-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VQ0ZPwfdTDsHDP4PWDO3kXHutNYB8jpQSU3V9vQH6L5HUCqNCWhEd6oGGQnCzcDn xbLSrbQy+TJgt9RmLAFXDA== 0000950114-97-000540.txt : 19971222 0000950114-97-000540.hdr.sgml : 19971222 ACCESSION NUMBER: 0000950114-97-000540 CONFORMED SUBMISSION TYPE: 10SB12G/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19971219 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIFIED HOLDINGS INC CENTRAL INDEX KEY: 0001033926 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 351797759 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10SB12G/A SEC ACT: SEC FILE NUMBER: 000-22629 FILM NUMBER: 97741725 BUSINESS ADDRESS: STREET 1: 429 N PENNSYLVANIA ST. CITY: INDIANAPOLIS STATE: IN ZIP: 46204 BUSINESS PHONE: 2176343300 MAIL ADDRESS: STREET 1: 429 N PENNSYLVANIA ST CITY: INDIANAPOLIS STATE: IN ZIP: 46204 10SB12G/A 1 AMENDMENT NO. 1 TO FORM 10-SB 1 WASHINGTON, D.C. 20549 FORM 10-SB AMENDMENT NO. 1 GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 Unified Holdings, Inc. - -------------------------------------------------------------------------------- (Name of Small Business Issuer in its charter) Delaware 35-1797759 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 429 North Pennsylvania Street, Indianapolis, Indiana 46204-1873 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (317) 634-3301 --------------------------------- Securities to be registered under Section 12(b) of the Act: Title of each class Name of each exchange on which to be so registered each class is to be registered Not Applicable - ------------------------------------- ------------------------------------- - ------------------------------------- ------------------------------------- Securities to be registered under Section 12(g) of the Act: Common Stock, $.01 par value - -------------------------------------------------------------------------------- (Title of class) Preferred Stock, $.01 par value - -------------------------------------------------------------------------------- (Title of class) 2 UNIFIED HOLDINGS, INC. FORM 10 S-B TABLE OF CONTENTS
Page ---- PART I 1 - ------ Item 1. Description of Business 1 ----------------------- Item 2. Management's Discussion and Analysis or Plan of Operation 27 --------------------------------------------------------- Item 3. Description of Property 31 ----------------------- Item 4. Security Ownership of Certain Beneficial Owners and Management 33 -------------------------------------------------------------- Item 5. Directors, Executive Officers, Promoters and Control Persons 34 ------------------------------------------------------------ Item 6. Executive Compensation 36 ---------------------- Item 7. Certain Relationships and Related Transactions 37 ---------------------------------------------- Item 8. Description of Securities 38 ------------------------- PART II 41 - ------- Item 1. Market Price of and Dividends on the Registrant's ------------------------------------------------- Common Equity and Other Stockholder Matters 41 ------------------------------------------- Item 2. Legal Proceedings 41 ----------------- Item 3. Changes In and Disagreements with Accountants 41 --------------------------------------------- Item 4. Recent Sales of Unregistered Securities 42 --------------------------------------- Item 5. Indemnification of Officers and Directors 42 ----------------------------------------- PART F/S 43 - -------- PART III 94 - -------- Item 1. Index to Exhibits 94 ----------------- Item 2. Description of Exhibits 94 -----------------------
- i - 3 PART I ------ ITEM 1. DESCRIPTION OF BUSINESS ----------------------- CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Registration Statement are or may constitute forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements involve certain risks and uncertainties. For example, a down turn in economic conditions generally and in particular those affecting bond and securities markets could lead to an exit of investors from mutual funds. Similarly, an increase in federal and state regulations of the mutual fund industry or the imposition of regulatory penalties could have an effect on operating results of the Company. These uncertainties, as well as others, are present in the financial services industry and stockholders are cautioned that management's view of the future on which it prices its products and estimates costs of operations and regulations may prove to be other than as anticipated. GENERAL Unified Holdings, Inc., a Delaware corporation ("Unified" or the "Company"), was organized December 7, 1989. At September 30, 1997, Unified owned all of the capital stock of Unified Management Corporation ("UMC"), Indianapolis, Indiana, a licensed National Association of Securities Dealers, Inc. ("NASD") broker-dealer, Unified Advisers, Inc. ("UAI"), Indianapolis, Indiana, a registered investment adviser and transfer agent, Health Financial, Inc. ("Health Financial"), Lexington, Kentucky, a registered investment adviser, HFI Acquisition Corporation, a Kentucky corporation ("HFI"), FLTC Acquisition Corporation, a Kentucky corporation ("FLTC"), and VAI Acquisition Corporation, a Delaware corporation ("VAC"). Each of HFI, FLTC and VAC currently do not conduct any operations. Reference in this filing to the "Company" or "Unified" include Unified and its wholly owned subsidiaries. The Company's principal business is providing and enhancing a platform for vertical integration in the financial services industry by means of stock-for-stock, pooling-of-interests transactions and an aggressive merger and acquisition program and providing management services and equipment for its wholly owned subsidiaries which, in turn, concentrate their services over seven major lines of business in the financial services industry: mutual fund services and distribution; brokerage and securities services; investment advisory and asset management services for various asset management categories; consolidations, tax-free reorganizations and start-ups of mutual funds; certain non-bank custodial services; retirement services involving the use of mutual funds; and internal and external proprietary product and systems development for the mutual fund industry. Through its subsidiaries, these services are provided primarily to third party financial services institutions, predominantly mutual funds. As a result of Unified's one-third stock ownership in and affiliation with Vintage Advisers, Inc. ("VAI"), a Delaware corporation, the Company's subsidiaries provide services for the affiliated Vintage Funds, a family of four no-load mutual funds, sponsored by VAI (hereinafter referred to as the "Vintage Funds"). The Company has enjoyed 14 consecutive quarters of operating profits. Currently, the Company serves as transfer agent, administrative services agent, distributor, fund accountant and/or shareholder services agent for ten mutual fund families consisting of approximately 36 different portfolios, including the four Vintage Funds portfolios, and performs other clerical functions for the Vintage Funds in addition to typical mutual fund services. The Company receives revenues for the management of the Vintage Funds along with certain commissions attributable to distribution of fund shares as well as mutual fund and clerical services fees. Since October 1995, the Vintage Funds have grown to over $57,160,000 in combined assets as of September 30, 1997, of which, as of such date, approximately 70% of such assets were from UMC's brokerage sweep accounts. Of the approximately $117,500,000 of Unified's clients' assets invested in mutual funds, nearly half of those assets are invested - 1 - 4 in the affiliated Vintage Funds. As of September 30, 1997, the Vintage Funds portfolios included the following: The Vintage Starwood Strategic Fund--$1,120,000; The Vintage Laidlaw Fund--$2,540,000; The Vintage First Lexington Balanced Fund--$3,050,000; and The Vintage Taxable Money Market Fund--$50,450,000. UMC, the Company's broker-dealer subsidiary, functions as the distributor of the Vintage Funds and also provides specialty services for certain customers of the Vintage Funds in addition to its discount brokerage activities. The brokerage subsidiary clears, on a fully-disclosed basis, through Pershing, a division of Donaldson, Lufkin & Jenrette Securities Corporation ("Pershing"). As of the date hereof, Unified had outstanding (i) 947,768 shares of its common stock, $.01 par value (the "Common Stock"), and (ii) 17,069 shares of its preferred stock, $.01 par value (the "Preferred Stock"), of which 8,486 of such shares are designated as "Series A 8% Cumulative Preferred Stock" and 8,583 of such shares are designed as "Series B 8% Cumulative Preferred Stock." As of September 30, 1997, the Company reported, on a consolidated basis, total assets of $3,755,242 and stockholders' equity of $1,981,330. As of July 15, 1997, the Company declared and paid a stock dividend with respect to the Common Stock such that each issued share of Common Stock on such date was divided into a greater number of shares of Common Stock that was equal to a fraction, the numerator of which was 50,000 and the denominator of which was the number of issued and outstanding shares of Common Stock immediately prior to such division of shares. Upon payment of such stock dividend, the Company had 50,000 shares of Common Stock issued and outstanding. Effective as of July 25, 1997, the Company terminated the Unified Holdings, Inc. Management and Employee Retention Plan (the "M.E.R.P.") and the Unified Holdings, Inc. Restricted Stock Option Plan (the "Stock Option Plan"). Prior to the termination of the M.E.R.P., the Company and each participant who held an option granted pursuant to the M.E.R.P. executed an amendment to their respective agreement to provide for immediate vesting, waive certain antidilution protection and clarify certain other terms. All such options were exercised as of July 25, 1997 and, in connection therewith, the Company issued 572,768 shares of Common Stock. Also effective as of July 25, 1997, the Company and each participant who held an award issued pursuant to the Stock Option Plan executed a Release and Surrender Agreement whereby such participants surrendered their awards to the Company. In connection with the exercise of the outstanding M.E.R.P. options, each optionee executed a demand promissory note payable to the Company in an amount equal to such optionee's aggregate exercise price for the shares subject to the option. The aggregate amount of the promissory notes was approximately $75,300 and such notes did not bear interest. On July 25, 1997, the Company paid to each optionee a bonus in an amount sufficient to extinguish the debt represented by their promissory note. Such bonuses also were adjusted upward to reflect the income tax effect of the bonus payment to the participant. The exercise of the options had no material financial impact on the Company; however, the payment of the bonuses had a cost to the Company of approximately $125,000. As of September 30, 1997, 50,000 shares of Common Stock were owned by the Unified Regional Prototype 401(k) Profit Sharing Plan ("401(k) Plan"). Mr. Lynn E. Wood, the Company's Chief Operating Officer and a Director, votes the shares held by the 401(k) Plan. As of November 30, 1997, the directors and executive officers of the Company owned beneficially an aggregate of 947,768 shares of Common Stock, or 100.0% of the issued and outstanding shares. - 2 - 5 As of the date hereof, the total number of shares of Preferred Stock that were authorized was 1,000,000, of which 22,100 shares have been designated as follows:
SHARES SHARES ISSUED AND STATED PAR DESIGNATED OUTSTANDING VALUE VALUE ---------- ----------- ------ ----- Series A 8% Cumulative Preferred Stock 10,000 8,486 $100 $.01 Series B 8% Cumulative Preferred Stock 10,000 8,583 100 .01 Series C 6.75% Cumulative Convertible Preferred Stock 2,100 -- 100 .01
Dividend payments on the Series A and Series B Preferred Stock are cumulative at 8% per annum of the stated value. Without the consent of the holders of not less than a majority of the then outstanding shares of Preferred Stock, the Company may not create any additional class or series of stock ranking or having a parity as to payment of dividends or as to liquidation preference over or with the Series A or Series B Preferred Stock. In the event of non-payment of the cumulative preferred dividends, the holders of Preferred Stock are entitled to vote on all matters presented to the stockholders of the Company, as provided in the Amended and Restated Certificate of Incorporation of the Company (the "Certificate of Incorporation"). Unified's principal executive offices are located at 429 North Pennsylvania Street, Indianapolis, Indiana 46204, and its telephone number is (317) 634-3301. RECENT DEVELOPMENTS On April 25, 1997, the Company entered into an agreement to acquire First Lexington Trust Company ("First Lexington"), located in Lexington, Kentucky. First Lexington is a non-bank affiliated trust company that is regulated by the Department of Financial Institutions, Commonwealth of Kentucky. The Department of Financial Institutions approved the acquisition of First Lexington by the Company on July 25, 1997. The transaction also is subject to the prior approval of the shareholders of First Lexington. The acquisition will be accounted for under the pooling-of-interests method of accounting and, in connection therewith, the Company will issue 80,008 shares of Common Stock in exchange for all of the outstanding capital stock of First Lexington. It currently is anticipated that this acquisition will be consummated by the end of January 1998. As of September 30, 1997, First Lexington reported total assets of $1,125,358 and shareholders' equity of $1,059,526. On May 8, 1997, the Company entered into an agreement to acquire VAI, located in Indianapolis, Indiana. VAI is a registered investment adviser under the Investment Advisers Act of 1940, as amended, and is the adviser to the Vintage Funds. Fees received by VAI for services are based upon net assets under management for each portfolio in the Vintage Funds. Management of VAI believes that as the assets under management of the Vintage Funds increase and the expenses of the Vintage Funds become less than the regulatory and prospectus imposed expense limitations, VAI will have to reimburse less of the expenses of the Vintage Funds because the expenses will be less than the regulatory and prospectus imposed expense limitations. Management of the Company believes that VAI would become profitable with a $20 million increase in assets under management for the Vintage Funds. The definitive agreement between the Company and VAI was terminated effective as of December 1, 1997. By separate agreement dated December 1, 1997, the stockholders of VAI, other than the Company, have agreed to surrender to VAI their shares of capital stock of VAI. The stock surrender may not be consummated until the shareholders of the Vintage Funds have approved the proposed change in control of such funds. Upon consummation of such stock surrender, which is anticipated to be consummated during December 1997 or January 1998, the Company will own all of the outstanding capital stock of VAI. As of September 30, 1997, VAI reported total assets of $549,237 and stockholders' equity of $(290,599). On June 1, 1997, the Company completed the acquisition of Health Financial, located in Lexington, Kentucky. This acquisition was accounted for under the pooling-of-interests method of accounting and, in connection therewith, on November 19, 1997 the Company issued 325,000 shares of Common Stock. Health Financial is an investment adviser providing services to trusts, retirement plans, - 3 - 6 businesses and individuals located in Kentucky. As of June 1, 1997, Health Financial reported total assets of $710,196 and shareholders' equity of $380,986. Mr. Timothy L. Ashburn, the President, Chief Executive Officer and Chairman of the Board of Directors of the Company (the "Board"), Mr. Jack R. Orben, a director of the Company, and the Company each currently own one-third of the outstanding capital stock of VAI. The terms of the original agreement between the Company and VAI were negotiated by Mr. Ashburn, on behalf of VAI, and by Mr. Lynn E. Wood, Chief Operating Officer of the Company, on behalf of the Company. Mr. Wood is a stockholder of the Company. Dr. Gregory W. Kasten, served as President and was the sole shareholder of Health Financial prior to its acquisition by the Company. Dr. Kasten and his family own approximately 37% of the outstanding capital stock of First Lexington. In connection with the acquisition by the Company of Health Financial, Dr. Kasten has entered into an agreement with Health Financial whereby Dr. Kasten will serve as the President and Chief Executive Officer of Health Financial for a period of at least two years at an annual salary of approximately $500,000. In connection with the acquisition of Health Financial, the Company restated its consolidated financial statements as of and for the years ended December 31, 1996 and 1995 and as of and for the three months ended March 31, 1997 and 1996. Reference is made to the unaudited pro forma combined consolidated financial statements, including the notes thereto, included in this Registration Statement. See "Pro Forma Combined Consolidated Financial Statements (Unaudited)." THE COMPANY'S SUBSIDIARIES AND OPERATIONS The Company has three wholly owned subsidiaries through which it conducts its operations: UAI, a registered investment adviser and transfer agent organized on February 1, 1990; UMC, a NASD and SIPC member broker-dealer organized on November 20, 1952 as Unified Underwriters, Inc. and which commenced operations as UMC effective February 25, 1976; and Health Financial, a registered investment adviser organized on October 3, 1986 and acquired by the Company on June 1, 1997. UNIFIED ADVISERS, INC. UAI is a mutual fund financial services company specializing in the development, support, maintenance, shareholder servicing and management of and in providing investment advise to mutual funds. UAI was formed in 1990 as a sister company to UMC in a move to separate and segregate the brokerage services employees (and brokerage account activities) from the mutual fund services employees (and mutual fund account activities). UAI is a highly automated, registered stock transfer agent, that presently provides transfer agency, fund accounting, administrative and/or compliance services for ten mutual fund families consisting of nearly $647 million in mutual fund assets, 36 portfolios and approximately 29,000 accounts. Additionally, as a registered investment adviser, UAI has approximately $117.5 million of assets under management, all of which are invested in mutual funds, with approximately $50 million of the $117.5 million invested in the Vintage Funds. UAI's primary services include: mutual fund transfer agency and shareholder recordkeeping; shareholder services plan support; mutual fund start-up services; administration; fund - 4 - 7 accounting; compliance; asset allocation services; statement processing; retirement plan services, including support and constructs; fulfillment; and investment advisory services. Through its systems group and its link to a brokerage affiliate, UAI has the capability of converting assets on a tax-free basis from existing funds into Unified's affiliated mutual fund family, the Vintage Funds. Additionally, UAI has the capability and flexibility to create or modify funds that are individualized to the client and the transaction. As a mutual fund service provider for third party mutual funds, UAI generally is responsible for all of a fund's business activities, including distribution (through UMC) and investment management. The Company believes that these services are an extension of distribution, that high quality servicing is critical to retaining shareholder accounts and that quality of service directly impacts the growth of mutual fund assets. Therefore, UAI strives to create an error-free operating environment based on stringent standards established by the Company. UAI's service responsibilities may be divided into five major services: * shareholder recordkeeping - encompasses all mutual fund shareholders' transactions, including taking purchase and redemption orders, entering orders into the transfer agency system and forwarding information regarding trade activity to the portfolio managers and fund accountants; * fund accounting - provides daily recordkeeping for each fund, including calculations of net asset value per share, dividend rates per share and the maintenance of all books, records and financial reports required by the Securities and Exchange Commission (the "SEC") and other regulatory agencies. This service also includes preparation of quarterly financial statements, shareholder reports and board reports for each portfolio, participation in the periodic updating of prospectuses, preparation of federal, state and local tax returns, payment of all costs and expenses of the fund and the maintenance of the official books and records of each fund; * cash management - ensures timely receipts and disbursements on shareholders activity for effective asset management, including cash availability for investment, reconciliation of accounts, cash movement and activity, processing of fees and tax withholding and reporting; * fund administration and legal compliance; and * investment advisory services. UAI, as the primary servicing agent for various mutual funds, including the Vintage Funds, receives fees from the funds for providing such services. As such, UAI is economically dependent on these funds and their respective contracts (and renewals) for a substantial portion of its revenue. UNIFIED MANAGEMENT CORPORATION. UMC was formed in 1952 as Unified Underwriters, Inc. and is a regional discount brokerage firm with a link to mutual fund assets via its brokerage account services. A licensed NASD broker-dealer since 1976, UMC specializes in mutual fund distribution and shareholder servicing liaison providing such services as: mutual fund distribution, distribution services and support; mutual fund conversion support for broker-dealer requirements; mutual fund trades; individual retirement account ("IRA") custodial services; 12b-1 maintenance, accounting and marketing support; - 5 - 8 securities (stock and bond) brokerage; brokerage clearing and execution services; consolidated brokerage statement processing; mutual fund and brokerage software development; asset allocation and performance measurement services and statement processing; and retirement account record keeping. UMC, as a fund distributor and broker-dealer of record, has created a beneficial synergy by linking brokerage accounts with funds and providing a proprietary brokerage sweep relationship through the Vintage Funds. UMC's arrangement with its brokerage clearing firm allows UMC to sweep monies from the brokerage clearing firm to the Vintage Funds as part of the transaction instead of leaving the money at the brokerage clearing firm. UMC also utilizes its brokerage services as an important component in the tax-free conversion (re-organization) of mutual fund assets from small third-party mutual funds into the Vintage Funds. UMC clears through Pershing and provides a full range of brokerage products. HEALTH FINANCIAL, INC. HFI is a registered investment adviser that was formed in 1986 and has been registered with the SEC since 1987. As of September 30, 1997, HFI managed over $340 million in assets for both individuals and institutions. The predominant management style of HFI is a balanced portfolio of no-load index funds in multi-asset classes consisting of the Standard & Poor's 500 large capitalization United States stocks, small capitalization United States stocks, United States bonds, real estate, cash and international stocks. THE COMPANY'S AFFILIATED MUTUAL FUNDS The Company currently owns a one-third interest in VAI, a registered investment adviser that manages and sponsors the Vintage Funds, a no-load family of mutual funds consisting of four portfolios. As of September 30, 1997, the Vintage Funds maintained approximately $57,160,000 in total net assets, predominantly in its one money market portfolio, and features its proprietary property, V.O.I.C.E. (Vision for Ongoing Investment in Charity and - - - - Education).sm - - The Vintage Funds' mission, largely due to its relationship with VAI and Unified, is to capture existing small fund assets via: tax-free reorganizations; acquisitions; asset mergers; construction of Vintage portfolios for certain registered investment advisers; and the marketing of its V.O.I.C.E.sm concept. The Vintage Funds were established by VAI as a platform for five primary visions: (i) As a proving ground for the V.O.I.C.E.sm program, and establishing V.O.I.C.E.sm as a niche in the industry, highlighting its philanthropic nature and its contributions to not-for-profit organizations, especially in the area of education; (ii) To provide a home for small, third party mutual funds thereby growing the Vintage Funds' assets by tax-free reorganizations due to its affiliation with Unified, the attraction of the V.O.I.C.E.sm program and stock-for-stock acquisitions; (iii) To create an efficient, no-load investment environment, with industry mid-point expense ratios and free exchange privileges; (iv) To provide the opportunities and diversity attributable to selected fund-of-funds; and - 6 - 9 (v) To create a complete mutual fund service environment with a special focus on the gathering and maintenance of retirement plans. One of the three Vintage Fund's equity portfolios is a fund-of-funds. THE PHILANTHROPIC V.O.I.C.E.sm (VISION FOR ONGOING INVESTMENT IN - - - CHARITY AND EDUCATION)sm PROGRAM. - - - The Company oversees and manages the V.O.I.C.E.sm program for VAI, exclusively for the Vintage Funds. V.O.I.C.E.sm is a unique and innovative philanthropic program through which individuals and institutions can cause contributions to be made to educational, charitable and philanthropic "not-for-profit" organizations at no expense to the Vintage Fund or to the shareholder. VAI makes the contributions from its own revenue to certain accredited college or university endowments or general scholarship funds designated by qualifying shareholders. The Vintage Funds, since their formation in December 1994, have licensed the V.O.I.C.E.sm program from VAI and, pursuant to the licensing agreement, VAI is required to make a contribution each quarter on behalf of each qualifying Vintage Fund shareholder participating in the V.O.I.C.E.sm program. All shareholders in all Vintage Funds maintaining an average annualized aggregate net asset value of $25,000 or more over the period of an entire calendar quarter will be qualified to designate an eligible institution to receive a donation under the program for that quarterly period. VAI will contribute, on a quarterly basis, an amount equal to that quarter's portion of 0.25% of the average annualized aggregate net asset value, as long as the average annualized aggregate net assets remain above $25,000 for the quarterly period. Although the contributions will be made in the shareholder's name and behalf, there are no tax deductions or tax advantages to the shareholders, since VAI is making the contributions on behalf of the shareholders and neither the shareholders' nor the Funds' assets are reduced. The contributions made by VAI during fiscal year 1996 and the ten months ended September 30, 1997 were $8,612 and $13,056, respectively. Philanthropic institutions outside the area of education may be accepted, at the discretion of VAI. The V.O.I.C.E.sm program is the proprietary property of VAI. REGULATION OF THE COMPANY'S BUSINESS Under the Investment Company Act of 1940 (the "1940's Act"), the advisory, sub-advisory and distribution agreements between the Vintage Funds and the Company's subsidiaries are reviewed annually and renewed accordingly by the Board of Trustees of the Vintage Funds (the "Boards of Trustees"). There are no assurances that the Company's subsidiaries will be able to continue the contracts with the Vintage Funds. The non-renewal of those agreements by the Company or its subsidiaries could have a material adverse effect on the Company's business. The service agreements with mutual funds and the actions of the Company and its subsidiaries supporting those agreements require regulation by the NASD, SEC, independent auditors and counsel, and often require the approval of the Boards of Trustees and, in certain cases, the shareholders of a particular Vintage Fund. The Company believes that such approval will be granted and that the mutual fund services agreements with the Vintage Funds will be renewed. The securities industry, including broker-dealer, investment advisory and transfer agency firms in the United States, are subject to extensive regulation under federal and state laws. Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, principally the NASD. The regulations to which broker-dealers are subjected cover all aspects of the securities business, including - 7 - 10 sales methods, trade practices, capital structure of securities firms, recordkeeping and the conduct of directors, officers and employees. Additional state and federal legislation, changes in rules promulgated by the SEC and by self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules often directly affect the methods of operation and profitability of money managers, broker-dealers and transfer agents. Subject to certain preemptive federal law, investment-related firms also are subject to regulation and licensing by state securities commissions in the states in which they transact business. The SEC, state securities administrators and the self-regulatory organizations may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees. The principal purpose of regulation and discipline of broker-dealers, investment advisers and stock transfer agents is the protection of customers and the securities markets rather than protection of creditors and shareholders of such firms. INDUSTRY REGULATIONS The Company is subject to extensive regulation as to its duties, affiliations, conduct and limitations on fees. Section 22(b) of the 1940's Act provides that a securities association registered under Section 15A of the Securities Exchange Act of 1934, as amended (the "1934 Act"), may adopt rules prohibiting its members from receiving a commission, discount, spread or fees except in accordance with a method or methods, and within such limitations as to the relation thereof to said public offering price, as such rules may prescribe in order that the price at which such security is offered or sold to the public shall not include an excessive sales load but shall allow for reasonable compensation for sales personnel, broker-dealers and underwriters, and for reasonable sales loads to investors. Section 22(c) of the 1940's Act further states that the SEC may make rules and regulations applicable to registered investment companies and to principal underwriters of, and dealers in, the redeemable securities of any registered investment company, whether or not members of any securities association. Any rules and regulations so made by the SEC, to the extent that they may be inconsistent with the rules of any securities association, shall, so long as they remain in force, supersede the rules of the association and be binding upon its members as well as all other underwriters and dealers to whom they may be applicable. The Company's wholly owned, broker-dealer subsidiary, UMC, is a NASD member. The NASD, a securities association registered pursuant to Section 15A of the 1934 Act, has prescribed rules with respect to maximum commissions, charges and fees related to investment in any open-end investment company registered under the 1940's Act. VAI, of which the Company owns one-third of the outstanding capital stock, is a registered investment adviser that serves as the adviser to the Vintage Funds. It is unlawful for any investment adviser to: (1) employ any device, scheme or artifice to defraud any client or prospective client; (2) engage in any transaction, practice or course of business that operates as a fraud or deceit upon any client or prospective client; or (3) engage in any act, practice or course of business that is fraudulent, deceptive or manipulative. The Boards of Trustees are presently seventy-five percent (75%) "disinterested" as defined under the 1940's Act, which allows the Vintage Funds to effect tax-free reorganizations of third party mutual funds, a business that the Vintage Funds, due to its affiliation with Unified, aggressively pursues. The 75% disinterested trustee arrangement is an important component in the Company's business plan as such plan relates to tax-free reorganizations of third party funds and to the Company's desire to acquire the registered investment advisers to other mutual fund families. An investment adviser can transfer control of an investment company only if at least 75% percent of the directors of the investment company are independent of the new and old investment adviser, and provided no unfair burden is imposed on the investment company as a result of the sale. The effect of such transfer results in the termination of the - 8 - 11 old investment adviser agreement and, if acquired by VAI, would require the new agreement to be approved by the Boards of Trustees and the Vintage Funds' shareholders. Directors and the investment adviser also are defined as fiduciaries; accordingly, the SEC is authorized to initiate an action to enjoin a breach of fiduciary duties involving personal misconduct by officers, directors, investment advisers and principal underwriters. Shareholders or the SEC also may bring an action against the officers, directors and investment adviser for breach of fiduciary duty in establishing the compensation paid the investment adviser. An investment adviser to a fund, its principals and its employees, also may be subject to proceedings initiated by the SEC to impose remedial sanctions for violation of any provision of the federal securities laws and the regulations adopted thereunder, and the SEC may preclude an investment adviser to an investment company from continuing to act in such capacity. Investment companies such as the Vintage Funds are subject to considerable substantive regulation. Such companies must comply with periodic reporting requirements. Proxy solicitations are subject to the general proxy rules as well as to special proxy rules applicable only to investment companies. Shares of investment companies can only be offered at a uniform public offering price based upon the current share net asset value plus the sales load. No more than 60% of the directors can be interested persons, defined to include, among others, persons affiliated with the management company or underwriter, and a majority of the directors must not be affiliated with the underwriter (distributor). The management agreement initially must have been approved by a majority of the outstanding shares and, after two years, must be annually approved, either by the board or by the outstanding voting shares. The management agreement must automatically terminate in the event of assignment and must be subject to termination upon 60-days notice by the board or by a vote of the majority of the outstanding voting shares. The underwriting or distribution agreement also must be annually approved by the board or by a vote of a majority of the outstanding voting shares, and must provide for automatic termination in event of assignment. Transactions between the investment company and an affiliate can be entered into only if approved by the SEC, after notice and opportunity for hearing. NET CAPITAL REQUIREMENTS As a broker-dealer and as a member of the NASD, UMC is subject to the SEC's minimum net capital rule (Rule 15c3-1), which provides that a broker-dealer doing business with the public must maintain certain minimum net capital and shall not permit its aggregate indebtedness to exceed certain specified limitations. The rule is designed to maintain a firm's financial integrity and liquidity. A broker-dealer may be required to reduce its business and restrict withdrawal of subordinated capital if its net capital drops below specified levels, and also may be prohibited from expanding its business or declaring cash dividends. In addition, failure to maintain the required net capital may subject a broker-dealer to disciplinary actions by the SEC, the NASD and state securities administrators, including fines, censure, suspension or expulsion. Rule 15c3-1 may limit UMC's uses of its capital. UMC is required to maintain minimum net capital, as defined, of 6 2/3% of aggregate indebtedness or $250,000, whichever is greater, and a ratio of aggregate indebtedness to net capital of not more than 15 to 1. At September 30, 1997, UMC had net capital of $404,168, which was $154,168 in excess of its required net capital of $250,000, and a ratio of aggregate indebtedness to net capital of 0.4 to 1. Factors that affect UMC's net capital include the general investment climate as well as the ability of the Company to obtain any liquid assets necessary to contribute equity capital to its subsidiaries. Although UMC currently has sufficient net capital, should the Company's liquidity be impaired and additional net capital becomes necessary, the continued operation of UMC and the Company could be restricted or suspended. - 9 - 12 Rule 15c3-1 requires the ratio of aggregate indebtedness, as defined, to net capital not exceed 15 to 1, and imposes certain restrictions on operations. In computing net capital, various adjustments to net worth are made with a view to excluding assets that are not readily convertible into cash and with a view to a conservative statement of other assets, such as a firm's position in securities. UMC may not allow withdrawal of subordinated capital if minimum net capital would thereafter be less than 5% of aggregate debit items as defined under Rule 15c3-1. Further, UMC may not permit equity capital to be withdrawn, whether by payment of dividends, repurchase of stock or other means, if its net capital would thereafter be less than 5% of aggregate debit items. Compliance with Rule 15c3-1 may limit those operations of a firm (such as UMC) that may require the use of its capital. REGULATORY PENALTIES FOR FAILURE TO MAINTAIN MINIMUM NET CAPITAL REQUIREMENTS Rule 15c3-1 imposes minimum financial requirements for broker-dealers. A decrease below minimum net capital could force UMC to suspend activities, pending recovery of net capital. Factors that affect UMC's net capital include the general investment climate as well as the ability of the Company to obtain any assets necessary to contribute equity capital to UMC. RISKS OF BUSINESS The Company's asset management, mutual fund services, mutual fund management and broker-dealer businesses are subject to various risks and contingencies, many of which are beyond the ability of the Company to control. These risks include: economic conditions generally and in particular those affecting bond and securities markets, interest rates and discretionary income available for investment; customer inability to meet payment or delivery commitments; customer fraud; and employee misconduct and error. COMPLIANCE REQUIREMENTS AND REGULATORY PENALTIES FOR NONCOMPLIANCE Various aspects of the Company's business are subject to federal and state regulation as well as "self regulatory" authorities that, depending on the nature of any non-compliance, may result in the suspension or revocation of licenses or registration, including broker-dealer, investment adviser and transfer agent licenses and registrations, as well as the imposition of civil fines and criminal penalties. Failure by the Company or any of its employees to comply with such regulations or with any of the laws, rules or regulations of federal, state or industry authorities (principally the NASD and SEC) could result in censure, imposition of fines or other sanctions, including revocation of the Company's right to do business or in suspension or expulsion from the NASD. Any of the foregoing could have a material adverse effect upon the Company. Such regulations are designed primarily for the protection of the investing customers of securities firms rather than the Company's stockholders. Finally, there is no assurance that the Company, along with other fund sellers, administrators and managers will not be subjected to additional stringent regulation and publicity that may adversely affect their business. COMPETITION Since its inception, the Company has directly competed with a number of larger, more established mutual fund service organizations and securities firms. Competition is influenced by various factors, including breadth, quality of service and price. All aspects of the Company's business are competitive, including competition for mutual fund assets to manage. Large national firms have much greater marketing capabilities, offer a broader range of financial services and compete not only with the Company and among themselves but also with commercial banks, insurance companies and others for retail and institutional clients. The Company's affiliated mutual funds are subject to competition from nationally and regionally distributed funds offering equivalent financial products with returns equal to or greater than those offered by the Vintage Funds. The Company is focused on the niche area of tax-free - 10 - 13 reorganizations and consolidations of small mutual funds into the Vintage Funds family and its proprietary products, such as V.O.I.C.E.sm Competition for assets under management is intense from both national and regional based firms. Access to local investment and the population of the region by modern communication systems is so efficient that the Company's geographical position cannot be deemed an advantage. The Company's investment management operations compete with a large number of other investment management firms, commercial banks, insurance companies, broker-dealers and other financial service firms. Most of these firms are larger and have access to greater resources than the Company. The investment advisory industry is characterized by relatively low cost of entry and the formation of new investment advisory entities that may compete directly with the Company is a frequent occurrence. The Company directly competes with as many as several hundred firms that are of similar or larger size. The Company's ability to increase and retain clients' assets could be materially adversely affected if client accounts under-perform the market. The ability of the Company's investment management subsidiary to compete with other investment management firms also is dependent, in part, on the relative attractiveness of their investment philosophies and methods under prevailing market conditions. A large number of mutual funds are sold to the public by investment management firms, broker-dealers, insurance companies and banks in competition with the Vintage Funds. Many of the Company's competitors apply substantial resources to advertising and marketing their mutual funds, which may adversely affect the ability of the Vintage Funds to attract new assets. The Company expects that there will be increasing pressures among mutual fund sponsors to obtain and hold market share. Although the Company may expand the financial services it can provide to its customers, it does not now offer as broad a range of financial services as national stock exchange member firms, commercial banks, insurance companies and others. DEPENDENCE ON KEY CLIENTS The Company presently provides mutual fund services, transfer agency, fund accounting, administration and distribution services to ten mutual fund families consisting of 36 portfolios. Four of those portfolios, the Vintage Funds, originally were organized and are sponsored by VAI. The Vintage Funds and those of the remaining parties, have entered into contracts with the Company that typically expire within one to three years. No assurance can be given that any of these third party funds or the Vintage Funds will remain clients of the Company upon expiration or termination of the various administration and distribution agreements. The loss by the Company of such mutual fund clients could have a material adverse effect on the Company. Additionally, UMC has entered into clearing agreements with its introduced broker-dealer clients that represent a substantial portion of the assets in the Vintage Funds through the use of the Vintage Taxable Money Market Funds as their brokerage sweep facility. The introduced broker-dealer relationships also represent a significant portion of UMC's revenues from trading commissions. The loss of clearing clients could have a material adverse effect on the Vintage Funds and the Company. VAI receives management fees from the Vintage Funds. As the Vintage Funds' manager and adviser, VAI, and, therefore, the Company, are economically dependent on the Vintage Funds for a substantial portion of their revenue. Contacts for portfolio management performed by VAI in the case of the Vintage Funds are awarded annually by review and approval of the independent Boards of Trustee of the various Vintage Funds. The Boards of Trustee consist of four trustees, three of whom are independent, and Timothy L. Ashburn who is affiliated with the Company. These Boards also are responsible for awarding the Company's subsidiaries the various service agreements for the Vintage Funds. - 11 - 14 DEPENDENCE ON KEY PERSONNEL The Company is dependent in a large part on Timothy L. Ashburn, the President, Chief Executive Officer and Chairman of the Board, as well as a group of senior management personnel. The loss or unavailability of any of these persons could have a material adverse effect on the Company. The Company's success also will depend on its ability to attract and retain highly skilled personnel in all areas of its business. There can be no assurance that the Company will be able to attract and retain personnel on acceptable terms in the future. Loss of any of these individual's services would likely have a material adverse effect on the Company's business. The Company is in the process of purchasing a key man insurance policy on each of Mr. Ashburn and Dr. Gregory W. Kasten in the amount of $1,000,000 each naming the Company as the beneficiary. EMPLOYEES As of September 30, 1997, the Company and its subsidiaries had 34 employees, of which 32 were full-time employees. BUSINESS DEVELOPMENT The Company believes that the consummation of the pending transactions and the integration of Health Financial, First Lexington and VAI will provide a greater asset and business base and increase the value of the Company as a whole. In addition, such transactions should provide the Company with a larger client base. The acquisitions of Health Financial, a registered investment adviser, and First Lexington, a trust company, and ownership of 100% of the capital stock of VAI will vertically integrate the Company's mutual fund service provider business and its financial services and lay the groundwork for future growth. Consummation of the pending transactions also should provide the basis for further development by the Company of services such as: mutual fund consolidations; tax-free reorganizations and start-ups; certain non-bank trust and custodial services; retirement services; and internal and external proprietary product and systems development. The Company anticipates continuing and expanding its mutual fund services and brokerage services contracts and relationships and increasing its assets under management through tax-free reorganizations of small mutual funds and stock-for-stock, pooling-of-interests acquisitions of registered investment advisers and compatible companies in the financial services industry. PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma combined consolidated balance sheet gives effect to the proposed acquisitions of First Lexington and VAI as if each of the transactions were consummated on September 30, 1997. The following pro forma combined consolidated income statements for the nine months ended September 30, 1997 and 1996 and for the years ended December 31, 1996 and 1995 set forth the results of operations of the Company combined with the results of operations of First Lexington and VAI as if the proposed transactions had occurred as of the first day of each of the periods presented. The unaudited pro forma combined consolidated financial statements should be read in conjunction with the accompanying Notes to the Pro Forma Combined Consolidated Financial Statements and with the historical financial statements of the Company, First Lexington and VAI. The historical interim financial information for the nine months ended September 30, 1997, used as a basis for the pro forma combined consolidated financial statements, include all necessary adjustments, which, in management's opinion, are necessary to present the financial position and operations fairly. These pro forma combined consolidated financial statements may not be indicative of the results of operations that actually would have occurred - 12 - 15 if the proposed transactions had been consummated on the dates assumed above or of the results of operations that may be achieved in the future. VAI has a November 30 fiscal year end. For purposes of the following pro forma combined consolidated financial statements, VAI information at or for the year ended November 30 and the nine months ended August 31 is reported as December 31 and September 30 data, respectively. - 13 - 16 UNIFIED HOLDINGS, INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1997 (UNAUDITED)
ADJUSTMENTS AND ELIMINATIONS UNIFIED FIRST ---------------------------- CONSOLIDATED VAI LEXINGTON COMBINED DEBIT CREDIT CONSOLIDATED ------------ --- --------- -------- ----- ------ ------------ ASSETS - ------ CASH AND CASH EQUIVALENTS $ 603,689 $ 19,367 $ 60,708 $ 683,764 $ $ $ 683,764 SECURITIES OWNED, AT MARKET VALUE Debt securities -- -- 957,771 957,771 957,771 Mutual funds (affiliated) 643,232 63,389 -- 706,621 706,621 Mutual funds 188,234 -- -- 188,234 188,234 NOTE RECEIVABLE - AFFILIATED COMPANY 50,000 -- -- 50,000 50,000 -- NOTE RECEIVABLE - NON-AFFILIATED COMPANY 5,361 -- -- 5,361 5,361 ACCOUNTS RECEIVABLE Receivables 1,227,296 45,484 89,474 1,362,254 255,174 1,107,080 Allowance for bad debts (2,041) -- -- (2,041) (2,041) OTHER ASSETS Prepaid and sundry assets 124,605 2,746 6,900 134,251 134,251 ---------- -------- ---------- ---------- -------- -------- ---------- Total current assets $2,840,376 $130,986 $1,114,853 $4,086,215 $ -- $305,174 $3,781,041 ========== ======== ========== ========== ======== ======== ========== INVESTMENTS Investment in affiliated company 377,756 -- -- 377,756 377,756 -- NOTE RECEIVABLES, net of current maturity 8,090 -- -- 8,090 8,090 ORGANIZATION COST, NET -- 146,270 2,550 148,820 148,820 DEFERRED DEVELOPMENT COST -- 294,844 -- 294,844 294,844 FIXED ASSETS Property, furniture and equipment, net 258,223 -- 7,955 266,178 266,178 Capitalized lease, net 148,538 -- -- 148,538 148,538 ---------- -------- ---------- ---------- -------- -------- ---------- TOTAL ASSETS $3,632,983 $572,100 $1,125,358 $5,330,441 $ -- $682,930 $4,647,511 ========== ======== ========== ========== ======== ======== ========== See notes to pro forma combined consolidated financial statements. - 14 - 17 ADJUSTMENTS AND ELIMINATIONS UNIFIED FIRST ---------------------------- CONSOLIDATED VAI LEXINGTON COMBINED DEBIT CREDIT CONSOLIDATED ------------ --- --------- -------- ----- ------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ LIABILITIES CURRENT LIABILITIES Current portion of capitalized lease obligations $ 86,320 $ -- $ -- $ 86,320 $ $ $ 86,320 Note payable - affiliated company -- 50,000 -- 50,000 50,000 -- Payable to affiliated company -- 255,174 -- 255,174 255,174 -- Accounts payable and accrued expenses 607,624 330,754 22,177 960,555 16,000 944,555 Accrued compensation 238,690 45,000 -- 283,690 283,690 Income taxes payable -- -- 21,405 21,405 21,000 405 Deferred income taxes -- -- 22,000 22,000 22,000 Other liabilities 724,435 -- -- 724,435 724,435 ---------- --------- ---------- ---------- -------- -------- ---------- Total current liabilities 1,657,069 680,928 65,582 2,403,579 342,174 -- 2,061,405 ---------- --------- ---------- ---------- -------- -------- ---------- LONG-TERM LIABILITIES Long-term portion of capitalized lease obligations 41,581 -- -- 41,581 41,581 Deferred income taxes -- -- 250 250 250 ---------- --------- ---------- ---------- -------- -------- ---------- Total liabilities 1,698,650 680,928 65,832 2,445,410 342,174 -- 2,103,236 ---------- --------- ---------- ---------- -------- -------- ---------- COMMITMENTS SHAREHOLDERS' EQUITY Common Stock 10,728 300 8,295 19,323 7,295 3,250 14,778 Preferred A 8,486 -- -- 8,486 8,486 Preferred B 8,583 -- -- 8,583 8,583 Subscribed stock to be issued in connection with acquisition of Health Financial 3,250 -- -- 3,250 3,250 -- Additional paid-in capital 1,148,588 599,700 821,705 2,569,993 598,000 7,795 1,979,788 Retained earnings (accumulated deficit) 635,101 (677,758) 229,526 186,869 257,244 444,113 Unrealized gain/(loss) on investments 119,597 (31,070) -- 88,527 88,527 ---------- --------- ---------- ---------- -------- -------- ---------- Total shareholders' equity 1,934,333 (108,828) 1,059,526 2,885,031 609,045 268,289 2,544,275 ---------- --------- ---------- ---------- -------- -------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,632,983 $ 572,100 $1,125,358 $5,330,441 $951,219 $268,289 $4,647,511 ========== ========= ========== ========== ======== ======== ========== See notes to pro forma combined consolidated financial statements.
- 15 - 18
UNIFIED HOLDINGS, INC. PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) REVENUE Revenue from broker/dealer operations $1,136,368 $ -- $ -- $1,136,368 $ $ $1,136,368 Investment adviser fees 1,510,491 239,153 -- 1,749,644 1,749,644 Revenue from fund services operations 1,015,451 -- -- 1,015,451 155,000 860,451 Trust and administration fees -- -- 235,179 235,179 235,179 Trail commission fees 720,107 -- -- 720,107 720,107 Custody and retirement fees 255,217 -- -- 255,217 255,217 Software and program fees 126,687 -- -- 126,687 126,687 Net investment and other income 107,097 1,251 33,849 142,197 50,499 91,698 ---------- -------- -------- ---------- -------- ------- ---------- Gross revenue 4,871,418 240,404 269,028 5,380,850 205,499 -- 5,175,351 ---------- -------- -------- ---------- -------- ------- ---------- COST OF SALES Brokerage revenue charges 724,449 -- -- 724,449 724,449 Trail commission charges 502,909 -- -- 502,909 502,909 Investment adviser fees 46,741 303,943 16,558 367,242 367,242 Administration fees 4,455 -- 27,290 31,745 31,745 ---------- -------- -------- ---------- -------- ------- ---------- Cost of sales 1,278,554 303,943 43,848 1,626,345 -- -- 1,626,345 ---------- -------- -------- ---------- -------- ------- ---------- Gross Profits 3,592,864 (63,539) 225,180 3,754,505 205,499 -- 3,549,006 ---------- -------- -------- ---------- -------- ------- ---------- EXPENSES Employee compensation and benefits 2,182,180 (132,722) -- 2,049,458 2,049,458 Brokerage operating charges 221,534 -- -- 221,534 221,534 Fund services operating charges 189,403 -- -- 189,403 189,403 Mail and courier service 35,940 158 1,733 37,831 37,831 Telephone 77,528 50 3,954 81,532 81,532 Equipment rental and maintenance 61,610 -- 3,785 65,395 65,395 See notes to pro forma combined consolidated financial statements. - 16 - 19 ADJUSTMENTS AND ELIMINATIONS UNIFIED FIRST ---------------------------- CONSOLIDATED VAI LEXINGTON COMBINED DEBIT CREDIT CONSOLIDATED ------------ --------- --------- -------- -------- --------- ------------ Professional fees 90,402 45,863 14,136 150,401 150,401 Occupancy 153,506 -- 2,500 156,006 156,006 Depreciation and amortization 123,581 59,548 6,827 189,956 189,956 Office supplies 42,691 -- -- 42,691 42,691 Travel and entertainment 68,115 (9,043) 126 59,198 59,198 Management fee -- 155,000 50,499 205,499 205,499 -- Interest expense 6,232 8,009 -- 14,241 14,241 Other operating expenses 145,664 18,615 25,212 189,491 189,491 ---------- --------- -------- ---------- -------- --------- ---------- Total expenses 3,398,386 145,478 108,772 3,652,636 -- 205,499 3,447,137 ---------- --------- -------- ---------- -------- --------- ---------- Income from operations before gain/(loss) on securities 194,478 (209,017) 116,408 101,869 205,499 205,499 101,869 Gain/(loss) on securities 24,996 (22,318) -- 2,678 2,678 Results of affiliate (67,537) -- -- (67,537) 67,537 -- ---------- --------- -------- ---------- -------- --------- ---------- Income before income taxes 151,937 (231,335) 116,408 37,010 205,499 273,036 104,547 Provision for income taxes 16,000 -- 37,000 53,000 37,000 16,000 ---------- --------- -------- ---------- -------- --------- ---------- Net income 135,937 (231,335) 79,408 (15,990) 205,499 310,036 88,547 ---------- --------- -------- ---------- -------- --------- ---------- Dividends on preferred stock 101,854 -- -- 101,854 -- -- 101,854 ---------- --------- -------- ---------- -------- --------- ---------- Net results after preferred stock dividend $ 34,083 $(231,335) $ 79,408 $ (117,844) $205,499 $ 310,036 $ (13,307) ========== ========= ======== ========== ======== ========= ========== See notes to pro forma combined consolidated financial statements.
- 17 - 20 UNIFIED HOLDINGS, INC. PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
ADJUSTMENTS AND ELIMINATIONS UNIFIED FIRST ---------------------------- CONSOLIDATED VAI LEXINGTON COMBINED DEBIT CREDIT CONSOLIDATED ------------ -------- --------- -------- ----- ------ ------------ REVENUE Revenue from broker/dealer operations $1,463,228 $ -- $ -- $1,463,228 $ $ $1,463,228 Investment adviser fees 1,207,793 175,293 -- 1,383,086 1,383,086 Revenue from fund services operations 1,509,636 -- -- 1,509,636 54,141 1,455,495 Trust and administration fees -- -- 123,561 123,561 123,561 Trail commission fees 759,034 -- -- 759,034 759,034 Custody and retirement fees 206,273 -- -- 206,273 206,273 Software and program fees 143,178 -- -- 143,178 143,178 Net investment and other income 23,095 48 44,799 67,942 46,500 21,442 ---------- -------- -------- ---------- -------- -------- ---------- Gross revenue 5,312,237 175,341 168,360 5,655,938 100,641 5,555,297 ---------- -------- -------- ---------- -------- -------- ---------- COST OF SALES Brokerage revenue charges 916,776 -- -- 916,776 916,776 Trail commission charges 491,977 -- -- 491,977 491,977 Investment adviser fees 42,562 35,194 10,132 87,888 87,888 Administration fees 3,060 -- 10,431 13,491 -- 13,491 ---------- -------- -------- ---------- -------- -------- ---------- Cost of sales 1,454,375 35,194 20,563 1,510,132 -- 1,510,132 ---------- -------- -------- ---------- -------- -------- ---------- Gross Profits 3,857,862 140,147 147,797 4,145,806 100,641 4,045,165 ---------- -------- -------- ---------- -------- -------- ---------- EXPENSES Employee compensation and benefits 2,122,910 115,668 -- 2,238,578 2,238,578 Brokerage operating charges 264,885 -- -- 264,885 264,885 Fund services operating charges 185,803 -- -- 185,803 185,803 Mail and courier service 43,034 241 -- 43,275 43,275 Telephone 45,478 1,835 3,553 50,866 50,866 Equipment rental and maintenance 62,734 -- -- 62,734 62,734 See notes to pro forma combined consolidated financial statements. - 18 - 21 ADJUSTMENTS AND ELIMINATIONS UNIFIED FIRST ---------------------------- CONSOLIDATED VAI LEXINGTON COMBINED DEBIT CREDIT CONSOLIDATED ------------ --------- --------- -------- -------- --------- ------------ Professional fees 37,015 31,802 13,824 82,641 82,641 Occupancy 149,156 -- 2,500 151,656 2,500 149,156 Depreciation and amortization 137,664 39,892 9,420 186,976 186,976 Office supplies 45,932 3,799 -- 49,731 49,731 Travel and entertainment 38,516 10,066 -- 48,582 48,582 Management fee -- 54,141 44,000 98,141 98,141 -- Interest expense 3,364 10,669 -- 14,033 14,033 Other operating expenses 147,135 17,951 39,163 204,249 204,249 ---------- --------- -------- ---------- -------- --------- ---------- Total expenses 3,283,626 286,064 112,460 3,682,150 -- 100,641 3,581,509 ---------- --------- -------- ---------- -------- --------- ---------- Income from operations before gain/(loss) on securities 574,236 (145,917) 35,337 463,656 100,641 100,641 463,656 Gain/(loss) on securities 39,929 -- 131 40,060 40,060 Results of affiliate (69,399) -- -- (69,399) 69,399 -- ---------- --------- -------- ---------- -------- --------- ---------- Income before income taxes 544,766 (145,917) 35,468 434,317 100,641 170,040 503,716 Provision for income taxes -- -- -- -- -- ---------- --------- -------- ---------- -------- --------- ---------- Net income 544,766 (145,917) 35,468 434,317 100,641 170,040 503,716 ---------- --------- -------- ---------- -------- --------- ---------- Dividends on preferred stock 102,309 -- -- 102,309 -- -- 102,309 ---------- --------- -------- ---------- -------- --------- ---------- Results after preferred stock dividend $ 442,457 $(145,917) $ 35,468 $ 332,008 $100,641 $ 170,040 $ 401,407 ========== ========= ======== ========== ======== ========= ========== See notes to pro forma combined consolidated financial statements.
- 19 - 22 UNIFIED HOLDINGS, INC. PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
ADJUSTMENTS AND ELIMINATIONS UNIFIED FIRST ---------------------------- CONSOLIDATED VAI LEXINGTON COMBINED DEBIT CREDIT CONSOLIDATED ------------ -------- --------- -------- ----- ----- ------------ REVENUE Revenue from broker/dealer operations $1,846,201 $ -- $ -- $1,846,201 $ $ $1,846,201 Investment adviser fees 1,679,728 248,090 -- 1,927,818 1,927,818 Revenue from fund services operations 1,968,384 -- -- 1,968,384 500,313 -- 1,468,071 Trust fees -- -- 176,825 176,825 176,825 Administration fees 66,000 -- 12,341 78,341 66,000 -- 12,341 Valuation system fees -- -- 2,000 2,000 2,000 Trail commission fees 995,318 -- -- 995,318 995,318 Custody and retirement fees 246,139 -- -- 246,139 246,139 Software and program fees 190,445 -- 4,181 194,626 194,626 Interest income 68,696 64 59,561 128,321 128,321 Other (25,189) 100 163 (24,926) (24,926) ---------- -------- -------- ---------- -------- -------- ---------- Gross revenue 7,035,722 248,254 255,071 7,539,047 566,313 -- 6,972,734 ---------- -------- -------- ---------- -------- -------- ---------- COST OF SALES Brokerage revenue charges 1,141,291 -- -- 1,141,291 1,141,291 Trail commission charges 653,595 -- -- 653,595 653,595 Investment adviser fees -- 65,560 -- 65,560 65,560 Administration fees 11,586 -- -- 11,586 11,586 ---------- -------- -------- ---------- -------- -------- ---------- Cost of sales 1,806,472 65,560 -- 1,872,032 -- -- 1,872,032 ---------- -------- -------- ---------- -------- -------- ---------- Gross Profits 5,229,250 182,694 255,071 5,667,015 566,313 -- 5,100,702 ---------- -------- -------- ---------- -------- -------- ---------- EXPENSES Employee compensation and benefits 2,742,595 181,835 -- 2,924,430 314,500 2,609,930 Investment advisory fees -- -- -- -- -- Administration fees 4,250 -- 12,341 16,591 16,591 Software maintenance fees -- -- 4,181 4,181 4,181 Related party employee, supplies and operating expenses reimbursed -- -- 66,000 66,000 66,000 -- Brokerage operating charges 332,508 -- -- 332,508 332,508 Investment adviser expenses 49,972 6,066 56,038 56,038 Fund services operating charges 233,500 -- -- 233,500 233,500 Market quotes 41,721 -- -- 41,721 41,721 Mail and courier service 63,511 276 -- 63,787 63,787 Telephone 70,279 2,549 4,690 77,518 77,518 Equipment rental and maintenance 105,122 3,909 2,237 111,268 111,268 See notes to pro forma combined consolidated financial statements. - 20 - 23 ADJUSTMENTS AND ELIMINATIONS UNIFIED FIRST ---------------------------- CONSOLIDATED VAI LEXINGTON COMBINED DEBIT CREDIT CONSOLIDATED ------------ --------- --------- -------- ----- ------ ------------ Insurance 36,147 5,501 13,652 55,300 55,300 Professional fees 59,029 92,263 15,273 166,565 166,565 Occupancy 198,651 -- 5,000 203,651 203,651 Depreciation and amortization 185,062 53,189 10,002 248,253 248,253 Office supplies 63,540 386 497 64,423 64,423 Travel and entertainment 51,513 20,536 -- 72,049 72,049 Taxes (other than payroll) 72,270 3,705 1,776 77,751 77,751 Temporary help 13,388 -- -- 13,388 13,388 Advertising and conventions 874 13,854 -- 14,728 14,728 Doubtful accounts -- -- -- -- -- Interest expense 4,993 14,119 -- 19,112 19,112 Other operating expenses 50,446 186,207 2,272 238,925 185,813 53,112 ---------- --------- -------- ---------- -------- -------- ---------- Total expense 4,379,371 578,329 143,987 5,101,687 -- 566,313 4,535,374 ---------- --------- -------- ---------- -------- -------- ---------- Income from operations before gain/(loss) on securities 849,879 (395,635) 111,084 565,328 566,313 566,313 565,328 Gain/(loss) on securities 49,684 (3,353) -- 46,331 46,331 Results of affiliate (151,108) -- -- (151,108) 151,108 -- ---------- --------- -------- ---------- -------- -------- ---------- Income before income taxes 748,455 (398,988) 111,084 460,551 566,313 717,421 611,659 Provision for income taxes -- -- 30,000 30,000 30,000 -- ---------- --------- -------- ---------- -------- -------- ---------- Net income 748,455 (398,988) 81,084 430,551 566,313 747,421 611,659 ---------- --------- -------- ---------- -------- -------- ---------- Dividends on preferred stock 136,634 -- -- 136,634 -- -- 136,634 ---------- --------- -------- ---------- -------- -------- ---------- Results after preferred stock dividend $ 611,821 $(398,988) $ 81,084 $ 293,917 $566,313 $747,421 $ 475,025 ========== ========= ======== ========== ======== ======== ========== See notes to pro forma combined consolidated financial statements.
- 21 - 24 UNIFIED HOLDINGS, INC. PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
ADJUSTMENTS AND ELIMINATIONS UNIFIED FIRST ---------------------------- CONSOLIDATED VAI LEXINGTON COMBINED DEBIT CREDIT CONSOLIDATED ------------ ------- --------- -------- ----- ------ ------------ REVENUE Revenue from broker/dealer operations $2,363,345 $ -- $ -- $2,363,345 $ $ $2,363,345 Investment adviser fees 1,317,965 27,207 -- 1,345,172 1,345,172 Revenue from fund services operations 1,395,782 -- -- 1,395,782 199,275 -- 1,196,507 Trust and administrative fees -- -- 108,429 108,429 108,429 Trail commission fees 540,950 -- -- 540,950 540,950 Custody and retirement fees 163,044 -- -- 163,044 163,044 Software and program fees 213,755 -- -- 213,755 213,755 Net investment and other income 38,092 811 55,946 94,849 94,849 ---------- ------- -------- ---------- -------- -------- ---------- Gross revenue 6,032,933 28,018 164,375 6,225,326 199,275 -- 6,025,051 ---------- ------- -------- ---------- -------- -------- ---------- COST OF SALES Brokerage revenue charges 1,244,893 -- -- 1,244,893 1,244,893 Trail commission charges 130,281 -- -- 130,281 130,281 Investment adviser fees 45,561 24,922 55,701 126,184 126,184 Administration fees 12,316 -- -- 12,316 12,316 ---------- ------- -------- ---------- -------- -------- ---------- Cost of sales 1,433,051 24,922 55,701 1,513,674 -- -- 1,513,674 ---------- ------- -------- ---------- -------- -------- ---------- Gross Profits 4,599,882 3,096 108,674 4,711,652 199,275 -- 4,512,377 ---------- ------- -------- ---------- -------- -------- ---------- EXPENSES Employee compensation and benefits 2,392,953 -- -- 2,392,953 -- 198,000 2,194,953 Brokerage operating charges 577,373 -- -- 577,373 577,373 Fund services operating charges 170,395 -- -- 170,395 170,395 Mail and courier service 76,522 108 76,630 76,630 Telephone 154,887 199 913 155,999 155,999 Equipment rental and maintenance 151,787 -- -- 151,787 151,787 Professional fees 74,911 6,827 12,349 94,087 94,087 Occupancy 215,402 -- 5,000 220,402 220,402 Depreciation and amortization 148,789 26,594 532 175,915 175,915 Office supplies 60,647 -- 36 60,683 60,683 Travel and entertainment 55,768 7,122 -- 62,890 62,890 Interest expense 7,429 5,450 -- 12,879 12,879 Other operating expense 271,802 4,257 13,755 289,814 -- 1,275 288,539 ---------- ------- -------- ---------- -------- -------- ---------- Total expense 4,358,665 50,557 32,585 4,441,807 -- 199,275 4,242,532 ---------- ------- -------- ---------- -------- -------- ---------- See notes to pro forma combined consolidated financial statements. - 22 - 25 ADJUSTMENTS AND ELIMINATIONS UNIFIED FIRST ---------------------------- CONSOLIDATED VAI LEXINGTON COMBINED DEBIT CREDIT CONSOLIDATED ------------ -------- --------- -------- ----- ------ ------------ Income from operations before gain/(loss) on securities 241,217 (47,461) 76,089 269,845 199,275 199,275 269,845 Gain/(loss) on securities 35,356 26 -- 35,382 35,382 Results of affiliate (1,599) -- -- (1,599) -- 1,599 -- -------- -------- ------- -------- -------- -------- -------- Income before income taxes 274,974 (47,435) 76,089 303,628 199,275 200,874 305,227 -------- -------- ------- -------- -------- -------- -------- Provision for income taxes -- -- 19,354 19,354 19,354 -- -------- -------- ------- -------- -------- -------- -------- Net income 274,974 (47,435) 56,735 284,274 199,275 220,228 305,227 -------- -------- ------- -------- -------- -------- -------- Dividends on preferred stock 136,757 -- -- 136,757 -- -- 136,757 -------- -------- ------- -------- -------- -------- -------- Results after preferred stock dividend $128,217 $(47,435) $56,735 $147,517 $199,275 $220,228 $168,470 ======== ======== ======= ======== ======== ======== ======== See notes to pro forma combined consolidated financial statements.
- 23 - 26 UNIFIED HOLDINGS, INC. PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (UNAUDITED)
ADJUSTMENTS AND ELIMINATIONS UNIFIED FIRST ---------------------------- CONSOLIDATED VAI LEXINGTON COMBINED DEBIT CREDIT CONSOLIDATED ------------ -------- --------- -------- ----- ----- ------------ REVENUE Revenue from broker/dealer operations $2,905,597 $ $ -- $2,905,597 $ $ $2,905,597 Investment adviser fees 507,526 15,266 522,792 522,792 Revenue from fund services operations 979,155 -- 979,155 979,155 Trail commission fees 605,774 -- 605,774 605,774 Custody and retirement fees 194,416 -- 194,416 194,416 Software and program fees 224,386 -- 224,386 224,386 Interest income -- 38,577 38,577 38,577 Other 167,273 167,273 167,273 ---------- -------- ------- ---------- -------- -------- ---------- Gross revenue 5,584,127 -- 53,843 5,637,970 -- -- 5,637,970 ---------- -------- ------- ---------- -------- -------- ---------- COST OF SALES Brokerage revenue charges 1,664,496 1,664,496 -- 1,664,496 Trail commission charges 104,437 104,437 -- 104,437 Administration fees -- -- -- -- ---------- -------- ------- ---------- -------- -------- ---------- Cost of sales 1,768,933 -- -- 1,768,933 -- -- 1,768,933 ---------- -------- ------- ---------- -------- -------- ---------- Gross Profit 3,815,194 -- 53,843 3,869,037 -- -- 3,869,037 ---------- -------- ------- ---------- -------- -------- ---------- EXPENSES Employee compensation and benefits 1,864,450 -- 1,864,450 1,864,450 Brokerage operating charges 651,291 -- 651,291 651,291 Investment adviser expenses 17,940 -- 17,940 17,940 Administration fees 2,450 -- 2,450 2,450 Fund services operating charges 114,181 -- 114,181 114,181 Market quotes 72,444 -- 72,444 72,444 Mail and courier service 136,404 -- 136,404 136,404 Telephone 147,377 863 148,240 148,240 Equipment rental and maintenance 112,069 -- 112,069 112,069 Insurance 64,339 7,943 72,282 72,282 Professional fees 39,404 3,379 42,783 42,783 Occupancy 172,850 5,000 177,850 177,850 Depreciation and amortization 143,145 234 143,379 143,379 Office supplies 12,106 7,577 19,683 19,683 Travel and entertainment 59,692 -- 59,692 59,692 See notes to pro forma combined consolidated financial statements. - 24 - 27 ADJUSTMENTS AND ELIMINATIONS UNIFIED FIRST ---------------------------- CONSOLIDATED VAI LEXINGTON COMBINED DEBIT CREDIT CONSOLIDATED ------------ -------- --------- -------- ----- ------ ------------ Taxes (other than payroll) 56,357 -- 56,357 56,357 Temporary help -- -- -- -- Advertising -- 265 265 265 Doubtful accounts 5,616 -- 5,616 5,616 Interest expense -- -- -- -- Other operating expenses 92,735 11,931 104,666 104,666 ---------- -------- ------- ---------- -------- -------- ---------- Total expense 3,764,850 -- 37,192 3,802,042 -- -- 3,802,042 ---------- -------- ------- ---------- -------- -------- ---------- Income from operations before gain/(loss) on securities 50,344 -- 16,651 66,995 -- -- 66,995 Gain/(loss) on securities 81 -- 81 81 Results of affiliate -- -- -- -- ---------- -------- ------- ---------- -------- -------- ---------- Income before income taxes 50,425 -- 16,651 67,076 -- -- 67,076 Provision for income taxes -- 3,452 3,452 -- 3,452 -- ---------- -------- ------- ---------- -------- -------- ---------- Net income 50,425 -- 13,199 63,624 -- 3,452 67,076 ---------- -------- ------- ---------- -------- -------- ---------- Dividends on preferred stock 108,377 -- -- 108,377 -- -- 108,377 ---------- -------- ------- ---------- -------- -------- ---------- Results after preferred stock dividend $ (57,952) $ -- $13,199 $ (44,753) $ -- $ 3,452 $ (41,301) ========== ======== ======= ========== ======== ======== ========== See notes to pro forma combined consolidated financial statements.
- 25 - 28 UNIFIED HOLDINGS, INC. NOTES TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On April 25, 1997, the Company entered into an agreement to acquire First Lexington located in Lexington, Kentucky. This acquisition will be accounted for under the pooling-of-interests method of accounting. In connection with the acquisition, the Company will issue 80,008 shares of Common Stock, based upon an exchange ratio of 9.644 shares of Common Stock for each outstanding share of First Lexington common stock. The acquisition is anticipated to be completed by the end of January 1998 and is subject to, among other things, regulatory approval and the approval of the stockholders of First Lexington. The pro forma combined consolidated financial statements reflect a surrender to VAI by all stockholders of VAI (other than the Company) of their capital stock of VAI. The proposed stock surrender will occur upon approval of the proposed surrender by the shareholders of the Vintage Funds and upon receipt of required regulatory approval. It currently is anticipated that the transaction will occur by the end of January 1998. Upon consummation of the stock surrender the Company will own 100% of the capital stock of VAI. The pro forma combined consolidated financial statements include the accounts of the Company, UAI, UMC, First Lexington and VAI. All intercompany notes and accounts receivable, and notes and accounts payable balances between the Company and its subsidiaries have been eliminated. The pro forma combined consolidated financial statements eliminate all intercompany revenue and expense between the Company and First Lexington and VAI in conformity with generally accepted accounting principles. The pro forma combined consolidated financial statements eliminate all equity in and advances between the Company and VAI. In conformity with generally accepted accounting principles, the Company has eliminated its equity share of the results of operations of VAI in the consolidated balances. The Company files consolidated federal and state income tax returns with its subsidiaries. Subsequent to their acquisition, First Lexington and VAI will be included in the consolidated tax returns of the Company, which uses the accrual method of tax and accounting reporting. The Company will utilize its net operating loss deduction to reduce the taxable income from its subsidiaries. The income tax effect has been eliminated in the pro forma combined consolidated statement of operations. Effective June 1, 1997, the Company acquired HFI in a transaction accounted for under the pooling-of-interests method of accounting. In connection with the acquisition, the Company issued 325,000 shares of Common Stock on November 19, 1997. - 26 - 29 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION --------------------------------------------------------- The following presents management's discussion and analysis of the Company's consolidated financial condition and results of operations as of the dates and for the periods indicated. This discussion should be read in conjunction with the other information set forth in this registration statement, including the Company's audited and unaudited consolidated financial statements and the accompanying notes thereto. OVERVIEW The Company's principal business is providing and enhancing a platform for vertical integration in the financial services industry by means of stock-for-stock, pooling-of-interests transactions and an aggressive merger and acquisition program and providing mutual fund management, mutual fund administrative services and brokerage operations through its wholly owned subsidiaries, UAI, UMC and Health Financial. UAI is a mutual fund financial services company specializing in the development, support, maintenance, shareholder servicing and management of and in providing investment advice to mutual funds. UAI was formed in 1990 as a sister company to UMC in a move to separate and segregate the brokerage services employees (and brokerage account activities) from the mutual fund services employees (and mutual fund account activities). UAI is a highly automated, registered stock transfer agent that has total back-office mutual fund service capabilities and presently provides transfer agency, fund accounting, administrative and/or compliance services for ten mutual fund families consisting of nearly $647 million in mutual fund assets, 36 portfolios and approximately 29,000 accounts. Additionally, as a registered investment adviser, UAI has $117.5 million of assets under management, all of which are invested in mutual funds, with approximately $50 million of the $117.5 million invested in the Vintage Funds. UMC is a regional discount brokerage firm with a link to mutual fund assets via its brokerage account services. A licensed NASD broker-dealer since 1976, UMC specializes in mutual fund distribution and shareholder servicing liaison providing such services as: mutual fund distribution services and support; mutual fund conversion support; mutual fund trades; IRA custodial services; 12b-1 maintenance, accounting and marketing support; securities (stock and bond) brokerage; brokerage clearing and execution services; consolidated brokerage statement processing; mutual fund and brokerage software development; asset allocation and performance measurement services and statement processing; and retirement account record keeping. HFI is a registered investment adviser that was formed in 1986 and has been registered with the SEC since 1987. As of September 30, 1997, HFI managed over $340 million in assets for both individuals and institutions. The predominant management style of HFI is a balanced portfolio of no-load index funds in multi-asset classes consisting of the Standard & Poor's 500 large capitalization United States stocks, small capitalization United States stocks, United States bonds, real estate, cash and international stocks. The Company expects a continuation in reductions in annual gross revenues from its brokerage clear-through clients because as the small brokerage firms' volumes increase, the client will be able to obtain lower clearing charges directly from the firm transacting the trades for UMC and UMC's clients. The Company expects that any reductions in brokerage services revenues will be offset by anticipated increases in investment management fees, internet brokerage service fees, mutual fund services revenues, through the acquisition of other mutual fund businesses, and fees that the Company hopes to realize through providing certain non-bank trust, custodial and retirement services. There can be no - 27 - 30 assurances that the Company will be able to accomplish such increases or that the Company will not experience or be able to prevent unexpected reductions in its revenues or unexpected increases in its expenses. COMPARISON OF RESULTS FOR CALENDAR YEARS ENDED DECEMBER 31, 1996 AND 1995 The Company's gross revenues increased by $1,002,789 to $7,035,722 in 1996 from $6,032,933 in 1995. This improvement in gross revenues resulted from a significant increase in mutual fund administrative services revenues. This increase was somewhat offset by a $517,144 decrease in revenue from broker-dealer operations from 1995 to 1996. Gross profit increased by $575,146 over the prior year to $5,175,028 in 1996 from $4,599,882 in 1995 directly related to higher volumes in the mutual fund administrative services business; however, overall percentage of gross profit to total revenue decreased to 73.55% in 1996 from 76.25% in 1995 due to a higher cost of sales, related primarily to trail commission charges. Operating expenses in 1996 were $4,325,149 as compared to $4,358,665 in 1995. Administrative salaries, employee compensation and benefits increased in 1996 compared to 1995 from $2,392,953 to $2,742,595. Brokerage operating charges decreased in 1996 to $332,508 from $577,373 in 1995 on lower volume. Total net income from operations was $849,879 in 1996, compared to $241,217 for the prior year, principally due to the increase in mutual fund administrative services revenues and the ability to control operating expenses. 1996 consolidated net income increased $473,481 to $748,455 from $274,974 for the prior year. Consolidated net income calculations include a charge for losses incurred at an affiliate of $151,108 and $1,599 for 1996 and 1995, respectively. The Company does not have any pending litigation of a material nature and is not aware of any potential litigation or claims. COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Year-to-date net income at September 30, 1997 of $135,937 compares to a net profit of $544,766 for the same period last year. Net profit for the nine months ended September 30, 1997 includes an after-tax loss of approximately $387,000 related to the acquisition of Health, coupled with a special bonus to the employees of the Company of approximately $125,000, higher legal, accounting and counsel fees related to the filing by the Company of this Registration Statement on Form 10-SB (the "Form 10-SB"), a charge for losses incurred at an affiliate and a provision for income taxes related to alternative minimum tax depreciation carryforwards, which could be modified based upon future operations of the Company. Fund services operating charges included a one-time conversion cost of approximately $25,000 related to a change of the Company's fund system service provider. Gross revenues of $4,871,418 in the nine-month period ended September 30, 1997 compare to $5,312,237 for the same period in 1996. For the current year, assets under management increased significantly. This increase accounted for the $302,698 increase in investment advisers revenues. Reduced brokerage charges significantly reduced revenue from broker/dealer operations. Mutual fund service and trailing commissions were partially offset by an increase in custody and retirement fees and net investment and other income. - 28 - 31 The gross profit of $3,592,864 for the nine months ended September 30, 1997 compares to $3,857,562 for the same period in 1996. The percentage of gross profit to total revenue increased to 73.8% during the nine-month period ended September 30, 1997 from 72.6% from the same prior year period. This improvement reflects better investment adviser margins. Operating expenses increased by $114,760 over the same prior year period from $3,283,626 to $3,398,386 primarily due to increased employee compensation and benefits and professional fees. Employee compensation was higher due to a one-time bonus paid to employees of the Company during July 1997 and higher legal, accounting and counsel fees related on the filing of the Form 10-SB. In addition, travel costs increased related to the completed and pending transactions and a one-time charge related to a change of the Company's fund system service provider. COMPARISON OF RESULTS FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND 1996 For the quarter ended September 30, 1997, net profit of $4,734 compared to a net profit of $408,063 for the same period last year. The third quarter of 1997 includes a special bonus to employees of the Company aggregating approximately $125,000, higher legal, accounting and counsel fees related to the filing of the Form 10-SB with the SEC during 1997 and an adjustment for the Company's investments in an affiliate resulted in a $147,467 charge as compared to a 1996 third quarter loss of $52,801. The current year quarter also includes a one-time expense of approximately $25,000 related to conversion of the Company's fund service system provider and increased travel costs related to acquisition activities. The quarter ended September 30, 1996 included a credit from the Company's communication service provider. Increased assets under management accounted for the increase in investment adviser revenues, which partially offset the decline in fund services revenues. The quarter ended September 30, 1997 also includes a provision for income taxes related to alternate minimum tax, which could be modified based upon future operations of the Company. For the three months ended September 30, 1997, gross revenues of $1,678,446 compared to $1,928,349 during the same quarter last year. Increased assets under management accounted for the increase in investment adviser revenues, which partially offset the decline in fund services revenues. Cost of sales increased $10,585 to $441,522 in the quarter ended September 30, 1997 from $430,937 for the quarter ended September 30, 1996. The lower brokerage cost of sales partially offset higher trail commission charges and administration fees. Quarterly operating expenses increased by $6,429 over last year of $1,067,343 to $1,073,772, due to a one-time bonus to employees of the Company aggregating approximately $125,000, a one-time expense for conversion of the Company's fund service system provider, increased travel costs related to completed and pending acquisitions and higher legal, accounting and counsel fees related to the filing of the Form 10-SB. In addition, operating expenses for the quarter ended September 30, 1996 included a credit from the Company's communication service provider. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity historically have been and continue to be cash flow from operating activities and available borrowing capacity for capitalized leases. At September 30, 1997 and December 31, 1996, the Company reported working capital of $1,183,307 and $965,512, respectively, or a working capital ratio of 1.71 and 2.00, respectively, to 1. - 29 - 32 Significant portions of the Company's computer and communication equipment and software are purchased through capitalized leases. The Company expects to be able to repay its borrowings for such capitalized leases over the respective lease periods. Capital expenditures for 1997 include the purchase of telephone and computer equipment and software to support the Company's mutual fund and brokerage services businesses. Such expenditures are not expected to exceed $400,000. The Company currently can provide its own sources of funds or lending to sufficiently absorb such expenditures so as not to endanger the liquidity or financial condition of the Company. The Company has entered into a revolving credit agreement with Bank One, Indiana, N.A. (the "Bank One Facility"), which is comprised of a revolving line of credit extended to the Company of $500,000. The obligations of the Company under the credit facility are secured by substantially all of the personal property of the Company. The Bank One Facility has customary financial covenants regarding tangible net worth and fixed charge ratio. The Bank One Facility also contains covenants and provisions that restrict, among other things, the Company's ability to: (i) engage in certain sales of assets; (ii) incur certain liens on its properties; (iii) merge or consolidate with or acquire another entity or engage in other fundamental changes; and (iv) sell or otherwise transfer any ownership interest in the Company. The Bank One Facility provides for certain customary events of default. As of September 30, 1997, the principal amount outstanding under the Bank One Facility was $109,839, and the interest rate on such borrowing was 9.0%. The Company does not expect to need to raise additional capital to satisfy its cash requirements but, as described below, will attempt to raise working capital to expand its business and products, for equipment and software purchases and to retire the outstanding shares of Series A and Series B Preferred Stock. The Company anticipates that, during December 1998, it will issue approximately 2,100 shares of Series C 6.75% Cumulative Preferred Stock to certain directors, executive officers and agents of the Company. Subscriptions for such shares have been accepted by the Company. Each share of Series C Preferred Stock will be convertible, at any time at the option of the holder thereof and without the payment of any additional consideration with respect thereto, into 135 shares of Common Stock. The Company also currently anticipates that, either during the fourth quarter of 1997 or the first quarter of 1998, it will attempt to raise additional capital through a private placement of up to 600,000 shares of its Common Stock. Upon completion of the proposed private placement, approximately $1.7 million of the proceeds would be used to retire the outstanding Series A and Series B Preferred Stock, while the remaining proceeds would be used for general corporate purposes, including, without limitation, investments in and advances to subsidiaries and possible future acquisitions of small investment advisory firms and registered investment advisers. Pending such application, the net proceeds would be invested in short-term investment grade obligations. Neither the Class C Preferred Stock nor the shares of Common Stock to be issued pursuant to the private placement will be registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. - 30 - 33 SENSITIVITY TO CHANGES IN MARKET CONDITIONS The Company's revenues, like those of other firms in the asset management, fund management, fund services and mutual fund brokerage industries, are directly related to fluctuations in assets and price levels of funds under management. A significant portion of the Company's earnings are generated from fees based on the average daily market value of the assets the Company administers for its clients. A rapid change in interest rates or a sudden decline in the bond markets, among other factors, could influence an investor's decision whether to invest or maintain an investment in a bond based mutual fund. As a result, fluctuations may occur in assets that the Company has under management due to changes in interest rates and other investment considerations. A significant investor trend seeking alternatives to mutual fund investments and/or to assets under management could have a negative impact on the Company's revenues by reducing the assets it manages. Additionally, from time to time, the Company has waived, and, in the future for competitive reasons, may waive certain fees normally charged to mutual funds to which it provides services. ECONOMIC BUSINESS RISKS OUTSIDE THE COMPANY'S CONTROL The Company's asset management, mutual fund services, mutual fund management and broker-dealer businesses are subject to various risks and contingencies, many of which are beyond the ability of the Company to control. These risks include economic conditions generally and in particular those affecting bond and securities markets, interest rates, discretionary income available for investment, customer inability to meet payment or delivery commitments, customer fraud and employee misconduct and error. ITEM 3. DESCRIPTION OF PROPERTY ----------------------- The Company, through its subsidiary, UMC, leases its corporate headquarters and administrative office facilities located at 429 North Pennsylvania Street, Indianapolis, Indiana. This facility is comprised of approximately 11,086 square feet and is subject to a lease expiring in 2007. Health Financial's administrative offices are located at 2353 Alexandria Avenue, Lexington, Kentucky. The operating lease for such offices expires in 2002 and such offices have approximately 2,554 square feet. The Company also will lease a portion of such property for corporate offices. The Company's current administrative offices are considered adequate to serve the Company's foreseeable needs. Other than the administrative offices lease and the equipment and capital leases listed herein, the Company has no other significant property holdings. - 31 - 34 Lease obligations are allocated between the Company and its subsidiaries based upon estimated usage. The leases include clauses for adjustment of operating costs and real estate taxes that are not reflected as part of the minimum obligations. The aggregate minimum rental commitments required under operating leases and noncancelable subleases for office space and equipment at September 30, 1997 were as follows:
YEAR ENDED DECEMBER 31 LEASE COMMITMENTS ---------------------- ----------------- 1997, three months $ 120,168 1998 256,215 1999 244,254 2000 224,508 2001 152,068 Thereafter 1,044,000 ---------- $2,041,213 ==========
The Company's capitalized lease obligations are payable over a 36-month period. The following is a summary of future minimum lease payments under capitalized lease obligations as of September 30, 1997:
YEAR ENDING DECEMBER 31 AMOUNT ----------------------- ------ 1997 $ 9,478 1998 53,187 1999 43,605 2000 20,200 2001 14,783 -------- Total 141,253 Less amount representing interest 13,353 -------- Net present value $127,900 ========
The Company, as of September 30, 1997, had equipment and furniture, net, of $258,223, and capitalized leased equipment, net, of $148,538, totaling $406,761 in equipment and furniture. The $406,761 was comprised of: major computer equipment, $288,388; minor computer equipment, $36,463; major operation equipment $6,630; major telecommunications equipment, $31,736; furniture and fixtures, $28,702; and leasehold improvements, $14,842. For purposes of depreciation, the federal tax basis, rate, method and life claimed with respect to such properties is set forth as follows: Book Depreciation: With the exception of the 1989 computer equipment, which originally was depreciated on a straight-line basis and is now being depreciated on the accelerated method, the properties are depreciated on a 3-10 year straight-line method, with a 5-year life for minor equipment and a 10-year life for major equipment. Tax Depreciation: All assets of the Company, UMC and UAI have been depreciated on a straight-line method with 3-10 year lives after consideration of the recommended tax and alternative minimum tax lives. HFI filed as an S-corporation prior to its acquisition by the Company. Prior to such acquisition, HFI utilized accelerated methods and lives as allowed by the Internal Revenue Service. - 32 - 35 ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The following table sets forth certain information with respect to the beneficial ownership of the outstanding Common Stock and Class B Preferred Stock: (i) by each person who is known by the Company to own beneficially more than five percent of the Common Stock and/or Class B Preferred Stock; (ii) by each of the Company's directors and executive officers; and (iii) by all current directors and executive officers as a group. No director or executive officer owns any shares of Class A Preferred Stock.
NUMBER OF SHARES NUMBER OF SHARES NAME OF OF COMMON STOCK PERCENT OF PREFERRED STOCK PERCENT BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS BENEFICIALLY OWNED OF CLASS - -------------------- -------------------------- -------- ------------------ -------- Timothy L. Ashburn 572,768 60.43% 5,204 60.6% David A. Bogaert -- -- -- -- Jack R. Orben -- -- 188 2.2 Weaver H. Gaines -- -- 50 Thomas G. Napurano -- -- 943 11.0 Lynn E. Wood 50,000 5.28 377 4.4 Gregory W. Kasten 325,000 34.29 -- -- All directors and executive officers (7 persons) 947,768 100.00 6,762 78.8 - ---------------- The address for each person is 429 North Pennsylvania Street, Indianapolis, Indiana 46204. Except for Mr. Timothy L. Ashburn, such share numbers do not include the 572,768 shares of Common Stock held pursuant to the terms of that certain Voting Trust Agreement (the "Voting Trust") dated as of October 10, 1997 by and between Mr. Ashburn, as the voting trustee, and each of the holders of Common Stock (other than shares held pursuant to the 401(k) Plan and shares owned by Dr. Kasten). The Voting Trust terminates on October 31, 1998. No person has voting power over such shares except Mr. Ashburn, the voting trustee pursuant to the Voting Trust. Each participant has sole investment power with respect to the shares they contributed to the Voting Trust. Of the 572,768 shares of Common Stock held subject to the Voting Trust, 63,656, 35,070, 18,000, 18,000, 62,949, 64,213 and 261,888 shares are owned by Messrs. Ashburn, Bogaert, Orben, Gaines, Napurano and Wood and all directors and executive officers as a group, respectively. Mr. Ashburn disclaims beneficial ownership of all shares subject to the Voting Trust except 63,656 shares. Except for Mr. Lynn E. Wood, such share numbers do not include the 50,000 shares of Common Stock held by the 401(k) Plan. No person has voting power over such shares except Mr. Wood, the trustee for the 401(k) Plan, who votes the shares held by the 401(k) Plan. Each participant has sole investment power over the shares held for their benefit in the 401(k) Plan. Of the 50,000 shares of Common Stock issued in the name of the 401(k) Plan, 4,370.180, 2,977.796, 5,161.789, 4,353.348 and 16,863.113 shares are held for the benefit of Messrs. Ashburn, Bogaert, Napurano and Wood and all directors and executive officers as a group, respectively. Mr. Wood disclaims beneficial ownership of all shares held subject to the 401(k) Plan except 4,353.348 shares. Includes 300 shares owned by Mr. Ashburn's IRA. Less than one percent.
- 33 - 36 THE UNIFIED REGIONAL PROTOTYPE 401(K) AND PROFIT SHARING PLAN The Company sponsors a profit-sharing and Section 401(k) defined contribution retirement plan that covers substantially all employees of the Company and its subsidiaries. Contributions to the 401(k) Plan are determined by the Board. During 1996 and 1995, a consolidated expense of $14,356 and $16,392, respectively, was provided in anticipation of contributions to be paid in 1996 and 1995, respectively. In 1996, the Company amended the 401(k) Plan to include matching for funds (a) invested in the Vintage Funds or (b) to purchase Series B Preferred Stock in the 401(k) Plan. The Company will match the employee's contribution up to fifty percent of the first six percent of the employee's before-tax contribution. The 401(k) Plan presently holds 50,000 shares of Common Stock, representing approximately 5.28% of the outstanding shares. The Board has appointed Lynn E. Wood to be the 401(k) Plan's Trustee and Mr. Wood votes the shares on behalf of the 401(k) Plan participants. ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS ------------------------------------------------------------ DIRECTORS AND EXECUTIVE OFFICERS The following sets forth information with respect to the Company's executive officers and members of the Board, including the names and ages of all executive officers and directors of the Company, all positions and offices with the Company held by each such person and each person's term of office as a director. TIMOTHY L. ASHBURN: (Age 47) Chairman since 1989; Chief Executive Officer 1989-1992 and 1994-present; President since November 1997; 401(k) Plan Committee since 1994; executive committee member since 1989; operating committee member since 1989. Mr. Ashburn was employed by the Vine Street Trust Company, Lexington, Kentucky, a wholly owned subsidiary of Cardinal Bancshares, a Kentucky bank holding company for the two-year period from April 1992 through March 1994, and was responsible for the operations of the bank's trust department and for investment management. Mr. Ashburn has been Chairman of the Board and Chief Executive Officer of VAI since December of 1994 and is Chairman of the Board of Trustees, President and Chief Executive Officer of the Vintage Funds. JACK R. ORBEN: (Age 58) Director since 1989; Plan Committee Member for 401(k) Plan since inception of such Plan. Mr. Orben has been the Chairman and an executive officer of Fiduciary Counsel, an investment adviser firm, located at 40 Wall Street, New York, New York since 1979. Fiduciary Counsel is a sub-adviser for several portfolios of the Company's affiliated mutual funds, the Vintage Funds. Mr. Orben is also Chairman and an executive officer of AFS Group, a 53% owner of Fiduciary Counsel, which owns 100% of Starwood Company, an investment adviser firm. Starwood is a sub-adviser for the Starwood Strategic portfolio of the Company's affiliated mutual funds, the Vintage Funds. Mr. Orben is a director of VAI and chairs its investment committee and is on the Board of Trustees and is a member of the executive committee for the Vintage Funds. WEAVER H. GAINES: (Age 54) Director 1990-1992, 1993-present; Plan Committee Member for 401(k) Plan since inception of such Plan. Since 1993, Mr. Gaines has been Chairman and Chief Executive Officer for Ixion Biotechnology, Inc., founding and managing the development-stage biotechnology company. In 1992, Mr. Gaines was a senior advisor to Bush/Quayle 92. From 1985 until - 34 - 37 1992, Mr. Gaines held various executive positions at the Mutual Life Insurance Company of New York (MONY), including Executive Vice President and General Counsel, and was a member of its executive and compensation committees and management of MONY's investment services subsidiaries. In 1988 and 1989, Mr. Gaines was president of UMC, then a wholly owned subsidiary of MONY. Mr. Gaines is a director of Voyeta Technologies, Inc., from 1996, First ING Life Insurance Company of New York, from 1994, and AquaGene, Inc., from 1997 Chairman of Bio + Florida, Florida's biotechnology trade association since 1997. THOMAS G. NAPURANO: (Age 56) Director since 1989; Chief Financial Officer since 1989; Executive Vice President since 1989; executive committee member since 1989; and operating committee member since 1989. Mr. Napurano is also a director and the chief financial officer for VAI and is the treasurer for the Vintage Funds. LYNN E. WOOD: (Age 51) Director since 1992; Chief Operating Officer since 1993; President from 1993 through November 1997; Trustee for 401(k) Plan; executive committee member since 1992; and operating committee member since 1992. Mr. Wood also is a director and the president and chief operating officer for VAI and is the assistant secretary to the Vintage Funds. DAVID A. BOGAERT: (Age 33) Executive Vice President and Executive Committee member since 1995; operating committee member since 1992; national sales and marketing director since 1995; and telephone service representative, brokerage services supervisor, institutional sales representative and Assistant Vice President 1986-1992. All directors were re-elected in December 1996 for one year terms. Each director serves until the next annual meeting of the stockholders or until his successor is duly elected and qualified. Officers serve at the discretion of the Board. The Company has an executive compensation committee that is composed of Messrs. Ashburn, Orben and Gaines and an acquisition committee that is composed of Messrs. Ashburn, Napurano and Gaines. The Company has no audit or nominating committee of the Board or any committees that perform similar functions. The Company does have a Plan Committee that oversees and governs the 401(k) Plan. - 35 - 38 ITEM 6. EXECUTIVE COMPENSATION ---------------------- EXECUTIVE COMPENSATION The following table summarizes compensation earned or awarded to the Company's Chief Executive Officer, who was the only executive officer whose aggregate annual salary and bonus exceeded $100,000 during 1996: Summary Compensation Table
SECURITIES UNDERLYING FISCAL OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS /SARS COMPENSATION - --------------------------- ---- ------ ----- ----- ------------ Timothy L. Ashburn, Chairman 1996 $100,000 $0 23,000 $0 and Chief Executive Officer 1995 100,000 0 0 0 1994 100,000 0 0 0 - ---------------- Gives effect to the February 6, 1997 two-for-one stock split.
The following table summarizes options granted during 1996, and the values of options outstanding on December 31, 1996, for the executive officer named above: Option/SAR Grants in Last Fiscal Year
NUMBER OF PERCENT OF TOTAL SECURITIES OPTIONS/SARS OPTIONS/SARS EMPLOYEES IN OR BASE EXPIRATION NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE ---- ----------- ----------- ------------ ---- Timothy L. Ashburn 23,000 22.9% $0.1314 July 25, 2006 - --------------- Gives effect to the February 6, 1997 two-for-one stock split.
The following table sets forth information concerning the aggregate dollar value realized upon exercise of options during 1996, the number of securities underlying options outstanding at year-end 1996 and the value of options outstanding at year-end 1996 having an exercise price lower than the market price of the Common Stock ("in-the-money" options), held by the individual named in the Summary Compensation Table. As of December 31, 1996, no SARs were outstanding. - 36 - 39 Aggregate Option Exercises in Last Fiscal Year and FY-End Options
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT FISCAL OPTIONS AT FISCAL ACQUIRED VALUE YEAR-END YEAR-END ON EXERCISE REALIZED (#) EXERCISABLE/ ($) EXERCISABLE/ (#) ($) UNEXERCISABLE UNEXERCISABLE ----------- -------- ----------------- ------------------ Timothy L. Ashburn 0 $0 0/23,000 $0/$2,364 - ------------------ Based on a price per share of $0.1028 (as adjusted for 1997 stock split), based upon an estimate of market value of tangible and intangible assets and liabilities of the Company per share of Common Stock as of December 31, 1996.
COMPENSATION OF DIRECTORS Directors currently are not compensated for attending meetings of the Board, except for reimbursements for reasonable expenses related to attendance at such meetings. Regularly scheduled board meetings are conducted quarterly on the third Wednesday in January, April, July and October of each year, unless otherwise changed, and the annual meeting of the Company's stockholders will be conducted in May of each year beginning in 1998. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The Company provides various services to VAI including, among other things: the use of supplies and equipment; funds registration; compliance services; solicitation of new business; development of new mutual funds; development of procedures; and policies and practices to develop new mutual fund relationships and increase assets under management via the conversion of other mutual funds into the Vintage Funds. The Company also provides mutual fund administrative services such as distribution, transfer agency, fund accounting, administration and compliance to the Vintage Funds. For the years ended December 31, 1995 and 1996 and for the nine months ended September 30, 1997, VAI paid to the Company approximately $198,000, $400,000 and $-0-, respectively, for these services. In exchange for the $198,000 and $400,000 payments, the Company received a total of one-third of the outstanding capital stock of VAI. The Company currently owns one-third of the outstanding capital stock of VAI. During 1995, the Company loaned VAI approximately $66,000. For the year ended December 31, 1996, VAI paid the Company $15,888 and $5,086 in principal and interest, respectively, with respect to such loan. For the nine months ended September 30, 1997, VAI paid to the Company $2,573 for interest with respect to such loan. As of September 30, 1997, approximately $50,000 was outstanding with respect to such loan. Other than described above, during the years ended December 31, 1996 and 1995, no transactions occurred between the Company and its affiliates that require disclosure pursuant to Item 404 of Regulation S-B. - 37 - 40 ITEM 8. DESCRIPTION OF SECURITIES ------------------------- GENERAL The authorized capital stock of the Company consists of 10,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock. The Company is authorized to issue its Preferred Stock in one or more series, with the number of shares, dividends and other rights, preferences, limitations and terms of each series to be determined and fixed by the Board without any further action by the stockholders of the Company. The Company has designated and issued certain shares of its Preferred Stock. As of the date hereof, (i) 8,486 shares of Series A 8% Cumulative Preferred Stock were issued and outstanding, (ii) 8,583 shares of Series B 8% Cumulative Preferred Stock were issued and outstanding, (iii) 947,768 shares of Common Stock were issued and outstanding and (iv) 2,100 shares of Series C 6.75% Cumulative Convertible Preferred Stock were designated, but no shares were issued or outstanding. PREFERRED STOCK DIVIDENDS. Required dividend payments on the Series A and Series B Preferred Stock are cumulative at 8% per annum of the stated value. In the event of non-payment of the cumulative preferred dividends, the preferred stockholders are entitled to vote on all matters presented to the stockholders of the Company, as provided for in the Certificate of Incorporation. To the extent that funds of the Company are legally available, the Board shall declare and the Company shall then pay to the holders of Series A and Series B Preferred Stock, out of the assets of the Company available for the payment of dividends under the Delaware General Corporation Law (the "DGCL") , the preferential Preferred Stock dividend at the time and in the amount due and no more. The dividend is calculated cumulatively (but does not compound) on a daily basis on each share at the rate of 8% per annum (based on 365/366-day year) of the stated value ($100). Dividends are paid quarterly as soon as practicable after the declaration of the dividend at the quarterly meeting of the Board. Since the issuance of the Preferred Stock on December 30, 1993, the Company has declared and paid a dividend with respect to the Series A and Series B Preferred Stock in each of thirteen consecutive quarters and the Company is current with all dividend payments to date. LIQUIDATION. In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Series A and Series B Preferred Stock are entitled, before any distribution or payment is made upon any junior securities ("Junior Securities") of the Company, to be paid out of the assets of the Company available for distribution to its stockholders, whether from capital, surplus or earnings, an amount in cash equal to the aggregate liquidation value ("Liquidation Value") of all shares of Series A and Series B Preferred Stock and the holders of the Preferred Stock are not entitled to any further payment. If the assets of the Company are insufficient to permit payment to the holders of the Series A Preferred Stock, then the entire remaining assets of the Company shall be distributed to the holders of the Series A Preferred Stock ratably based upon a ratio the denominator of which is the aggregate Liquidation Value and the numerator of which is the funds available for payment. If any assets remain after the holders of the Series A Preferred Stock have been paid in full the amounts to which they shall be entitled, the remaining assets of the Company shall be distributed to the holders of the Series B Preferred Stock and, if this obligation is satisfied in its entirety, the remaining assets shall be paid to the holders of the Junior Securities. Series A takes priority over Series B in all respects, and Series B takes priority over the Junior Securities. Neither the consolidation or merger of the Company into or with any other corporation or corporations, nor the sale, exchange or transfer by the Company of less than substantially all of its assets, nor any reduction of the capital of the Company, shall of itself be deemed to be a liquidation, dissolution or winding up of the Company. The - 38 - 41 Company may, in its sole discretion, redeem on any quarterly dividend date ("Dividend Reference Date") any whole number of shares of Series A or Series B Preferred Stock, provided that (i) the Series A is redeemed ahead of the Series B, (ii) all dividends are current and (iii) the Company has funds legally available to effect the redemption. The shares of Preferred Stock shall be redeemed from the holder on a pro rata basis, based upon the number of shares of Preferred Stock owned by each such holder as a proportion of the total number of shares of Preferred Stock then outstanding. The Series A Preferred Stock shall be redeemed in its entirety before the redemption of any Series B Preferred Stock. To the extent not previously redeemed, the Company shall redeem all of the issued and outstanding shares of Preferred Stock on January 25, 2014 at Liquidation Value. INSUFFICIENT FUNDS. If on January 25, 2014, the funds of the Company legally available for a redemption shall be insufficient to redeem all shares of Series A and Series B Preferred Stock required to be redeemed, funds to the maximum extent legally available for such purpose shall be utilized by the Company to redeem the maximum number of shares of Series A on a pro rata basis and, if all such shares can be redeemed, then to redeem the Series B Preferred Stock, on a full or, if necessary, on a pro rata basis. If, because sufficient funds are not legally available, the Company shall fail to redeem all of the issued and outstanding shares of Series A and/or Series B Preferred Stock at such time, the Company will redeem such shares as promptly as practicable after funds are legally available. RESTRICTIONS. For as long as any of the Preferred Stock shall be outstanding, the Company shall not, without the written consent of a majority of the then outstanding holders: (a) create any class or series of stock ranking as to payment of dividends or as to liquidation preference having priority over or on a parity with the Preferred Stock; (b) amend, alter or repeal the Certificate of Incorporation or by-laws in a manner adversely affecting any of the Preferred Stock holders' powers, preferences and rights; or (c) declare or pay any distribution, including dividends or redemptions, to any Junior Securities unless all Preferred Stock Dividends are current. VOTING RIGHTS. No vote or consent of the holders of the Series A or Series B Preferred Stock is required for the authorization, including an increase in the authorized number of shares of any Junior Securities, or issuance of any Junior Securities of the Company, so long as the Company does not issue any Junior Securities that have class voting rights beyond those required by law. The holders of the Preferred Stock are not entitled to vote on matters coming before the stockholders of the Company unless the Company defaults ("Payment Default") and fails to cure such default. Upon the occurrence of a Payment Default and the Company's failure to cure such default, a formula for calculating the voting rights of the holders of the Preferred Stock is set forth in the Certificate of Designation of each of the Series A and Series B Preferred Stock, such that the holders of Preferred Stock are entitled to vote, under the formula, on any matters brought before the Company's stockholders until such time as the dividend is made current. COMMON STOCK DIVIDENDS. The holders of Common Stock are entitled to share ratably in dividends thereon when, as and if declared by the Board from funds legally available therefor, after full cumulative dividends have been paid or declared and funds sufficient for the payment thereof set apart, on all series of Preferred Stock. - 39 - 42 VOTING RIGHTS. Each holder of Common Stock has one vote for each share held on matters presented for consideration by the holders. The holders of Common Stock do not have cumulative voting rights in the election of directors. PREEMPTIVE RIGHTS. The holders of Common Stock have no preemptive right to acquire any additional unissued shares or treasury shares of the Company. LIQUIDATION RIGHTS. In the event of liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of Common Stock will be entitled to share ratably in any of its assets or funds that are available for distribution to its common stockholders after the satisfaction of its liabilities (or after adequate provision is made therefor) and after preferences on any outstanding Preferred Stock. ASSESSMENT AND REDEMPTION. Shares of Common Stock currently outstanding are fully paid and non-assessable. Such shares do not have any redemption or sinking fund provisions. - 40 - 43 Part II ------- ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON -------------------------------------------------------- EQUITY AND OTHER STOCKHOLDER MATTERS ------------------------------------ There currently is no established public trading market for the Common Stock. In February 1995, 1996 and 1997, 6899.724, 5,501.891 and 24,821.118, respectively, shares of Common Stock were issued by the Company to the 401(k) Plan. In addition, in March 1996, February 1997 and September 1997, the Company purchased 5172.42, 3296.991 and 889.990, respectively, shares from participants in such plan upon termination of their employment. Such shares were reallocated to the remaining employees in the 401(k) Plan. Management of the Company is not aware of any other transfers of Common Stock. The Company has not paid any dividends with respect to the Common Stock during the disclosed time periods. All share and price information has been adjusted to reflect all stock splits and stock dividends paid by the Company since January 1, 1995.
SALES PRICE --------------------------------- HIGH LOW ------- ------- 1995 ---- First Quarter $5.1880 $5.1880 Second Quarter -- -- Third Quarter -- -- Fourth Quarter -- -- 1996 ---- First Quarter 1.5360 1.5354 Second Quarter -- -- Third Quarter -- -- Fourth Quarter -- -- 1997 ---- First Quarter 0.1028 0.0935 Second Quarter -- -- Third Quarter 1.2312 1.2312 Fourth Quarter -- --
Because of the closely held nature of the Company, no representation is made that the foregoing prices are or are not reflective of a "market price." As of September 30, 1997, the Company reported 33 stockholders of record holding the Common Stock. ITEM 2. LEGAL PROCEEDINGS ----------------- The Company is from time to time a party to various legal actions arising in the normal course of business. Management believes that there are no proceedings threatened or pending against the Company or its subsidiaries, which, if determined adversely, would have a material adverse effect on the business or financial position of the Company or its subsidiaries. ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS --------------------------------------------- This item is not applicable as the Company has had no change in its principal independent accountant during the Company's two most recent fiscal years. - 41 - 44 ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES --------------------------------------- For the three years ending December 31, 1996 and through the date of this Form 10-SB filing, the only sales of the Company's securities have been: (i) 476 shares of Series B Preferred Stock for $47,600 (Timothy L. Ashburn's IRA purchased 311 shares for $31,100, Joan Inman purchased 100 shares for $10,000, Weaver H. Gaines' IRA purchased 50 shares for $5,000 and Anthony Ghoston purchased 15 shares for $1,500); (ii) 37,222.733 shares of Common Stock to the 401(k) Plan (6,899.724, 5501.891 and 24,821.118 shares in February 1995, 1996 and 1997, respectively); (iii) in July 1997, the Company issued 572,768 shares of Common Stock upon the exercise of options granted pursuant to the terms of the M.E.R.P. at an exercise price of $0.1314 per share; and (iv) 325,000 shares of Common Stock issued in connection with the acquisition of Health Financial. There have been no sales of Series A Preferred Stock during such period. All shares of Common Stock issued by the Company were issued pursuant to the exemption provided by Rules 506 and 701 as promulgated by the Commission. All shares of Series B Preferred Stock were issued in transactions not involving a public offering pursuant to Section 4(2) of the Securities Act of 1933, as amended. ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS ----------------------------------------- Section 145 of the DGCL provides generally that a Delaware corporation may indemnify its directors and officers against expenses, judgments, fines and settlements actually and reasonably incurred by them in connection with any civil suit or action, except actions by or in the right of the corporation, or any administrative or investigative proceeding if, in connection with the matters in issue, they acted in good faith and in a manner they reasonably believed to be in, or not opposed to, the best interest of the corporation, and in connection with any criminal suit or proceeding, if in connection with the matters in issue, they had no reasonable cause to believe their conduct was unlawful. Section 145 further permits a Delaware corporation to grant its directors and officers additional rights of indemnification through bylaw provisions and otherwise and to purchase indemnity insurance on behalf of its directors and officers. Article 11 of the Certificate of Incorporation provides that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which the director derived any improper personal benefit. The Company maintains a liability insurance policy that indemnifies directors, officers, employees and agents of the Company. - 42 - 45 Part F/S -------- CONSOLIDATED FINANCIAL STATEMENTS INDEX -----
Page ---- INDEPENDENT AUDITORS' REPORT 45 SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION OF THE COMPANY AS OF SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 AND 1995 46 SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995 48 SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY OF THE COMPANY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 59 SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE COMPANY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995 50 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS 51 INDEPENDENT AUDITORS' REPORT 61 BALANCE SHEET OF FIRST LEXINGTON AS OF DECEMBER 31, 1996 62 STATEMENT OF OPERATIONS AND RETAINED EARNINGS OF FIRST LEXINGTON FOR THE YEAR ENDED DECEMBER 31, 1996 64 STATEMENTS OF CASH FLOW OF FIRST LEXINGTON FOR THE YEAR ENDED DECEMBER 31, 1996 65 NOTES TO FINANCIAL STATEMENTS 66 INDEPENDENT AUDITOR'S REPORT 70 BALANCE SHEETS OF FIRST LEXINGTON AS OF DECEMBER 31, 1995 AND 1994 71 - 43 - 46 STATEMENTS OF INCOME AND RETAINED EARNINGS OF FIRST LEXINGTON FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1994 73 STATEMENTS OF CASH FLOWS OF FIRST LEXINGTON FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE TEN MONTH PERIOD ENDED DECEMBER 31, 1994 74 NOTES TO FINANCIAL STATEMENTS 75 INDEPENDENT AUDITORS' REPORT 78 STATEMENTS OF FINANCIAL CONDITION OF VAI AS OF AUGUST 31, 1997 (UNAUDITED) AND NOVEMBER 30, 1996 AND 1995 79 STATEMENTS OF OPERATIONS OF VAI FOR THE NINE MONTHS ENDED AUGUST 31, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED NOVEMBER 30, 1996 AND 1995 81 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY OF VAI FOR THE NINE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED) AND FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995 82 STATEMENTS OF CASH FLOWS OF VAI FOR THE NINE MONTHS ENDED AUGUST 31, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED NOVEMBER 30, 1996 AND 1995 83 NOTES TO FINANCIAL STATEMENTS 84 BALANCE SHEET OF FIRST LEXINGTON AS OF SEPTEMBER 30, 1997 (UNAUDITED) 89 STATEMENTS OF OPERATIONS OF FIRST LEXINGTON FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) 91 STATEMENTS OF CASH FLOWS OF FIRST LEXINGTON FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) 92 NOTE TO FINANCIAL STATEMENTS (UNAUDITED) 93
- 44 - 47 INDEPENDENT AUDITORS' REPORT ---------------------------- We have audited the accompanying supplemental consolidated statements of financial condition of Unified Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related supplemental consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These supplemental consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 supplemental consolidated 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, such supplemental consolidated financial statements present fairly, in all material respects, the financial position of Unified Holdings, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their operations, and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Larry E. Nunn & Associates, L.L.C. Columbus, Indiana October 30, 1997 - 45 - 48 UNIFIED HOLDINGS, INC. SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 AND 1995 ASSETS ------
DECEMBER 31, SEPTEMBER 30, ------------------------------ 1997 1996 1995 ------------- ---------- ---------- (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 603,689 $ 426,215 $ 423,986 Investment in affiliated mutual funds 643,232 203,040 -- Investment in non-affiliated mutual funds 188,234 177,915 156,621 Note receivable - affiliated company 50,000 50,000 65,888 Note receivable - non-affiliated company 5,361 30,113 -- Accounts receivable (net of allowance for doubtful accounts of $2,041) 1,225,255 920,212 691,645 Prepaid and sundry assets 124,605 127,430 127,718 ---------- ---------- ---------- Total current assets 2,840,376 1,934,925 1,465,858 ---------- ---------- ---------- NON-CURRENT ASSETS Equity in and advances to affiliate 377,756 445,293 196,401 Notes receivable, net at current maturity 8,090 11,262 -- FIXED ASSETS, AT COST Property, equipment and furniture (net of accumulated depreciation of $891,076, $785,453 and $700,104, respectively) 258,223 411,390 573,874 Capitalized leased equipment (net of accumulated depreciation of $99,384, $68,058 and $37,299, respectively) 148,538 99,876 100,127 ---------- ---------- ---------- Total fixed assets 406,761 511,266 674,001 ---------- ---------- ---------- Total non-current assets 792,607 967,821 870,402 ---------- ---------- ---------- TOTAL ASSETS $3,632,983 $2,902,746 $2,336,260 ========== ========== ========== See accompanying notes and independent auditors' report.
- 46 - 49
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ DECEMBER 31, SEPTEMBER 30, ---------------------------- 1997 1996 1995 ------------- ---------- ---------- (Unaudited) CURRENT LIABILITIES Current portion of capitaled leases $ 86,320 $ 38,651 $ 44,637 Accounts payable and accrued liabilities 359,626 482,860 573,385 Accrued compensation and benefits 238,690 139,730 144,265 Payable to broker/dealers 247,998 124,489 140,905 Other liabilities 724,435 183,683 113,094 ---------- ---------- ---------- Total current liabilities 1,657,069 969,413 1,016,286 ---------- ---------- ---------- LONG-TERM LIABILITIES Long-term capitaled leases, net of current portion 41,581 32,695 41,264 ---------- ---------- ---------- Total long-term liabilities 41,581 32,695 41,264 ---------- ---------- ---------- TOTAL LIABILITIES 1,698,650 1,002,108 1,057,550 ---------- ---------- ---------- STOCKHOLDERS' EQUITY Preferred Stock Series A 8,486 8,486 8,486 Preferred Stock Series B 8,583 8,583 8,583 Common Stock, $.01 par value per share 10,728 1,599 1,577 Subscribed shares to be issued in connection with acquisition of Health Financial 3,250 3,250 3,250 Additional paid-in capital 1,148,588 1,076,598 1,068,172 Retained earnings 635,101 761,329 149,508 Net unrealized appreciation on securities available-for-sale 119,597 40,793 39,134 ---------- ---------- ---------- Total stockholders' equity 1,934,333 1,900,638 1,278,710 ---------- ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,632,983 $2,902,746 $2,336,260 ========== ========== ==========
- 47 - 50 UNIFIED HOLDINGS, INC. SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1996 AND 1995
SEPTEMBER 30, DECEMBER 31, ---------------------------- ---------------------------- 1997 1996 1996 1995 ---------- ---------- ---------- ---------- (Unaudited) REVENUE: Revenue from broker/dealer operations $1,136,368 $1,463,228 $1,846,201 $2,363,345 Investment adviser fees 1,510,491 1,207,793 1,679,728 1,317,965 Revenue from fund service operations 1,015,451 1,509,636 1,968,384 1,395,782 Trail commissions 720,107 759,034 995,318 540,950 Custody and retirement fees 255,217 206,273 246,139 163,044 Software and program fees 126,687 143,178 190,445 213,755 Net investment and other income 107,097 23,095 109,507 38,092 Total revenue 4,871,418 5,312,237 7,035,722 6,032,933 COST OF SALES: Brokerage revenue charges 724,449 916,776 1,141,291 1,244,893 Trail commission charges 502,909 491,977 653,595 130,281 Investment adviser fees 46,741 42,562 61,558 54,827 Administration fees 4,455 3,060 4,250 3,050 ---------- ---------- ---------- ---------- Total cost of sales 1,278,554 1,454,375 1,860,694 1,433,051 ---------- ---------- ---------- ---------- Gross profit 3,592,864 3,857,862 5,175,028 4,599,882 ---------- ---------- ---------- ---------- EXPENSES: Employee compensation and benefits 2,182,180 2,122,910 2,742,595 2,392,953 Brokerage operating charges 221,534 264,885 332,508 577,373 Fund services operating charges 189,403 185,803 233,500 170,395 Mail and courier service 35,940 43,034 63,511 76,522 Telephone 77,528 45,478 70,279 154,887 Equipment rental and maintenance 61,610 62,734 105,122 151,787 Occupancy 153,506 149,156 198,651 215,402 Depreciation 123,581 137,664 185,062 148,789 Other 353,104 271,962 393,921 470,557 ---------- ---------- ---------- ---------- Total expenses 3,398,386 3,283,626 4,325,149 4,358,665 ---------- ---------- ---------- ---------- INCOME FROM OPERATIONS BEFORE GAIN ON SECURITIES $ 194,478 $ 574,236 $ 849,879 $ 241,217 REALIZED GAIN (LOSS) ON SECURITIES 24,996 39,929 49,684 35,356 RESULTS OF AFFILIATE (67,537) (69,399) (151,108) (1,599) ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 151,937 544,766 748,455 274,974 PROVISION FOR INCOME TAXES 16,000 -- -- -- ---------- ---------- ---------- ---------- NET INCOME 135,937 544,766 748,455 274,974 ---------- ---------- ---------- ---------- DIVIDENDS ON PREFERRED STOCK 101,854 102,309 136,634 136,757 ---------- ---------- ---------- ---------- RESULTS AFTER PREFERRED STOCK DIVIDEND $ 34,083 $ 442,457 $ 611,821 $ 138,217 ========== ========== ========== ========== See accompanying notes and independent auditors' report.
- 48 - 51 UNIFIED HOLDINGS, INC. SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1996 AND 1995
SUBSCRIBED SHARES TO BE ISSUED IN UNREALIZED PREFERRED PREFERRED CONNECTION ADDITIONAL RETAINED GAIN (LOSS) COMMON COMMON CLASS A CLASS B WITH HEALTH PAID-IN EARNINGS ON TREASURY STOCK STOCK STOCK FINANCIAL CAPITAL (DEFICIT) INVESTMENTS STOCK TOTAL ------ --------- --------- ------------ ----------- ---------- ----------- ----------- ----------- BALANCE December 31, 1994 $ 1,577 $8,486 $8,107 $3,250 $ 3,187,148 $ 11,291 $ 39,134 $(2,166,100) $1,092,893 1995 net income 274,974 274,974 Non-qualified option plan 1,500 shares (2,166,100) 2,166,100 -- Sales of preferred stock 476 47,124 47,600 Dividends on Preferred Stock (136,757) (136,757) ------- ------ ------ ------ ----------- --------- -------- ----------- ---------- BALANCE December 31, 1995 $ 1,577 $8,486 $8,583 $3,250 $ 1,068,172 $ 149,508 $ 39,134 $ -- $1,278,710 1996 net income 748,455 748,455 Unrealized gain (loss) on investments 1,659 1,659 Common stock issued 22 8,426 8,448 Dividends on Preferred Stock (136,634) (136,634) ------- ------ ------ ------ ----------- --------- -------- ----------- ---------- BALANCE December 31, 1996 $ 1,599 $8,486 $8,583 $3,250 $ 1,076,598 $ 761,329 $ 40,793 $ -- $1,900,638 1997 net income 135,937 135,937 Unrealized gain (loss) on investments 78,804 78,804 Common Stock issued 97 2,456 2,553 Issuance of Common Stock 5,728 69,534 75,262 Dividend to Health Financial stockholder (157,007) (157,007) Dividends on Preferred Stock (101,854) (101,854) Adjustment to stated capital 3,304 (3,304) -- ------- ------ ------ ------ ----------- --------- -------- ----------- ---------- BALANCE September 30, 1997 $10,728 $8,486 $8,583 $3,250 $ 1,148,588 $ 635,101 $119,597 $ -- $1,934,333 ======= ====== ====== ====== =========== ========= ======== =========== ========== See accompanying notes and independent auditors' report.
- 49 - 52 UNIFIED HOLDINGS, INC. SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1996 AND 1995
SEPTEMBER 30, DECEMBER 31, ---------------------------- --------------------------- 1997 1996 1996 1995 --------- --------- --------- --------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 135,937 $ 544,766 $ 748,455 $ 274,974 Adjustments to reconcile net income to net cash provided (used) in operating activities: Provision for depreciation and amortization 123,581 137,664 185,062 148,789 Results of affiliated company 67,537 69,399 151,108 1,599 Book value of fixed assets disposed 128,851 41,859 41,859 -- (Increase) decrease in operating assets: Receivables (305,043) (488,912) (228,567) (22,215) Prepaid and sundry assets 2,825 12,386 288 25,034 Increase (decrease) in liabilities: Accounts payable and accrued expenses 1,255 (29,820) (90,525) (110,995) Accrued compensation and benefits 98,960 14,090 (4,535) 36,082 Payable to broker/dealers 123,509 (4,971) (16,416) (15,694) Other liabilities 416,263 71,804 70,589 98,009 --------- --------- --------- --------- Net cash provided by operating activities 793,675 368,265 857,318 435,583 --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (147,927) (29,124) (29,124) (14,859) Unrealized gain/(loss) on securities 78,804 (4,592) 1,659 -- Notes receivable 27,924 (41,375) (25,487) (65,888) Equity in affiliate -- -- (400,000) (198,000) Proceeds from sale of fixed assets -- -- -- 200 Investment in non-affiliated mutual funds (10,319) 28,706 -- -- Investment in affiliated mutual funds (440,192) (219,988) (224,334) (47,804) --------- --------- --------- --------- Net cash used by investing activities (491,710) (266,373) (77,286) (326,351) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Dividend to preferred stockholders (101,854) (102,309) (136,634) (136,757) Dividend to Health Financial stockholder (157,007) -- -- -- Issuance of Common Stock - profit-sharing plan 2,553 8,448 8,448 -- Issuance of Common Stock - MERP 75,262 -- -- -- Proceeds from Series B Preferred Stock issuances -- -- -- 47,600 Reclassification of note receivable from affiliated company -- (65,888) -- -- Payment receivable on note from affiliated company -- 15,888 -- -- Repayment on borrowing -- -- -- (78,010) Borrowings for equipment 93,320 35,063 35,063 80,213 Repayment of capitalized lease obligations (36,765) (73,744) (84,680) (119,120) --------- --------- --------- --------- Net cash used by financing activities (124,491) (182,542) (177,803) (206,074) --------- --------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 177,474 (80,650) 2,229 (96,842) --------- --------- --------- --------- CASH AND CASH EQUIVALENTS Beginning of year 426,215 423,986 423,986 520,828 --------- --------- --------- --------- End of year $ 603,689 $ 343,336 426,215 423,986 ========= ========= ========= ========= SUPPLEMENTARY INFORMATION Interest paid during year $ 6,232 $ 3,364 $ 4,993 $ 10,703 ========= ========= ========= =========
- 50 - 53 UNIFIED HOLDINGS, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 Note 1 - NATURE OF OPERATIONS The consolidated financial statements include the accounts of Unified Holdings, Inc. (the "Company"), a Delaware corporation, and its wholly owned subsidiaries, Unified Management Corp. ("Management"), Unified Advisers, Inc. ("Advisers") and Health Financial, Inc. ("Health"). Management, an Indiana corporation, is a registered broker dealer under the Securities Exchange Act of 1934, as amended, and is a member of the National Association of Securities Dealers, Inc. Advisers is incorporated in Indiana and is a registered investment adviser under the Investment Advisers Act of 1940, as amended, and provides investment advisory, transfer agent, dividend disbursing, transfer agency system software licensing and fund accounting services to investment companies. Health is incorporated in the State of Kentucky and is an investment advisory business providing services to trusts, retirement plans, businesses and individuals located primarily in Kentucky. Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Merger of Health Financial, Inc. ---------------------------------------------------------- The consolidated financial statements include the accounts of the Company, Management, Advisers and Health. All intercompany transactions and balances between the Company and its subsidiaries have been eliminated. Effective June 1, 1997, the Company acquired Health in a transaction accounted for as a pooling-of-interests. In connection with the acquisition, the Company will issue 325,000 shares of common stock, $.01 par value, of the Company (the "Common Stock"). The shares are anticipated to be issued in November 1997. The Supplemental Consolidated Financial Statements give retroactive effect to the transaction and, as a result, the Supplemental Consolidated Statements of Financial Condition, Statements of Operations and Statements of Cash Flows are presented as if the combining companies had been consolidated for all periods presented. (As required by generally accepted accounting principles, the Supplemental Consolidated Financial Statements become the historical consolidated financial statements upon issuance of the financial statements for the period that includes the date of the transaction.) The Supplemental Consolidated Statements of Changes in Stockholders' Equity reflects the accounts of the Company as if the Common Stock issued in the Health acquisition had been outstanding during all periods presented. The Supplemental Consolidated Financial Statements, including the notes thereto, should be read in conjunction with the historical consolidated financial statements of the Company. - 51 - 54 UNIFIED HOLDINGS, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fees and Commissions -------------------- The mutual fund and trust administration services operations provides administrative and investment services to investment companies and separate accounts. The Company records revenue on the accrual basis of accounting. For the brokerage line of business, commissions and clearing revenue are recorded on the settlement date of the related security transaction. This does not materially differ from recording commissions based upon the trade date. The investment advisory business revenue as well as the investment advisory fees earned by third party advisers are recorded on the accrual basis. The fees earned by the operation and paid to the sub-advisers are based on established fee schedules and contracts. Generally, the Company has the right to collect fees from the invested assets. Thus, collection of the fees is reasonably certain. Property and Equipment ---------------------- Property and equipment is stated at cost. Depreciation, including the depreciation of capital leased equipment, is computed on the straight-line method and accelerated method over the estimated useful lives of the assets for financial statement purposes. Income Taxes ------------ The Company files consolidated federal and state income tax returns with its subsidiaries. Health prior to its acquisition by the Company, elected to be taxed as a S-corporation. Therefore, federal and state taxable income and losses were passed through to Health's stockholder. Subsequent to its acquisition by the Company, Health will be included in the consolidated tax returns of the Company. The Company has adopted Statement of Financial Accounting Standards No. 109, Accounting For Income Taxes. The Statement requires use of the liability method of accounting for deferred income taxes. Use of Estimates ---------------- The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. - 52 - 55 UNIFIED HOLDINGS, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Statements of Cash Flows ------------------------ For purposes of the statements of cash flows, the Company considers all liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents included money market investments of $321,124 which are not insured by the Federal Deposit Insurance Corporation (the "FDIC"). Options ------- The Company applies APB Opinion 25 and related interpretations in accounting for its Management and Employee Retention Plan. Shares were issued at fair market value at the date granted to the employee. There is no significant effect on the Company's net income under this plan consistent with the method of Financial Accounting Standards Board ("FASB") Statement No. 123. Organizational Costs -------------------- Costs relating to the organization of Health have been capitalized and are not being amortized for financial statement purposes. Marketable Securities and Investments ------------------------------------- Investments are recorded at cost and amortized over the period to maturity for the premium or discount from par value under generally accepted accounting principles. Other marketable investments are recorded and adjusted to the fair market value as of the date of the financial statements. Note 3 - COMMITMENTS and CONTINGENCIES The Company has operating leases expiring in 2001 for office facilities and equipment. The leases include provisions for adjustment of operating costs and real estate taxes. Such obligations are allocated between Advisers and Management based on estimated usage. The aggregate minimum rental commitments required under operating leases for office space and equipment at December 31, 1996 were as follows:
Lease Year Ended December 31 Commitments ---------------------- ----------- 1997 $204,831 1998 198,987 1999 187,026 2000 167,280 Thereafter 111,520 -------- Total $869,644 ========
- 53 - 56 UNIFIED HOLDINGS, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 Note 3 - COMMITMENTS and CONTINGENCIES (continued) Total rental expense was $195,869 and $212,418 for the years ended December 31, 1996 and 1995, respectively. The Company and its subsidiaries maintain bank accounts that periodically exceed the FDIC guarantee limit. As of December 31, 1996 and 1995, the entities did not have any bank accounts that were in excess of the FDIC limit. Note 4 - TRANSACTIONS WITH RELATED PARTIES The Company provided administrative services to Vintage Advisers, Inc. ("Vintage") during the year. The Company owns one-third of the outstanding capital stock of Vintage. The revenue for these services was $500,313 for 1996 and $199,275 for 1995. The receivable from this affiliated company was $100,592 at December 31, 1996 and $4,160 at December 31, 1995. In 1995, the Company loaned Vintage $65,888 to reimburse the Vintage Funds for an outstanding obligation. The promissory note is due on demand with interest payable at prime plus two percent per annum. The note receivable at December 31, 1996 was $50,000. Health leased part of its office to First Lexington Trust Company ("First Lexington"), a related party, and other entities under a renewable one-year agreement, which amounted to $15,500 per year for 1996 and 1995. Health was reimbursed by First Lexington for the use of supplies, equipment and employees costs and benefits expended in connection with Health's operations, which amounted to $66,000 for the year ended December 31, 1996. In 1995, Health received advisory fee revenue amounting to $47,734 from First Lexington. In 1996, the fees were paid by the investment or trust sponsors. Note 5 - EMPLOYEE BENEFIT PLANS The Company sponsors a profit-sharing and Section 401(k) defined contribution retirement plan that covers substantially all employees. Contributions to the plan are determined by the Board of Directors. The plan covers employees of the Company, Management and Advisers. During 1996, an expense of $45,000 was provided in anticipation of contributions to be paid in 1997. During 1995, $16,392 was contributed to the plan. In 1996, the Company amended the 401(k) plan to include matching for funds contributed into the Vintage Funds or used to purchase Class B Preferred Stock of the Company in the 401(k) plan. The Company will match the employee's contribution up to fifty percent of the first six percent of the employee's before-tax contribution. - 54 - 57 UNIFIED HOLDINGS, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 Note 6 - FEDERAL INCOME TAXES Consolidated net operating loss carryforwards at December 31, 1996 amounted to approximately $14,000,000 expiring through 2008. However, due to a limitation imposed by the Internal Revenue Code of 1986, as amended, only approximately $90,000 of such loss carryforwards incurred prior to December 31, 1989 are available for use in any one year. The remainder of the loss carryforwards incurred subsequent to 1989, approximately $8,300,000, are fully available to offset taxable income. Consolidated state net operating loss carryforwards at December 31, 1996 amounted to approximately $10,000,000 and expire through 2008. The Company utilized approximately $515,000 and $74,000 of net operating loss carryforwards during 1996 and 1995, respectively, to reduce current income tax expense of $174,423 and $13,582, respectively, to zero. Note 7 - CAPITALIZED LEASE OBLIGATIONS Capitalized lease obligations are payable over a 36-month period. The following is a summary of future minimum lease payments under capitalized lease obligations as of December 31, 1996:
Year Ending December 31, Amount ------------------------ ------ 1997 $43,292 1998 25,605 1999 10,077 ------- Total 78,974 Less amount representing interest 7,628 ------- Net present value $71,346 =======
Note 8 - NON-CASH INVESTMENT AND FINANCIAL ACTIVITY The Company acquired equipment through capital lease obligations in the amount of $35,063 during 1996 and $80,218 during 1995. Note 9 - CASH SEGREGATED UNDER FEDERAL REGULATION Pursuant to Rule 15c3-3 as promulgated by the Securities and Exchange Commission, the Company calculates its reserve requirement and segregates cash and/or securities for the exclusive benefit of the customers on a periodic basis. The reserve requirement calculated by the Company was $-0- at December 31, 1996 and 1995. Balances segregated in excess of reserve requirements are not restricted. - 55 - 58 UNIFIED HOLDINGS, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 Note 10 - NET CAPITAL REQUIREMENTS The Company is subject to the Securities and Exchange Commission's "Uniform Net Capital Rule" (Rule 15c3-1), which requires the maintenance of minimum net capital, as defined, of 6-2/3% of aggregate indebtedness or $50,000, whichever is greater, and a ratio of aggregate indebtedness to net capital of not more than 15 to 1. At December 31, 1996 and 1995, the Company had net capital of $137,894 and $203,377, respectively, which was in excess of its required net capital of $50,000, and a net capital ratio of 2.28 to 1 at December 31, 1996 and 1.33 to 1 at December 31, 1995. Note 11 - MAJOR CLIENT AND VENDOR The Company's gross profit generated from a major client during 1996 and 1995 was approximately 10% and 17%, respectively, of gross profit and accounts receivable from the client were approximately $62,000 and $50,000 at December 31, 1996 and 1995, respectively. The Company's total expenses from a major vendor during 1996 and 1995 were approximately 8% and 13%, respectively, of total expenses. Accounts payable to this vendor at December 31, 1996 and 1995 were $-0-. Note 12 - EQUITY IN AND INVESTMENT IN AFFILIATE The Company invested $400,000 in November 1996 for 4,756 shares and $198,000 in December 1995 for 5,244 shares of common stock of Vintage, a registered investment adviser under the Investment Advisers Act of 1940. The Company's share of equity investment in Vintage was $32,575 and $50,804 at December 31, 1996 and 1995, respectively. The Company used the equity method of accounting for its investment in Vintage for years ended December 31, 1996 and 1995. The results of operations for the years ended November 30, 1996 and November 30, 1995 are as follows:
Audited Audited 1996 1995 --------- -------- Total assets $ 622,493 $344,630 Total equity 97,823 152,565 Operating revenue 248,254 28,018 Net (loss) (398,988) (47,435) Unified Holdings - share of net (loss) $(151,108) $ (1,599)
- 56 - 59 UNIFIED HOLDINGS, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 Note 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1996 and 1995. FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
1996 1995 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- ($ in thousands) Financial assets Cash and cash equivalents $ 426 $ 426 $ 424 $ 424 Investment in affiliated mutual fund 381 381 -- -- Notes receivable from affiliated Company 91 91 66 66 Receivables (trade) 920 920 691 691 Investment in affiliates 445 445 196 196 Prepaid and sundry assets 127 127 128 128 Financial liabilities Current liabilities (969) (969) (1,016) (1,016) Long--term capitalized lease obligations (33) (33) (41) (41)
The carrying amounts shown in the above table are included in the statement of financial position under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: - 57 - 60 UNIFIED HOLDINGS, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 Note 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Cash and cash equivalents, receivables and current liabilities: -------------------------------------------------------------- The carrying amounts approximate fair value because of the short maturity of these instruments. Investment in money market mutual funds are treated as cash equivalents with maturity under 90 days. Long-term capitalized lease obligations: --------------------------------------- The fair value of the Company's long-term capitalized lease obligations is estimated based on the quoted market prices for similar issues. Note 14 - COMMON AND PREFERRED STOCK Common Stock: The authorized Common Stock of the Company consisted of 300,000 shares of Common Stock, no par value, of which 50,000 shares were outstanding at December 31, 1996 and 1995. At a meeting of the stockholders of the Company on February 6, 1997, the Company's stockholders approved an amendment to its Certificate of Incorporation, as amended, that increased the par value of the Common Stock from no par value per share to $0.01 per share and increased the authorized number of shares to 25,000,000. On July 15, 1997, the Company declared and paid a stock dividend with respect to the Common Stock such that each issued share of Common Stock on such date was divided into a greater number of shares of Common Stock that was equal to a fraction, the numerator of which was 50,000 and the denominator of which was the number of issued and outstanding shares of Common Stock immediately prior to such division of shares. Upon payment of such stock dividend, the Company had 50,000 shares of its Common Stock outstanding. By unanimous written consent dated August 1, 1997, the stockholders of the Company approved an Amended and Restated Certificate of Incorporation of the Company that decreased the number of authorized shares of Common Stock to 10,000,000. In connection with the acquisition of Health on June 1, 1997, the Company will issue 325,000 shares of its Common Stock as reflected in Note 1 of the notes to the financial statements. Preferred Stock: The total preferred shares authorized for the Company is 1,000,000 with a par value of $.01 per share of which 22,100 shares have been designated as follows: - 58 - 61 UNIFIED HOLDINGS, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 Note 14 - COMMON AND PREFERRED STOCK (continued)
Shares Shares Issued and Stated Par Designated Outstanding Value Value ---------- ----------- ------ ----- Preferred Stock Series A 10,000 8,486 $100 $.01 Preferred Stock Series B 10,000 8,583 100 .01 Preferred Stock Series C 2,100 -- 100 .01
Required dividend payments on the Series A and Series B Preferred Stock are cumulative at 8% per annum of the stated value. The Company may not create any additional class or series of stock ranking or having a parity as to payment of dividends or as to liquidation preference over or with the Series A or Series B Preferred Stock. In the event of non-payment of the cumulative preferred dividends, the preferred stockholders shall be entitled to vote on all matters presented to the stockholders of the Company, as provided for in the Amended and Restated Certificate of Incorporation of the Company. During 1995, the Board authorized the issuance of 476 shares of Series B Preferred Stock to certain members of the Board of Directors and employees upon payment of cash of $100 per share. On August 1, 1997, the Board designated 2,100 shares of the Preferred Stock of the Company as Series C 6.75% Cumulative Convertible Preferred Stock. Note 15 - SUBSEQUENT EVENT On February 6, 1997, the Board authorized the payment of a preferred stock dividend of 8% for Class A and Class B preferred shares for the three-month period ended January 31, 1997, payable March 1, 1997. On April 25, 1997, the Company entered into an agreement to acquire First Lexington located in Lexington, Kentucky. First Lexington is a non-bank affiliated trust company that is regulated by the Kentucky Department of Financial Institutions, which has approved the proposed merger. This acquisition will be accounted for under the pooling-of-interests method of accounting. In connection with the acquisition, the Company will issue 80,008 shares of Common Stock, based upon an exchange ratio of 9.644 shares of Common Stock for each outstanding share of First Lexington common stock. As of March 31, 1997, First Lexington reported total assets of $1,022,345 and shareholders' equity of $992,548. On May 8, 1997, the Company entered into an agreement to acquire Vintage. Vintage was incorporated in Delaware on December 12, 1994 and is registered to do business in Indiana for the purpose of being the adviser to the Vintage Funds. Vintage is a registered adviser under the Investment Advisers Act of 1940, as amended. This acquisition will be accounted for under the - 59 - 62 UNIFIED HOLDINGS, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 pooling-of-interests method of accounting. In connection with the acquisition, the Company will issue 120,000 shares of Common Stock, based upon an exchange ratio of 1.2 shares of Common Stock for each outstanding share of Vintage common stock. As of March 31, 1997, Vintage reported total assets of $607,800 and shareholders' equity of $50,700. Effective as of December 1, 1997, the Company and Vintage terminated the definitive agreement dated May 8, 1997. By separate agreement dated December 1, 1997, the stockholders of Vintage (other than the Company) have agreed to surrender to Vintage their shares of capital stock of Vintage. Upon consummation of such stock surrender, the Company will own all of the outstanding capital stock of Vintage. - 60 - 63 To the Stockholders and Board of Directors First Lexington Trust Company 3320 Tates Creek Road, Suite 101 Lexington, Kentucky INDEPENDENT AUDITORS' REPORT ---------------------------- We have audited the balance sheet of First Lexington Trust Company as of December 31, 1996 and the related statements of operations, retained earnings and cash flows for the year then ended. 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 audit. The financial statements of First Lexington Trust Company as of December 31, 1995 were audited by other auditors whose report dated February 27, 1996 expressed an unqualified opinion on these statements. We conducted our audit in accordance with generally accepted accounting standards. 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 audit provides a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of First Lexington Trust Company as of December 31, 1996 and the results of its operations and its cash flow for the year then ended in conformity with generally accepted accounting principles. /s/ Larry E. Nunn & Associates, L.L.C. Columbus, Indiana February 19, 1997 - 61 - 64 FIRST LEXINGTON TRUST COMPANY BALANCE SHEET December 31, 1996 ----------------- ASSETS ------
CURRENT ASSETS Cash: Bank $10,573 Mutual fund money market 10,000 Mutual fund trust account 15,034 Brokerage money market 76,208 $ 111,815 ------- Accounts receivable: Fee income 48,430 Mutual fund trust account 5,965 54,395 ------- Accrued interest income receivable 4,801 Prepaid expenses 3,424 ---------- 174,435 ---------- INVESTMENT IN DEBT SECURITIES 802,970 ---------- PROPERTY AND EQUIPMENT: Office equipment 3,334 Software 45,392 ---------- 48,726 Less accumulated depreciation 10,768 ---------- 37,958 ---------- OTHER ASSETS Organization costs 9,000 ---------- TOTAL ASSETS $1,024,363 ========== See accompanying notes and independent auditors' report.
- 62 - 65 STATEMENT 1 LIABILITIES & STOCKHOLDERS' EQUITY ---------------------------------- CURRENT LIABILITIES Accounts payable, trade $ 8,604 Accrued advisory fees 4,253 Accrued income taxes 9,200 Deferred income 3,248 Deferred income taxes 15,653 ---------- 40,958 LONG-TERM LIABILITIES: Deferred income taxes 2,387 ---------- Total liabilities 43,345 ---------- COMMITMENTS & CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $1.00 par value, 10,000 shares authorized, 8,295 shares issued and outstanding 8,295 Paid-in capital 821,705 ---------- Total stock investment 830,000 Retained earnings 151,018 ---------- Total stockholders' equity 981,018 ---------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $1,024,363 ==========
- 63 - 66 STATEMENT 2 FIRST LEXINGTON TRUST COMPANY STATEMENT OF OPERATIONS AND RETAINED EARNINGS December 31, 1996 -----------------
REVENUES: Trustee fees $176,825 Administration fees 12,341 Valuation system fees 2,000 Software maintenance fees 4,181 -------- Total revenue 195,347 -------- DIRECT SUPPLIER COSTS Investment advisory fees 6,066 Plan administration fees 12,341 Software maintenance fees 4,181 Related party employee, supplies and operating expenses reimbursed 66,000 -------- Total supplier costs 88,588 -------- TOTAL GROSS PROFIT 106,759 -------- OPERATING EXPENSES: Computer software expenses 2,237 Insurance 13,652 Legal and professional services 15,273 Depreciation and amortization 10,002 Office supplies and postage 497 Rent 5,000 Telephone 4,690 Publication and subscriptions 810 Property taxes 1,776 Licenses and fees 1,421 Other 41 -------- Total operating expenses 55,399 -------- INCOME FROM OPERATIONS 51,360 -------- OTHER INCOME (EXPENSES) Investment interest income 59,561 Capital gains and other income 163 -------- INCOME BEFORE INCOME TAXES 111,084 -------- INCOME TAXES Current 20,400 Deferred 9,600 -------- NET INCOME 81,084 RETAINED EARNINGS, BEGINNING OF YEAR 69,934 -------- RETAINED EARNINGS, END OF YEAR $151,018 ======== See accompanying notes and independent auditors' report.
- 64 - 67 STATEMENT 3 FIRST LEXINGTON TRUST COMPANY STATEMENT OF CASH FLOW December 31, 1996 -----------------
CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 81,084 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 9,600 Depreciation and amortization 10,002 (Increase) decrease in assets: Accounts receivable (25,590) Accrued interest income receivable 197 Prepaid expenses (1,054) Increase (decrease) in liabilities: Accounts payable, trade (20,114) Accrued advisory fees (10,149) Accrued income taxes (4,341) Deferred income 2,172 -------- Net cash provided by (used in) operating activities 41,807 -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase for property and equipment (9,307) Purchase of investments 103,339 Proceeds from the sale of investments (64,647) -------- Net cash provided by (used in) investing activities 29,385 -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the sale of common stock 1,000 -------- Net cash provided by (used in) financing activities 1,000 -------- NET INCREASE (DECREASE) IN CASH 72,192 CASH AT BEGINNING OF YEAR 39,623 -------- CASH AT END OF YEAR $111,815 ======== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION Cash paid during period - income taxes $ 24,741 See accompanying notes and independent auditors' report.
- 65 - 68 FIRST LEXINGTON TRUST COMPANY NOTES TO FINANCIAL STATEMENTS December 31, 1996 ----------------- Note 1 - NATURE OF OPERATIONS The Company, First Lexington Trust Company, was incorporated in March 1994 and is a non-bank affiliated trust company regulated by the Department of Financial Institutions, Commonwealth of Kentucky. The Company received its trust charter in March 1994. The majority of trust assets as of December 31, 1996, totaling approximately $21.5 million, are invested in no-load mutual funds under the direction of the trust investment committee. 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenues and Investment Advisory Fees - ------------------------------------- The revenues representing trust and investment advisory fees as well as the investment advisory fees earned by third party advisers are recorded on the accrual basis. The fees earned by the Company and paid to the sub advisers are based on established fees, schedules and contracts. The Company, as the trustee, has the right to collect fees from the trust assets. Thus, collection of the fees is reasonably certain. Property and Equipment - ---------------------- Property and equipment are stated at cost. Depreciation is computed on the straight-line method over the estimated useful life of the assets for financial statement purposes. Investments - ----------- The investments designated as "Held to Maturity" are recorded at cost and amortized over the period to maturity for the premium or discount from par value under generally accepted accounting principles. Other marketable investments are recorded and adjusted to the fair market value as of the date of the financial statements. Organizational Costs - -------------------- Costs relating to the organization of the Company have been capitalized and are not being amortized for the financial statement purposes. Income Taxes - ------------ Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases under the assets and liabilities method of Financial Accounting Standards Statement No. 109 ("SFAS 109"). Deferred assets and liabilities are measured using differences expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. - 66 - 69 FIRST LEXINGTON TRUST COMPANY NOTES TO FINANCIAL STATEMENTS December 31, 1996 ----------------- Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Use of Estimates - ---------------- The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Statement of Cash Flows - ----------------------- For purposes of the statement of cash flow, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. 3 - INVESTMENTS IN DEBT SECURITIES The Company is required by the Kentucky Department of Financial Institutions to maintain a minimum of $800,000 of capital while trust assets under management do not exceed $100,000,000. When trust assets under management exceed $100,000,000, the capital requirement will be increased by $350,000. The marketable investments in debt securities are classified as "Held to Maturity" and the amortized cost and fair market value of the investments as of December 31, 1996 are as follows:
Maturity Date Amortized Unrealized Market Debt Security MO DY YR Face Value Cost Gain (loss) Value ------------- -------- ---------- --------- ----------- ------ Federal Home Loan Mortgage Corporation REMIC 1675-P 10 15 2023 $100,000 $ 94,313 $ (6,652) $ 87,661 REMIC 1646-N 03 15 2023 200,000 189,355 (2,697) 186,658 REMIC 1681-B 11 15 2023 220,000 211,465 (2,551) 208,914 Federal National Mortgage Association REMIC 94-23-0 10 25 2007 97,000 89,005 490 89,495 Note 03 06 2006 70,000 70,325 (1,225) 69,100 Federal Home Loan Bank Note 12 29 2003 25,000 24,487 (167) 24,320 U.S. Treasury Note 02 28 1999 100,000 99,020 105 99,125 Tennessee Valley Authority Subordinated Debenture 04 24 2002 25,000 25,000 -- 25,000 -------- -------- -------- -------- Totals $837,000 $802,970 $(12,697) $790,273 ======== ======== ======== ========
- 67 - 70 FIRST LEXINGTON TRUST COMPANY NOTES TO FINANCIAL STATEMENTS December 31, 1996 ----------------- Note 4 - RELATED PARTY TRANSACTIONS The Company leases its office space from Health Financial, Inc., a related party, under a renewable one year agreement, which amounted to $5,000 for the year ended December 31, 1996. Additionally, the Company reimburses Health Financial, Inc. for the use of supplies, equipment and employees costs and benefits expended in connection with the Company's operations, which amounted to $66,000 for the year ended December 31, 1996. The sole shareholder of Health Financial, Inc. owns approximately 36% of the outstanding capital stock of the Company. 5 - DEFERRED INCOME TAX As discussed in Note 2, the Company records income taxes in accordance with SFAS 109. The Company reports revenue and expenses on the cash basis while tax depreciation is deducted using accelerated methods. Organizational costs are being amortized using the straight line method over 60 months. The deferred tax liability in the financial statements as of December 31, 1996 is as follows:
Deferred tax asset $ 1,040 Deferred tax liability 19,080 ------- Net deferred tax asset (liability) $18,040 =======
The components of income tax expense for the year ended December 31, 1996 are as follows:
Current income tax Federal $14,925 State and local 5,475 ------- Total current 20,400 ------- Deferred income tax Federal 7,025 State and local 2,575 ------- Total deferred 9,600 ------- Total Income Tax $30,000 =======
- 68 - 71 FIRST LEXINGTON TRUST COMPANY NOTES TO FINANCIAL STATEMENTS December 31, 1996 ----------------- Note 6 - CONTINGENCIES The Company maintains bank accounts that periodically exceed the Federal Deposit Insurance Corporation (the "FDIC") guarantee limit during the year. At December 31, 1996 the Company had bank accounts that were in excess of the FDIC limit by approximately $16,440. The Company maintains a Trust Cash Fund with a no load mutual fund for the deposit of funds for customer investments and disbursement with the mutual fund. The following represents the account as of December 31, 1996:
Total account balance $837,102 Due to customers or investment 822,068 -------- Company balance in fund $ 15,034 ========
7 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1996. Financial Accounting Standards Board Statement No. 107, Disclosures About Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties
1996 ------------------------- Carrying Fair Amount Value -------- ----- Financial Assets Cash and cash equivalents $118,815 $118,815 Receivables 56,196 56,196 Investments in debt securities 802,970 790,274 Current liabilities 40,958 40,958
The carrying amounts shown in the table are included in the balance sheet under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents, receivables and current liabilities - -------------------------------------------------------------- The carrying amounts approximate fair value because of the short maturity of those instruments. Investments in money market funds are treated as cash equivalents with maturities under 90 days. Investments and debt obligations - -------------------------------- The fair value of the Company's investments are estimated based on the quoted market price for similar issues. - 69 - 72 First Lexington Trust Company 3320 Tates Creek Road, Suite 101 Lexington, Kentucky Independent Auditor's Report ---------------------------- We have audited the accompanying balance sheets of First Lexington Trust Company (a Corporation) as of December 31, 1995 and 1994, and the related statements of income and retained earnings and cash flows for the year ended December 31, 1995 and for the ten-month period ended December 31, 1994. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First Lexington Trust Company as of December 31, 1995 and 1994, and the results of its operations and cash flows for the year ended December 31, 1995 and ten-month period ended December 31, 1994 in conformity with generally accepted accounting principles. /s/ Barr, Anderson & Roberts, P.S.C. Lexington, Kentucky February 27, 1996 - 70 - 73 FIRST LEXINGTON TRUST COMPANY BALANCE SHEETS DECEMBER 31, 1995 AND 1994
1995 1994 -------- -------- ASSETS ------ Current assets Cash $ 39,623 $ 32,866 Accounts receivable 28,805 6,971 Accrued interest receivable 4,998 4,825 Prepaid insurance 2,370 2,232 -------- -------- Total current assets 75,796 46,894 -------- -------- Investments in debt securities - Note B 841,662 791,367 -------- -------- Equipment and software - Note A Office equipment 3,334 3,334 Software 36,085 0 Accumulated depreciation (766) (234) -------- -------- Net equipment and software 38,653 3,100 -------- -------- Organization costs - Note A 9,000 9,000 -------- -------- Total assets $965,111 $850,361 ======== ======== The accompanying notes are an integral part of these financial statements.
- 71 - 74 FIRST LEXINGTON TRUST COMPANY BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (CONTINUED)
1995 1994 -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 28,718 $ 864 Accrued liabilities 14,402 2,500 Deferred income 1,076 1,346 Income taxes payable - Notes A and D 13,541 450 Deferred income taxes - Notes A and D 6,453 1,990 -------- -------- Total current liabilities 64,190 7,150 Deferred income taxes - Notes A and D 1,987 1,012 -------- -------- Total liabilities 66,177 8,162 -------- -------- Stockholders' equity Common stock, $1.00 par value, 829,000 829,000 10,000 shares authorized and 8,290 shares issued and outstanding Retained earnings 69,934 13,199 -------- -------- Total stockholders' equity 898,934 842,199 -------- -------- Total liabilities and stockholders' equity $965,111 $850,361 ======== ======== The accompanying notes are an integral part of these financial statements.
- 72 - 75 FIRST LEXINGTON TRUST COMPANY STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1994
1995 1994 -------- ------- Revenues Trustee and advisory fees $108,429 $15,266 -------- ------- Total revenues 108,429 15,266 -------- ------- Expenses Investment advisory fees - Note C 55,701 -- Advertising and promotion 281 265 Insurance 10,562 7.943 Publications and subscriptions 238 9,838 Seminars and expositions -- 2,075 Professional fees 8,474 3,379 Plan administration fees 3,875 -- Taxes and licenses 2,668 -- Rent - Note C 5,000 5,000 Telephone 913 863 Office supplies 36 7,577 Commissions 6 18 Depreciation - Note A 532 234 -------- ------- Total expenses 88,286 37,192 -------- ------- Net income (loss) from operations 20,143 (21,926) Other revenues Interest income 55,946 38,577 -------- ------- Net income before income taxes 76,089 16,651 Income taxes - Notes A and D 19,354 3,452 -------- ------- Net income 56,735 13,199 Beginning retained earnings 13,199 -- -------- ------- Ending retained earnings $ 69,934 $13,199 ======== ======= The accompanying notes are an integral part of these financial statements.
- 73 - 76 FIRST LEXINGTON TRUST COMPANY STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1994
1995 1994 -------- --------- Cash flows from operating activities: Net income $ 56,735 $ 13,199 -------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization (372) (411) (Increase) in accounts receivable (21,834) (6,971) (Increase) in accrued interest receivable (173) (4,825) (Increase) in prepaid insurance (138) (2,232) Increase in accounts payable 27,854 3,364 Increase in accrued liabilities 11,902 -- Increase (decrease) in deferred income (270) 1,346 Increase in income taxes payable 13,091 460 Increase in deferred income taxes payable 5,438 3,002 -------- --------- Total adjustments 35,498 (6,277) -------- --------- Net cash provided by operating activities 92,233 6,922 -------- --------- Cash flows from investing activities: Payments for purchase of equipment and software (36,085) (3,334) Payments for the purchase of bonds (49,391) (795,588) Payments for organization costs -- (9,000) Proceeds from return of principal -- 4,866 -------- --------- Net cash used by investing activities (85,476) (803,056) -------- --------- Cash flows from financing activities: Proceeds from issuance of common stock -- 829,000 -------- --------- Net cash provided by financing activities -- 829,000 -------- --------- Net increase in cash 6,757 32,866 Cash, beginning of year 32,866 -- -------- --------- Cash, end of year $ 39,623 $ 32,866 ======== ========= Cash paid for income taxes $ 825 $ -- ======== ========= The accompanying notes are an integral part of these financial statements.
- 74 - 77 First Lexington Trust Company Notes To Financial Statements NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- Business Activity - The Company is a non-bank affiliated trust ----------------- company regulated by the Department of Financial Institutions, Commonwealth of Kentucky. The Company manages trust assets of approximately $11.2 and $4.1 million as of December 31, 1995 and 1994, respectively. The majority of the trust assets, over ninety-five percent (95%), are invested in no-load mutual funds under the direction of the trust investment committee. Fees are charged based on the Company's fee schedule. These fees are recorded on the accrual basis. The trustee has the right to collect fees from trust assets. Thus, collection of fees is reasonably certain. Equipment and Software - Equipment and software are carried at ---------------------- cost. Depreciation of equipment is provided using the straight-line method for financial reporting purposes at rates based on estimated useful lives. Depreciation is computed for federal income tax purposes using the modified accelerated cost recovery system. Amortization of software will begin when the software is placed in service during 1996. Organization Costs - Costs relating to the organization of the ------------------ Company have been capitalized and are being amortized using the straight-line method over a sixty-month period for income tax purposes. Income Taxes - Deferred tax assets and liabilities are recognized ------------ for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases under the asset and liability method of Financial Accounting Standards Statement No. 109 ("SFAS 109") . Deferred tax assets and liabilities are measured using differences expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. NOTE B - INVESTMENTS IN DEBT SECURITIES - --------------------------------------- The Company is required by the Kentucky Department of Financial Institutions to maintain a minimum of $800,000 capital while trust assets under management do not exceed $100,000,000. When trust assets under management exceed $100,000,000 the capital requirement will be increased by $350,000. - 75 - 78 First Lexington Trust Company Notes To Financial Statements NOTE B - INVESTMENTS IN DEBT SECURITIES (CONTINUED) - --------------------------------------------------- The marketable debt securities are classified as "Held to Maturity." The amortized cost and fair value of the investments as of December 31, 1995 and 1994, are as follows:
1995 ---- Due to Amortized Unrealized Debt Security Mature Cost Gain (Loss) Fair Value - --------------------------- ------ --------- ----------- ---------- Federal Home Loan Mortgage Corporation 10/15/23 $ 94,241 $ (2,031) $ 92,210 Federal Home Loan Mortgage Corporation 03/15/23 189,219 1,957 191,176 Federal Home Loan Mortgage Corporation 11/15/23 211,364 8,475 219,839 Federal Home Loan Mortgage Corporation 12/29/03 24,427 370 24,797 Federal National Mortgage Association 10/25/07 88,812 3,376 92,188 U. S. Treasury Notes 02/29/96 69,869 65 69,934 U. S. Treasury Notes 02/28/99 98,730 1,926 100,656 General Electric Capital Corporation 12/08/06 40,000 1,190 41,190 Toyota Motor Credit Corporation 04/24/02 25,000 319 25,319 -------- -------- -------- Total $841,662 $ 15,647 $857,309 ======== ======== ======== 1994 ---- Due to Amortized Unrealized Debt Security Mature Cost Gain (Loss) Fair Value - --------------------------- ------ --------- ----------- ---------- Federal Home Loan Mortgage Corporation 10/15/23 $ 94,175 $(18,068) $ 76,107 Federal Home Loan Mortgage Corporation 03/15/23 189,093 (24,321) 164,772 Federal Home Loan Mortgage Corporation 11/15/23 211,270 (26,934) 184,336 Federal National Mortgage Association 10/25/07 88,630 (8,689) 79,941 U. S. Treasury Notes 02/29/96 69,744 (1,888) 67,856 U. S. Treasury Notes 02/28/99 98,455 (6,611) 91,844 General Electric Capital Corporation 12/08/06 40,000 (400) 39,600 -------- -------- -------- Total $791,367 $(86,911) $704,456 ======== ======== ========
- 76 - 79 First Lexington Trust Company Notes To Financial Statements NOTE C - RELATED PARTY TRANSACTIONS - ----------------------------------- Lease - The Company leases office space from Health Financial, Inc., a ----- related party, under renewable one year agreements. Rent expense under this lease was $5,000 for 1995 and 1994. Investment Advisory Fees - There were no advisory fees incurred in 1994. ------------------------ The Company incurred investment advisory fees to the following parties in 1995: Health Financial, Inc. $47,734 Protrust Capital 5,184 Commonwealth Investment Services 1,556 Non-related party 1,227 ------- Total $55,701 =======
NOTE D - INCOME TAXES - --------------------- As discussed in Note A, the Company records income taxes in accordance with SFAS 109. The net deferred tax liability in the accompanying balance sheet includes the following amounts of deferred tax assets and liabilities:
1995 1994 ------- ------ Deferred tax asset $ 5,779 $1,024 Deferred tax liability 14,239 4,026 ------- ------ Net deferred tax liability $ 8,440 $3,002 ======= ======
The deferred tax liability results from the use of accelerated methods of depreciation that reduce the tax basis of equipment, payables and receivables not recognized in the current year for tax purposes, and prepaid insurance fully deducted for tax purposes. The deferred tax asset results from unearned revenue included in income for tax purposes. The components of income tax expense are as follows:
Current Deferred Total ----------------------- --------------------- ---------------------- 1995 1994 1995 1994 1995 1994 ------- ------ ------ ------ ------- ------ U. S. federal $11,190 $450 $4,013 $2,047 $15,203 $2,497 State and local 2,726 -- 1,425 955 4,151 955 ------- ---- ------ ------ ------- ------ Total $13,916 $450 $5,438 $3,002 $19,354 $3,452 ======= ==== ====== ====== ======= ======
- 77 - 80 To the Board of Directors and Stockholder of Vintage Advisers, Inc. INDEPENDENT AUDITORS' REPORT ---------------------------- We have audited the accompanying statements of financial condition of Vintage Advisers, Inc. as of November 30, 1996 and 1995, and the related statements of operations, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of Vintage's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, such financial statements present fairly, in all material respects, the financial position of Vintage Advisers as of November 30, 1996 and 1995, and the results of its operations, changes in stockholders' equity and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Larry E. Nunn & Associates, L.L.C. Columbus, Indiana October 30, 1997 - 78 - 81 VINTAGE ADVISERS, INC. STATEMENTS OF FINANCIAL CONDITION August 31, 1997 (Unaudited) and November 30, 1996 and 1995 --------------------------
ASSETS ------ November 30, August 31, -------------------------- 1997 1996 1995 ----------- -------- -------- (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 19,367 $ 27,123 $ 3,135 Investment in affiliated mutual fund (cost approximates market) 63,389 40,023 86,280 Receivable from affiliated mutual funds 26,420 23,585 15,864 Other receivables 19,064 30,000 -- Prepaid insurance 2,746 1,100 -- -------- -------- -------- Total current assets 130,986 121,831 105,279 ======== ======== ======== OTHER ASSETS Organization cost, net of $119,675, $79,783 and $26,594, respectively, accumulated amortization 146,270 186,162 239,351 Deferred development cost, net of $13,104, $-0- and $-0-, respectively, accumulated depreciation 294,844 314,500 -- -------- -------- -------- Total other assets 441,114 500,662 239,351 -------- -------- -------- TOTAL ASSETS $572,100 $622,493 $344,630 ======== ======== ======== - 79 - 82 LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ November 30, August 31, -------------------------- 1997 1996 1995 ----------- -------- -------- (Unaudited) CURRENT LIABILITIES Loan payable to stockholder $ -- $ 10,000 $ 10,000 Loan payable to stockholder -- 75,000 75,000 Loan payable to stockholder 50,000 50,000 -- Payable to affiliated companies 255,174 117,177 98,103 Accounts payable and accrued liabilities 375,754 272,493 8,962 -------- --------- -------- Total current liabilities 680,928 524,670 192,065 -------- --------- -------- TOTAL LIABILITIES 680,928 524,670 192,065 -------- --------- -------- CONTINGENCIES AND COMMITMENTS STOCKHOLDERS' EQUITY Common stock par value, $.01 per share, 100,000 shares authorized, 30,000, 20,000 and 25,244 shares outstanding, respectively 300 300 252 Paid-in capital 599,700 599,700 199,748 Retained earnings (deficit) (677,758) (446,423) (47,435) Unrealized (loss) on securities (31,070) (55,754) -- -------- --------- -------- Total stockholders' equity (108,828) 97,823 152,565 -------- --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $572,100 $ 622,493 $344,630 ======== ========= ======== See accompanying notes and independent auditors' report.
- 80 - 83 VINTAGE ADVISERS, INC. STATEMENTS OF OPERATIONS Nine Months Ended August 31, 1997 and 1996 (Unaudited) and Years Ended November 30, 1996 and 1995
August 31, November 30, --------------------------- --------------------------- 1997 1996 1996 1995 --------- --------- --------- -------- (Unaudited) REVENUE: Investment adviser fees from affiliated companies $ 239,153 $ 175,293 $ 248,090 $ 27,207 Miscellaneous income 134 -- 100 -- Interest income 1,117 48 64 811 --------- --------- --------- -------- Total revenue 240,404 175,341 248,254 28,018 --------- --------- --------- -------- COST OF SALES: Reimbursement (303,943) (35,194) (65,560) (24,922) --------- --------- --------- -------- Total cost of sales (303,943) (35,194) (65,560) (24,922) --------- --------- --------- -------- Gross profit (63,539) 140,147 182,694 3,096 --------- --------- --------- -------- EXPENSES: Wages and payroll taxes (132,722) 115,668 181,835 -- Professional fees 45,863 31,802 92,263 6,827 Printing, brochures, marketing expenses 10,123 10,769 13,854 3,209 Telephone 50 1,835 2,549 199 Courier 158 241 276 108 License fees 347 270 565 290 Insurance 4,955 3,851 5,501 -- Taxes 2,367 2,757 3.705 387 Travel and entertainment (9,043) 10,066 20,536 7,122 Interest expense 8,009 10,669 14,119 5,450 Amortization 59,548 39,892 53,189 26,594 Equipment -- 3,799 3,909 -- Office supplies 35 304 386 -- Management fee 154,728 54,141 185,500 -- All other 1,060 -- 142 371 --------- --------- --------- -------- Total expenses 145,478 286,064 578,329 50,557 --------- --------- --------- -------- Income from operations before gain (loss) on securities (209,012) (145,917) (395,635) (47,461) Realized gain (loss) on securities (22,318) -- (3,353) 26 --------- --------- --------- -------- NET INCOME (LOSS) $(231,335) $(145,917) $(398,988) $(47,435) ========= ========= ========= ======== See accompanying notes and independent auditors' report.
- 81 - 84 VINTAGE ADVISERS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Nine Months Ended August 31, 1997 (Unaudited) and Years Ended November 30, 1996 and 1995 ------------------------------------------
Common Stock Common Paid-in Retained Shares Stock Capital Deficit Total ------ ------ ------- --------- --------- Initial incorporation 20,000 $200 $ 1,800 $ -- $ 2,000 Unified Holdings, Inc. investment 5,244 52 197,948 -- 198,000 Net income (loss) -- -- -- (47,435) (47,435) ------ ---- -------- --------- --------- Balance, Nov. 30, 1995 25,244 252 199,748 (47,435) 152,565 Unified Holdings, Inc. investment 4,756 48 399,952 -- 400,000 Unrealized gain (loss) on securities -- -- -- (55,754) (55,754) Net income (loss) -- -- -- (398,988) (398,988) ------ ---- -------- --------- --------- Balance, Nov. 30, 1996 30,000 300 $599,700 $(502,177) $ 97,823 Unrealized gain (loss) on securities -- -- -- 24,684 24,684 Net income (loss) -- -- -- (231,335) (231,335) ------ ---- -------- --------- --------- Balance, August 31, 1997 (Unaudited) 30,000 300 $599,700 $(708,828) $(108,828) ====== ==== ======== ========= ========= See accompanying notes and independent auditors' report.
- 82 - 85 VINTAGE ADVISERS, INC. STATEMENTS OF CASH FLOWS For the Nine Months Ended August 31, 1997 and 1996 (Unaudited) and Years Ended November 30, 1996 and 1995
August 31, November 30, --------------------------- --------------------------- 1997 1996 1996 1995 --------- --------- --------- -------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME (LOSS) $(231,335) $(145,917) $(398,988) $(47,435) Adjustment to reconcile net income to net cash provided (used) in operating activities: Amortization 59,548 39,892 53,189 26,594 Loss on sale of securities -- -- 3,353 -- (Increase) decrease in operating assets: Prepaid insurance (1,646) (2,750) (1,100) -- Receivable from affiliated mutual fund (2,835) 422 (7,721) (15,864) Receivable from other 10,936 (24,266) (30,000) -- Increase (decrease) in liabilities: Payable to affiliated companies 137,997 (43,371) 19,074 98,103 Accounts payable and accrued liabilities 103,261 173,969 263,531 8,962 --------- --------- --------- -------- Net cash (used) provided by operating activities 75,926 (2,021) (98,662) 70,360 --------- --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Organization cost -- -- -- (265,945) Deferred development cost -- -- (314,500) -- Investment in affiliated mutual funds 1,318 (12,850) (12,850) (86,280) --------- --------- --------- -------- Net cash used by investing activities 1,318 (12,850) (327,350) (352,225) --------- --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Loan from stockholders and repayments (85,000) -- -- 85,000 Loan from Unified Holdings, Inc. -- 65,888 65,888 -- Repayment of loan to Unified Holdings, Inc. -- (15,888) (15,888) -- Issuance of common stock -- -- 400,000 200,000 Loan payable to stockholders -- 10,442 -- -- --------- --------- --------- -------- Net cash provided by financing activities (85,000) 60,442 450,000 285,000 --------- --------- --------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS (7,756) 45,571 23,988 3,135 CASH AND CASH EQUIVALENTS, Beginning of year 27,123 3,135 3,135 -- --------- --------- --------- -------- CASH AND CASH EQUIVALENTS, end of year $ 19,367 $ 48,706 $ 27,123 $ 3,135 ========= ========= ========= ======== NON--CASH ITEMS: Operating activities reflect cash paid for: -- Interest $ 8,009 $ 10,669 $ 14,119 $ 5,450 --------- --------- --------- -------- See accompanying notes and independent auditors' report.
- 83 - 86 VINTAGE ADVISERS, INC. NOTES TO FINANCIAL STATEMENTS November 30, 1996 and 1995 -------------------------- Note 1 - ORGANIZATION AND CAPITALIZATION Vintage Advisers, Inc. (the "Company") was incorporated in Delaware on December 12, 1994 and is registered to do business in Indiana for the purpose of being the adviser to the Vintage Mutual Funds (the "Funds"). The Company is a registered investment adviser under the Investment Advisers Act of 1940, as amended. Since incorporation, the Company authorized an increase in the capitalization of the Company from 1,000 shares to 100,000 shares and declared a 100 to 1 stock split on outstanding shares. On November 30, 1995, Unified Holdings, Inc. subscribed to invest $198,000 for 5,244 shares of common stock. This transaction was completed in December 1995. On October 22, 1996, Unified Holdings, Inc. invested $400,000 for 4,756 shares of common stock. The Company instituted a Management and Employee Retention Plan (the "Plan") and reserved 60,000 common shares of the Company to be issued pursuant to the plan. Of such shares, 25,760 shares have been designated for issuance pursuant to the Plan. The Company applies APB Opinion 25 and related interpretations in accounting for this plan. Accordingly, no compensation cost has been recognized. Had compensation cost been determined, based on the fair market value at the grant dates of the awards under this plan consistent with the method of Financial Accounting Standards Board ("FASB") Statement 123, the Company's net income (loss) would be reduced to the pro forma amounts indicated:
Year Ended Year Ended November 30, 1996 November 30, 1995 ----------------- ----------------- Net income (loss), as reported $(398,988) $(47,435) Pro forma $(406,693) $(55,140)
The Company authorized 10,000 common shares for an option to a significant stockholder for the V.O.I.C.E.sm program. This option had not been issued as of November 30, 1996. - 84 - 87 VINTAGE ADVISERS, INC. NOTES TO FINANCIAL STATEMENTS November 30, 1996 and 1995 -------------------------- Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents - ---------------- Investments in affiliated money market mutual funds are treated as cash equivalents with maturities under 90 days. Securities Owned - ---------------- Investments in mutual funds are valued at their respective net asset value and recorded on a trade date basis. The Company considers these as short-term investments in its operations. Fees - ---- The Company provides investment advisory services to the Vintage mutual funds and records revenue on the accrual basis of accounting. Organization and Development Costs - ---------------------------------- The organizational costs for the Company were capitalized and will be charged to earnings over a sixty-month period on a straight-line basis. These costs were an integral part of the process of organizing the Company and various fees and expenses of the funds that will benefit future periods. The development costs for the Company were capitalized and will be charged to earnings over a 120-month period on a straight-line basis. Use of Estimates - ---------------- The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Flows - ---------- For purposes of the statement of cash flows, the Company considers all liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents included money market investments of $1,620 for 1996 and $1,556 for 1995, which are not insured by the Federal Deposit Insurance Corporation. Income Taxes - ------------ The Company has adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109") accounting for income taxes. The statement requires use of the liability method of accounting for deferred income taxes. - 85 - 88 VINTAGE ADVISERS, INC. NOTES TO FINANCIAL STATEMENTS November 30, 1996 and 1995 -------------------------- Note 3 - LOANS PAYABLE The Company has borrowed from three of the principal stockholders on a demand basis during 1996 and 1995. The Company pays interest at prime plus two percent (2%). Interest is paid periodically until the loan is repaid. 4 - TRANSACTIONS WITH RELATED PARTIES The Company provides investment advisory and affiliated companies provide administrative services to the Vintage Mutual Funds. Fees for such services are based on the net assets under management for each fund in accordance with the terms of the respective fund prospectus. Such fees may be limited by regulatory or prospectus imposed expense limitations. During December 1995, the Company has committed to repay the Vintage Mutual Funds for the initial registration and organization cost of the funds, which were $65,888. During October 1996, the Company reimbursed the Vintage Mutual Funds $84,717. Under the agreement, the Company is obligated to repay the funds, to the extent of fees earned for the annual fiscal year expenses incurred by the funds that are in excess of expense limits imposed by securities laws and regulations. The following is a summary of these transactions:
December 1, 1995 September 1, 1995 to November 30, 1996 to November 30, 1995 -------------------- -------------------- Fees earned $248,090 $27,207 Funds excess expenses $ 65,560 $24,922 -------- ------- Total $182,530 $ 2,285 ======== =======
Management and administrative services are provided by an affiliated company, Unified Holdings, Inc. and its subsidiaries. - 86 - 89 VINTAGE ADVISERS, INC. NOTES TO FINANCIAL STATEMENTS November 30, 1996 and 1995 -------------------------- Note 4 - TRANSACTIONS WITH RELATED PARTIES (continued) During fiscal 1995, the Company was invoiced $198,000 for various services included in the funds registration and organization cost and $13,915 for expenses and organization cost. During fiscal 1996, the Company was invoiced $500,000 for expenses incurred of which $314,500 was capitalized as a deferred development cost. For the years ended November 30, 1996 and 1995, the Company incurred recurring management fees from an affiliate in the amount of $185,000 and $0, respectively. The amount is reflected on the Company's Statements of Operations as part of all other. At November 30, 1996 and 1995, the Company owed $115,856 and $4,160, respectively, to this affiliated Company. 5 - PROVISION FOR INCOME TAXES During its two years of operation, the Company has incurred taxable losses. No tax benefit has been reflected in accordance with the Financial Accounting Standards Board Statement No. 96, Accounting for Income Taxes (SFAS 96). The Company does not expect a material impact on the Company's results of operations because of the tax benefit. 6 - COMMITMENTS Vintage Advisers, Inc. has an obligation with the Vintage Mutual Funds to provide the Company's V.O.I.C.E.sm program. This program will cause the Company to pay twenty-five basis points to approved designated charitable organizations on behalf of each stockholder of the Vintage Mutual Funds which have invested an average of twenty-five thousand dollars or more quarterly. The payment is made quarterly. During 1996, the Company licensed the V.O.I.C.E.sm program to a regional bank. This Agreement should provide future on-going revenue. 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at November 30, 1996 and 1995. FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. - 87 - 90 VINTAGE ADVISERS, INC. NOTES TO FINANCIAL STATEMENTS November 30, 1996 and 1995 -------------------------- Note 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
1996 1995 ------------------------ ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- ($ in thousands) Financial assets Cash and cash equivalents $ 27.1 $ 27.1 $ 3.1 $ 3.1 Receivables 53.5 53.5 15.8 15.8 Investments 40.0 40.0 86.2 86.2 Financial liabilities Payables (trade) (272.4) (272.4) 8.9 8.9 (affiliated company) 117.2 117.2 (98.1) (98.1)
The carrying amounts shown in the table are included in the statement of financial condition under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash, receivables and payables: The carrying amounts ------------------------------ approximate fair value because of the short maturity of those instruments. Investments: The carrying amounts have been adjusted to ----------- fair value according to the daily net asset value prices at the close of the markets on November 30 for each respective year. 8 - DEFERRED COMPENSATION For the year-ended November 30, 1996, the Company charged results of operations for deferred compensation in the amount of $178,500. The deferred compensation amounts for the employees are as follows:
DEFERRED AMOUNT NAME AT NOVEMBER 30, 1996 ---- -------------------- Timothy L. Ashburn $ 50,000 David A. Bogaert 35,000 Thomas G. Napurano 45,000 Jack Orben 10,000 Lynn E. Wood 38,500 -------- Total $178,500 ========
The Company anticipates paying the deferred compensation when the Company's financial resources and net worth are sufficient. - 88 - 91 FIRST LEXINGTON TRUST COMPANY BALANCE SHEET September 30, 1997 (Unaudited) ASSETS ------ CURRENT ASSETS Cash: Bank $ 20,777 Mutual fund money market 12,122 Mutual fund trust account 9,781 Brokerage money market 18,028 ---------- 60,708 ---------- Accounts receivable: Fee income 78,788 Mutual fund trust account 4,769 ---------- 83,557 ---------- Accrued interest income receivable 5,917 Prepaid expenses 6,900 ---------- 12,817 ---------- Total current assets 157,082 ---------- INVESTMENT IN DEBT SECURITIES 957,771 ---------- PROPERTY AND EQUIPMENT: Office equipment 3,334 Software 9,444 ---------- Gross property and equipment 12,778 ---------- Less accumulated depreciation (4,823) ---------- Net property and equipment 7,955 ---------- OTHER ASSETS Organization costs 2,550 ---------- TOTAL ASSETS $1,125,358 ========== See accompanying notes and independent auditors' report. - 89 - 92
LIABILITIES & STOCKHOLDERS' EQUITY ---------------------------------- CURRENT LIABILITIES Accounts payable, trade $ 18,055 Accrued advisory fees -- Accrued income taxes 21,405 Deferred income 4,122 Deferred income taxes 22,000 ---------- Total current liabilities 65,582 LONG-TERM LIABILITIES: Deferred income taxes 250 ---------- Total liabilities 65,832 ---------- COMMITMENTS & CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $1.00 par value 10,000 shares authorized 8,295 shares issued and outstanding 8,295 Paid-in capital 821,705 ---------- Total stock investment 830,000 Retained Earnings 229,526 ---------- Total stockholders' equity 1,059,526 ---------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $1,125,358 ==========
- 90 - 93 FIRST LEXINGTON TRUST COMPANY STATEMENTS OF OPERATIONS Nine Months ended September 30, 1997 and 1996 (Unaudited)
1997 1996 -------- -------- REVENUES: Trustee fees $209,789 $111,129 Administration fees 25,390 10,431 Valuation system fees -- 2,000 Software maintenance fees -- 4,181 -------- -------- Total revenue $235,179 $127,741 -------- -------- DIRECT SUPPLIER COSTS Investment advisory fees 16,558 10,132 Plan administration fees 27,290 10,431 Related party employee, supplies and operating expenses reimbursed 50,499 44,000 -------- -------- Total supplier costs 94,347 64,563 -------- -------- TOTAL GROSS PROFIT 140,832 63,178 -------- -------- OPERATING EXPENSES: Computer software expenses 3,785 4,181 Insurance 10,593 14,706 Legal and professional services 14,136 13,824 Depreciation 6,827 9,420 Office supplies and postage 1,733 283 Rent 2,500 2,500 Telephone 3,954 3,553 Property taxes 8,672 -- Licenses and fees 10 15 Other 6,063 19,978 -------- -------- Total operating expenses 58,273 68,460 -------- -------- INCOME FROM OPERATIONS 82,559 (5,282) OTHER INCOME (EXPENSES) Investment interest income 33,849 40,619 Capital gains and other income -- 131 -------- -------- INCOME BEFORE INCOME TAXES 116,408 35,468 INCOME TAXES Current 29,000 -- Deferred 8,000 -- -------- -------- NET INCOME 79,408 35,468 RETAINED EARNINGS, BEGINNING OF YEAR 151,018 69,934 -------- -------- RETAINED EARNINGS, END OF YEAR $230,426 $105,402 ======== ======== See accompanying notes and independent auditors' report.
- 91 - 94 FIRST LEXINGTON TRUST COMPANY STATEMENTS OF CASH FLOWS Nine Months ended September 30, 1997 and 1996 (Unaudited)
1997 1996 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 78,508 $ 35,468 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 4,210 9,420 Depreciation and amortization 9,188 (6,453) Loss on disposed assets 20,065 -- (Increase) decrease in assets: Accounts receivable (29,161) 28,805 Accrued interest income receivable (1,116) 4,998 Prepaid expenses (3,476) 2,370 Increase (decrease) in liabilities: Accounts payable and accrued expenses (1,406) (48,698) Accrued advisory fees 13,803 -- Accrued income taxes 12,205 (13,541) Deferred income 874 1,484 --------- -------- Net cash provided by (used in) operating activities 103,694 13,853 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment -- (732) Purchase of investments (154,801) (487) Proceeds from the sale of investments -- -- --------- -------- Net cash provided by (used in) investing activities (154,801) (1,219) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt -- -- Purchase of treasury stock -- -- Proceeds from the sale of Company stock -- -- --------- -------- Net cash provided by (used in) financing activities -- -- --------- -------- NET INCREASE (DECREASE) IN CASH (51,107) 12,634 CASH AT BEGINNING OF YEAR 111,815 39,623 --------- -------- CASH AT END OF YEAR $ 60,708 $ 52,257 ========= ======== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION Cash paid during period - income taxes $ 8,885 $ 23,347 See accompanying notes and independent auditors' report.
- 92 - 95 FIRST LEXINGTON TRUST COMPANY NOTE TO FINANCIAL STATEMENTS Nine Months ended September 30, 1997 (Unaudited) NOTE A - BASIS OF PRESENTATION The unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. - 93 - 96 Part III -------- ITEM 1. INDEX TO EXHIBITS ----------------- See Exhibit Index hereto. ITEM 2. DESCRIPTION OF EXHIBITS ----------------------- See Exhibit Index hereto. - 94 - 97 Signatures ---------- In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this Amendment No. 1 to the Registration Statement on Form 10-SB to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 18th day of December, 1997. UNIFIED HOLDINGS, INC. By /s/ Timothy L. Ashburn --------------------------------------------- Timothy L. Ashburn, Chairman of the Board and Chief Executive Officer - 95 - 98 EXHIBIT INDEX
Exhibit Number Description Page ------- ----------- ---- 2.1 Agreement and Plan of Merger dated April 25, 1997 by and among the Company, HFI Acquisition Corporation, Health Financial, Inc. and Dr. Gregory W. Kasten. 2.2 Amended and Restated Agreement and Plan of Merger dated as of April 25, 1997 by and among the Company, FLTC Acquisition Corporation, First Lexington Trust Company and Dr. Gregory W. Kasten. 2.3 Agreement and Plan of Merger dated as of May 8, 1997 by and among the Company, VAI Acquisition Corporation, Vintage Advisers, Inc. and Timothy L. Ashburn. 2.4 First Amendment to Agreement and Plan of Merger dated as of May 31, 1997 by and among the Company, HFI Acquisition Corporation, Health Financial, Inc. and Dr. Gregory W. Kasten. 2.5 Termination Agreement dated as of December 1, 1997 by and among the Company, VAI Acquisition Corporation, Vintage Advisers, Inc. and Timothy L. Ashburn. 2.6 Release and Surrender Agreement dated as of December 1, 1997 by and among the Company, Vintage Advisers, Inc., Timothy L. Ashburn and Jack R. Orben. 3.1(a) Amended and Restated Certificate of Incorporation of the Company, filed as Exhibit 4.1(a) to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 3.1(b) Certificate of Designations, Preferences, and Relative Rights, Qualifications and Restrictions of the Series A 8% Cumulative Preferred Stock of the Company, filed as Exhibit 4.1(b) to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 3.1(c) Certificate of Designations, Preferences, and Relative Rights, Qualifications and Restrictions of the Series B 8% Cumulative Preferred Stock of the Company, filed as Exhibit 4.1(c) to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 3.1(d) Certificate of Designations, Preferences, and Relative Rights, Qualifications and Restrictions of the Series C 6.75% Cumulative Convertible Preferred Stock of the Company, filed as Exhibit 4.1(d) to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. - 96 - 99 Exhibit Number Description Page ------- ----------- ---- 3.2 By-laws of the Company, filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 10.1 Employment Agreement dated as of June 1, 1997 by and between Health Financial, Inc. and Dr. Gregory W. Kasten. 10.2 Business Loan Agreement dated as of September 10, 1997 by and between the Company and Bank One, Indiana, N.A. 10.3 Commercial Security Agreement dated as of September 10, 1997 by and between the Company and Bank One, Indiana, N.A. 10.4 Promissory Note dated as of September 10, 1997 issued by the Company in favor of Bank One, Indiana, N.A. 21.1 List of Subsidiaries. 27.1 Financial Data Schedule. - ---------------------- Previously filed on May 30, 1997.
- 97 - EX-2.4 2 1ST AMEND. TO THE AGREE. AND PLAN OF MERGER 1 EXHIBIT 2.4 ----------- FIRST AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER ---------------------------- This Amendment to the Agreement and Plan of Merger (the "Amendment") is made and entered into this 31st day of May 1997 by and among Unified Holdings, Inc., a Delaware corporation ("Unified"), HFI Acquisition Corporation, a Kentucky corporation and wholly owned subsidiary of Unified ("Merger Sub" and, collectively with Unified, the "Buyers"), Health Financial, Inc., a Kentucky corporation ("Seller"), and Dr. Gregory W. Kasten, the sole shareholder of Seller ("Shareholder"). WITNESSETH: WHEREAS, Unified, Merger Sub, Seller and Shareholder entered into that certain Agreement and Plan of Merger dated April 25, 1997 (the "Agreement"); and WHEREAS, the respective Board of Directors of Unified, Merger Sub and Seller as well as Stockholder have heretofore approved the merger of Merger Sub with and into Seller; and WHEREAS, each of Unified, Merger Sub, Seller and Shareholder believes that based upon events subsequent to April 25, 1997, certain provisions of the Agreement should be amended to change the following: (i) the means of effecting the proposed transaction; and (ii) the conditions to each party's obligations to effect the proposed transaction. NOW THEREFORE, in consideration of the premises and the agreements herein contained, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree that the Agreement is hereby amended in each of the following respects: (1) Article I is hereby amended in its entirety to read as follows: "THE STOCK PURCHASE 1.01 The Stock Purchase. Shareholder agrees to sell, and Unified ------------------ agrees to purchase, all of the issued and outstanding shares of common stock, no par value, of Seller ("Seller Common Stock") (the "Stock Purchase Transaction"). The purchase price shall be 325,000 shares of common stock, $0.01 par value, of Unified ("Unified Common Stock"), in the aggregate (the "Stock Purchase Consideration"). 2 1.02. Closing. The closing (the "Closing") of the Stock Purchase ------- Transaction shall take place at 10:00 a.m., local time, on the date that the Effective Time (as defined in Section 1.03) occurs (the "Closing Date"), or at such other time, and at such place, as Unified and Shareholder shall agree. 1.03. Effective Time. The Stock Purchase Transaction shall become -------------- effective (the "Effective Time") as of June 1, 1997. Unified shall, as soon as practicable after the Effective Time, issue a stock certificate representing the Stock Purchase Consideration. The parties contemplate that Unified shall immediately undertake a review of its books and records in connection with the filing of the Registration Statement (as defined in Section 5.02(a)) and that the stock certificate representing the Stock Purchase Consideration shall be issued on the day after such review is completed (the "Issue Date"). 1.04. Boards of Directors and Officers. At the Effective Time, the -------------------------------- directors and officers of Seller immediately prior to the Effective Time shall be the directors and officers, respectively, of the Seller following the Stock Purchase Transaction, and such directors and officers shall hold office in accordance with the Seller's Bylaws and applicable law; provided, however, as of the Effective Time, Seller shall take any and all actions necessary to add Timothy L. Ashburn as a member of the Board of Directors of Seller. 1.05. Anti-Dilution Adjustments. If, on the Issue Date, the number ------------------------- of issued and outstanding shares of Unified Common Stock exceeds 625,000, excluding shares issued in connection with any possible acquisition transaction by Unified, then appropriate and proportionate adjustment or adjustments will be made such that Shareholder's proportionate interest in the outstanding Unified Common Stock equals the quotient of 325 divided by 950. 1.06. Material Adverse Effect. As used in the Agreement, the term ----------------------- "Material Adverse Effect" with respect to an entity means any condition, event, change or occurrence that has or may reasonably be expected to have a material adverse effect on the condition (financial or otherwise), properties, business or results of operations, of such entity and its "Subsidiaries" (as defined in Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC")), taken as a whole as reflected in the Seller Financial Statements (as defined in Section 2.05(b)) or the Unified Financial Statements (as defined in Section 3.04), as the case may be; it being understood that a Material Adverse Effect shall not include: (i) a change with respect to, or effect on, such entity and its Subsidiaries resulting from a change in law, rule, regulation, generally accepted accounting principles or regulatory accounting principles; or (ii) a change disclosed in the Seller Financial Statements or the Unified Financial Statements, as the case may be." - 2 - 3 (2) The Agreement is hereby amended such that any reference to the Merger shall mean the Stock Purchase Transaction, any reference to the Surviving Corporation shall mean Seller and any reference to the Merger Consideration shall mean the Stock Purchase Consideration. (3) Section 3.02 is hereby amended to read as follows: "3.02. Capitalization of Unified. As of the date hereof, Unified ------------------------- had designated 10,000 shares of preferred stock, $0.01 par value, of Unified ("Unified Preferred Stock") as "Series A 8% Cumulative Preferred Stock," of which 8,486 shares were issued and outstanding, and 10,000 shares of Unified Preferred Stock as "Series B 8% Cumulative Preferred Stock, of which 8,583 shares were issued and outstanding. As of the date hereof, 17,069 shares of Unified Preferred Stock were issued and outstanding. At the Issue Date, excluding shares to be issued in connection with any possible acquisition transaction by Unified, no more than 625,000 shares of Unified Common Stock will be issued and outstanding. At the Issue Date, Unified shall have no authorized capital stock other than Unified Common Stock and Unified Preferred Stock. At the Issue Date, there shall be no shares of Unified Common Stock reserved for issuance or issuable pursuant to any (i) Unified employee and/or director stock option, incentive and/or benefits plans ("Unified Employee/Director Stock Grants"), (ii) stock split or dividend. Seller acknowledges that Unified anticipates filing with the Secretary of State of the State of Delaware, prior to the Issue Date, a change in the par value of Unified Common Stock to $0.01, (ii) an increase in the number of shares of Unified Common Stock authorized to a number equal to or less than 25,000,000, and (iii) a possible reduction in the number of shares of Unified Preferred Stock authorized to a number equal to or less than the number currently outstanding. Unified continually evaluates possible acquisitions and may prior to the Issue Date enter into one or more agreements providing for, and may consummate, the acquisition by it of another company (or the assets thereof) for consideration that may include Equity Securities. Notwithstanding the foregoing, neither Unified nor any Unified Subsidiary has taken any action that would (i) prevent the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368 of the Code or (ii) materially impede or delay receipt of any approval referred to in Section 6.01(b) or the consummation of the transactions contemplated by this Agreement. At the Issue Date, the Unified Common Stock to be issued in the Stock Purchase Transaction will be duly authorized, validly issued, fully paid and nonassessable, and will not be issued in violation of any preemptive right of any shareholder of Unified." (4) Section 6.01 of the Agreement is hereby amended to eliminate subsection (d). (5) Section 6.02 of the Agreement is hereby amended to eliminate subsections (e) and (f). - 3 - 4 (6) Section 6.03 of the Agreement is hereby amended such that subsection (e) shall read in its entirety as follows: "(e) Surrender of Seller Common Stock. Shareholder shall have -------------------------------- delivered to Unified a stock certificate representing 1,200 shares of Seller Common Stock, which shares shall be the only shares of Seller Common Stock issued and outstanding. In addition, Shareholder shall represent to Unified that he has full power and authority to exchange, sell, assign and transfer such shares of Seller Common Stock and that, when the same are accepted by Unified, Unified will acquire good, marketable and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances, and that such shares are not subject to any adverse claims or proxies." (7) Section 7.01 of the Agreement is hereby amended to eliminate subsection (f). (8) The third sentence of Section 9.01 is hereby amended in its entirety to read as follows: "In the event of consummation of the Stock Purchase Transaction, the agreements contained in or referred to in Sections 5.02(b), 5.06, 5.08, 5.09, 5.12, 5.13 and 5.14 and Article 8 shall survive the Effective Time." (9) Section 9.01 is hereby amended by appending the following sentence to the end thereof: "The representations set forth in Section 3.02 shall survive until the Issue Date." (10) The second sentence of Section 9.02 is hereby amended in its entirety to read as follows: "There shall not be any third party beneficiaries of any provisions hereof except for Sections 5.08, 5.09 and 5.12 and Article 8, which may be enforced against Buyers, Seller or Shareholder by the parties therein identified." Other than as amended hereby, the Agreement remains in full force and effect. This Amendment may be executed in several counterparts, each of which shall be deemed the original, but all of which together constitute one and the same instrument. - 4 - 5 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. UNIFIED HOLDINGS, INC. By: /s/ Timothy L. Ashburn --------------------------------------- Timothy L. Ashburn, Chairman and Chief Executive Officer By: /s/ Lynn E. Wood --------------------------------------- Lynn E. Wood, President and Chief Operating Officer HFI ACQUISITION CORPORATION By: /s/ Timothy L. Ashburn --------------------------------------- Timothy L. Ashburn, President and Chief Executive Officer HEALTH FINANCIAL, INC. By: /s/ Dr. Gregory W. Kasten --------------------------------------- Dr. Gregory W. Kasten, President "SHAREHOLDER" /s/ Dr. Gregory W. Kasten ------------------------------------------- Dr. Gregory W. Kasten - 5 - EX-2.5 3 TERMINATION AGREEMENT 1 TERMINATION AGREEMENT --------------------- This Termination Agreement (the "Termination Agreement") is made and entered into as of the 1st day of December 1997 by and among Unified Holdings, Inc., a Delaware corporation ("Unified"), VAI Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Unified ("Merger Sub" and, collectively with Unified, the "Buyers"), Vintage Advisers, Inc., a Delaware corporation ("Seller"), and Timothy L. Ashburn, a stockholder of Seller ("Stockholder"). WITNESSETH: WHEREAS, Unified, Merger Sub, Seller and Stockholder entered into that certain Agreement and Plan of Merger dated as of May 8, 1997 (the "Agreement"); and WHEREAS, each of Unified, Merger Sub, Seller and Stockholder believes that based upon events subsequent to May 8, 1997, that is in the best interests of the parties to terminate the Agreement. NOW THEREFORE, in consideration of the premises and the agreements herein contained, the receipt and adequacy of which are hereby acknowledged, pursuant to the provisions of Sections 7.01 and 7.02 of the Agreement, the parties hereto agree that the Agreement is terminated as of the date hereof and there shall be no liability on the part of Buyers or Seller or their respective officers or directors except as set forth in the second sentence of Section 5.01 and in Section 5.08 and Article 8 of the Agreement. This Amendment may be executed in several counterparts, each of which shall be deemed the original, but all of which together constitute one and the same instrument. 2 IN WITNESS WHEREOF, the parties hereto have executed this Termination Agreement as of the day and year first above written. UNIFIED HOLDINGS, INC. By: /s/ Timothy L. Ashburn ---------------------------------- Timothy L. Ashburn, Chairman and Chief Executive Officer By: /s/ Lynn E. Wood ---------------------------------- Lynn E. Wood, President and Chief Operating Officer VAI ACQUISITION CORPORATION By: /s/ Timothy L. Ashburn ---------------------------------- Timothy L. Ashburn, President and Chief Executive Officer VINTAGE ADVISERS, INC. By: /s/ Lynn E. Wood ---------------------------------- Lynn E. Wood, President and Chief Operating Officer "STOCKHOLDER" /s/ Timothy L. Ashburn ------------------------------------- Timothy L. Ashburn -2- EX-2.6 4 ASSIGNMENT AND SURRENDER 1 ASSIGNMENT AND SURRENDER FOR VALUE RECEIVED each of the undersigned hereby agrees to assign, transfer and surrender to VINTAGE ADVISERS, INC. (the "Company"), when requested by the Company, all right, title and interest of the undersigned in and to any and all shares of common stock, $1.00 par value, of the Company owned by the undersigned, together with any and all rights of the undersigned, if any, to acquire any other or additional securities of the Company; and the undersigned hereby irrevocably constitutes and appoints any officer of the Company as his true and lawful attorney-in-fact to make such transfer on the books of the Company maintained for the purpose, with full power of substitution. TIMOTHY L. ASHBURN JACK R. ORBEN /s/ Timothy L. Ashburn /s/ Jack R. Orben - ------------------------------------- ------------------------------------- SIGNATURE SIGNATURE December 1, 1997 December 1, 1997 IN THE PRESENCE OF IN THE PRESENCE OF /s/ Barbara Ashburn /s/ Tilishia N. Goveia - ------------------------------------- ------------------------------------- AGREED AND ACCEPTED: December 1, 1997 VINTAGE ADVISERS, INC. UNIFIED HOLDINGS, INC. By: /s/ Lynn E. Wood By: /s/ Timothy L. Ashburn ---------------------------------- ---------------------------------- Lynn E. Wood, President and Timothy L. Ashburn, Chairman Chief Operating Officer and Chief Executive Officer EX-10.1 5 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.1 ------------ EMPLOYMENT AGREEMENT This agreement ("Agreement") has been entered into this 1st day of June, 1997, by and between Health Financial, Inc., a Kentucky corporation ("Health Financial"), and Dr. Gregory W. Kasten, an individual ("Executive"), in connection with and as further mutual consideration for the sale of Health Financial by Executive to Unified Holdings, Inc., a Delaware corporation ("Company"), pursuant to that certain Agreement and Plan of Merger (the "Agreement and Plan of Merger") between Company and HFI Acquisition Corporation, a Kentucky corporation ("HFI"), as Buyers, and Health Financial and Executive, as Sellers, as amended by that certain First Amendment to the Agreement and Plan of Merger dated May 31, 1997 by and between the Company and HFI, as Buyers, and Health Financial and Executive, as Sellers. RECITALS The Board of Directors of Health Financial (the "Board"), has determined that it is in the best interests of Health Financial and its shareholder to reinforce and encourage the continued attention and dedication of the Executive to Health Financial as a member of Health Financial's management and to assure that Health Financial will have the continued dedication of the Executive. The Board desires to provide for the continued employment of the Executive on the terms hereof, and the Executive is willing to commit himself to continue to serve Health Financial. Additionally, the Board believes it is imperative to encourage the Executive's full attention and dedication to Health Financial currently and to provide the Executive with compensation and benefits arrangements upon the breach of this Agreement by Health Financial, which ensures that the compensation and benefits expectations of the Executive will be satisfied. Therefore, in order to accomplish these objectives, the Board has caused Health Financial to enter into this Agreement. Executive acknowledges that his assent to, and fulfillment of, the terms and conditions of this Agreement is an indispensable element of the consideration provided by Executive pursuant to the Agreement and Plan of Merger. IT IS AGREED AS FOLLOWS: SECTION 1: DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. For purposes of this Agreement, the following words and phrases, whether or not capitalized, shall have the meanings specified below, unless the context plainly requires a different meaning. 1.1(a) "BOARD" means the Board of Directors of Health Financial or the Company, as the case may be. 1.1(b) "CASH COMPENSATION" means the Executive's Annual Base Salary (as defined in Section 2.3(a)) plus the Incentive Bonus (as defined in Section 2.3(b)) awarded to the Executive in any given year. 1.1(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended. 1.1(d) "COMPANY" shall mean Unified Holdings, Inc., a Delaware corporation and the sole shareholder of Health Financial. 1.1(e) "EMPLOYMENT PERIOD" means the period that begins on the Effective Date and ends on the earlier of: (i) the close of business on the date ending twenty-four (24) months after the Effective Date, provided that, commencing on the first anniversary of the Effective Date, and continuing at each anniversary date thereafter, this Agreement shall renew for an additional year such that -1- 2 the remaining term shall be twenty-four (24) months unless written notice is provided to Executive at least ten (10) days and not more than thirty (30) days prior to any such anniversary date, that this Agreement shall not renew, in which event this Agreement shall expire at the end of twelve (12) months following such anniversary date; or (ii) the Date of Termination as defined in Section 3.6. 1.1(f) "EFFECTIVE DATE" shall mean June 1, 1997. 1.1(g) "HEALTH FINANCIAL" means Health Financial, Inc., a Kentucky corporation. 1.1(h) "PERSON" means any "person" within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended. 1.2 GENDER AND NUMBER. When appropriate, pronouns in this Agreement used in the masculine gender include the feminine gender, words in the singular include the plural, and words in the plural include the singular. 1.3 HEADINGS. All headings in this Agreement are included solely for ease of reference and do not bear on the interpretation of the text. Accordingly, as used in this Agreement, the terms "Article" and "Section" mean the text that accompanies the specified Article or Section of the Agreement. 1.4 APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Kentucky, without reference to its conflict of law principles. SECTION 2: TERMS AND CONDITIONS OF EMPLOYMENT. 2.1 PERIOD OF EMPLOYMENT. Throughout the Employment Period, the Executive shall remain in the employ of Health Financial in accordance with the terms and provisions of this Agreement. 2.2 POSITIONS AND DUTIES. 2.2(a) Throughout the Employment Period, the Executive shall be the President and Chief Executive Officer of Health Financial. The Executive shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, and may have such other powers and duties as may from time to time be prescribed by the Board. The Executive shall also manage the investment portfolios under the control of Health Financial in accordance with past practice, and shall endeavor to maintain the levels of investment performance previously achieved by Health Financial. 2.2(b) Throughout the Employment Period (but excluding any periods of vacation and sick leave to which he is entitled), the Executive shall devote reasonable attention and time during normal business hours to the business and affairs of Health Financial and shall use his reasonable best efforts to perform faithfully and efficiently such responsibilities as are assigned to him under or in accordance with this Agreement; provided that, it shall not be a violation of this paragraph for the Executive to (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures or fulfill speaking engagements, or (iii) manage personal investments for the Executive's own account or those of family members, so long as such activities do not interfere with the performance of the Executive's responsibilities as an employee of Health Financial in accordance with this Agreement. -2- 3 2.3 COMPENSATION. The Executive's annual Compensation and other benefits described in this Section 2.3, shall be provided by Health Financial. 2.3(a) ANNUAL BASE SALARY. For the first two-year period within the Employment Period, the Executive shall receive an annual base salary of $500,000, which shall be due and paid in equal or substantially equal monthly installments. Thereafter, during the Employment Period, the annual base salary payable to the Executive shall be reviewed thereafter at least annually beginning upon the second anniversary of the Effective Date and upon each anniversary date thereafter, but need not be adjusted upward as a result of such review and shall not be reduced. "Annual Base Salary" as used herein shall mean the annual base salary for a then current year. 2.3(b) INCENTIVE BONUSES. In addition to Annual Base Salary, the Executive shall be awarded an incentive bonus on a basis commensurate with those provided through any incentive compensation plan generally available to other peer executives of Health Financial. 2.3(c) INCENTIVE, SAVINGS AND RETIREMENT PLANS. Throughout the Employment Period, the Executive shall be entitled to participate in, or receive cash benefits on a basis commensurate with, all incentive, savings and retirement plans generally available to other peer executives of Health Financial. 2.3(d) WELFARE BENEFIT PLANS. Throughout the Employment Period (and thereafter, subject to Section 4.1(c) hereof), the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under, or receive cash benefits on a basis commensurate with, welfare benefit plans, practices, policies and programs provided by Health Financial (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent generally available to other peer executives of Health Financial. 2.3(e) EXPENSES. Throughout the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures generally applicable to other peer executives of Health Financial. 2.3(f) FRINGE BENEFITS. Throughout the Employment Period, the Executive shall be entitled to such fringe benefits as generally are provided to other peer executives of Health Financial or shall receive cash benefits commensurate therewith. 2.3(g) VACATION. Throughout the Employment Period, the Executive shall be entitled to five (5) weeks paid vacation. SECTION 3: TERMINATION OF EMPLOYMENT. 3.1 DEATH. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. 3.2 DISABILITY. If Health Financial determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 7.1 of its intention to terminate the Executive's employment. In such event, the Executive's employment with Health Financial shall terminate effective on the thirtieth (30th) day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean that the Executive has been unable to perform the services required of -3- 4 the Executive hereunder on a full-time basis for a period of one hundred eighty (180) consecutive business days by reason of a physical and/or mental condition. "Disability" shall be deemed to exist when certified by a physician selected by Health Financial or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). The Executive will submit to such examinations and tests as such physician deems necessary to make any such Disability determination. 3.3 TERMINATION FOR CAUSE. Health Financial may terminate the Executive's employment during the Employment Period for "Cause," which shall mean termination based upon: (i) the Executive's willful and continued failure to perform substantially his duties with Health Financial (other than as a result of incapacity due to physical or mental condition), after a demand for substantial performance is delivered to him by the Chairman of the Board or the President or the Chairman of the Board of the Company, which specifically identifies the manner in which the Executive has not substantially performed his duties, (ii) the Executive's willful commission of misconduct which is materially injurious to Health Financial, monetarily or otherwise, or (iii) the Executive's material breach of any provision of this Agreement. For purposes of this paragraph, no act, or failure to act on the Executive's part shall be considered "willful" unless done, or omitted to be done, without good faith and without reasonable belief that the act or omission was in the best interest of Health Financial. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until (i) he receives a Notice of Termination (as defined in Section 3.5) from the Chairman of the Board or the President or the Chairman of the Board of Directors of the Company, (ii) he is given the opportunity, with counsel to be heard before the Board of Directors of the Company, and (iii) the Board of Directors of the Company finds, in its good faith opinion, that the Executive was guilty of the conduct set forth in the Notice of Termination. 3.4 GOOD REASON. The Executive may terminate his employment with Health Financial for "Good Reason," which shall mean termination based upon: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 2.2 or any other action by Health Financial which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose any action not taken in bad faith and which is remedied by Company or Health Financial promptly after receipt of notice thereof given by the Executive; (ii) (a) the failure by Health Financial to provide benefits commensurate with any benefit or compensation plan, stock ownership plan, life insurance plan, health and accident plan or disability plan to which the Executive is entitled as specified in Section 2.3, (b) the taking of any action by Health Financial which would adversely affect the Executive's participation in, or materially reduce the Executive's benefits under, any plans described in Section 2.3, or deprive the Executive of any material fringe benefit enjoyed by the Executive as described in Section 2.3(f), or (c) the failure by Health Financial to provide the Executive with the number of paid vacation days to which the Executive is entitled as described in Section 2.3(g); or (iii) a material breach by Health Financial of any provision of this Agreement. 3.5 NOTICE OF TERMINATION. Any termination by Health Financial for Cause or Disability, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party, given in accordance with Section 7.1. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination -4- 5 date (which date shall be not more than fifteen (15) days after the giving of such notice). The failure by the Executive or Health Financial to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or Health Financial hereunder or preclude the Executive or Health Financial from asserting such fact or circumstance in enforcing the Executive's or Health Financial's rights hereunder. 3.6 DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by Health Financial for Cause, or by the Executive for Good Reason, the Date of Termination shall be the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be, (iii) if the Executive's employment is terminated by Health Financial other than for Cause, death or Disability, the Date of Termination shall be the date of receipt of the Notice of Termination, or (iv) if the Executive shall terminate employment with Health Financial for any reason other than for Good Reason, the Date of Termination shall be the date the Executive shall terminate his employment with Health Financial; provided that if within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). SECTION 4: CERTAIN BENEFITS UPON TERMINATION. 4.1 TERMINATION WITHOUT CAUSE OR TERMINATION FOR GOOD REASON. If during the Employment Period: (i) Health Financial shall terminate the Executive's employment without Cause, or (ii) the Executive shall terminate employment with Health Financial for Good Reason, the Executive shall be entitled to the benefits provided below: 4.1(a) "Accrued Obligations": On the fifth (5th) business day following the Date of Termination, Health Financial shall pay to the Executive the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not previously paid, (2) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and (3) any accrued vacation pay; in each case to the extent not previously paid. 4.1(b) "Annual Base Salary Continuation": For the remainder of the initial twenty-four (24) month period occurring after the Date of Termination, if any, Health Financial shall pay to the Executive, the Executive's then-current Annual Base Salary as would have been paid to the Executive had the Executive remained in Health Financial's employ during such twenty-four (24) month period. Health Financial at any time may elect to pay the balance of such payments then remaining in a lump sum, in which case the total of such payments shall be discounted to present value as determined according to Code Section 280G(d)(4). 4.1(c) "Annual Noncompete Payments": After the later of the Date of Termination and the expiration of the twenty-four (24) month period described in Section 4.1(b), Health Financial shall pay to the Executive, on a monthly basis in arrears, $41,600 until the later of (i) the date five (5) years after the date hereof and (ii) the date three (3) years after the Date of Termination. 4.1(d) "Other Benefits": To the extent not previously paid or provided, Health Financial shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided for which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of Health Financial as those provided -5- 6 generally to other peer executives and their families during the ninety (90) day period immediately preceding the Effective Date or, if more favorable to the Executive, as those provided generally after the Effective Date to other peer executives of Health Financial and their families. Over the remainder of the Employment Period, the Executive shall also receive health insurance benefits as maintained by Health Financial for the benefit of its senior executive officers. The Executive shall not be required to mitigate the amount of any payment provided for in this Section by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section be reduced by any compensation earned by the Executive as the result of employment by another employer after the Date of Termination, or otherwise. 4.2 DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of Accrued Obligations (as defined in Section 4.1(a)) (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within five (5) days of the Date of Termination) and (ii) the timely payment or provision of Other Benefits (as defined in Section 4.1(d)), including death benefits pursuant to the terms of any plan, policy, or arrangement of Health Financial. 4.3 DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for (i) payment of Accrued Obligations (as defined in Section 4.1(a)) (which shall be paid to the Executive in a lump sum in cash within five (5) days of the Date of Termination) and (ii) the timely payment or provision of Other Benefits (as defined in Section 4.1(d)) including disability benefits pursuant to the terms of any plan, policy or arrangement of Health Financial. 4.4 TERMINATION FOR CAUSE; TERMINATION OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Accrued Obligations (as defined in Section 4.1(a)). If the Executive terminates employment with Health Financial during the Employment Period, (excluding a termination for Good Reason), this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations (as defined in Section 4.1(a)) and the timely payment or provision of Other Benefits (as defined in Section 4.1(d)). In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination. If the Executive's employment shall terminate for the reasons stated in this Section, the provisions of Section 5 shall continue to apply. 4.5 NON-EXCLUSIVITY OF RIGHTS. Except as provided in Sections 4.1(d) nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by Health Financial and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with Health Financial. Amounts which are vested benefits of which the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, Health Financial at or subsequent to the Date of Termination, shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 4.6 FULL SETTLEMENT. Health Financial's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which Health Financial may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Sections 4.1(d), such amounts shall not be -6- 7 reduced whether or not the Executive obtains other employment. Health Financial agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonable incur as a result of any contest (regardless of the outcome thereof) by Health Financial, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive regarding the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Code Section 7872(f)(2)(A). 4.7 RESOLUTION OF DISPUTES. If there shall be any dispute between Health Financial and the Executive (i) in the event of any termination of the Executive's employment by Health Financial, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, Health Financial shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that Health Financial would be required to pay or provide pursuant to Section 4.1 as though such termination were by Health Financial without Cause or by the Executive with Good Reason; provided, however, that Health Financial shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. SECTION 5: NON-COMPETITION. 5.1 NON-COMPETE AGREEMENT. 5.1(a) It is agreed that during the Employment Period and until the later of (i) the date five (5) years after the date hereof and (ii) the date three (3) years after the Date of Termination, the Executive shall not, without prior written approval of the Board of Directors of the Company, become an officer, employee, agent, partner, or director of any business enterprise in substantial direct competition (as defined in Section 5.1(b)) with Health Financial. 5.1(b) For purposes of Section 5.1, a business enterprise with which the Executive becomes associated as an officer, employee, agent, partner, or director shall be considered in substantial direct competition, if such entity competes with Health Financial in any business in which Health Financial is engaged and is within in Health Financial's market area (as defined herein) during the Employment Period and as of the Date of Termination. Health Financial's market area is defined for this purpose, as those states in which reside customers of Health Financial or the Company. In the event any court shall determine that such area where competition is prohibited or the time period during which competition is prohibited is overbroad, then the area or time where such competition is prohibited shall be reduced appropriately as the court may determine is necessary to make this Section 5 enforceable. 5.2 NON-SOLICITATION OF EMPLOYEES. It is agreed that during the Employment Period and until the later of (i) the date five (5) years after the date hereof and (ii) the date three (3) years after the Date of Termination, Executive shall not, either directly or indirectly, approach or solicit any employee of the Company or any subsidiary or affiliate thereof, with a view towards enticing such employee to leave the employ of the Company or any subsidiary or affiliate thereof, as the case may be, to work for the Executive or any Person. 5.3 NON-SOLICITATION OF CUSTOMERS. It is agreed that during the Employment Period and until the later of (i) the date five (5) years after the date hereof and (ii) the date three (3) years after the Date of Termination, Executive shall not, either directly or indirectly, approach or solicit any past or existing customers of the Company or any subsidiary or affiliate thereof, with a view towards diverting or -7- 8 attempting to divert from the Company or any subsidiary or affiliate thereof, as the case may be, any business that the Company or any subsidiary or affiliate thereof, as the case may be, has enjoyed, to the Executive or to any other Person who or which is competitive with the Company and/or its subsidiaries and/or its affiliates. 5.4 CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of Health Financial all secret or confidential information, knowledge or data relating to Health Financial or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by Health Financial and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with Health Financial, the Executive shall not, without the prior written consent of Health Financial, or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than Health Financial and those designated by it. In no event shall an asserted violation of the provisions of this Section constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 5.5 REASONABLENESS OF COVENANTS. The Executive acknowledges and agrees that the covenants and agreements contained in Sections 5.1 through 5.4 hereof are reasonable, and the Executive shall not raise any issue of their reasonableness in any proceeding to enforce such covenants and agreements. SECTION 6: SUCCESSORS. 6.1 SUCCESSORS OF EXECUTIVE. This Agreement is personal to the Executive, and without the prior written consent of Health Financial, amounts receivable hereunder shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. SECTION 7: MISCELLANEOUS. 7.1 NOTICE. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses as set forth below; provided that all notices to Health Financial shall be directed to the attention of the President of Health Financial with a copy to the Secretary of Health Financial, or to such other address as one party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. Notice to Executive: ------------------- Dr. Gregory W. Kasten 3320 Tates Creek Road Lexington, Kentucky 40502 Notice to Health Financial: -------------------------- Health Financial, Inc. c/o Unified Holdings, Inc. 429 North Pennsylvania Street Indianapolis, Indiana 46204 Attention: President 7.2 VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. -8- 9 7.3 WITHHOLDING. Health Financial may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. 7.4 WAIVER. The Executive's or Health Financial's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or Health Financial may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 3.4 shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. 7.5 REPLACEMENT OF PRIOR AGREEMENT. This Agreement supersedes and replaces any prior agreement between the Executive and Health Financial. [remainder of this page intentionally left blank] -9- 10 IN WITNESS WHEREOF, the Executive and Health Financial, pursuant to the authorization from its Board, have caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. /s/ Dr. Gregory W. Kasten --------------------------------------- Dr. Gregory W. Kasten (Executive) HEALTH FINANCIAL, INC. By /s/ Dr. Gregory W. Kasten ------------------------------------- Name: Dr. Gregory W. Kasten Title: President -10- EX-10.2 6 BUSINESS LOAN AGREEMENT 1 BUSINESS LOAN AGREEMENT ________________________________________________________________________________________________________________________
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $500.000.00 09-10-1997 12-31-2001 599 328 0189952980 00582 -- ________________________________________________________________________________________________________________________
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item Borrower: UNIFIED HOLDINGS, INC. Lender: Bank One. Indiana, NA 429 N PENNSYLVANIA STREET SUITE 420 111 Monument Circle INDIANAPOLIS, IN 46204 Indianapolis, IN 46277 THIS BUSINESS LOAN AGREEMENT between UNIFIED HOLDINGS, INC. ("Borrower") and Bank One, Indiana, NA ("Lender") is made and executed as of September 10, 1997. This Agreement governs all loans, credit facilities and/or other financial accommodations described herein and, unless otherwise agreed to In writing by Lender and Borrower, all other present and future loans, credit facilities and other financial accommodations provided by Lender to Borrower. All such loans, credit facilities and other financial accommodations, together with all renewals, amendments and modifications thereof, are referred to in this Agreement Individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) In granting. renewing, or extending any Loan, Lender Is relying upon Borrower's representations, warranties, and agreements, as set forth In this Agreement; and (b) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of September 10, 1997, and shall continue thereafter until all Loans and other obligations owing by Borrower to Lender hereunder have been paid in full and Lender has no commitments or obligations to make further advances under the Loans to Borrower. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms In the Uniform Commercial Code as adopted In the State of Indiana. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Business Loan Agreement, as may be amended or modified from time to time, together with all exhibits and schedules attached hereto from time to time. Borrower. The word "Borrower" means UNIFIED HOLDINGS, INC. Collateral. The word "Collateral" means and Includes without limitation all property and assets granted as collateral for any Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Grantor. The word "Grantor" means and includes each and all of the persons or entities granting a Security Interest in any Collateral for any of the Loans. Guarantor. The word "Guarantor" means and Includes each and all of the guarantors, sureties, and accommodation parties for any of the Loans. Indebtedness. The word "Indebtedness" means the Indebtedness evidenced by the Note, including all principal and accrued interest thereon, together with all other liabilities, costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus any accrued interest thereon, owing by Borrower, or any one or more of them, to Lender of any kind or character, now existing or hereafter arising, as well as all present and future claims by Lender against Borrower, or any one or more of them, and all renewals, extensions, modifications, substitutions and rearrangements of any of the foregoing; whether such Indebtedness arises by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, overdraft, indemnity agreement or otherwise; whether such Indebtedness is voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable Individually or jointly with others; whether Borrower may be liable primarily or secondarily or as debtor, maker, comaker, drawer, endorser, guarantor, surety, accommodation party or otherwise. Lender. The word "Lender" means Bank One, Indiana, NA, its successors and assigns. 2 Note. The word "Note" means any and all promissory note or notes which evidence Borrower's Loans in favor of Lender, as well as any amendment, modification, renewal or replacement thereof. Permitted Lions. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either (I) not yet due, or (II) being contested in good faith by appropriate proceedings for and which Borrower has established adequate reserves; (c) purchase money liens or purchase money security interests upon or in any property acquired or hold by Borrower in the ordinary course of business to secure any indebtedness permitted under this Agreement; and (d) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing. Related Documents. The words "Related Documents" mean and Include without limitation the Note and all credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Note. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of security interest, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment Intended as a security device, or any other security or lien Interest whatsoever, whether created by law, contract, or otherwise. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each request for an advance or disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists hereafter: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Indiana and is duly qualified and in good standing in all other states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents to which Borrower is a party have been duly authorized by all necessary action; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Borrower has all requisite power and authority to execute and deliver this Agreement and all other Related Documents to which Borrower is a party. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely discloses Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement and all other Related Documents to which Borrower is a party constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and except to the extent specific remedies may generally be limited by equitable principles. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower is the sole owner of, and has good title to, all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last six (6) years. Compliance. Except as disclosed in writing to Lender (a) Borrower is conducting Borrower's businesses in material compliance with all applicable federal, state and local laws, statutes, ordinances, rules, regulations, orders, determinations and court decisions, Including without limitation, those pertaining to health or environmental matters, and (b) Borrower otherwise does not have any known material contingent liability In connection with the release into the environment, disposal or the improper storage of any toxic or hazardous substance or solid waste. Litigation and Claims. No litigation, claim, Investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may in any one case or in the aggregate materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. 3 Taxes. All tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those that have been disclosed in writing to Lender which are presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to and approved by Lender In writing, Borrower has not entered into any Security Agreements, granted a Security Interest or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral, except in favor of Lender. Licenses, Trademarks and Patents. Borrower possesses and will continue to possess all permits, licenses, trademarks, patents and rights thereto which are needed to conduct Borrower's business and Borrower's business does not conflict with or violate any valid rights of others with respect to the foregoing. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes approved by Lender and such proceeds will not be used for the purchasing or carrying of "margin stock" as defined in Regulation U issued by the Board of Governors of the Federal Reserve System. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies In all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's chief executive office if Borrower has more than one place of business, is located at 429 N PENNSYLVANIA STREET SUITE 420, INDIANAPOLIS, IN 46204. Unless Borrower has designated otherwise In writing this location is also the office or offices where Borrower keeps Its records concerning the Collateral. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without Independent investigation, is relying upon the above representations and warranties in extending Loan advances to Borrower. - Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain In full force and effect during the term of this Agreement. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor, and (c) the creation, occurrence or assumption by Borrower of any actual or contingent liabilities not permitted under this Agreement. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine, audit and make and take away copies or reproductions of Borrower's books and records at all reasonable times. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Financial Statements. Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's balance sheet, income statement, and statement of changes in financial position for the year ended, compiled by a certified public accountant satisfactory to Lender, together with the management letter, if any, prepared by such accountants promptly upon receipt, and, as soon as available, but in no event later than forty five (45) days after the end of each fiscal quarter, Borrower's balance sheet, income statement, and statement of changes in financial position for the period ended, prepared and certified, subject to year-end review adjustments, as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Insurance. Maintain fire and other risk insurance, public liability insurance, business interruption insurance and such other Insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender. In connection with all policies covering 4 assets in which Lender holds or is offered a Security Interest for the Loans, Borrower will provide Lender with such lender loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing Insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (a) the then current property values on the basis of which Insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits; provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting principles. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance wit the Americans With Disabilities Act, all applicable environmental statutes, rules, regulations and ordinances and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Environmental Compliance and Reports. Borrower shall comply in all respects with all federal, state and local environmental laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; and furnish to Lender promptly and In any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part In connection with any environmental activity whether or not there Is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, Instruments, documents and other agreements as Lender or Its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Maintain Basic Business. Engage in any business activities substantially different than those in which Borrower is presently engaged. Continuity of Operations. Cease operations, liquidate, dissolve or merge or consolidate with or into any other entity. Liens. Mortgage, assign, pledge, grant a security Interest In or otherwise encumber Borrower's assets, except as allowed as a Permitted Lien. Transfer of Assets. Transfer, sell or otherwise dispose of any of Borrower's assets other than in the ordinary course of business. Transfer of Ownership. Permit the sale, pledge or other transfer of any ownership interest In Borrower. Investments. Invest in, or purchase, create, form or acquire any Interest in, any other enterprise or entity. CONDITIONS PRECEDENT TO ADVANCES. If Lender is obligated to make any Loan advances or to otherwise disburse any Loan proceeds to Borrower, such obligation shall be subject to the conditions precedent that as of the date of such advance or disbursement and after giving effect thereto (a) all representations and 5 warranties made to Lender In this Agreement and the Related Documents shall be true and correct as of and as if made on such date, (b) no material adverse change In the financial condition of Borrower or any Guarantor since the effective date of the most recent financial statements furnished to Lender, or in the value of any Collateral, shall have occurred and be continuing, (c) no event has occurred and Is continuing, or would result from the requested advance or disbursement, which with notice or lapse of time, or both, would constitute an Event of Default, (d) no Guarantor has sought, claimed or otherwise attempted to limit, modify or revoke such Guarantor's guaranty of any Loan, and (a) Lender has received all Related Documents appropriately executed by Borrower and all other proper parties. TANGIBLE NET WORTH. Borrower will maintain a Minimum Tangible Net Worth of $975,000.00 until 12-31-1997, and increasing each January 1 at to the greater of the existing covenant or 90% of prior FYE Tangible Net Worth. FIXED CHARGE RATIO. Maintain as of the end of each fiscal year a ratio of Adjusted Net Income for the 12 month period ending with such fiscal year to Fixed Charges for such 12 month period of not less than 1.20 to 1.00. For purposes of this Agreement and to the extent the following terms are utilized in this Agreement, the term "Tangible Net Worth" shall mean borrower's total assets excluding all intangible assets (including, without limitation, goodwill, trademarks, patents, copyrights, organization expenses, and similar Intangible items) less total liabilities excluding Subordinated Debt. The term "Subordinated Debt" shall mean all indebtedness owing by Borrower which has been subordinated by written agreement to all indebtedness now or hereafter owing by Borrower to Lender, such agreement to be in form and substance acceptable to Lender. The term "Liquid Assets" shall mean borrower's unencumbered cash, marketable securities and accounts receivable net of reserves. The term "Adjusted Net Income" means earnings before interest, taxes, -depreciation and amortization. The term "Fixed Charges" mean interest expense plus current maturities of long-term debt plus current maturities of capital leases plus dividends plus cash capital expenditures. The term "Cash Flow" shall mean net income after taxes, and exclusive of extraordinary items, plus depreciation and amortization. Except as provided above, all computations made to determine compliance with the requirements contained In this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a nontaxable account taxable, Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or any other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on any of the Indebtedness. Other Defaults. Failure of Borrower, any Guarantor or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement, the Note or in any of the other Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement now existing or hereafter arising between Lender and Borrower. False Statements. Any warranty, representation or statement made or furnished to Lender under this Agreement or the Related Documents is false or misleading In any material respect. Default to Third Party. The occurrence of any event which permits the acceleration of the maturity of any indebtedness owing by Borrower, Grantor or any Guarantor to any third party under any agreement or undertaking. Bankruptcy or Insolvency. If the Borrower, Grantor or any Guarantor: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its Inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party or any of the Collateral, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession Is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces In such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of sixty (60) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party. Liquidation, Death and Related Events. If Borrower, Grantor or any Guarantor is an entity, the liquidation, dissolution, merger or consolidation of any such entity or, If any of such parties is an individual, the death or legal incapacity of any such individual. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. 6 EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, Lender may, at its option, without further notice or demand, (a) terminate all commitments and obligations of Lender to make Loans to Borrower, if any, (b) declare all Loans and any other Indebtedness immediately due and payable, (c) refuse to advance any additional amounts under the Note, or (d) exercise all the rights and remedies provided in the Note or in any of the Related Documents or available at law, in equity, or otherwise; provided, however, if any Event of Default of the type described in the "Bankruptcy or Insolvency" subsection above shall occur, all Loans and any other Indebtedness shall automatically become due and payable, without any notice, demand or action by Lender. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedies shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of Indiana. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of Indiana without regard to any conflict of laws or provisions thereof. JURY WAIVER. THE UNDERSIGNED AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE UNDERSIGNED AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT OR ANY OTHER RELATED DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER RELATED DOCUMENTS. ARBITRATION. Lender and Borrower agree that upon the written demand of either party, whether made before or after the institution of any legal proceedings, but prior to the rendering of any judgment In that proceeding, all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Agreement, any Related Document or otherwise, Including without limitation contract disputes and tort claims, shall be arbitrated pursuant to the Commercial Rules of the American Arbitration Association. Any arbitration proceeding held pursuant to this arbitration provision shall be conducted In the city nearest the Borrower's address having an AAA regional office, or at any other place selected by mutual agreement of the parties. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This arbitration provision shall not limit the right of either party during any dispute, claim or controversy to seek, use, and employ ancillary, provisional or preliminary rights and/or remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting, foreclosing upon or proceeding under forcible entry and detainer for possession of, any real or personal property, and any such action shall not be deemed an election of remedies. This includes, without limitation, obtaining injunctive relief or a temporary restraining order, invoking a power of sale under any deed of trust or mortgage, obtaining a writ of attachment or imposition of a receivership, or exercising any rights relating to personal property, Including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right or remedy, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated; provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of either party. Judgment upon any award rendered by any arbitrator may be entered In any court having jurisdiction. Nothing In this arbitration provision shall preclude either party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of any Action for these purpose. The Federal Arbitration Act (Title 9 of the United States Code) shall apply to the construction, Interpretation, and enforcement of this arbitration provision. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation Interests, as well as all notices of any repurchase of such participation interests. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses, Including attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may hire one or more attorneys to help collect the Indebtedness If Borrower does not pay, and Borrower will pay Lender's reasonable attorneys' fees. Notices. All notices required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be 7 given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current addresses). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute the same document. Signature pages may be detached from the counterparts to a single copy of this Agreement to physically form one document. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time Is of the Essence. Time is of the essence In the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given In writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor or Guarantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS EXECUTED AS OF THE DATE SET FORTH ABOVE. BORROWER: UNIFIED HOLDINGS, INC. By: /s/ Lynn E. Wood LYNN E. WOOD, PRESIDENT & CEO LENDER: Bank One, Indiana, NA By: Authorized Officer EX-10.3 7 COMMERCIAL SECURITY AGREEMENT 1 COMMERCIAL SECURITY AGREEMENT ________________________________________________________________________________________________________________________
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $500.000.00 09-10-1997 12-31-2001 599 328 0189952980 00582 -- ________________________________________________________________________________________________________________________
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item Borrower: UNIFIED HOLDINGS, INC. Lender: Bank One, Indiana, NA 429 N PENNSYLVANIA STREET SUITE 420 111 Monument Circle INDIANAPOLIS, IN 46204 Indianapolis, IN 46277 THIS COMMERCIAL SECURITY AGREEMENT Is entered Into by UNIFIED HOLDINGS, INC. (referred to below as "Grantor") for the benefit of Bank One, Indiana, NA (referred to below as "Lender"). For valuable consideration, Grantor grants to Lender a security interest In the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated In this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code as adopted in the State of Indiana ("Code"). All references to dollar amounts shall mean amounts In lawful money of the United States of America. Agreement. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. Collateral. The word "Collateral" means the following described property of Grantor, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: All inventory, chattel paper, equipment and general intangibles In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (a) All attachments, accessions, accessories, tools, parts, supplies, increases, and additions to and all replacements of and substitutions for any property described above. (b) All products and produce of any of the property described in this Collateral section. (c) All proceeds (including, without limitation, insurance proceeds) from the sale, lease, destruction, loss, or other disposition of any of the property described in this Collateral section. (d) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Event of Default. The words "Event of Default" mean and include any of the Events of Default set forth below in the section titled "Events of Default." Grantor. The word "Grantor" means UNIFIED HOLDINGS, INC., its successors and assigns (which is a debtor under the Code) Guarantor. The word "Guarantor" means and includes without limitation, each and all of the guarantors, sureties, and accommodation parties in connection with the indebtedness. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and accrued interest thereon, together with all other liabilities, costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" Includes all other obligations, debts and liabilities, plus any accrued interest thereon, owing by Grantor, or any one or more of them, to Lender of any kind or character, now existing or hereafter arising, as well as all present and future claims by Lender against Grantor, or any one or more of them, and all renewals, extensions, modifications, substitutions and rearrangements of any of the foregoing; whether such Indebtedness arises by note, draft, 2 acceptance, guaranty, endorsement, letter of credit, assignment, overdraft, indemnity agreement or otherwise; whether such Indebtedness is voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Grantor may be liable individually or jointly with others; whether Grantor may be liable primarily or secondarily or as debtor, maker, comaker, drawer, endorser, guarantor, surety, accommodation party or otherwise. Lender. The word "Lender" means Bank One, Indiana, NA, its successors and assigns (which is a secured party under the Code). Note. The word "Note" means the promissory note dated September 10, 1997, in the principal amount of $500,000.00 from UNIFIED HOLDINGS, INC. to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for such promissory note. Related Documents. The words "Related Documents" mean and include without limitation the Note and all credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Note. RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a nontaxable account taxable, Grantor hereby grants Lender a contractual possessory security interest In and hereby assigns, conveys, delivers, pledges, and transfers all of Grantor's right, title and interest in and to Grantor's accounts with Lender (whether checking, savings, or any other account), including all accounts hold jointly with someone else and all accounts Grantor may open in the future. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all Indebtedness against any and all such accounts. OBLIGATIONS OF GRANTOR. Grantor represents, warrants and covenants to Lender as follows: Perfection of Security Interest. Grantor agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor hereby Irrevocably appoints Lender as its attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may sign and file financing statements without Grantor's signature. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor has disclosed to Lender all tradenames and assumed names currently used by Grantor, all tradenames and assumed names used by Grantor within the previous six (6) years and all of Grantor's current business locations. Grantor will notify Lender in writing at least thirty (30) days prior to the occurrence of any of the following: (i) any changes in Grantor's names, tradename(s) or assumed name(s), or (ii) any change in Grantor's business location(s) or the location of any of the Collateral. No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. Location of the Collateral. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. Removal of Collateral. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Indiana, without the prior written consent of Lender. Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer In partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security Interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other 3 funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. Title. Grantor represents and warrants to Lender that it is the owner of the Collateral and holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. Collateral Schedules and Locations. As often as Lender shall require, and insofar as the Collateral consists of general intangibles, Grantor shall deliver to Lender schedules of such Collateral, including such information as Lender may require, including without limitation names and addresses of account debtors and agings of general intangibles. Insofar as the Collateral consists of inventory an equipment, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of Its subsidiaries or related companies. Maintenance and Inspection of Collateral. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and governmental charges or levies upon the Collateral and provide Lender evidence of such payment upon its request. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral Is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligor under any surety bond furnished in the contest proceedings. Compliance With Governmental Requirements. Grantor is conducting and will continue to conduct Grantor's businesses in material compliance with all federal, state and local laws, statutes, ordinances, rules, regulations, orders, determinations and court decisions applicable to Grantor's businesses and to the production, disposition or use of the Collateral, including without limitation, those pertaining to health and environmental matters such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (collectively, together with any subsequent amendments, hereinafter called "CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous Substance Waste Amendments of 1984 (collectively, together with any subsequent amendments, hereinafter called "RCRA"). Grantor represents and warrants that (i) none of the operations of Grantor is the subject of a federal, state or local investigation evaluating whether any material remedial action is needed to respond to a release or disposal of any toxic or hazardous substance or solid waste into the environment; (ii) Grantor has not filed any notice under any federal, state or local law indicating that Grantor is responsible for the release into the environment, the disposal on any promises in which Grantor is conducting its businesses or the improper storage, of any material amount of any toxic or hazardous substance or solid waste or that any such toxic or hazardous substance or solid waste has been released, disposed of or is improperly stored, upon any premises on which Grantor is conducting its businesses; and (iii) Grantor otherwise does not have any known material contingent liability in connection with the release into the environment, disposal or the improper storage, of any such toxic or hazardous substance or solid waste. The terms "hazardous substance" and "release", as used herein, shall have the meanings specified in CERCLA, and the terms "solid waste" and "disposal", as used herein, shall have the meanings specified in RCRA; provided, however, that to the extent that the laws of the State of Indiana establish meanings for such terms which are broader than that specified in either CERCLA or RCRA, such broader meanings shall apply. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the termination of this Agreement. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risk insurance, including without limitation fire, theft and liability coverage together with such other Insurance as Lender may require with respect to the Collateral, in form, amounts, Coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of Insurance In form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. 4 Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. Application of insurance proceeds to the payment of the Indebtedness will not extend, postpone or waive any payments otherwise due, or change the amount of such payments to be made and proceeds may be applied in such order and such amounts as Lender may elect. Solvency of Grantor. As of the date hereof, and after giving effect to this Agreement and the completion of all other transactions contemplated by Grantor at the time of the execution of this Agreement, (i) Grantor is and will be solvent, (ii) the fair salable value of Grantor's assets exceeds and will continue to exceed Grantor's liabilities (both fixed and contingent), (iii), Grantor is paying and will continue to be able to pay its debts as they mature, and (iv) if Grantor is not an individual, Grantor has and will have sufficient capital to carry on Grantor's businesses and all businesses in which Grantor is about to engage. Lien Not Released. The lien, security interest and other security rights of Lender hereunder shall not be impaired by an indulgence, moratorium or release granted by Lender, including but not limited to, the following: (a) any renewal, extension, increase or modification of any of the Indebtedness; (b) any surrender, compromise, release, renewal, extension, exchange or substitution granted in respect of any of the Collateral; (c) any release or indulgence granted to any endorser, guarantor or surety of any of the Indebtedness; (d) any release of any other collateral for any of the Indebtedness; (e) any acquisition of any additional collateral for any of the Indebtedness; and (f) any waiver or failure to exercise any right, power or remedy granted herein, by law or in any of the Related Documents. Request for Environmental Inspections. Upon Lender's reasonable request from time to time, Grantor will obtain at Grantor's expense an inspection or audit report(s) addressed to Lender of Grantor's operations from an engineering or consulting firm approved by Lender, indicating the presence or absence of toxic and hazardous substances, underground storage tanks and solid waste on any premises in which Grantor is conducting a business; provided, however, Grantor will be obligated to pay for the cost of any such inspection or audit no more than one time in any twelve (12) month period unless Lender has reason to believe that toxic or hazardous substance or solid wastes have been dumped or released on any such promises. If Grantor fails to order or obtain an inspection or audit within ton (10) days after Lender's request, Lender may at its option order such inspection or audit, and Grantor grants to Lender and its agents, employees, contractors and consultants access to the premises in which it is conducting its business and a license (which is coupled with an interest and is irrevocable) to obtain inspections and audits. Grantor agrees to promptly provide Lender with a copy of the results of any such inspection or audit received by Grantor. The cost of such inspections and audits by Lender shall be a part of the Indebtedness, secured by the Collateral and payable by Grantor on demand. Chattel Paper. To the extent a security interest in the chattel paper of Grantor is granted hereunder, Grantor represents and warrants that all such chattel paper have only one original counterpart and no other party other than Grantor or Lender is in actual or constructive possession of any such chattel paper. Grantor agrees that at the option of and on the request by Lender, Grantor will either deliver to Lender all originals of the chattel paper which is included in the Collateral or will mark all such chattel paper with a legend indicating that such chattel paper is subject to the security interest granted hereunder. Landlord's Waivers. Grantor egress that upon the request of Lender, Grantor shall cause each landlord of real property leased by Grantor at which any of the Collateral is located from time to time to execute and deliver agreements satisfactory in form and substance to Lender by which such landlord waives or subordinates any rights it may have in the Collateral. GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights In the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and be payable on demand by Lender. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Grantor to make any payment when due on the Indebtedness. 5 Other Defaults. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement, the Note, any of the other Related Documents or in any other agreement now existing or hereafter arising between Lender and Grantor. False Statements. Any warranty, representation or statement made or furnished to Lender under this Agreement, the Note or any of the other Related Documents is false or misleading in any material respect. Default to Third Party. The occurrence of any event which permits the acceleration of the maturity of any indebtedness owing by Grantor or any Guarantor to any third party under any agreement or undertaking. Bankruptcy or Insolvency. If the Grantor or any Guarantor: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party or any of the Collateral, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Low and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of sixty (60) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party. Liquidation, Death and Related Events. If Grantor or any Guarantor is an entity, the liquidation, dissolution, merger or consolidation of any such entity or, if any of such parties is an individual, the death or legal incapacity of any such individual. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the Indebtedness. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise dispose of the Collateral or the proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral (as a unit or in parcels) at public auction or private sale. Lender may buy the Collateral, or any portion thereof, (i) at any public sale, and (ii) at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations. Lender shall not be obligated to make any sale of Collateral regardless of a notice of sale having been given. Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days prior to the date any public sale, or after which a private sale, of any of such Collateral is to be held. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Under all circumstances, the Indebtedness will be repaid without relief from any Indiana or other valuation and appraisement laws. Appoint Receiver. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral 6 consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Grantor waives any right to require Lender to proceed against any third party, exhaust any other security for the Indebtedness or pursue any other right or remedy available to Lender. Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement and supercedes all prior written and oral agreements and understandings, it any, regarding same. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of Indiana. Subject to the provisions on arbitration in any Related Document, this Agreement shall be governed by and construed in accordance with the laws of the State of Indiana without regard to any conflict of laws or provisions thereof. JURY WAIVER. THE UNDERSIGNED AND LENDER (BY ITS ACCEPTANCE HEREOF), HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE UNDERSIGNED AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT OR ANY OTHER RELATED DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER RELATED DOCUMENTS. Attorneys' Fees; Expenses. Grantor will upon demand pay to Lender the amount of any and all costs and expenses (including without limitation, reasonable attorneys' fees and expenses) which Lender may incur in connection with (i) the perfection and preservation of the collateral assignment and security interests created under this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, the Collateral, (iii) the exercise or enforcement of any of the rights of Lender under this Agreement, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. Termination. Upon (i) the satisfaction in full of the Indebtedness and all obligations hereunder, (ii) the termination or expiration of any commitment of Lender to extend credit that would become Indebtedness hereunder, and (iii) Lender's receipt of a written request from Grantor for the termination hereof, this Agreement and the security interests created hereby shall terminate. Upon termination of this Agreement and Grantor's written request, Lender will, at Grantor's sole cost and expense, return to Grantor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to the terms hereof and execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination. Indemnity. Grantor hereby agrees to indemnify, defend and hold harmless Lender, and its officers, directors, shareholders, employees, agents and representatives (each an "Indemnified Person") from and against any and all liabilities obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature (collectively, the "Claims") which may be imposed on, incurred by or asserted against, any Indemnified Person (whether or not caused by any Indemnified Person's sole, concurrent or contributory negligence) arising in connection with the Related Documents, the Indebtedness or the Collateral (including, without limitation, the enforcement of the Related Documents and the defense of any Indemnified Person's action and/or inactions in connection with the Related Documents), except to the limited extent that the Claims against the Indemnified Person are proximately caused by such Indemnified Person's gross negligence or willful misconduct. The indemnification provided for in this Section shall survive the termination of this Agreement and shall extend and continue to benefit each individual or entity who is or has at any time been an Indemnified Person hereunder. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. 7 Notices. All notices required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor will keep Lender informed at all times of Grantor's current address(es). Power of Attorney. Grantor hereby irrevocably appoints Lender as its true and lawful attorney-in-fact, such power of attorney being coupled with an interest, with full power of substitution to do the following in the place and stead of Grantor and in the name of Grantor: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Successor interests. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns; provided, however, Grantor's rights and obligations hereunder may not be assigned or otherwise transferred without the prior written consent of Lender. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right to thereafter demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER 10, 1997. GRANTOR: UNIFIED HOLDINGS, INC. By: /s/ Lynn E. Wood LYNN E. WOOD, PRESIDENT & CEO EX-10.4 8 PROMISSORY NOTE 1 PROMISSORY NOTE ________________________________________________________________________________________________________________________
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $500.000.00 09-10-1997 12-31-2001 599 328 0189952980 00582 -- ________________________________________________________________________________________________________________________
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item Borrower: UNIFIED HOLDINGS, INC. Lender: Bank One, Indiana, NA 429 N PENNSYLVANIA STREET SUITE 420 111 Monument Circle INDIANAPOLIS, IN 46204 Indianapolis, IN 46277 Principal Amount: $500,000.00 Date of Note: September 10, 1997 PROMISE TO PAY. For value received, UNIFIED HOLDINGS, INC. ("Borrower") promises to pay to Bank One, Indiana, NA ("Lender"), or order, in lawful money of the United States of America, the principal amount of Five Hundred Thousand & 00/100 Dollars ($500,000.00) ("Total Principal Amount") or so much as may be outstanding, together with Interest on the unpaid outstanding principal balance from the date advanced until paid in full. PAYMENT. Borrower will pay this loan in accordance with the following payment schedule: This Note shall be payable as follows: During the Draw Period (as hereafter defined), Interest shall be due, and payable as it accrues, commencing on September 30, 1997, and continuing on the same day of each month thereafter. Commencing on December 31, 1997, and continuing on the same day of each month occurring thereafter until this Note matures (the "Term Period"), Borrower shall pay to Lender forty-seven (47) monthly installments equal to the sum of (i) principal in an amount that represents 1/48th of the principal amount outstanding on the last day of the Draw Period, plus (ii) all accrued but unpaid interest, and a final payment on December 31, 2001, of the outstanding principal balance of this Note, plus all accrued but unpaid interest and any other unpaid amounts under this Note. Interest on this Note Is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance Is outstanding. Borrower will pay Lender at the address designated by Lender from time to time in writing. If any payment of principal of or Interest on this Note shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day. As used herein, the term "Business Day" shall mean any day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed. Unless otherwise agreed to, In writing, or otherwise required by applicable law, payments will be applied first to accrued, unpaid Interest, then to principal, and any remaining amount to any unpaid collection costs, late charges and other charges, provided, however, upon delinquency or other default, Lender reserves the right to apply payments among principal, interest, late charges, collection costs and other charges at its discretion. The books and records of Lender shall be prima facie evidence of all outstanding principal of and accrued but unpaid interest on this Note. If this Note is governed by or is executed in connection with a loan agreement, this Note is subject to the terms and provisions thereof. VARIABLE INTEREST RATE. The interest rate on this Note is subject to fluctuation based upon the Prime Rate of interest in effect from time to time (the "Index") (which rate may not be the lowest, best or most favorable rate of interest which Lender may charge on loans to its customers). "Prime Rate" shall mean the rate announced from time to time by Lender as its prime rate. Each change in the rate to be charged on this Note will become effective without notice on the same day as the Index changes. Except as otherwise provided herein, the unpaid principal balance of this Note will accrue interest at a rate per annum which will from time to time be equal to the sum of the Index, plus 0.500%. NOTICE: Under no circumstances will the Interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower may pay without fee all or a portion of the principal amount owed hereunder earlier than It is due. All prepayments shall be applied to the indebtedness owing hereunder In such order and manner as Lender may from time to time determine In its sole discretion. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the regularly scheduled payment or $26.00, whichever is greater, up to the maximum amount of $260.00 per late charge. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment of principal or interest when due under this Note or any other indebtedness owing now or hereafter by Borrower to Lender; (b) failure of Borrower or any other party to comply with or perform any term, obligation, covenant or condition contained in this Note or in any other promissory note, credit agreement, loan agreement, guaranty, security agreement, mortgage, deed of trust or any other instrument, agreement or document, whether now or hereafter existing, executed in connection with this Note (the Note and all such other instruments, agreements, and documents shall be collectively known herein as the "Related Documents"); (c) Any representation or statement made or furnished to Lender herein, in any of the Related Documents or in connection with any of the foregoing is false or misleading in any material respect; (d) Borrower or any other party liable for the payment of this Note, whether as maker, endorser, guarantor, surety or otherwise, becomes insolvent or bankrupt, has a receiver or trustee appointed for any part 2 of its property, makes an assignment for the benefit of its creditors, or any proceeding is commenced either by any such party or against it under any bankruptcy or Insolvency laws; (a) the occurrence of any event of default specified in any of the other Related Documents or in any other agreement now or hereafter arising between Borrower and Lender; (f) the occurrence of any event which permits the acceleration of the maturity of any indebtedness owing now or hereafter by Borrower to any third party; or (g) the liquidation, termination, dissolution, death or legal incapacity of Borrower or any other party liable for the payment of this Note, whether as maker, endorser, guarantor, surety, or otherwise. LENDER'S RIGHTS. Upon default, Lender may at its option, without further notice or demand (i) declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, (II) refuse to advance any additional amounts under this Note, (iii) foreclose all liens securing payment hereof. (iv) pursue any other rights, remedies and recourses available to the Lender, including without limitation, any such rights, remedies or recourses under the Related Documents, at law or in equity, or (v) pursue any combination of the foregoing. Upon default resulting from the bankruptcy or Insolvency of the Borrower as described in clause (a) above under the heading "DEFAULTS", the unpaid principal balance of this Note and all accrued but unpaid Interest thereon shall automatically become due and payable immediately and shall not be subject to the discretion of Lender. Upon default, including failure to pay upon final maturity, Lender, at its option, may also do one or both of the following: (a) increase the variable interest rate on this Note to 3.500 percentage points over the Index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any Increased rate). The Interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire an attorney to help collect this Note if Borrower does not pay and Borrower will pay Lender's reasonable attorneys' fees and all other costs of collection, unless prohibited by applicable law. This Note will be repaid under all circumstances without relief from any Indiana or other valuation and appraisement laws. This Note has been delivered to Lender and accepted by Lender in the State of Indiana. Subject to the provisions on arbitration, this Note shall be governed by and construed in accordance with the laws of the State of Indiana without regard to any conflict of laws or provisions thereof. JURY WAIVER. THE BORROWER AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN BORROWER AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE OR THE OTHER RELATED DOCUMENTS. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING EVIDENCED BY THIS NOTE. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a nontaxable account taxable, Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or any other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a non-revolving line of credit. Once an amount equal to the Total Principal Amount has been advanced hereunder, Borrower is not entitled to further advances under this Note. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. ARBITRATION. Lender and Borrower agree that upon the written demand of either party, whether made before or after the institution of any legal proceedings, but prior to the rendering of any judgment in that proceeding, all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Note, any Related Document or otherwise, including without limitation contract disputes and tort claims, shall be arbitrated pursuant to the Commercial Rules of the American Arbitration Association. Any arbitration proceeding held pursuant to this arbitration provision shall be conducted in the city nearest the Borrower's address having an AAA regional office, or at any other place selected by mutual agreement of the parties. No act to take or dispose of any collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This arbitration provision shall not limit the right of either party during any dispute, claim or controversy to seek, use, and employ ancillary, provisional or preliminary rights and/or remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting, foreclosing upon or proceeding under forcible entry and detainer for possession of, any real or personal property, and any such action shall not be deemed an election of remedies. This Includes, without limitation, obtaining injunctive relief or a temporary restraining order, Invoking a power of sale under any deed of trust or mortgage, obtaining a writ of attachment or Imposition of a receivership, or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right or remedy, concerning any collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral, shall also be arbitrated; provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of either party. Judgment upon any award rendered by any arbitrator may be entered In any court having jurisdiction. Nothing in this arbitration provision shall preclude either party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches and similar doctrines which would otherwise be applicable In an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of any action for these purpose. The Federal Arbitration Act (Title 9 of the United States Code) shall apply to the construction, interpretation, and enforcement of this arbitration provision. 3 REQUIREMENTS FOR ADVANCES. Commencing on the date of this Note and concluding on November 30, 1997 (the "Draw Period"), Borrower may request advances under this Note ("Advances") from time to time. Advances shall be subject to the following conditions; (i) Advances are only permitted during the Draw Period; (ii) the aggregate of all Advances may not exceed the Total Principal Amount; (iii) Borrower must request an Advance at least one banking day before the Advance is to be made; and (iv) Borrower's right to obtain Advances shall terminate on the last business day of the Draw Period. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive. presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this Note, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this Note without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: UNIFIED HOLDINGS, INC. By: /s/ Lynn E. Wood LYNN E. WOOD, PRESIDENT & CEO EX-21.1 9 LIST OF SUBSIDIARIES 1 Exhibit 21.1 LIST OF SUBSIDIARIES
Corporation State ----------- ----- Unified Management Corporation Indiana Unified Advisers, Inc. Indiana HFI Acquisition Corporation Kentucky FLTC Acquisition Corporation Kentucky VAI Acquisition Corporation Delaware Health Financial, Inc. Kentucky
EX-27.1 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENTS OF OPERATION OF UNIFIED HOLDINGS, INC. FILED AS A PART OF THE COMPANY'S REGISTRATION STATEMENT ON FORM 10-SB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REGISTRATION STATEMENT. YEAR DEC-31-1997 JAN-01-1995 DEC-31-1995 423,986 156,621 759,574 2,041 0 1,465,858 1,411,404 737,403 2,336,260 1,016,286 0 4,827 0 17,069 0 2,336,260 0 6,032,933 1,433,051 1,433,051 4,351,236 0 7,429 274,974 0 274,974 0 0 0 274,974 0.27 0.15
-----END PRIVACY-ENHANCED MESSAGE-----