attributable to this LOC. During 2004, UTG drew $ 2,275,000 on this LOC to repay the outstanding principal balances on the notes payable describe above. The entire draw was repaid during 2004. 12. OTHER CASH FLOW DISCLOSURES On a cash basis, the Company paid $ 77,453, $ 162,179, and $ 263,441 in interest expense for the years 2004, 2003 and 2002, respectively. The Company paid $ 110,000, $ 175,000, and $ 60,290 in federal income tax for 2004, 2003 and 2002, respectively. As of December 31, 2004, the Company has $ 450,250 that has not been disbursed to former minority shareholders of FCC in connection with FCC's merger with and into UTG. The total consideration to be paid by the Company to the former minority shareholders as a result of the merger is $ 2,480,000 (See Note 15 to the consolidated financial statements). At December 31, 2004, the Company acquired $ 2,990,928 in fixed maturity investments for which the cash had not yet been paid. The payable for these securities is included in the line item "Other liabilities" on the consolidated balance sheet. 13. 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 the largest shareholder of UTG, Mr. Jesse T. Correll, the Company's CEO and Chairman. In aggregate at December 31, 2004 these accounts have no balances 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. 14. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") has issued Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits (an amendment of FASB Statements 87, 88 and 106). Statement No. 132 was developed to address concerns of users of financial statements regarding their need for more information about pension plan assets, obligations, benefit payment, contributions and net benefit costs. This statement was effective at the beginning of the first interim period beginning after December 15, 2003. The adoption of Statement 132 (revised 2003) did not affect the Company's financial position or results of operations, since the Company has no such plans that meet the provisions of this statement. The Financial Accounting Standards Board ("FASB") has issued Statement No. 151, Inventory Costs--an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. The adoption of Statement 151 does not currently affect the Company's financial position or results of operations, since the Company has no inventory costs that meet the provisions of this statement. The Financial Accounting Standards Board ("FASB") has issued Statement No. 152, Accounting for Real Estate Time-Sharing Transactions. Statement No. 152 amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. Statement No. 152 also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. The adoption of Statement 152 does not currently affect the Company's financial position or results of operations, since the Company has no real estate interests that meet the provisions of this statement. The Financial Accounting Standards Board ("FASB") has issued Statement No. 153, Exchanges of Nonmonetary Assets. Statement No. 153 amends APB Opinion No. 29, Accounting for Nonmonetary Transactions, to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. This statement is effective for financial statements for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company will account for all future nonmonetary asset exchanges in accordance with the requirements of Statement No. 153. The Financial Accounting Standards Board ("FASB") has issued Statement No. 123 (revised 2004), Share Based Payment. Statement No. 123 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company will account for all future share based payments in accordance with the requirements of Statement No. 123. 15. 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 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 December 31, 2002. December 31, 2002 -------------------- Total revenues $ 30,064,644 Total benefits and other expenses $ 27,927,456 Operating income $ 2,137,188 Net Income $ 1,394,218 Basic earnings per share $ 0.40 Diluted earnings per share $ 0.35 16. COMPREHENSIVE INCOME Tax Before-Tax (Expense) Net of Tax 2004 Amount or Benefit Amount ------------------------------------------ ---------------- ------------------- --------------- Unrealized holding gains during period $ 7,896,605 $ (2,763,812) $ 5,132,793 Less: reclassification adjustment for gains realized in net income (31,766) (11,118) (20,648) ---------------- ------------------- --------------- Net unrealized gains 7,864,838 (2,752,693) 5,112,145 ---------------- ------------------- --------------- Other comprehensive income $ 7,864,838 $ (2,752,693) $ 5,112,145 ================ =================== =============== Tax Before-Tax (Expense) Net of Tax 2003 Amount or Benefit Amount ------------------------------------------ ---------------- ------------------- --------------- Unrealized holding losses during period $ (1,941,662) $ 679,582 $ (1,262,080) Less: reclassification adjustment for losses realized in net income 86,979 (30,443) 56,536 ---------------- ------------------- --------------- Net unrealized losses (1,854,683) 649,139 (1,205,544) ---------------- ------------------- --------------- Other comprehensive deficit $ (1,854,683) $ 649,139 $ (1,205,544) ================ =================== =============== Tax Before-Tax (Expense) Net of Tax 2002 Amount or Benefit Amount ------------------------------------------ ---------------- ------------------- --------------- Unrealized holding gains during period $ 2,868,146 $ (1,003,851) $ 1,864,295 Less: reclassification adjustment for gains realized in net income (1,689) 591 (1,098) ---------------- ------------------- --------------- Net unrealized gains 2,866,457 (1,003,260) 1,863,197 ---------------- ------------------- --------------- Other comprehensive income $ 2,866,457 $ (1,003,260) $ 1,863,197 ================ =================== =============== In 2004, 2003 and 2002, the Company established a deferred tax liability of $ 3,555,787, $ 803,095 and $ 1,170,197, respectively, for the unrealized gains based on the applicable United States statutory rate of 35%. 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 2004 -------------------- --------------------- --------------------- -------------------- 1st 2nd 3rd 4th --------------- --------------- --------------- --------------- Premiums and policy fees, net $ 3,874,145 $ 3,671,667 $ 3,389,672 $ 3,204,945 Net investment income 1,831,077 2,734,854 2,865,198 2,989,757 Total revenues 5,833,347 6,607,203 6,429,302 6,597,027 Policy benefits including dividends 5,172,042 4,923,292 4,467,013 4,203,360 Commissions and amortization of DAC and COI 493,284 505,872 544,678 635,077 Operating expenses 1,397,448 1,432,013 1,319,472 1,163,814 Operating income (1,255,061) (278,683) 71,029 594,776 Net income (874,195) 66,841 141,264 390,473 Basic earnings per share (0.22) 0.02 0.04 0.09 Diluted earnings per share (0.22) 0.02 0.04 0.09 2003 -------------------- --------------------- --------------------- -------------------- 1st 2nd 3rd 4th --------------- --------------- --------------- --------------- Premiums and policy fees, net $ 3,883,003 $ 4,093,239 $ 3,686,584 $ 3,360,212 Net investment income 2,888,444 3,231,542 2,462,813 1,687,701 Total revenues 7,185,509 7,811,693 6,498,785 4,992,371 Policy benefits including dividends 5,520,920 4,931,443 5,516,224 5,102,089 Commissions and amortization of DAC and COI 544,139 441,914 513,488 5,507,726 Operating expenses 1,169,139 3,500,807 1,451,973 1,444,861 Operating income (loss) (90,406) (1,102,433) (1,023,300) (7,102,405) Net income (loss) (494,124) (669,492) (464,142) (4,768,732) Basic earnings (loss) per share 0.14) (0.17) (0.12) (1.24) Diluted earnings (loss) per share (0.12) (0.17) (0.12) (1.24) 2002 -------------------- --------------------- --------------------- -------------------- 1st 2nd 3rd 4th --------------- --------------- --------------- --------------- Premiums and policy fees, net $ 4,276,861 $ 4,388,284 $ 3,725,823 $ 3,440,609 Net investment income 3,396,613 3,383,548 3,294,038 3,440,603 Total revenues 7,882,176 7,994,915 7,211,394 7,088,714 Policy benefits including dividends 4,835,106 4,609,999 5,110,590 4,930,553 Commissions and amortization of DAC and COI 688,618 578,688 501,283 532,722 Operating expenses 1,530,433 1,649,134 1,441,502 1,255,387 Operating income 755,809 1,095,700 86,789 311,445 Net income (loss) 477,034 722,679 327,499 (188,417) Basic earnings (loss) per share 0.14 0.21 0.08 (0.05) Diluted earnings (loss) per share 0.12 0.18 0.08 (0.05) ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE ITEM 9A. 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 III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF UTG The Board Of Directors In accordance with the laws of Illinois and the Certificate of Incorporation and Bylaws of UTG, as amended, UTG is managed by its executive officers under the direction of the Board of Directors. The Board elects executive officers, evaluates their performance, works with management in establishing business objectives and considers other fundamental corporate matters, such as the issuance of stock or other securities, the purchase or sale of a business and other significant corporate business transactions. In the fiscal year ended December 31, 2004, the Board met 4 times. All directors attended at least 75% of all meetings of the board, except Mr. John Albin and Mr. Ward Correll. The Board of Directors has an Audit Committee consisting of Messrs. Perry, Albin, and Brinck. The Audit Committee performs such duties as outlined in the Company's Audit Committee Charter. The Audit Committee reviews and acts or reports to the Board with respect to various auditing and accounting matters, the scope of the audit procedures and the results thereof, internal accounting and control systems of UTG, the nature of services performed for UTG and the fees to be paid to the independent auditors, the performance of UTG's independent and internal auditors and the accounting practices of UTG. The Audit Committee also recommends to the full Board of Directors the auditors to be appointed by the Board. The Audit Committee met twice in 2004. The Board has reviewed the qualifications of each member of the audit committee and determined no member of the committee meets the definition of a "financial expert". The Board concluded however, that each member of the committee has a proven track record as a successful businessman, each operating their own company and their experience as businessmen provide a knowledge base and experience adequate for participation as a member of the committee. The compensation of UTG's executive officers is determined by the full Board of Directors (see report on Executive Compensation). Under UTG's By-Laws, the Board of Directors should be comprised of at least six and no more than eleven directors. At December 31, 2004. the Board consisted of eight directors. Shareholders elect Directors to serve for a period of one year at UTG's Annual Shareholders' meeting. Directors and officers of UTG file periodic reports regarding ownership of Company securities with the Securities and Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934 as amended, and the rules promulgated thereunder. During 2004, UTG was aware of the following individual who filed a late Form 4, statement of changes in beneficial ownership of securities, with the Securities and Exchange Commission; Thomas F Darden, II, director. This individual reported a purchase of 4,315 shares of UTG stock. Audit Committee Report To Shareholders In connection with the December 31, 2004 financial statements, the audit committee: (1) reviewed and discussed the audited financial statements with management; (2) discussed with the auditors the matters required by Statement on Auditing Standards No. 61; and (3) received and discussed with the auditors the matters required by Independence Standards Board Statement No.1. Based upon these reviews and discussions, the audit committee recommended to the Board of Directors that the audited financial statements be included in the Annual Report on Form 10-K filed with the SEC. William W. Perry - Committee Chairman John S. Albin Joseph A. Brinck, II The following information with respect to business experience of the Board of Directors has been furnished by the respective directors or obtained from the records of UTG. Directors Name, Age Position with the Company, Business Experience and Other Directorships John S. Albin, 76 Director of UTG since 1984; farmer in Douglas and Edgar counties, Illinois, since 1951; Chairman of the Board of Longview State Bank from 1978 to 2005; President of the Longview Capitol Corporation, a bank holding company, since 1978; Chairman of First National Bank of Ogden, Illinois, from 1987 to 2005; Chairman of the State Bank of Chrisman from 1988 to 2005; Chairman of First National Bank in Georgetown from 1994 to 2005; Director and Secretary of Illini Community Development Corporation since 1990; Commissioner of Illinois Student Assistance Commission from 1996 to 2002. Randall L. Attkisson, 59 Director of UTG since 1999; President and Chief Operating Officer of UTG since 2001; Chief Financial Officer, Treasurer, Director of First Southern Bancorp, Inc, a bank holding company, since 1986; Treasurer, Director of First Southern Funding, LLC since 1992; Director of Kentucky Christian Foundation since 2002; Director of The River Foundation, Inc. since 1990; President of Randall L. Attkisson & Associates from 1982 to 1986; Commissioner of Kentucky Department of Banking & Securities from 1980 to 1982; Self-employed Banking Consultant in Miami, FL from 1978 to 1980. Joseph A. Brinck, II, 49 Director of UTG since 2003; CEO of Stelter & Brinck, LTD, a full service combustion engineering and manufacturing company from 1979 to present; President of Superior Thermal, LTD from 1990 to present. Currently holds Professional Engineering Licenses in Ohio, Kentucky, Indiana and Illinois. Jesse T. Correll, 48 Chairman and CEO of UTG since 2000; Director of UTG since 1999; Chairman, President, Director of First Southern Bancorp, Inc. since 1983; President, Director of First Southern Funding, LLC since 1992; President, Director of The River Foundation since 1990; Director of Thomas Nelson, Inc., a premier publisher of Bibles and Christian Books since 2001; Director of Computer Services, Inc., provider of bank technology products and services since 2001; Director of Global Focus since 2001; Young Life Dominican Republic Committee Member since 2000. Jesse Correll is the son of Ward Correll. Ward F. Correll, 76 Director of UTG since 2000; President, Director of Tradeway, Inc. of Somerset, KY since 1973; President, Director of Cumberland Lake Shell, Inc. of Somerset, KY since 1971; President, Director of Tradewind Shopping Center, Inc. of Somerset, KY since 1966; Director of First Southern Bancorp since 1988; Director of First Southern Funding, LLC since 1991; Director of The River Foundation since 1990; and Director First Southern Insurance Agency since 1987. Ward Correll is the father of Jesse Correll. Thomas F. Darden, 50 Mr. Darden is the Chief Executive Officer of Cherokee Investment Partners, a private equity fund with over $1 billion of capital for investing in brownfields. Cherokee has offices in North Carolina, Colorado, New Jersey, London, Toronto and Montreal. Beginning in 1984, he served for 16 years as the Chairman of Cherokee Sanford Group, the largest privately-held brick manufacturing company in the United States and previously the Southeast's largest soil remediation company. From 1981 to 1983, Mr. Darden was a consultant with Bain & Company in Boston. From 1977 to 1978, he worked as an environmental planner for the Korea Institute of Science and Technology in Seoul, where he was a Henry Luce Foundation Scholar. Mr. Darden is on the Boards of Shaw University and the University of North Carolina's environmental department. He is on the Board of Directors of the National Brownfield Association and on the Board of Trustees of North Carolina Environmental Defense. He was Chairman of the Research Triangle Transit Authority and served two terms on the N.C. Board of Transportation through appointments by the Governor and the Speaker of the House. Mr. Darden is a director of Winston Hotels, Inc. (NYSE) and serves on the Board of Governors of Research Triangle Institute in Research Triangle Park, NC. Mr. Darden earned a Masters in Regional Planning from the University of North Carolina at Chapel Hill, a JD from Yale Law School and a BA from the University of North Carolina at Chapel Hill, where he was a Morehead Scholar. His 1976 undergraduate thesis analyzed the environmental impact of third world development and his 1981 Yale thesis addressed interstate acid rain air pollution. Mr. Darden and his wife Jody have three children, ages 16 to 25. William W. Perry, 48 Director of UTG since 2001; Owner of SES Investments, Ltd., an oil and gas investments company since 1991; President of EGL Resources, Inc., an oil and gas operations company based in Texas and New Mexico since 1992; President of a real estate investment company; Chairman of Perry & Perry, Inc., a Texas oil and gas consulting company since 1977; Director of Young Life Foundation and involved with Young Life in various capacities; Director of Abel-Hangar Foundation, Director of University of Oklahoma Associates; Midland, Texas city council member since 2002 James P. Rousey, 46 Executive Vice President, Chief Administrative Officer and Director of UTG since September 2001; Regional CEO and Director of First Southern National Bank from 1988 to 2001. Board Member with the Illinois Fellowship of Christian Athletes since 2001. Executive Officers Of UTG More detailed information on the following executive officers of UTG appears under "Directors": Jesse T. Correll Chairman of the Board and Chief Executive Officer Randall L. Attkisson President and Chief Operating Officer James P. Rousey Executive Vice President and Chief Administrative Officer Other executive officers of UTG are set forth below: Name, Age Position with UTG and Business Experience Theodore C. Miller, 42 Corporate Secretary since December 2000, Senior Vice President and Chief Financial Officer since July 1997; Vice President since October 1992 and Treasurer from October 1992 to December 2003; Vice President and Controller of certain affiliated companies from 1984 to 1992. Vice President and Treasurer of certain affiliated companies from 1992 to 1997; Senior Vice President and Chief Financial Officer of subsidiary companies since 1997; Corporate Secretary of subsidiary companies since 2000. Code Of Ethics We have adopted a Code of Business Conduct and Ethics for our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions) and employees. Our Code of Business Conduct and Ethics is available to our stockholders by requesting a free copy of the Code of Business Conduct and Ethics by writing to us at United Trust Group, 5250 South Sixth St, Springfield, Illinois 62703. ITEM 11. EXECUTIVE COMPENSATION Executive Compensation Table The following table sets forth certain information regarding compensation paid to or earned by UTG's Chief Executive Officer and President, and each of the executive officers of UTG whose salary plus bonus exceeded $100,000 during UTG's last fiscal year: SUMMARY COMPENSATION TABLE Name and Annual Compensation Other Annual All Other (1) Principal Position Year Salary ($) Bonus ($) Compensation ($) Compensation ($) Jesse T. Correll (2) 2004 75,720 - - 4,500 Chairman of the Board 2003 75,720 - - 4,500 Chief Executive Officer 2002 75,000 - - 4,500 Randall L. Attkisson 2004 75,720 - - 4,500 President 2003 75,720 - - 4,500 2002 75,000 - - 4,500 Theodore C. Miller 2004 100,000 - - 3,000 Corporate Secretary 2003 100,000 3,000 - 3,000 Senior Vice President 2002 100,000 - - 3,000 Chief Financial Officer James P. Rousey 2004 135,000 - - 1,519 Executive Vice President 2003 135,000 - - 2,025 Chief Administrative Officer 2002 135,000 10,000 - 2,025 Member of the Board Douglas A. Dockter (3) 2004 100,000 1,000 - 2,700 Vice President 2003 100,000 4,000 - 2,689 2002 95,000 - - 2,316 (1) All Other Compensation consists of matching contributions to a Employee Savings Trust 401(k) Plan. (2) On March 27, 2000, Mr. Jesse T. Correll assumed the position as Chairman of the Board and Chief Executive Officer of UTG and each of its affiliates. In March 2001, the Board of Directors approved an annual salary for Mr. Correll of $75,000, with payments to begin on April 1, 2001. (3) Mr. Douglas A. Dockter is not considered an executive officer of UTG, but is included in this table pursuant to compensation disclosure requirements. Option/SAR Grants/Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values At December 31, 2004 there were no shares of the common stock of UTG subject to unexercised options held by the named executive officers. There were no options or stock appreciation rights granted to the named executive officers for the past three fiscal years. Compensation of Directors UTG's standard arrangement for the compensation of directors provides that each director shall receive an annual retainer of $2,400, plus $300 for each meeting attended and reimbursement for reasonable travel expenses. UTG's director compensation policy also provides that directors who are employees of UTG or its affiliates do not receive any compensation for their services as directors except for reimbursement for reasonable travel expenses for attending each meeting. Employment Contracts There are no employment agreements in effect with any executive officers of the Company. Compensation Committee Interlocks and Insider Participation UTG does not have a compensation committee and decisions regarding executive officer compensation are made by the full Board of Directors of UTG. The following persons served as directors of UTG during 2004 and were officers or employees of UTG or its affiliates during 2004: Jesse T. Correll, Randall L. Attkisson and James P. Rousey. Accordingly, these individuals have participated in decisions related to compensation of executive officers of UTG and its subsidiaries. During 2004, Jesse T. Correll and Randall L. Attkisson, executive officers of UTG and UG, were also members of the Board of Directors of UG. Jesse T. Correll and Randall L. Attkisson are each directors and executive officers of FSBI and participate in compensation decisions of FSBI. FSBI owns or controls directly and indirectly approximately 46.5% of the outstanding common stock of UTG. Performance Graph The following graph compares the cumulative total shareholder return on UTG's Common Stock during the five fiscal years ended December 31, 2004 with the cumulative total return on the NASDAQ Composite Index Performance and the NASDAQ Insurance Index (1). The graph assumes that $ 100 was invested on December 31, 1999 in each of the Company's common stock, the NASDAQ Composite Index, and the NASDAQ Insurance Stock Index, and that any dividends were reinvested.
(1) The Company selected the NASDAQ Composite Index Performance as an appropriate comparison since during the time period reflected, the Company's Common Stock was traded on the NASDAQ Small Cap exchange under the sign "UTGI" until December 31, 2001. Furthermore, the Company selected the NASDAQ Insurance Stock Index as the second comparison because there is no similar single "peer company" in the NASDAQ system with which to compare stock performance and the closest additional line-of-business index which could be found was the NASDAQ Insurance Stock Index. Trading activity in the Company's Common Stock is limited, which may be due in part as a result of the Company's low profile. The Return Chart is not intended to forecast or be indicative of possible future performance of the Company's Common Stock. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Principal Holders Of Securities The following tabulation sets forth the name and address of the entity known to be the beneficial owners of more than 5% of UTG's Common Stock and shows: (i) the total number of shares of common Stock beneficially owned by such person as of March 22, 2005 and the nature of such ownership; and (ii) the percent of the issued and outstanding shares of common stock so owned as of the same date. Title Amount Percent of Name and Address and Nature of of Class of Beneficial Owner(2) Beneficial Ownership Class (1) Common Jesse T. Correll 185,454 (3) 4.7% Stock, no First Southern Bancorp, Inc. 1,739,072 (3)(4) 44.0% par value First Southern Funding, LLC 335,453 (3)(4) 8.5% First Southern Holdings, LLC 1,483,791 (3)(4) 37.5% First Southern Capital Corp., LLC 237,333 (3)(4) 6.0% First Southern Investments, LLC 24,086 0.6% Ward F. Correll 98,523 (5) 2.5% WCorrell, Limited Partnership 72,750 (3) 1.8% Cumberland Lake Shell, Inc. 98,523 (5) 2.5% Total(6) 2,619,921 66.2% (1) The percentage of outstanding shares is based on 3,955,355 shares of Common Stock outstanding as of March 22, 2005. (2) The address for each of Jesse Correll, First Southern Bancorp, Inc. ("FSBI"), First Southern Funding, LLC ("FSF"), First Southern Holdings, LLC ("FSH"), First Southern Capital Corp., LLC ("FSC"), First Southern Investments, LLC ("FSI"), and WCorrell, Limited Partnership ("WCorrell LP"), is P.O. Box 328, 99 Lancaster Street, Stanford, Kentucky 40484. The address for each of Ward Correll and Cumberland Lake Shell, Inc. ("CLS") is P.O. Box 430, 150 Railroad Drive, Somerset, Kentucky 42502. (3) The share ownership of Jesse Correll listed includes 112,704 shares of Common Stock owned by him individually. The share ownership of Mr. Correll also includes 72,750 shares of Common Stock held by WCorrell, Limited Partnership, a limited partnership in which Jesse Correll serves as managing general partner and, as such, has sole voting and dispositive power over the shares held by it. In addition, by virtue of his ownership of voting securities of FSF and FSBI, and in turn, their ownership of 100% of the outstanding membership interests of FSH, Jesse Correll may be deemed to beneficially own the total number of shares of Common Stock owned by FSH (as well as the shares owned by FSBI directly), and may be deemed to share with FSH (as well as FSBI) the right to vote and to dispose of such shares. Mr. Correll owns approximately 79% of the outstanding membership interests of FSF; he owns directly approximately 50%, companies he controls own approximately 14%, and he has the power to vote but does not own an additional 3% of the outstanding voting stock of FSBI. FSBI and FSF in turn own 99% and 1%, respectively, of the outstanding membership interests of FSH. Mr. Correll is also a manager of FSC and thereby may also be deemed to beneficially own the total number of shares of Common Stock owned by FSC, and may be deemed to share with it the right to vote and to dispose of such shares. The aggregate number of shares of Common Stock held by these other entities, as shown in the above table, is 1,976,405 shares. (4) The share ownership of FSBI consists of 255,281 shares of Common Stock held by FSBI directly (which FSBI acquired by virtue of its merger with Dyscim, LLC) and 1,483,791 shares of Common Stock held by FSH of which FSBI is a 99% member and FSF is a 1% member, as further described below. As a result, FSBI may be deemed to share the voting and dispositive power over the shares held by FSH. (5) Represents the shares of Common Stock held by CLS, all of the outstanding voting shares of which are owned by Ward F. Correll and his wife. As a result, Ward F. Correll may be deemed to share the voting and dispositive power over these shares. (6) According to the most recent Schedule 13D, as amended, filed jointly by each of the entities and persons listed above, Jesse Correll, FSBI, FSF, FSH, FSC, and FSI, have agreed in principle to act together for the purpose of acquiring or holding equity securities of UTG. In addition, the Schedule 13D indicates that because of their relationships with Jesse Correll and these other entities, Ward Correll, CLS, and WCorrell, Limited Partnership may also be deemed to be members of this group. Because the Schedule 13D indicates that for its purposes, each of these entities and persons may be deemed to have acquired beneficial ownership of the equity securities of UTG beneficially owned by the other entities and persons, each has been identified and listed in the above tabulation. Security Ownership Of Management Of UTG The following tabulation shows with respect to each of the directors of UTG, with respect to UTG's chief executive officer and President, and each of UTG's executive officers whose salary plus bonus exceeded $100,000 for fiscal 2004, and with respect to all executive officers and directors of UTG as a group: (i) the total number of shares of all classes of stock of UTG or any of its parents or subsidiaries, beneficially owned as of March 1, 2005 and the nature of such ownership; and (ii) the percent of the issued and outstanding shares of stock so owned, and granted stock options available as of the same date. Title Directors, Named Executive Amount Percent of Officers, & All Directors & and Nature of of Class Executive Officers as a Group Ownership Class (1) UTG's John S. Albin 10,503 (4) * Common Randall L. Attkisson 0 (2) * Stock, no Joseph A. Brinck, II 0 * par value Jesse T. Correll 2,497,312 (3) 63.1% Ward F. Correll 98,523 (5) 2.4% Thomas F. Darden 21,095 (6) * Theodore C. Miller 10,000 (6) * William W. Perry 30,000 (6) * James P. Rousey 0 * All directors and executive officers as a group (ten in number) 2,667,433 67.4% (1) The percentage of outstanding shares for UTG is based on 3,955,355 shares of Common Stock outstanding as of March 22, 2005. (2) Randall L. Attkisson is an associate and business partner of Mr. Jesse T. Correll and holds minority ownership positions in certain of the companies listed as owning UTG Common Stock including First Southern Bancorp, Inc. Ownership of these shares is reflected in the ownership of Jesse T. Correll. (3) The share ownership of Mr. Correll includes 112,704 shares of United Trust Group common stock owned by him individually, 255,281 shares of United Trust Group common stock held by First Southern Bancorp, Inc. and 335,453 shares of United Trust Group common stock owned by First Southern Funding, LLC. The share ownership of Mr. Correll also includes 72,750 shares of United Trust Group common stock held by WCorrell, Limited Partnership, a limited partnership in which Mr. Correll serves as managing general partner and, as such, has sole voting and dispositive power over the shares held by it. In addition, by virtue of his ownership of voting securities of First Southern Funding, LLC and First Southern Bancorp, Inc., and in turn, their ownership of 100% of the outstanding membership interests of First Southern Holdings, LLC (the holder of 1,483,791 shares of United Trust Group common stock), Mr. Correll may be deemed to beneficially own the total number of shares of United Trust Group common stock owned by First Southern Holdings, and may be deemed to share with First Southern Holdings the right to vote and to dispose of such shares. Mr. Correll owns approximately 79% of the outstanding membership interests of First Southern Funding; he owns directly approximately 50%, companies he controls own approximately 14%, and he has the power to vote but does not own an additional 3% of the outstanding voting stock of First Southern Bancorp. First Southern Bancorp and First Southern Funding in turn own 99% and 1%, respectively, of the outstanding membership interests of First Southern Holdings. Mr. Correll is also a manager of First Southern Capital Corp., LLC, and thereby may also be deemed to beneficially own the 237,333 shares of United Trust Group common stock held by First Southern Capital, and may be deemed to share with it the right to vote and to dispose of such shares. Share ownership of Mr. Correll in United Trust Group common stock does not include 24,086 shares of United Trust Group common stock held by First Southern Investments, LLC. (4) Includes 392 shares owned directly by Mr. Albin's spouse. (5) Cumberland Lake Shell, Inc. owns 98,523 shares of UTG Common Stock, all of the outstanding voting shares of which are owned by Ward F. Correll and his wife. As a result Ward F. Correll may be deemed to share the voting and dispositive power over these shares. Ward F. Correll is the father of Jesse T. Correll. There are 72,750 shares of UTG Common Stock owned by WCorrell Limited Partnership in which Jesse T. Correll serves as managing general partner and, as such, has sole voting and dispositive power over the shares of Common Stock held by it. The aforementioned 72,750 shares are deemed to be beneficially owned by and listed under Jesse T. Correll in this section. (6) Shares subject to UTG Employee and Director Stock Purchase Plan. * Less than 1%. Except as indicated above, the foregoing persons hold sole voting and investment power. The following table reflects the Company's Employee and Director Stock Purchase Plan Information: - --------------------------------- ------------------------------ ------------------------------- ------------------------------ Plan category Number of securities to be Weighted-average exercise Number of securities issued upon exercise of price of outstanding options, remaining available for outstanding options, warrants and rights future issuance under warrants and rights employee and director stock purchase plans (excluding securities reflected in column (a)) (a) (b) (c) - --------------------------------- ------------------------------ ------------------------------- ------------------------------ Employee and director stock purchase plans approved by security holders 310,123 0 0 - --------------------------------- ------------------------------ ------------------------------- ------------------------------ Employee and director stock purchase plans not approved by security holders 0 0 0 - --------------------------------- ------------------------------ ------------------------------- ------------------------------ Total 0 0 310,123 - --------------------------------- ------------------------------ ------------------------------- ------------------------------ 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 allows for the issuance of up to 400,000 shares of UTG common stock. The plan's purpose is to encourage ownership of UTG stock by eligible directors and employees of UTG and its subsidiary 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. During 2004 and 2003, the Board of Directors of UTG approved offerings under the plan to qualified individuals. For the years ended December 31, 2004 and 2003, four individuals purchased 14,440 and eight individuals purchased 58,891 shares of UTG common stock, respectively. Each participant under the plan executed 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. At December 31, 2004, UTG had 89,877 shares outstanding that were issued under this program with a value of $ 11.63 per share pursuant to the above formula. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On September 1, 2004, UTG contributed the common stock of its wholly-owned subsidiary, North Plaza, to its life insurance subsidiary, UG. The contribution, which received prior approval by the regulatory authorities, increased the capital of the life insurance subsidiary by $ 7,857,794. On February 20, 2003, UG purchased $ 4,000,000 of a trust preferred security offering issued by FSBI. The security has a mandatory redemption after 30 years with a call provision after 5 years. The security pays a quarterly dividend at a fixed rate of 6.515%. The Company received $ 264,841 and $ 226,104 of dividends in 2004 and 2003, respectively. On June 18, 2003, UG entered into a lease agreement with Bandyco, LLC, an affiliated entity, for a one-sixth interest in an aircraft. Bandyco, LLC is affiliated with Ward F. Correll, who is a director of the Company. The lease term is for a period of five years at a cost of $ 523,831. The Company is responsible for its share of annual non-operational costs, in addition to the operational costs as are billable for specific use. On November 6, 2003, UG purchased real estate at a cost of $ 2,220,256 from an outside third party through the formation of an LLC in which UG is a two-thirds owner. The other one-third partner is Millard V. Oakley, who is a former Director of UTG. Hampshire Plaza Garage is a 578 space parking garage located in New Hampshire. 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 (See Note 10.A. to the consolidated financial statements). On November 20, 1998, FSF and 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 (See Note 10.C. to the consolidated financial statements). At the March 2003 Board of Directors meeting, the Appalachian Life Insurance Company (APPL) and UG Boards reaffirmed the merger of APPL with and into UG and approved the final merger documents. Upon receiving the necessary regulatory approvals, the merger of Abraham Lincoln Insurance Company (ABE) and APPL with and into UG was consummated effective July 1, 2003. ABE and APPL were each 100% owned subsidiaries of UG prior to the merger. Management of the Company believes the completion of the mergers will provide the Company with additional cost savings. These cost savings result from streamlining the Company's operations and organizational structure from three life insurance subsidiaries to one life insurance subsidiary, UG. Thus, the Company will further improve administrative efficiency. On January 1, 1993, UTG entered an agreement with UG pursuant to which UTG provided management services necessary for UG to carry on its business. UG paid $ 5,625,451, $ 5,906,406 and $ 3,025,194 to UTG in 2004, 2003 and 2002, respectively, under this arrangement. ABE paid fees to FCC pursuant to a cost sharing and management fee agreement. FCC provided management services for ABE to carry on its business. The agreement required ABE to pay a percentage of the actual expenses incurred by FCC based on certain activity indicators of ABE business to the business of all the insurance company subsidiaries plus a management fee based on a percentage of the actual expenses allocated to ABE. ABE paid fees of $ 188,494 in 2002 under this agreement. ABE paid fees of $ 165,269 and $ 170,729 in 2003 and 2002, respectively, to UTG under this agreement. APPL had a management fee agreement with FCC whereby FCC provided certain administrative duties, primarily data processing and investment advice. APPL paid fees of $ 222,000 during 2002 under this agreement. APPL paid fees of $ 222,000 and $ 222,000 to UTG during 2003 and 2002, respectively, under this agreement. Respective domiciliary insurance departments have approved the agreements of the insurance companies and it is Management's opinion that where applicable, costs have been allocated fairly and such allocations are based upon accounting principles generally accepted in the United States of America. Since the Company's affiliation with FSF, UG has acquired mortgage loans through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. UG pays a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $ 45,468, $ 63,214 and $ 70,140 in servicing fees and $ 0, $ 13,821 and $ 35,127 in origination fees to FSNB during 2004, 2003 and 2002, respectively. The Company reimbursed expenses incurred by Mr. Jesse T. Correll and Mr. Randall L. Attkisson relating to travel and other costs incurred on behalf of or relating to the Company. The Company paid $ 50,098, $ 20,238 and $ 74,621 in 2004, 2003 and 2002, respectively to First Southern Bancorp, Inc. in reimbursement of such costs. In addition, beginning in 2001, the Company began reimbursing FSBI a portion of salaries and pension costs for Mr. Correll and Mr. Attkisson. The reimbursement was approved by the UTG Board of Directors and totaled $ 160,960, $ 151,440 and $ 169,651 in 2004, 2003 and 2002, respectively, which included salaries and other benefits. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Kerber, Eck and Braeckel LLP ("KEB") served as UTG's independent certified public accounting firm for the fiscal year ended December 31, 2004 and for fiscal year ended December 31, 2003. In serving its primary function as outside auditor for UTG, KEB performed the following audit services: examination of annual consolidated financial statements; assistance and consultation on reports filed with the Securities and Exchange Commission; and assistance and consultation on separate financial reports filed with the State insurance regulatory authorities pursuant to certain statutory requirements. Audit Fees. Audit fees billed for these audit services in the fiscal year ended December 31, 2004 and December 31, 2003 totaled $ 99,970 and $ 115,000, respectively and audit fees billed for quarterly reviews of the Company's financial statements totaled $ 12,014 and $ 13,909 for the year 2004 and 2003, respectively. Audit Related Fees. No audit related fees were incurred by the Company from KEB for the fiscal years ended December 31, 2004 and December 31, 2003. Tax Fees. KEB did not render any services related to tax compliance, tax advice or tax planning for the fiscal years ended December 31, 2004 and December 31, 2003. All Other Fees. No other services besides the audit services described above were performed by, and therefore no other fees were billed by, KEB for services in the fiscal years ended December 31, 2004 and December 31, 2003. The audit committee of the Company appoints the independent certified public accounting firm, with the appointment approved by the entire Board of Directors. Non-audit related services to be performed by the firm are to be approved by the audit committee prior to engagement. The Company had no non-audit related services performed by KEB for the fiscal years ended December 31, 2004 and December 31, 2003. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as a part of the report: (1) Financial Statements: See Item 8, Index to Financial Statements (2) Financial Statement Schedules Schedule I - Summary of Investments - other than invested in related parties. Schedule II - Condensed financial information of registrant Schedule IV - Reinsurance Schedule V - Valuation and qualifying accounts NOTE: Schedules other than those listed above are omitted because they are not required or the information is disclosed in the financial statements or footnotes. (B) Exhibits: Index to Exhibits incorporated herein by this reference (See pages 73 and 74). INDEX TO EXHIBITS Exhibit Number 2(a) (4) Articles of Merger of First Commonwealth Corporation, A Virginia Corporation with and into United Trust Group, Inc., An Illinois Corporation dated as of May 30, 2002, including exhibits thereto. 3(a) (5) Articles of Incorporation of the Registrant and all amendments thereto. 3(b) (5) By-Laws for the Registrant and all amendments thereto. 4(a) (4) UTG's Agreement pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K with respect to long-term debt instruments. 10(a)(2) Coinsurance Agreement dated September 30, 1996 between Universal Guaranty Life Insurance Company and First International Life Insurance Company, including assumption reinsurance agreement exhibit and amendments. 10(b)(1) Management and Consultant Agreement dated as of January 1, 1993 between First Commonwealth Corporation and Universal Guaranty Life Insurance Company. 10(c)(1) Management Agreement dated December 20, 1981 between Commonwealth Industries Corporation, and Abraham Lincoln Insurance Company. 10(d)(1) Reinsurance Agreement dated January 1, 1991 between Universal Guaranty Life Insurance Company and Republic Vanguard Life Insurance Company. 10(e)(1) Reinsurance Agreement dated July 1, 1992 between United Security Assurance Company and Life Reassurance Corporation of America. 10(f)(1) Agreement dated June 16, 1992 between John K. Cantrell and First Commonwealth Corporation. 10(g)(1) Stock Purchase Agreement dated February 20, 1992 between United Trust Group, Inc. and Sellers. 10(h)(1) Amendment No. One dated April 20, 1992 to the Stock Purchase Agreement between the Sellers and United Trust Group, Inc. 10(i)(1) Security Agreement dated June 16, 1992 between United Trust Group, Inc. and the Sellers. 10(j)(1) Stock Purchase Agreement dated June 16, 1992 between United Trust Group, Inc. and First Commonwealth Corporation 10(k)(3) Universal note and security agreement dated November 15, 2001, between United Trust Group, Inc. and First National Bank of the Cumberlands. INDEX TO EXHIBITS Exhibit Number 10(l)(3) Line of credit agreement dated November 15, 2001, between United Trust Group, Inc. and First National Bank of the Cumberlands. 10(m)(4) United Trust Group, Inc. Employee and Director Stock Purchase Plan and form of related Stock Restriction and Buy-Sell Agreement. 21(a) (5) List of Subsidiaries of the Registrant. 31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). 31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). 32.1 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. 32.2 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. 99(a) (3) Audit Committee Charter. Footnote: (1) Incorporated by reference from the Company's Annual Report on Form 10-K, File No. 0-5392, as of December 31, 1993. (2) Incorporated by reference from the Company's Annual Report on Form 10-K, File No. 0-5392, as of December 31, 1996. (3) Incorporated by reference from the Company's Annual Report on Form 10-K, File No. 0-5392, as of December 31, 2001. (4) Incorporated by reference from the Company's Annual Report on Form 10-K, File No. 0-5392, as of December 31, 2002. (5) Incorporated by reference from the Company's Annual Report on Form 10-K, File No. 0-5392, as of December 31, 2003. UNITED TRUST GROUP, INC. SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES As of December 31, 2004 Schedule I Column A Column B Column C Column D - -------------------------------------------------------------------------- ---------------- ---------------- Amount at Which Shown in Balance Cost Value Sheet --------------- ---------------- ---------------- Fixed maturities: Bonds: United States Government and government agencies and authorities $ 7,801,268 $ 7,803,595 $ 7,801,268 State, municipalities, and political subdivisions 2,448,293 2,565,108 2,448,293 Collateralized mortgage obligations 58,453 57,771 58,453 Public utilities 0 0 0 All other corporate bonds 1,665,401 1,671,314 1,665,401 --------------- ---------------- ---------------- Total fixed maturities 11,973,415 $ 12,097,788 11,973,415 ================ Investments held for sale: Fixed maturities: United States Government and government agencies and authorities 41,377,077 $ 41,632,843 41,632,843 State, municipalities, and political subdivisions 162,025 177,444 177,444 Collateralized mortgage obligations 79,634,753 79,643,440 79,643,440 Public utilities 0 0 0 All other corporate bonds 26,043,598 26,740,160 26,740,160 --------------- ---------------- ---------------- 147,217,453 $ 148,193,887 148,193,887 ================ Equity securities: Banks, trusts and insurance companies 4,501,676 $ 4,692,661 4,692,661 All other corporate securities 10,714,538 19,706,511 19,706,511 --------------- ---------------- ---------------- 15,216,214 $ 24,399,172 24,399,172 ================ Mortgage loans on real estate 20,722,415 20,722,415 Investment real estate 28,192,081 28,192,081 Real estate acquired in satisfaction of debt 0 0 Policy loans 12,844,748 12,844,748 Other long-term investments 0 0 Short-term investments 39,489 39,489 --------------- ---------------- Total investments $ 236,205,815 $ 246,365,207 =============== ================ UNITED TRUST GROUP, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT Schedule II NOTES TO CONDENSED FINANCIAL INFORMATION (a) The condensed financial information should be read in conjunction with the consolidated financial statements and notes of United Trust Group, Inc. and Consolidated Subsidiaries. UNITED TRUST GROUP, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT ONLY BALANCE SHEETS As of December 31, 2004 and 2003 Schedule II 2004 2003 ---------------- --------------- ASSETS Investment in affiliates $ 46,758,363 $ 44,724,882 Cash and cash equivalents 502,375 439,734 FIT recoverable 10,051 988 Accrued interest income 26,751 26,058 Receivable from affiliates, net 391,694 18,477 Other assets 366,682 471,448 ---------------- --------------- Total assets $ 48,055,916 $ 45,681,587 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable $ 0 $ 2,289,776 Deferred income taxes 2,022,606 2,008,445 Other liabilities 1,582,205 1,686,727 ---------------- --------------- Total liabilities 3,604,811 5,984,948 Shareholders' equity: Common stock, net of treasury shares 79,315 80,008 Additional paid-in capital, net of treasury 42,590,820 42,672,189 Accumulated other comprehensive income of affiliates 6,678,542 1,566,397 Accumulated deficit (4,897,572) (4,621,955) ---------------- --------------- Total shareholders' equity 44,451,105 39,696,639 ---------------- --------------- Total liabilities and shareholders' equity $ 48,055,916 $ 45,681,587 ================ =============== UNITED TRUST GROUP, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS Three Years Ended December 31, 2004 Schedule II 2004 2003 2002 --------------- ---------------- ---------------- Revenues: Management fees from affiliates $ 5,790,843 $ 6,031,472 $ 6,510,753 Other income from affiliates 0 0 0 Interest income from affiliates 0 0 324,467 Interest income 4,933 7,904 11,215 Other income 0 50,137 52,163 --------------- ---------------- ---------------- 5,795,776 6,089,513 6,898,598 Expenses: Interest expense 77,453 162,179 263,441 Operating expenses 5,085,180 5,335,851 5,669,116 --------------- ---------------- ---------------- 5,162,633 5,498,030 5,932,557 --------------- ---------------- ---------------- Operating income 633,143 591,483 966,041 Income tax expense (105,098) (263,992) (327,472) Equity in income (loss) of subsidiaries (803,662) (6,723,981) 700,226 --------------- ---------------- ---------------- Net income (loss) $ (275,617) $ (6,396,490)$ 1,338,795 =============== ================ ================ Basic income (loss) per share from continuing operations and net income (loss) $ (0.07) $ (1.67)$ 0.38 =============== ================ ================ Diluted income (loss) per share from continuing operations and net income (loss) $ (0.07) $ (1.67)$ 0.33 =============== ================ ================ Basic weighted average shares outstanding 3,986,731 3,839,947 3,505,424 =============== ================ ================ Diluted weighted average shares outstanding 3,986,731 3,839,947 4,005,424 =============== ================ ================ UNITED TRUST GROUP, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT ONLY STATEMENTS OF CASH FLOWS Three Years Ended December 31, 2004 Schedule II 2004 2003 2002 ---------------- --------------- ---------------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income (loss) $ (275,617) $ (6,396,490) $ 1,338,795 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in (income) loss of subsidiaries 803,662 6,723,981 (700,226) Depreciation 104,766 52,383 0 Change in FIT recoverable (9,063) 9,981 22,817 Change in accrued interest income (693) (26,058) 64,331 Change in indebtedness (to) from affiliates, net (373,217) 4,787 674,524 Change in deferred income taxes 14,161 79,011 327,472 Change in other assets and liabilities (54,885) (1,000,625) (226,075) ---------------- --------------- ---------------- Net cash provided by (used in) operating activities 209,114 (553,030) 1,501,638 ---------------- --------------- ---------------- Cash flows from investing activities: Payments received on notes receivable from affiliates 0 0 800,000 ---------------- --------------- ---------------- Net cash provided by investing activities 0 0 800,000 ---------------- --------------- ---------------- Cash flows from financing activities: Purchase of treasury stock (299,057) (441,143) (520,253) Issuance of common stock 167,360 195,905 706,691 Payments on notes payable (4,564,776) (705,499) (3,405,395) Proceeds from line of credit 2,275,000 0 2,000,000 Dividend received from subsidiary 2,275,000 600,000 1,400,000 Cash received in FCC merger 0 0 69,187 Payments made from FCC merger 0 0 (1,586,500) ---------------- --------------- ---------------- Net cash used in financing activities (146,473) (350,737) (1,336,270) ---------------- --------------- ---------------- Net increase (decrease) in cash and cash equivalents 62,641 (903,767) 965,368 Cash and cash equivalents at beginning of year 439,734 1,343,501 378,133 ---------------- --------------- ---------------- Cash and cash equivalents at end of year $ 502,375 $ 439,734 $ 1,343,501 ================ =============== ================ UNITED TRUST GROUP, INC. REINSURANCE As of December 31, 2004 and the year ended December 31, 2004 Schedule IV - ---------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F ---------------- ---------------- --------------- --------------- ------------- Percentage Ceded to Assumed of amount other from other assumed to Gross amount companies companies Net amount net - ---------------------------------------------------------------------------------------------------------------------------- Life insurance in force $ 2,145,096,000 $ 531,146,000 $ 995,939,000 $ 2,609,889,000 38.2% ================ ================ =============== =============== Premiums and policy fees: Life insurance $ 17,161,525 $ 3,111,559 $ 26,273 $ 14,076,239 0.2% Accident and health insurance 76,595 23,720 11,315 64,190 17.6% ---------------- ---------------- --------------- --------------- $ 17,238,120 $ 3,135,279 $ 37,588 $ 14,140,429 0.3% ================ ================ =============== =============== UNITED TRUST GROUP, INC. REINSURANCE As of December 31, 2003 and the year ended December 31, 2003 Schedule IV - ---------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F ---------------- ---------------- --------------- --------------- ------------- Percentage Ceded to Assumed of amount other from other assumed to Gross amount companies companies Net amount net - ---------------------------------------------------------------------------------------------------------------------------- Life insurance in force $ 2,289,738,000 $ 580,145,000 $ 1,273,735,000 $ 2,983,328,000 42.7% ================ ================ =============== =============== Premiums and policy fees: Life insurance $ 18,000,036 $ 3,062,361 $ 25,026 $ 14,962,701 0.2% Accident and health insurance 86,856 35,619 9,100 60,337 15.1% ---------------- ---------------- --------------- --------------- $ 18,086,892 $ 3,097,980 $ 34,126 $ 15,023,038 0.2% ================ ================ =============== =============== UNITED TRUST GROUP, INC. REINSURANCE As of December 31, 2002 and the year ended December 31, 2002 Schedule IV - -------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F --------------- --------------- --------------- --------------- ------------ Percentage Ceded to Assumed of amount other from other assumed to Gross amount companies companies Net amount net - -------------------------------------------------------------------------------------------------------------------- Life insurance in force $ 2,440,716,000 $ 560,356,000 $ 1,553,748,000 $ 3,434,108,000 45.2% =============== =============== =============== =============== Premiums and policy fees: Life insurance $ 18,454,030 $ 2,829,619 $ 73,979 $ 15,698,390 0.5% Accident and health insurance 130,905 31,826 22,135 121,214 18.3% --------------- --------------- --------------- --------------- $ 18,584,935 $ 2,861,445 $ 96,114 $ 15,819,604 0.6% =============== =============== =============== =============== UNITED TRUST GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS As of and for the years ended December 31, 2004, 2003, and 2002 Schedule V Balance at Additions Beginning Charges Balances at Description Of Period and Expenses Deductions End of Period - --------------------------------------------------------------------------------------------------------------------------- December 31, 2004 .. Allowance for doubtful accounts - mortgage loans $ 120,000 $ 0 $ 0 $ 120,000 December 31, 2003 Allowance for doubtful accounts - mortgage loans $ 120,000 $ 0 $ 0 $ 120,000 December 31, 2002 Allowance for doubtful accounts - mortgage loans $ 120,000 $ 0 $ 0 $ 120,000 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. UNITED TRUST GROUP, INC. (Registrant) /s/ John S. Albin March 24, 2005 John S. Albin, Director /s/ Randall L. Attkisson March 24, 2005 Randall L. Attkisson, President, Chief Operating Officer and Director /s/ Joseph A. Brinck March 24, 2005 Joseph A. Brinck, Director /s/ Jesse T. Correll March 24, 2005 Jesse T. Correll, Chairman of the Board, Chief Executive Officer and Director /s/ Ward F. Correll March 24, 2005 Ward F. Correll, Director March 24, 2005 Thomas F. Darden, Director s/ William W. Perry March 24, 2005 William W. Perry, Director /s/ James P. Rousey March 24, 2005 James P. Rousey, Chief Administrative Officer and Director /s/ Theodore C. Miller March 24, 2005 Theodore C. Miller, Corporate Secretary and Chief Financial Officer