-----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, HSG8hkRUY8KQ3WDVmjfPKB3rDU4LNCNGYYawjmEnSrIzOMZUEhJUmFMOlqU6Ht8b 8mSuHTgwJ062SVECERopLA== 0001033926-02-000007.txt : 20021108 0001033926-02-000007.hdr.sgml : 20021108 20021108143848 ACCESSION NUMBER: 0001033926-02-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIFIED FINANCIAL SERVICES 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22629 FILM NUMBER: 02814005 BUSINESS ADDRESS: STREET 1: 2424 HARRODSBURG ROAD CITY: LEXINGTON STATE: KY ZIP: 40503 BUSINESS PHONE: 8592962016 MAIL ADDRESS: STREET 1: 2424 HARRODSBURG ROAD CITY: LEXINGTON STATE: KY ZIP: 40503 FORMER COMPANY: FORMER CONFORMED NAME: UNIFIED HOLDINGS INC DATE OF NAME CHANGE: 19970218 10-Q 1 form10q093002.txt FORM 10Q SEPTEMBER 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2002 ------------------------------------------------------------------------------------ Commission file number 0-22629 -------------------------------------------------------------------------------------------- UNIFIED FINANCIAL SERVICES, INC. - ------------------------------------------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 35-1797759 - ---------------------------------------------------------- ----------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 2424 HARRODSBURG ROAD LEXINGTON, KENTUCKY 40503 - ------------------------------------------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (859) 296-2016 - ------------------------------------------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No Number of shares Title of class outstanding as of November 1, 2002 - -------------------------------------------- ------------------------------------------- Common stock, $0.01 par value 2,858,972 UNIFIED FINANCIAL SERVICES, INC. FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition - September 30, 2002 (Unaudited) and December 31, 2001...............................................................1 Consolidated Statements of Operations (Unaudited) - Nine and Three Months Ended September 30, 2002 and 2001...............................................................3 Consolidated Statements of Comprehensive Income (Unaudited) - Nine and Three Months Ended September 30, 2002 and 2001..................................................4 Consolidated Statements of Cash Flow (Unaudited) - Nine Months Ended September 30, 2002 and 2001.....................................................................5 Notes to Consolidated Financial Statements......................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........16 Cautionary Statement Regarding Forward-Looking Statements......................................16 General........................................................................................16 Comparison of Results for the Nine Months Ended September 30, 2002 and 2001....................17 Comparison of Results for the Three Months Ended September 30, 2002 and 2001...................20 Liquidity and Capital Resources................................................................21 Item 3. Quantitative and Qualitative Disclosure About Market Risk......................................23 Item 4. Controls and Procedures........................................................................27 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...............................................................28 SIGNATURES.......................................................................................................29 CERTIFICATION....................................................................................................30 EXHIBIT INDEX....................................................................................................34 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS ------ SEPTEMBER 30, DECEMBER 31, 2002 2001 -------------- ---------------- Current Assets Cash and cash equivalents (see note 14)........................... $ 6,637,890 $ 8,844,482 Due from banks.................................................... 2,581,559 1,357,483 Federal funds sold................................................ -- 4,033,000 Bond investments (see note 14).................................... 16,338,105 11,374,531 Investment in securities and non-affiliated mutual funds.................................................... 599,937 555,013 Note receivable................................................... 800,000 800,000 Loans (net of allowance for loan losses of $520,216 for 2002 and $430,000 for 2001)................................. 60,635,321 43,705,576 Accounts receivable (net of allowance for doubtful accounts of $81,940 for 2002 and $260,299 for 2001).............................................. 5,683,832 5,480,214 Prepaid assets and deposits....................................... 376,608 425,061 Deferred tax asset................................................ 289,676 287,435 -------------- -------------- Total current assets.......................................... 93,942,928 76,862,795 -------------- -------------- Fixed Assets, at cost Equipment and furniture (net of accumulated depreciation of $2,517,104 for 2002 and $2,330,472 for 2001)............................................ 2,114,049 2,277,430 -------------- -------------- Total fixed assets............................................ 2,114,049 2,277,430 -------------- -------------- Non-Current Assets Investment in affiliate (see note 12)............................. 1,010 1,010 Goodwill (net of accumulated amortization of $347,734 for 2002 and 2001) (see note 3)........................ 1,006,061 1,006,061 Other non-current assets.......................................... 62,830 43,696 -------------- -------------- Total non-current assets...................................... 1,069,901 1,050,767 -------------- -------------- TOTAL ASSETS............................................. $ 97,126,878 $ 80,190,992 ============== ============== (CONTINUED ON NEXT PAGE) See accompanying notes. -1- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ SEPTEMBER 30, DECEMBER 31, 2002 2001 ---------------- ---------------- Current Liabilities: Current portion of capital lease obligations....................... $ -- $ 595 Current portion of bank borrowings................................. -- 3,153 Borrowed funds..................................................... 4,828,246 -- Bank line-of-credit................................................ 1,270,000 1,104,780 Deposits (see note 14)............................................. 70,702,009 55,905,541 Accounts payable and accrued expenses.............................. 695,262 2,448,177 Accrued compensation and benefits.................................. 562,383 570,883 Payable to broker-dealers.......................................... 93,698 142,985 Income taxes payable............................................... 233,461 215,027 Deferred income taxes.............................................. 193,781 55,608 Other liabilities.................................................. 1,822,060 1,382,025 ------------- ------------- Total current liabilities...................................... 80,400,900 61,828,774 ------------- ------------- Long-Term Liabilities Long-term portion of capital lease obligations..................... -- 454 Deferred income taxes.............................................. 25,680 12,853 Other long-term liabilities........................................ 807,475 1,600,000 ------------- ------------- Total long-term liabilities.................................... 833,155 1,613,307 ------------- ------------- Total liabilities......................................... 81,234,055 63,442,081 ------------- ------------- Commitments and Contingencies........................................... -- -- ------------- ------------- Stockholders' Equity Common stock, par value $.01 per share............................. 33,090 33,277 Additional paid-in capital......................................... 16,078,230 16,187,294 Retained earnings.................................................. (772,223) 231,300 Accumulated other comprehensive income............................. 553,726 297,040 ------------- ------------- Total stockholders' equity................................ 15,892,823 16,748,911 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 97,126,878 $80,190,992 ============= ============== See accompanying notes. -2- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ----------------------------- 2002 2001 2002 2001 ------------- ------------- ------------ ------------ REVENUE: Gross revenue (see note 10)................. $ 13,339,936 $ 12,997,782 $ 4,546,030 $ 4,403,936 ------------- ------------- ------------ ------------ Total gross revenue..................... 13,339,936 12,997,782 4,546,030 4,403,936 ------------- ------------- ------------ ------------ COST OF SALES: Cost of sales (see note 10)................. 2,710,700 2,522,673 904,959 939,771 ------------- ------------- ------------ ------------ Total cost of sales..................... 2,710,700 2,522,673 904,959 939,771 ------------- ------------- ------------ ------------ GROSS PROFIT (see note 10)....................... 10,629,236 10,475,109 3,641,071 3,464,165 ------------- ------------- ------------ ------------ EXPENSES: Employee compensation....................... 6,397,473 7,127,167 2,094,317 2,367,491 Employee insurance and benefits............. 1,029,568 1,023,444 292,942 331,464 Mail and courier............................ 112,336 122,327 36,126 26,391 Telephone................................... 191,492 304,150 49,571 90,291 Equipment rental and maintenance............ 361,171 357,892 118,921 108,629 Occupancy................................... 712,727 676,965 243,105 227,689 Depreciation and amortization............... 281,954 602,480 53,894 218,522 Professional fees........................... 498,283 517,681 197,848 188,701 Interest.................................... (7,489) 67,648 208 8,778 Program administration fees................. 20,855 157,445 67,400 62,635 Provision for bad debt...................... 96,739 255,543 65,332 31,004 Provision for loan losses................... 589,186 90,000 44,783 35,000 Business development costs.................. 41,332 39,207 27,892 19,218 Insurance................................... 167,294 125,055 53,456 80,071 Other operating expenses (see note 12)...... 1,117,788 1,021,954 413,446 580,503 ------------- ------------- ------------ ------------ Total expenses.......................... 11,610,709 12,488,958 3,759,241 4,376,387 ------------- ------------- ------------ ------------ Loss from continuing operations............. (981,473) (2,013,849) (118,170) (912,222) Other loss.................................. (28,338) (51,851) (4,136) (43,566) Income tax benefit (expense)................ (6,919) 635,872 (10,096) 237,633 ------------- ------------- ------------ ------------ Net loss from continuing operations.............................. (1,016,730) (1,429,828) (132,402) (718,155) Income (loss) from discontinued operations (net of income taxes of $8,081, $660,872, $(96) and $237,633, respectively) .................... 13,207 1,039,012 (158) 364,971 ------------- ------------- ------------ ------------ Net loss ........................................ $ (1,003,523) $ (390,816) $ (132,560) $ (353,184) ============= ============= ============ ============ Per share loss Basic common shares outstanding............. 2,858,972 2,880,028 2,858,972 2,880,028 Net loss - basic............................ $ (0.35) $ (0.14) $ (0.05) $ (0.12) Fully diluted common shares outstanding (see note 13).......................... 2,858,972 2,905,564 2,858,972 2,905,564 Net loss - fully diluted.................... $ (0.35) $ (0.13) $ (0.05) $ (0.12) See accompanying notes. -3- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ----------------------------- 2002 2001 2002 2001 ------------- ------------- ------------ ------------ Net loss ........................................ $ (1,003,523) $ (390,816) $ (132,560) $ (353,184) Other comprehensive income (loss), net of tax Unrealized gain on securities, net of reclassification adjustment............. 256,686 269,038 105,552 190,109 ------------- ------------- ------------ ------------ Comprehensive loss............................... $ (746,837) $ (121,778) $ (27,008) $ (163,075) ============= ============= ============ ============ See accompanying notes. -4- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 2002 2001 CASH FLOW FROM OPERATING ACTIVITIES -------------- -------------- Net loss....................................................... $ (1,003,523) $ (390,816) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Income tax payable.......................................... 18,434 -- Deferred income taxes....................................... 148,759 (48,871) Provision for depreciation and amortization................. 275,417 836,937 Provision for loan losses................................... 589,186 90,000 Provision for bad debt...................................... 375,276 261,943 Write off of bad debt....................................... (276,593) -- Recovery of bad debt........................................ -- 18,980 Amortization of bond discount............................... (20,116) (18,502) Change in market value of securities........................ (373,187) 449,014 Comprehensive income........................................ 256,686 269,039 Loss on disposal of fixed assets............................ (992) (61,868) Loss on sale/disposal of securities......................... 13,599 10,469 (Increase) decrease in operating assets: Receivables.............................................. (302,301) 1,221,647 Loan receivables......................................... (17,518,931) (17,182,385) Prepaid and sundry assets................................ 48,453 (85,759) Other non-current assets................................. (19,134) 292,185 Increase (decrease) in operating liabilities: Deposits................................................. 14,796,468 19,111,337 Accounts payable and accrued expenses.................... (1,802,202) (1,782,763) Accrued compensation and benefits........................ (8,500) (1,669) Other liabilities........................................ (352,489) 89,968 ------------- ------------- Net cash provided by (used in) operating activities......... (5,155,690) 3,078,886 ------------- ------------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of equipment.......................................... (214,983) (598,302) Due from banks................................................. (1,224,076) (220,704) Federal funds sold/purchased................................... 4,033,000 9,203,000 Bond investments............................................... (4,554,540) (10,523,427) Securities sold/purchased under agreement to repurchase........ 24,000 (1,143,000) Borrowed funds................................................. 4,804,246 -- Proceeds from sale of securities............................... 234,556 65,964 Proceeds from sale of fixed assets............................. 103,939 300,000 Investment in affiliated mutual fund........................... -- (100) Investment in affiliate........................................ -- (1,000) Investment in securities and mutual funds...................... (308,810) (93,161) ------------- ------------- Net cash provided by (used in) investing activities......... 2,897,332 (3,010,730) ------------- ------------- CASH FLOW FROM FINANCING ACTIVITIES Repayment of borrowings........................................ (633,154) (2,431,021) Retirement of common stock..................................... (109,251) -- Borrowings on line of credit................................... 795,220 1,125,000 Repayment of capital lease obligations......................... (1,049) (7,750) ------------- ------------- Net cash provided by (used in) financing activities......... 51,766 (1,313,771) ------------- ------------- Net decrease in cash and cash equivalents.......................... (2,206,592) (1,245,615) Cash and cash equivalents - beginning of year...................... 8,844,482 5,582,098 ------------- ------------- Cash and cash equivalents - end of period.......................... $ 6,637,890 $ 4,336,483 ============= ============= See accompanying notes. -5- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 AND 2001 --------------------------- Note 1 - NATURE OF OPERATIONS Unified Financial Services, Inc., a Delaware holding company for various financial services companies, was organized on December 7,1989. We distribute our services via the traditional industry channels of our subsidiaries and via the Internet. Through our subsidiaries, all of which are wholly owned, we provide services primarily in five lines of business: trust and retirement services; mutual fund administration services; banking; brokerage; and investment advisory services. Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation --------------------- The consolidated financial statements include the accounts of Unified Financial Services, Inc. and our subsidiaries after elimination of all material intercompany accounts and transactions. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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 (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine- and three-month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. On May 31, 2002, we disposed of Fully Armed Productions, Inc., which we acquired on June 1, 1999 in exchange for 18,182 shares of our common stock. In connection with such disposition, and in exchange for all of the outstanding capital stock of Fully Armed Productions, Inc., we received 18,182 shares of our common stock and $37,569 in cash. The results of Fully Armed Productions, Inc. are shown as a non-cash flow transaction in our Consolidated Statements of Cash Flow. Due to the immateriality of the results of Fully Armed Productions, Inc. to the consolidated results of Unified Financial Services, the consolidated financial statements contained herein and in our Annual Report on Form 10-K for the year ended December 31, 2001 have not been restated for the disposition. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2001. Financial Statement Presentation -------------------------------- Certain amounts in the 2001 financial statements have been reclassified to conform to the 2002 presentation. -6- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 AND 2001 --------------------------- Note 3 - NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards ("SFAS") No. 144,"ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS," is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. SFAS 144 supersedes Statement of Financial Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" and amends Accounting Principles Board Opinion No. 30, "REPORTING RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS." This statement develops one accounting model (based on the model in SFAS 121) for long-lived assets to be disposed of, expands the scope of discontinued operations and modifies the accounting for discontinued operations. This standard did not have a material impact on our consolidated financial position, results of operations or cash flows for the nine- of three- month periods ended September 30, 2002. Statement of Financial Accounting Standards No. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS," addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. This statement is effective for fiscal years beginning after June 15, 2002. We have adopted this statement, which did not have a material impact on our consolidated financial position, results of operations or cash flows for the nine- or three-month periods ended September 30, 2002. Statement of Financial Accounting Standards No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS," addresses the financial accounting and reporting for acquired goodwill and other intangible assets. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. This statement is effective for fiscal years beginning after December 15, 2001. Effective January 1, 2002, we adopted SFAS 142 and ceased the amortization of goodwill (for the nine months ended September 30, 2002, goodwill amortization would have been approximately $78,000 and would be approximately $104,000 for the year ending December 31, 2002). Other provisions of this statement require that goodwill be measured periodically for impairment. We are currently in the process of fair valuing our reporting unit with goodwill in order to determine potential goodwill impairment, but have not yet determined the impact for 2002. Statement of Financial Accounting Standards No. 141, "BUSINESS COMBINATIONS," requires all business combinations initiated after September 30, 2001 to be accounted for under the purchase method of accounting. SFAS No. 141 also sets forth guidelines for applying the purchase method of accounting in the determination of intangible assets, including goodwill acquired in a business combination, and expands financial disclosures concerning business combinations consummated after June 1, 2001. Management does not believe that this statement will have a material effect on our consolidated financial statements. -7- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 AND 2001 --------------------------- Note 4 - OPTIONS Under the terms of our stock incentive plan, employees, directors, advisers and consultants of our company and its subsidiaries are eligible to receive the following: (a) incentive stock; options; (b) nonqualified stock options; (c) stock appreciation rights; (d) restricted stock; (e) restricted stock units; and (f) performance awards. Options granted under our plan may be nonqualified or incentive stock options and typically are granted at a price equal to the quoted market price (or valuation made by independent valuation experts) on our common stock on the trading day immediately prior to the date of grant. Generally, options granted will have a term of ten years from the date of the grant, and will vest in increments of 33% per year over a three-year period or be 100% vested on the date of grant. Effective as of December 31, 2001, in conjunction with the sale of our insurance operations, our board of directors extended to December 31, 2006 the exercise period of 13,255 options held by employees of our former insurance operations, irrespective of the date of termination of such employees. All other terms of such options, including the vesting schedules, were unchanged. As of September 30, 2002 and 2001, options to acquire 107,441 and 102,836 shares, respectively, of our common stock were outstanding and issued to certain of our employees, directors and advisers pursuant to our stock incentive plan. In addition, as of such dates, our board had granted options to acquire 54,545 and 60,000 shares, respectively, of our common stock outside of such plan (see note 12). A summary of our outstanding stock options as of September 30,2002 and 2001 is as follows: SEPTEMBER 30, ------------------------------------------------ 2002 2001 --------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ------ ----- ------ ----- Options outstanding at beginning of year...... 149,396 $41.94 170,752 $41.94 Granted....................................... 38,150 16.50 -- -- Option to acquire 66,666 shares at $45.00 per share converted into option to acquire 60,000 shares at $50.00 per share........... -- -- (6,666) 45.00 Option to acquire 60,000 shares at $50.00 per share converted into option to acquire 54,545 shares at $55.00 per share........... (5,455) 50.00 -- -- Forfeitures................................... (20,105) 34.92 (1,250) 40.00 Options outstanding at end of period.......... 161,986 38.24 162,836 41.62 Options exercisable at end of period.......... 161,644 38.23 157,458 41.68 Options available for future grants........... 142,559 n/a 147,164 n/a As of September 30, 2002, 85,136 of such options were intended to qualify as incentive stock options pursuant to Section 422 of the Internal Revenue Code of 1986, as amended. -8- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 AND 2001 --------------------------- Note 4 - OPTIONS (Continued) We apply Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," in accounting for stock-based employee compensation arrangements whereby compensation costs related to stock options generally are not recognized in determining net income. Had we computed compensation costs for our stock options pursuant to Financial Accounting Standard Board Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," the effect would have been immaterial for the nine- and three-month periods ended September 30, 2002 (based upon the Black-Scholes option pricing model) and,in fact, would have been anti-dilutive for such periods. Note 5 - BANK LINE OF CREDIT Bank line of credit at September 30, 2002 consisted of the following: MAXIMUM LINE LINE OF CREDIT AT OF CREDIT SEPTEMBER 30, 2002 ------------ ------------------ Secured by assignment of receivables, bears interest at prime...................... $2,500,000 $1,270,000 Effective July 22, 2002, the bank line of credit was renewed. The line of credit bears interest at prime, which is payable monthly, and all amounts outstanding under the line of credit are due June 30, 2003. The line of credit is secured by contracts receivable and guaranteed by Unified Financial Services, Inc. Note 6 - RENTAL AND LEASE INFORMATION We lease certain office facilities and equipment. Rental expense for the nine months ended September 30, 2002 and 2001 were $712,727 and $676,965, respectively. At September 30, 2002, we were committed to minimal rental payments under certain noncancellable operating leases. As of September 30, 2002, the minimum future rental commitments for each of the succeeding five years subsequent to September 30, 2002 were as follows: 2003 ......................................$ 575,333 2004 ....................................... 506,406 2005 ....................................... 464,147 2006 ....................................... 405,513 2007 ....................................... 425,325 Thereafter.................................. 688,271 ---------- Total.................................. $3,064,995 ========== As of September 30, 2002, the leases with respect to the property occupied by our trust and retirement services operation had expired. We currently are negotiating a new lease with the landlord, which we anticipate will be executed during November 2002. It currently is anticipated that the term of such lease will be five years and annual lease payments of approximately $207,720 will be due with respect to such new lease. -9- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 AND 2001 --------------------------- Note 7 - COMMITMENTS AND CONTINGENCIES We are a party to various lawsuits, claims and other legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, all such matters are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on our consolidated financial position or results of operations. Note 8 - CASH SEGREGATED UNDER FEDERAL REGULATION AND NET CAPITAL REQUIREMENTS Unified Financial Securities is subject to the Securities and Exchange Commission's Uniform Net Capital Rule, which requires the maintenance of minimum net capital, as defined, of the greater of (i) 6-2/3% of aggregate indebtedness or (ii) $50,000, and a ratio of aggregate indebtedness to net capital of not more than 15 to 1. At September 30, 2002, the net capital and ratio of aggregate indebtedness for Unified Financial Securities were $126,474 and 3.34 to 1, respectively. Unified Financial Securities is a fully disclosed broker-dealer. As a result, pursuant to Rule 15c3-3 as promulgated by the Securities and Exchange Commission, Unified Financial Securities is not required to segregate cash and/or securities for the benefit of its customers. Note 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair value of our financial instruments at September 30, 2002 and 2001. 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. SEPTEMBER 30, ------------------------------------------------------- 2002 2001 -------------------------- ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------ -------- ------- (IN THOUSANDS) Financial assets: Cash and cash equivalents............ $ 6,637.9 $ 6,637.9 $ 4,336.5 $ 4,336.5 Due from banks....................... 2,581.6 2,581.6 1,383.3 1,383.3 Bond investments..................... 16,338.1 16,338.1 20,975.7 20,975.7 Securities and mutual funds.......... 599.9 599.9 548.7 548.7 Loans, net of allowance.............. 60,635.3 60,635.3 37,927.1 37,927.1 Receivables (trade), net of allowance 5,683.8 5,683.8 11,583.5 11,583.5 Prepaid and sundry................... 376.6 376.6 383.0 383.0 Financial liabilities: Current liabilities.................. 80,400.9 80,400.9 66,522.3 66,522.3 Capital lease obligation............. -- -- 1.2 1.2 Term debt............................ -- -- 1,604.7 1,604.7 -10- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 AND 2001 --------------------------- Note 10 - DISCLOSURES ABOUT REPORTING SEGMENTS We have five reportable operating segments: trust and retirement services; mutual fund administration services; banking; brokerage; and investment advisory services. In addition, we also report corporate as a separate segment. Our banking segment, which includes Unified Banking Company and Commonwealth Premium Finance Company, reports revenue partially in accordance with the AICPA Audit and Accounting Guide for Banks and Savings Institutions, which requires that banking revenue be reported net of interest expense, and partially in accordance with the AICPA Audit and Accounting Guide for Financial Institutions(other than banks and insurance companies), which treats the provision for loan losses as an operating expense. Pursuant to the AICPA guide for banks, banking revenue is presented net of the provision for loan losses. As a result, we report our provision for loan losses as an operating expense on our Statements of Operations. For the nine months and three months ended September 30, 2002 and 2001, our banking operation recorded interest expense of $2,263,119 and $2,691,129, respectively, and $815,730 and $843,781, respectively. Our banking operation's provision for loan losses was $589,186 and $90,000 for the nine months ended September 30, 2002 and 2001, respectively, and $44,783 and $35,000 for the three months ended September 30, 2002 and 2001, respectively. Additionally, pursuant to the AICPA guide for banks,banks typically do not report gross profit. However, for comparability among our operating segments, we have reported banking gross profit, which amount is equal to banking revenue for any given period. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on profit or loss from operations before income taxes, not including recurring gains and losses. Our reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were acquired as a unit and the management at the time of the acquisition was retained. Reportable segment revenue, gross profit, total assets, depreciation and amortization and capital expenditures were as follows as of or for the nine or three months ended September 30, 2002 and 2001: -11- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 AND 2001 --------------------------- AS OF OR FOR THE FOR THE NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ----------------------------- 2002 2001 2002 2001 ------------- ------------- ------------ ------------ Revenue: - ------- Trust and retirement........................ $ 3,885,920 $ 3,696,935 $ 1,220,518 $ 1,293,164 Mutual fund administration.................. 4,391,201 4,011,885 1,655,321 1,344,586 Banking..................................... 2,067,516 1,509,233 739,341 587,589 Brokerage................................... 1,810,285 2,134,780 697,713 686,617 Investment advisory......................... 1,176,585 1,492,696 372,955 486,604 Corporate................................... 8,429 152,253 (139,818) 5,376 ------------- ------------- ------------ ------------ Total.................................. $ 13,339,936 $ 12,997,782 $ 4,546,030 $ 4,403,936 ============= ============= ============ ============ Gross profit: - ------------- Trust and retirement........................ $ 3,173,721 $ 3,132,380 $ 1,002,698 $ 949,997 Mutual fund administration.................. 3,801,128 3,501,397 1,460,490 1,213,106 Banking..................................... 2,067,516 1,509,233 739,341 587,589 Brokerage................................... 607,221 823,397 139,990 267,207 Investment advisory......................... 971,667 1,356,449 298,850 440,890 Corporate................................... 7,983 152,253 (298) 5,376 ------------- ------------- ------------ ------------ Total.................................. $ 10,629,236 $ 10,475,109 $ 3,641,071 $ 3,464,165 ============= ============= ============ ============ Total assets: - ------------- Trust and retirement........................ $ 3,061,531 $ 3,199,981 Mutual fund administration.................. 2,579,270 1,917,680 Banking..................................... 84,301,793 64,316,514 Brokerage................................... 689,409 750,970 Investment advisory......................... 1,350,491 1,401,080 Corporate................................... 5,144,384 1,264,341 Discontinued................................ -- 9,144,380 ------------- ------------- Total.................................. $ 97,126,878 $ 81,994,946 ============= ============= Depreciation and amortization: - ----------------------------- Trust and retirement........................ $ 101,171 $ 99,879 Mutual fund administration.................. 94,658 78,634 Banking..................................... 132,708 118,236 Brokerage................................... 3,698 16,781 Investment advisory......................... 14,215 98,937 Corporate................................... (64,496) 190,013 ------------- ------------- Total.................................. $ 281,954 $ 602,480 ============= ============= Capital expenditures: - -------------------- Trust and retirement........................ $ 39,670 $ 137,930 Mutual fund administration.................. 157,793 24,625 Banking..................................... 5,800 72,190 Brokerage................................... -- 8,216 Investment advisory......................... 3,890 9,742 Corporate................................... 7,830 79,335 Discontinued................................ -- 266,264 ------------- ------------- Total.................................. $ 214,983 $ 598,302 ============= ============= -12- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 AND 2001 --------------------------- Note 11 - UNIFIED BANKING COMPANY STATEMENTS OF FINANCIAL CONDITION AND OPERATIONS Unified Banking Company commenced operations on November 1, 1999. Included in our consolidated financial statements at September 30,2002 and 2001 were the bank's total assets of $85,367,049 and $61,868,681, respectively, and total liabilities of $79,499,532 and $55,694,800, respectively. As of such dates, certain components of such assets and liabilities were as follows: SEPTEMBER 30, --------------------------- 2002 2001 ---------- ----------- Due from banks.............................................. $2,581,559 $ 1,384,679 Investments in securities: US agency securities...................................... 18,921,084 20,975,732 FHLB stock................................................ 502,200 189,600 Loans: Real estate loans......................................... 39,189,704 22,914,763 Commercial loans.......................................... 16,669,424 9,795,098 Installment loans......................................... 5,260,243 5,701,533 Other loans............................................... 36,167 159 Allowance for loan losses................................. 520,216 395,000 Bank deposits: Demand deposits........................................... 9,899,790 6,718,278 Official checks........................................... 272,666 220,312 NOW accounts.............................................. 2,306,868 1,186,852 Money market accounts..................................... 12,237,436 7,241,353 Savings accounts.......................................... 52,396 63,056 Time deposits............................................. 43,711,080 33,513,324 Other interest-bearing deposits........................... 5,675,935 4,788,500 Federal and borrowed funds.................................. 4,828,246 1,536,000 As discussed in Note 10, we report our results of operations in accordance with the AICPA guide for financial institutions (other than banks and insurance companies). If we reported our results of operations in accordance with the AICPA guide for banks, the results of operations for Unified Banking Company for the nine-and three-month periods ended September 30, 2002 at 2001 would have been as follows: NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ----------------------------- 2002 2001 2002 2001 ------------- ------------- ------------ ------------ Interest and dividend income....... $ 3,385,041 $ 3,343,574 $ 1,228,919 $ 1,074,723 Loan fees.......................... 236,935 173,466 87,340 77,721 Other income....................... 226,785 145,697 75,079 101,267 ------------- ------------- ------------ ------------ Total revenue................. 3,848,761 3,662,737 1,391,338 1,253,711 Interest expense................... 2,217,091 2,590,748 798,429 813,294 ------------- ------------- ------------ ------------ Subtotal........................ 1,631,670 1,071,989 592,909 440,417 Provision for loan losses.......... (589,186) (90,000) (44,783) (35,000) ------------- ------------- ------------ ------------ Net revenue................... 1,042,484 981,989 548,126 405,417 Operating expenses................. 1,593,013 1,586,666 531,189 536,863 ------------- ------------- ------------ ------------ Profit (loss) before income taxes $ (550,529) $ (604,677) $ 16,937 $ (131,446) ============= ============= ============ ============ -13- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 AND 2001 --------------------------- Note 11 - UNIFIED BANKING COMPANY STATEMENTS OF FINANCIAL CONDITION AND OPERATIONS (Continued) The revenue amounts in Note 10 for our banking operation include the "Subtotal" amounts reflected above for Unified Banking Company plus the revenues of Commonwealth Premium Finance Corporation. Note 12 - INVESTMENT IN AFFILIATE On May 23, 2000, we subscribed for 10 shares of VSX Holdings, LLC, a Delaware limited liability company, in exchange for $10 and certain intangible property rights. We currently own approximately 0.5% of the outstanding shares of VSX Holdings, but have the right to purchase up to an additional 1,990 (19.9%) shares at a price of $1 per share, upon the occurrence of certain specified events. Our investment in VSX Holdings is accounted for on the cost method of accounting. VSX Holdings is involved in the development of an alternative trading system to be known as VSX.com, which, upon and subject to organization and regulatory approval, will serve as a virtual,real-time private financial market place. In connection with the organization of VSX Holdings, a third-party investor made a $3.0 million loan to VSX Holdings, which loan is evidenced by a debenture issued by VSX Holdings to such investor. The debenture is secured by 85,000 shares of our common stock pledged by certain executive officers of our company. In addition, concurrent with the issuance of such debenture, we issued an option to the third-party investor to acquire shares of our common stock, which option has a five-year term. The investor may elect to foreclose on the pledged collateral or exercise the option. Pursuant to such option, the holder of the option and the debenture is entitled to surrender the debenture to us in payment of the exercise price of the option. During the years ending May 23, 2003, 2004 and 2005, the exercise price per share of our common stock subject to the option will be $55, $60 and $65, respectively. Should the investor foreclose on the pledged collateral, the executive officers would succeed to the option and/or the claim against VSX Holdings. Should the option be exercised prior to May 23, 2003 by the holder of the note (whether the investor, the executive officers or any other holder): (a) we would issue 54,545 shares of stock (50,000 after May 23, 2003) to the investor, the executive officers or any other holder, as the case may be, and (b) we would succeed to the $3.0 million claim against VSX Holdings. We also have entered into a management arrangement with VSX Holdings whereby we provide consulting and development services to VSX Holdings. For the nine months ended September 30, 2002 and 2001 and the three months ended September 30, 2002 and 2001, we received payments totaling $258,756 and $819,977, respectively,and $39,301 and $0, respectively, from VSX Holdings for such consulting and development services, which amounts are recorded as a reduction of "Other operating expenses" on our Consolidated Statements of Operations. -14- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 AND 2001 --------------------------- Note 13 - INCOME (LOSS) PER SHARE OF STOCK Income (loss) per share of stock is computed using the number of common shares outstanding during the applicable period. Diluted income (loss) per share of stock is computed using the number of common shares outstanding and dilutive potential common shares(outstanding stock options). Dilutive potential common shares included in the diluted income (loss) per share calculation were determined using the treasury stock method. Under the treasury stock method, outstanding stock options are dilutive when the average "market price" of our common stock exceeds the option price during a period. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period. For the nine- and three-month periods ended September 30, 2002, all potential common shares were considered to be anti-dilutive and were excluded from the calculation of diluted loss per share. For the nine- and three-month periods ended September 30, 2001, 137,300 potential common shares were considered to be anti-dilutive and were excluded from the calculation of diluted loss per share. Note 14 - RELATED PARTY TRANSACTION As of September 30, 2002, $3,454,164 was eliminated from both bond investments and deposits on our Consolidated Statement of Financial Condition, which amount represented cash on deposit at our bank from various subsidiaries of our company. Note 15 - SALE OF INSURANCE OPERATIONS On December 17, 2001, we sold substantially all the assets and assigned substantially all of the liabilities of our insurance subsidiaries, Equity Insurance Managers, Inc., Equity Insurance Administrators, Inc. and 21st Century Claims Service, Inc., to Arthur J. Gallagher & Co. In connection with the sale, $800,000 in cash was deposited into an escrow account, and is subject to possible indemnification claims of Arthur J. Gallagher & Co.pursuant to the sale agreement. Any funds remaining in the escrow account after June 16, 2003 (and which are not subject to a claim made by Arthur J. Gallagher & Co. before such date) will be released to us. As of December 31, 2001, we established a long-term liability of $800,000 related to the escrow. As of September 30, 2002, we believed there was a current potential for approximately $300,000 in claims against the escrow. In addition,in connection with the sale, we received an interest-bearing note receivable of $800,000, which is subject to possible reduction in the event Arthur J. Gallagher does not achieve certain revenue or income targets for the year ending December 31, 2002 with respect to the business that it acquired from our insurance subsidiaries. As of December 31, 2001, we established a liability of $800,000 related to the revenue and income targets. As of September 30, 2002, we were not able to determine whether Arthur J. Gallagher & Co. would achieve such targets and, as a result, we did not adjust the liability as of such date. In accordance with generally accepted accounting principles, we will adjust the liability when definitive information is available with respect to such targets. -15- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q are or may constitute forward- looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Such forward-looking statements are based on current expectations, estimates and projections about Unified Financial Services' industries, management's beliefs and assumptions made by management. For example, a downturn 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, securities or banking industries or the imposition of regulatory penalties could have an effect on our operating results. In addition, by accepting deposits at fixed rates, at different times and for different terms, and lending funds at fixed rates for fixed periods, a bank accepts the risk that the cost of funds may rise and interest on loans and investment securities may be at a fixed rate. Similarly, the cost of funds may fall, but a bank may have committed by virtue of the term of a deposit to pay what becomes an above-market rate. Investments may decline in value in a rising interest rate environment. Loans have the risk that the borrower will not repay all funds due in a timely manner as well as the risk of total loss. Collateral may or may not have the value attributed to it. Although we believe our loan loss reserve and our allowance for doubtful accounts are adequate, they may prove inadequate if one or more large borrowers or clients, or numerous smaller borrowers or clients, or a combination of both, experience financial difficulty for individual, national or international reasons. Because the financial services industry is highly regulated, decisions of governmental authorities can have a major effect on operating results. These uncertainties, as well as others, are present in the financial services industry and we caution stockholders that management's view of the future on which we price and distribute our products and estimate costs of operations and regulations may prove to be other than as anticipated. In addition, our current expectations with respect to our five business lines, our ability to enhance stockholder value and aggressively and profitably grow assets under management and under service, our ability to provide a high level of service satisfaction and manage costs, our ability to expand profit margins, our ability to achieve future growth and the development of VSX Holdings as an alternative trading system may prove to be other than expected. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those listed under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2001. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. GENERAL Unified Financial Services, Inc., a Delaware holding company that was organized on December 7, 1989, provides financial products and services, principally through three principal businesses: o The provision of complete back-office and shareholder services for the assets of third-party mutual fund families, as well as our affiliated series funds; o Management and administration of 401(k) and other ERISA-directed assets; and -16- o Management of wealth for individuals through a suite of family-office services. The integration of our three principal businesses (mutual fund administration services, trust and retirement services and investment advisory services) with our banking and brokerage operations allows for the capture of additional profitable revenues. Further, this integration provides much greater control of the quality of our component services. Our fundamental objective is to enhance stockholder value by aggressively and profitably growing assets under management and under service. Our ability to provide a high level of service satisfaction, with an emphasis on managing costs, combined with a dedication to maintaining a highly trained and motivated workforce should lead to expanding profit margins. Our principal executive offices are located at 2424 Harrodsburg Road, Lexington, Kentucky 40503, telephone number (859) 296-2016. We and our subsidiaries also maintain offices at 431 North Pennsylvania Street, Indianapolis, Indiana, telephone number (317) 917-7001; 2353 Alexandria Drive, Lexington, Kentucky 40504, telephone number (859) 296-4407; 1400 Civic Place, Southlake, Texas 76092, telephone number (817) 431-2197; 36 West 44th Street, The Bar Association Building, Suite 1310, New York, New York 10036, telephone number (212) 852-8852; and One US Bank Plaza, Suite 2100, St. Louis, Missouri 63101, telephone number (314) 552-6440. The following presents management's discussion and analysis of our 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 Quarterly Report on Form 10-Q, including our consolidated financial statements and the accompanying notes thereto. COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 Revenue for the nine months ended September 30, 2002 compared to the same period of 2001 increased $342,154, or 2.6%, from $12,997,782 to $13,339,936. For such periods, gross profit increased $154,127, or 1.5%. For the first nine months of 2002 compared to the same period of 2001, trust and retirement services revenue increased $188,984, or 5.1%, primarily due to a small increase in assets under management. For such periods, trust and retirement services gross profit increased $41,341 after fees paid to advisor partners increased slightly year over year, increasing 2.9% from $3.056 million in 2001 to $3.144 million in 2002, and lower interest income and other income of $46,988 period over period. As of September 30, 2002, our trust and retirement services operation had approximately $485.8 million in assets under management compared to $482.7 million as of September 30, 2001. Our trust and retirement services assets under management remained relatively constant due to the addition of new client assets during such periods despite declines in the DJIA, S&P 500 and Nasdaq of approximately 24.2%, 28.9% and 39.9%, respectively, from September 30, 2001 to September 30, 2002. For such periods, mutual fund administration services revenue increased $379,316, or 9.5%, and mutual fund administration services gross profit increased $299,732, or 8.6%. As of September 30, 2002, we provided mutual fund administrative services to 31 mutual fund families consisting of approximately 194 portfolios and approximately $9.7 billion in assets under service, compared to 30 mutual fund families consisting of 145 portfolios and approximately $5.8 billion in mutual fund assets under service as of September 30, 2001. Approximately $2.8 billion of the increase in assets under service was added during the month of June 2002 with our commencement of services for the Huntington Funds. During the past 12 months, our mutual fund services operation added several new large clients, but also saw several -17- small clients discontinue operations due to market conditions. While our assets under service increased period to period, the mix of services (transfer agency, fund accounting and administrative services) that we provided to certain of our mutual fund clients changed. We recognize higher margins on administrative services and, to a lesser extent, fund accounting services compared to transfer agency services. Our pricing, in certain instances, also is dependent upon the number of shareholder accounts serviced. An omnibus account may represent a significant amount of assets under service, but would not generate as much in fees as an account with hundreds of shareholders but less assets under service. Period over period, transfer agency and fund accounting revenues increased $425,432 and $123,423, respectively, while administration services revenues declined $152,172. Banking revenue and gross profit (please see note 10) increased $558,283, or 37.0%, for the nine months ended September 30, 2002 compared to the same period of 2001, primarily due to an increase in net interest income of $424,000 and a $120,000 increase in secondary market loan revenue. Net loans as of September 30, 2002 increased to $61.2 million from $44.1 million as of September 30, 2001. Our banking operation's net interest margin increased from 1.56% for the nine months ended September 30, 2001 to 2.04% for the nine months ended September 30, 2002. During the first nine months of 2002, our net interest margin rose 48 basis points from the same period of 2001. We also experienced a$20,424,000 million, or 38.0%, increase in deposits from September 30, 2001 to September 30, 2002. Such deposits primarily were used to fund our banking operation's loan growth. During the nine months ended September 30, 2002, our banking operation charged-off $500,229 in loans that management previously had classified as doubtful, of which $455,000 represented one credit. We are working aggressively to collect these loans, and will continue to do so, but management believed it necessary to charge-off these loans at this time. As of September 30, 2002, our banking operation's ratio of non-performing loans to total loans was 0.21%, compared to 0% at September 30, 2001, after the charge-off of loans of $500,229. At September 30, 2002, our non-performing loans totaled $130,000. We are working aggressively to collect all non-performing loans, but may be required to increase our provision for loan losses in future quarters if we are unsuccessful in collecting these loans, which could have a material effect on our results of operations. For the nine months ended September 30, 2002 compared to the same period of 2001, brokerage revenue and gross profit declined $324,495, or 15.2%, and $216,177, or 26.3%, respectively. These declines primarily were attributable to a $99,098 decline in commission revenue collected from introducing firm clients and a $129,824 decline in commission revenue due to the loss of certain full service brokerage accounts following the death of the former President of Commonwealth Investment Services. Also contributing to such decline was a $73,011 decline in investment management fees resulting from lower trading volume. For such periods, investment advisory revenue and gross profit declined $316,109, or 21.2%, and $384,780, or 28.4%, respectively. Such declines primarily were due to the lower market value of assets under management at such operation. Assets under management at our investment advisory operation declined $133.3 million, or 37.6%, from $354.7 million at September 30, 2001 to $221.4 million at September 30, 2002. From September 30, 2001 to September 30, 2002, assets under management at our investment advisory operation declined approximately 15.2% due to the decline in the financial markets during such period (which decline was less than the overall decline in the financial markets). Such operation also experienced a loss of approximately $65.0 million in assets under management due to the transfer of the assets of the Liquid Green Money Market Fund to the Huntington Funds and the termination of such operation's relationship with one portfolio manager. -18- Corporate revenue and gross profit declined $143,826, or 94.5% and $144,272, or 94.8%, respectively, primarily due to our receipt in 2001 of $135,000 in settlement of a trademark dispute. Total expenses declined $878,249, or 7.0%, for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. During the second half of 2001, management implemented certain expense cuts in an effort to improve the profitability of our company, which cuts were partially offset by a $589,186 increase in the provision for loan losses during 2002, primarily due to the write-off of one delinquent loan as discussed above. For such periods, employee compensation declined $729,694, or 10.2%. This decline primarily was attributable to salary reductions taken by certain officers of our company during the first quarter of 2002, which reductions ranged from 20% to 40% of such officers' annualized salary, and a reduced employee workforce. Telephone expense declined $112,658, or 37.0%, for the nine months ended September 30, 2002 compared to the same period of 2001 due to a change in our company's long distance provider and the termination of our wide area network. For such periods, depreciation and amortization expense declined $320,526 or 53.2%, primarily due to the effect of a reversal of a previous depreciation accrual and our adoption of Statement of Financial Accounting Standards No. 142, which required us to cease amortizing goodwill. Under recently adopted accounting rules, we will be required to periodically evaluate the carrying value of our goodwill balances to determine whether the value has been impaired. If we determine there has been an impairment, we will recognize a charge to our earnings in the quarter we determine the value has been impaired, which could be material. For such periods, interest expense declined $75,137, or 111.1%, due to our repayment of our outstanding term loan during December 2001. Program administration fees declined $136,590, or 86.8%, primarily due to a $190,000 insurance recovery in the first quarter of 2002 related to a loss recorded during 2001 at our mutual fund services operation. This recovery was partially offset by a $49,270 unrecoverable loss during the nine months ended September 30, 2002. Our provision for bad debt decreased $158,804 due to the write-off of certain uncollected receivables at our mutual fund operations during 2001. Our provision for loan losses increased $499,186, or 554.7%, for the nine months ended September 30, 2002 compared to the same period of 2001, primarily due to the expense associated with the $455,000 loan charged-off in June 2002. Unified Banking Company is required by Federal law to maintain a reserve for possible loan losses based upon the size of and risks associated with the loan portfolio. Insurance costs increased $42,239, or 33.8%, during such periods, primarily due to increased premiums associated with our insurance coverage. For such periods, other operating expense increased $95,834, or 9.4%, primarily due to a $819,977 benefit received by us during the nine months ended September 30, 2001 in connection with the construction and development of the VSX marketplace and its corresponding products, compared to a $258,756 benefit received by us during the nine months ended September 30, 2002. Removing the effect of the benefit received from VSX Holdings during 2001, other expenses declined $465,385, or 25.2%, primarily due to a $91,093, $57,354 and $267,270 decrease in travel and entertainment, advertising and other operating expenses, respectively, at our trust and retirement services operation. During 2001, our trust and retirement services operation incurred expenses related to the development of new client products and in connection with its conversion to a new data processing system. Such expenses were recorded as other operating expenses. For the nine months ended September 30, 2002, we recorded a $1,016,730 loss from continuing operations compared to a $1,429,828 loss for the same period of 2001. The $448,099 decline in loss during such periods was a result of the expense reductions discussed above as well as the revenue increase that we experienced in 2002. The results for the nine months ended September 30, 2002 also included a $6,919 income tax expense while the same period of 2001 included a $635,872 income tax benefit. -19- For the nine months ended September 30, 2002, we recorded $13,207 net income from discontinued operations compared to $1,039,012 in net income from discontinued operations for the same period of 2001. Discontinued operations for the nine months ended September 30, 2001 included the operating results of our insurance operations, which were sold in December 2001. We recorded a net loss of $1,003,523, or a basic and fully diluted loss per share of $0.35, for the nine months ended September 30, 2002 compared to a net loss of $390,816, or a basic and fully diluted loss per share of $0.14 and $0.13, respectively, for the same period of 2001. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 Revenue for the third quarter of 2002 compared to the third quarter of 2001 increased $142,094, or 3.2%, from $4,403,936 to $4,546,030. For such periods, gross profit increased $176,906, or 5.1%. For the second quarter of 2002 compared to the same quarter of 2001, trust and retirement services revenue decreased $72,647, or 5.6%, and gross profit increased $52,701, or 5.5%. During the third quarter of 2001, our trust and retirement services operation incurred substantial start-up costs associated with a new program. Such costs reduced our gross profit for such quarter, which contributed to the increase in gross profits for the third quarter of 2002 compared to the same quarter of 2001. For such quarters, mutual fund administration services revenue increased $310,735, or 23.1%, and gross profit increased $247,384, or 20.4%. As discussed above, as of September 30, 2002, we provided mutual fund administrative services to 31 mutual fund families consisting of approximately 194 portfolios and $9.7 billion in assets under services, compared to 30 mutual fund families consisting of 145 portfolios and $5.8 billion in assets under service as of September 30, 2001. Banking revenue and gross profit (please see note 10) increased $151,752, or 25.8%, for third quarter of 2002 compared to the same quarter of 2001, primarily due to an increase in net interest income of $175,000 and a $10,000 increase in secondary market loan revenue. Net loans as of September 30, 2002 increased $17.1 million from $44.1 million as of September 30, 2001. For the quarter ended September 30, 2002 compared to the same quarter of 2001, brokerage revenue decreased $128,871, or 18.8%, and gross profit declined $127,217, or 47.6%. These declines primarily were attributable to a $22,289 decline in commission revenue collected from introducing firm clients and a $19,088 decline in commission revenue due to the loss of certain full service brokerage accounts following the death of the former President of Commonwealth Investment Services. Also contributing to such decline was a $19,330 decline in trail commission income due to a decrease in asset levels of mutual funds for which our brokerage operation serves as distributor and a $24,270 decline in investment management fees. For such quarters, investment advisory revenue and gross profit declined $113,648, or 23.4%, and $142,039, or 32.2%, respectively. As discussed above, such declines primarily were due to the lower market value of assets under management resulting from the overall declines in the financial markets. Total expenses declined $617,146, or 14.1%, for the third quarter of 2002 compared to the same quarter of 2001. As discussed above, during the second half of 2001, management implemented certain expense cuts in an effort to improve the profitability of our company, which cuts were partially offset by a $589,186 increase in the provision for loan losses during 2002, primarily due to the write-off of one delinquent loan as discussed above. For such quarters, employee compensation declined $273,174, or 11.5%, primarily due to salary reductions taken by certain officers of our company during the first quarter -20- of 2002 and a reduced employee workforce. Employee insurance and benefits declined $38,522, or 11.6%, primarily due to a reduced employee workforce, partially offset by increased health insurance costs in 2002. Mail and courier expense increased $9,735, or 36.9%, primarily due to increased mailing costs associated with marketing efforts at our trust and retirement services operation. Telephone expense declined $40,720, or 45.1%, for the reasons discussed above. For such quarters, depreciation and amortization expense declined $164,628, or 75.3%, primarily due to the effect of a reversal of a previous depreciation accrual and our adoption of Statement of Financial Accounting Standards No. 142, which required us to cease amortizing goodwill. Under recently adopted accounting rules, we will be required to periodically evaluate the carrying value of our goodwill balances to determine whether the value has been impaired. If we determine there has been an impairment, we will recognize a charge to our earnings in the quarter we determine the value has been impaired, which could be material. For such quarters, interest expense declined $8,570, or 97.6%, due to our repayment of our outstanding term loan during December 2001. Our provision for bad debt increased $34,328, or 110.7%, due to reserves taken at our mutual fund services operation. Our provision for loan losses increased $9,783, or 28.0%, primarily due to an increase in the size of our banking operation's loan portfolio and our write-off of approximately $45,000 of non-performing loans. For such quarters, insurance expense declined $26,615, or 33.2%. The third quarter of 2001 included a $20,000 additional charge for worker's compensation premiums based upon an audit of our worker's compensation account for 2000 and a $20,000 additional insurance expense at our trust and retirement services operation. These additional charges in 2001 resulted in the decline in insurance costs for the third quarter of 2002 compared to the same quarter of 2001. Increased premiums associated with our insurance coverages for 2002 partially offset such declines. For such quarters, other operating expense declined $167,057, or 28.8%, primarily due to a $119,596 decline in expenses at our trust and retirement services operation, which expenses were described above. In addition, we received a $39,303 benefit during the third quarter of 2002 (compared to $0 during the same quarter of 2001) in connection with the construction and development of the VSX marketplace and its corresponding products. For the quarter ended September 30, 2002, we recorded a $132,402 loss from continuing operations compared to a $718,155 loss for the same quarter of 2001. The $585,753 decline in loss for such quarters was a result of the expense reductions described above and the increase in revenues we experienced during the third quarter of 2002. For the quarter ended September 30, 2002, we recorded $158 net loss from discontinued operations compared to $364,971 in net income from discontinued operations for the same quarter of 2001. Discontinued operations for the quarter ended September 30, 2001 included the operating results of our insurance operations, which were sold in December 2001. We recorded a net loss of $132,560, or a basic and fully diluted loss per share of $0.05, for the quarter ended September 30, 2002 compared to a net loss of $353,184, or a basic and fully diluted loss per share of $0.12, for the same quarter of 2001. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY. Our primary sources of liquidity historically have been and continue to be cash on hand, cash flow from operating activities, available borrowing capacity from capitalized leases and a loan from a regional bank. The net decrease in cash and cash equivalents at September 30, 2002 from December 31, 2001 was $2,206,592. The net decrease primarily was due to an increase in loans receivable, partially offset by increased customer deposits. -21- With respect to our banking operation, long-term liquidity is a function of the core deposit base and an adequate capital base. Our banking operation is committed to growth of its core deposit base and maintenance of its capital base. The growth of the deposit base is internally generated through product pricing and product development. During its first three years of operations, Unified Banking Company is required to maintain a consolidated Tier 1 capital to total assets ratio of at least 8.0%. As of September 30, 2002, Unified Banking Company had a consolidated ratio of Tier 1 capital to total assets of 8.96%. Short-term liquidity needs arise from continuous fluctuations in the flow of funds on both sides of the balance sheet resulting from growth and seasonal and cyclical customer demands. The securities portfolio provides stable long-term earnings as well as serving as a primary source of liquidity. The designation of securities as available-for-sale and held-to-maturity does not impact the portfolio as a source of liquidity due to the ability to enter into repurchase agreements using those securities. We anticipate continued loan demand in our market area. We have utilized, and expect to continue to utilize, Federal Home Loan Bank borrowings to fund a portion of future loan growth. Unified Banking Company experienced net growth in assets of 22.3% during the first nine months of 2002, while deposits increased 16.6% during the same period. We continue to emphasize growth in stable core deposits while utilizing the Federal Home Loan Bank and Federal funds purchased as necessary to balance liquidity and cost effectiveness. We closely monitor our level of liquidity to meet expected future needs. In February 2002, Unified Banking Company borrowed approximately $5.0 million in ten- to 15-year fixed rate amortizing advances from the Federal Home Loan Bank, which proceeds were invested in 15- to 20-year FNMA mortgage-backed securities. The interest spread between these assets and liabilities is approximately 1.25%. CAPITAL RESOURCES. Total stockholders' equity was $15,892,823 at September 30, 2002 compared to $16,748,911 at year-end 2001. The decrease in total stockholders' equity was due to our net loss for the nine months ended September 30, 2002, partially offset by $256,686 in unrealized gains on securities for such period. The growth of Unified Banking Company will have an effect on our working capital. It currently is anticipated that as Unified Banking Company grows, our working capital ratio will become more in line with ratios traditionally associated with bank holding companies. We believe that our existing capital resources should be adequate for the working capital requirements of our core businesses over the next twelve months. In the event that our plans or assumptions change, or if our resources available to meet unanticipated changes in business conditions prove to be insufficient to fund operations, we could be required to seek additional financing prior to that time. -22- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The business activities of our company expose it to a variety of risks. Management of these risks is necessary for the long-term profitability of our company. We manage these risks through the establishment of numerous policies, procedures and controls. The most significant risks that affect us are market risk and credit risk. We also are subject to regulatory risk. Market risk is the risk of loss to us resulting from changes in interest rates, equity prices or both. We are exposed to market risk since we, through our subsidiaries, maintain positions in fixed-income and equity securities. We primarily manage our risk through the establishment of trading policies and guidelines and through the implementation of control and review procedures. Our asset/liability strategy is to minimize the sensitivity of earnings to changes in interest rates while maintaining an acceptable net interest margin. Unified Banking Company's asset/liability committee monitors the interest rate sensitivity of the bank's balance sheet on a monthly basis. The committee reviews asset and liability repricing in the context of current and future interest rate scenarios affecting the economic climate in our market areas. Our pricing policy is that all earning assets and interest bearing liabilities be either based on floating rates or have a fixed rate not exceeding five years. Real estate mortgage loans held by us, while having long final maturities, are comprised of one-, two- or three-year adjustable rate loans. The adjustable basis of these loans significantly reduces interest rate risk. -23- The following table illustrates Unified Banking Company's estimated static gap with prepayments calculated as of September 30, 2002: TIME TO MATURITY OR REPRICING 0 TO 1 1 TO 2 2 TO 3 3 TO 6 6 TO 9 9 TO 12 12 TO 48 48 TO 51 >51 (DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS --------- ------ ------ ------ ------ ------ ------ -------- -------- ------ ------ RATE SENSITIVE ASSETS Securities................. U.S. agencies............ $ -- $ 634 $ 611 $ 590 $1,654 $ 1,487 $ 1,341 $ 8,742 $ 352 $ 3,543 $ 18,954 FHLB stock............... 502 -- -- -- -- -- -- -- -- -- 502 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total securities....... 502 634 611 590 1,654 1,487 1,341 8,742 352 3,543 19,456 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Loans Commercial Fixed.................. -- 113 40 41 123 326 128 1,919 616 846 4,152 Variable............... 12,518 -- -- -- -- -- -- -- -- -- 12,518 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total commercial..... 12,518 113 40 41 123 326 128 1,919 616 846 16,670 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Real Estate Commercial Fixed................ -- 44 304 203 1,325 280 788 5,117 138 -- 8,199 Variable............. 4,209 -- -- -- -- -- -- -- -- -- 4,209 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total commercial... 4,209 44 304 203 1,325 280 788 5,117 138 -- 12,408 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Residential Fixed................ -- 244 388 98 287 388 264 3,697 1,612 2,556 9,484 Variable............. 4,245 -- -- -- -- -- -- -- -- -- 4,245 Other................ -- 7 7 7 20 443 21 354 23 783 1,664 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total residential.. 4,245 251 395 105 307 781 285 4,051 1,635 3,339 15,393 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total real estate 8,454 295 699 308 1,632 1,061 1,073 9,168 1,773 3,339 27,801 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Construction Fixed.................. -- 6 -- -- -- -- -- -- -- -- 6 Variable............... 2,881 -- -- -- -- -- -- -- -- -- 2,881 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total construction... 2,881 6 -- -- -- -- -- -- -- -- 2,887 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Personal Home equity loans...... 8,552 -- -- -- -- -- -- -- -- -- 8,552 Installment loans...... -- 227 287 169 753 370 516 941 102 18 3,383 Cash reserve loan...... 28 -- -- -- -- -- -- -- -- -- 28 Personal open end letters of credit.... 1,836 -- -- -- -- -- -- -- -- -- 1,836 Loans secured by deposits............. -- -- -- -- 1 1 11 27 -- -- 41 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total personal....... 10,416 227 288 169 754 371 327 968 102 18 13,840 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total loans................ 34,269 641 1,026 518 2,509 1,758 1,728 12,055 2,491 4,203 61,198 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- TOTAL RATE SENSITIVE ASSETS....... $ 34,771 $ 1,274 $1,638 $1,107 $4,163 $ 3,245 $ 3,069 $ 20,797 $2,843 $ 7,746 $ 80,654 ======== ======= ====== ====== ====== ======= ======= ======== ====== ======= ======== -24- TIME TO MATURITY OR REPRICING 0 TO 1 1 TO 2 2 TO 3 3 TO 6 6 TO 9 9 TO 12 12 TO 48 48 TO 51 >51 (DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS --------- ------ ------ ------ ------ ------ ------- -------- -------- ------ ------ RATE SENSITIVE LIABILITIES Interest bearing deposits NOW accounts............. $ 2,038 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 2,308 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Money market accounts Market rate accounts... 4,704 -- -- -- -- -- -- -- -- -- 4,704 Business market rate accounts............. 2,066 -- -- -- -- -- -- -- -- -- 2,066 Special personal MMDA................. 1,090 -- -- -- -- -- -- -- -- -- 1,090 Special business MMDA................. 4,378 -- -- -- -- -- -- -- -- -- 4,378 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Total money market accounts........... 12,238 -- -- -- -- -- -- -- -- -- 12,238 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Savings accounts......... 52 -- -- -- -- -- -- -- -- -- 52 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Time deposits CD's > 100K............ -- 718 898 1,315 4,670 2,000 1,570 6,361 100 -- 17,633 CD's < 100K............ -- 849 1,291 2,967 9,215 1,658 1,403 8,652 41 1 26,078 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Total time deposits.. -- 1,567 2,189 4,282 13,885 3,658 2,973 15,013 141 1 43,711 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Individual retirement accounts............. -- 63 128 85 452 88 2 4,821 32 4 5,676 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Total interest bearing deposits... 14,598 1,630 2,317 4,367 14,337 3,746 2,975 19,834 173 5 63,985 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Borrowed funds Repurchased agreements. -- 24 -- -- -- -- -- -- -- -- 24 FHLB borrowings........ -- 28 28 728 72 72 72 2,019 297 1,488 4,804 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Total borrowed funds. -- 52 28 728 72 72 72 2,019 297 1,488 4,828 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- TOTAL RATE SENSITIVE LIABILITIES.. $ 14,598 $ 1,683 $ 2,346 $ 5,095 $ 14,410 $ 3,817 $ 3,048 $21,853 $ 471 $ 1,493 $ 68,813 ======== ======== ======= ======== ======== ======== ======== ======= ======= ======== ======== INCREMENTAL GAP REPORT SUMMARY INFORMATION Total rate sensitive assets $ 34,771 $ 1,274 $ 1,638 $ 1,107 $ 4,163 $ 3,245 $ 3,069 $20,797 $ 2,843 $ 7,746 Total rate sensitive liabilities.............. 14,598 1,683 2,346 5,095 14,410 3,817 3,048 21,853 471 1,493 Gap........................ 20,173 (409) (708) (3,988) (10,246) (572) 21 (1,056) 2,373 6,253 RSA/RSL.................... 2.38x 0.76x 0.70x 0.22x 0.29x 0.85x 1.01x 0.95x 6.04x 5.19x RSA/assets................. 0.41 0.01 0.02 0.01 0.05 0.04 0.04 0.24 0.03 0.09 RSL/assets................. 0.17 0.02 0.03 0.06 0.17 0.04 0.04 0.26 0.01 0.02 Gap/assets................. 23.63% -0.48% -0.83% -4.67% -12.00% -0.67% 0.03% -1.24% 2.78% 7.32% Gap/RSA.................... 58.02 -32.09 -43.21 -360.12 -246.13 -17.64 0.70 -5.08 83.44 80.73 CUMULATIVE GAP REPORT SUMMARY INFORMATION Total rate sensitive assets $ 34,771 $ 36,045 $37,683 $38,790 $ 42,953 $ 46,198 $ 49,267 $70,065 $ 72,908 $ 80,654 Total rate sensitive liabilities.............. 14,598 16,281 18,626 23,722 38,131 41,948 44,996 66,849 67,320 68,813 Gap........................ 20,173 19,764 19,057 15,068 4,822 4,250 4,271 3,216 5,588 11,841 RSA/RSL.................... 2.38x 2.21x 2.02x 1.64x 1.13x 1.10x 1.09x 1.05x 1.08x 1.17x RSA/assets................. 0.41 0.42 0.44 0.45 0.50 0.54 0.58 0.82 0.85 0.94 RSL/assets................. 0.17 0.19 0.22 0.28 0.45 0.49 0.53 0.78 0.79 0.81 Gap/assets................. 23.63% 23.15% 22.32% 17.65% 5.65% 4.98% 5.00% 3.77% 6.55% 13.87% Gap/RSA.................... 58.02 54.83 50.57 38.85 11.23 9.20 8.67 4.59 7.66 14.68 We measure the impact of interest rate changes on our income statement through the use of gap analysis. The gap represents the net position of assets and liabilities subject to repricing in specified time periods. During any given time period, if the amount of rate-sensitive liabilities exceeds the amount of rate-sensitive assets, a company would generally be considered negatively gapped and would benefit from falling rates over that period of time. Conversely, a positively gapped company would generally benefit from rising rates. -25- Interest rate changes do not affect all categories of assets and liabilities equally or simultaneously. There are other factors that are difficult to measure and predict that would influence the effect of interest rate fluctuations on our income statement. For example, a rapid drop in interest rates might cause our borrowers to repay their loans at a more rapid pace and certain mortgage-related investments to be prepaid more quickly than projected. This could mitigate some of the benefits of falling rates as are expected when negatively gapped. Conversely, a rapid rise in rates could give us an opportunity to increase our margins and stifle the rate of repayment on our mortgage-related loans, which would increase our returns. The following table shows the "rate shock" results of a simulation model that attempts to measure the effect of rising and falling interest rates over a two-year horizon in a rapidly changing rate environment. BASIS POINT PERCENTAGE CHANGE IN CHANGE IN NET INTEREST INCOME MARKET VALUE OF PORTFOLIO EQUITY INTEREST RATES PROJECTED CHANGE PROJECTED CHANGE -------------- ------------------- ------------------------------- -300 -14.19 -3.13 -200 -8.78 -4.46 -100 -4.10 0.19 0 -- -- 100 4.26 -6.83 200 8.30 -16.22 300 12.41 -25.98 We use a sensitivity model that simulated these interest rate changes on our earning assets and interest-bearing liabilities. This process allows us to explore the complex relationships among the inancial instruments in various interest rate environments. The preceding sensitivity analysis is based on numerous assumptions including: the nature and timing of interest rate levels, including the shape of the yield curve; prepayments on loans and securities; changes in deposit levels; pricing decisions on loans and deposits; reinvestment/replacement of asset and liability cash flows; and others. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how client preferences or competitor influences might change. Interest rate exposure is measured by the potential impact on our income statement of changes in interest rates. We use information from our gap analysis and rate shock calculations as input to help manage our exposure to changing interest rates. We use our rate shock information to tell us how much exposure we have to rapidly changing rates. -26- ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our company's and our subsidiaries' management, including our company's president and chief executive officer along with our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our president and chief executive officer along with our chief financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our company (including our consolidated subsidiaries) required to be included in our periodic SEC filings. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation. -27- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index attached hereto. (b) Reports on Form 8-K. We did not file any Current Reports on Form 8-K during the quarter ended September 30, 2002. -28- SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIFIED FINANCIAL SERVICES, INC. (Registrant) Dated: November 8, 2002 By: /s/ John S. Penn --------------------------------------------------------- John S. Penn, President and Chief Executive Officer Dated: November 8, 2002 By: /s/ Thomas G. Napurano --------------------------------------------------------- Thomas G. Napurano, Executive Vice President and Chief Financial Officer -29- CERTIFICATION I, John S. Penn, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Unified Financial Services, Inc.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period for which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls as of a date within 90 days prior to the filing date of this quarterly report (the"Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Effective Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and -30- (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 8, 2002 /s/ John S. Penn -------------------------------------------- John S. Penn President and Chief Executive Officer -31- CERTIFICATION I, Thomas G. Napurano, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Unified Financial Services, Inc.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period for which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Effective Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and -32- (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 8, 2002 /s/ Thomas G. Napurano -------------------------------------------- Thomas G. Napurano Chief Financial Officer -33- EXHIBIT INDEX Ex. No. Description - ------- ----------- 10.1 Tri-Party Agreement, dated June 18, 2002, among Health Financial, Inc., Unified Trust Company, National Association and Dr. Gregory W. Kasten, is filed herewith.* 10.2 Waiver of Provisions of Employment Agreement, dated May 15, 2002, between Unified Financial Services, Inc. and Charles H. Binger, is filed herewith.* 10.3 Waiver of Provisions of Employment Agreement, dated May 15, 2002, between Unified Financial Services, Inc. and David F. Morris, is filed herewith.* 10.4 Line of Credit Note, dated July 22, 2002, by Commonwealth Premium Finance Corporation in favor of Bank One, Kentucky, NA, is filed herewith. 10.5 Continuing Guaranty, dated July 22, 2002, by Unified Financial Services, Inc. in favor of Bank One, Kentucky, NA, is filed herewith. 11.1 Computations of Earnings per Share, is filed herewith. 99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is filed herewith. 99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is filed herewith. * Management or compensatory arrangement. -34-
EX-10 3 ex101.txt EXHIBIT 10.1 TRI-PARTY AGREEMENT ------------------- THIS TRI-PARTY AGREEMENT (this "Agreement") is made and entered into as of the 18th day of June 2002, by and among UNIFIED TRUST COMPANY, NATIONAL ASSOCIATION ("Unified Trust"), HEALTH FINANCIAL, INC. ("Health Financial"), and DR. GREGORY W. KASTEN ("Employee"). W I T N E S S E T H WHEREAS, Employee and Health Financial are parties to that certain Employment Agreement, dated June 1, 1997 (the "Employment Agreement"); and WHEREAS, Employee, Unified Trust and Health Financial desire to enter into this Agreement (i) to enable Employee to realize the benefits to which he is entitled under the Employment Agreement as an officer and employee of Unified Trust and (ii) to enable Unified Trust to realize the benefits that Health Financial is entitled under the Employment Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Health Financial hereby assigns to Unified Trust all of the rights, title and interest of Health Financial in, to and under the Employment Agreement, and Employee consents to such assignment. Employee acknowledges and agrees that since December 23, 2001, Health Financial's obligation to make salary payments to Executive has been satisfied by Unified Trust. 2. Unified Trust hereby assumes and agrees to perform and be responsible for all agreements, undertakings and obligations of Health Financial arising under the Employment Agreement, and Employee consents to such assumption. 3. The parties hereto acknowledge and agree that this Agreement shall serve as an amendment to the Employment Agreement and that (i) for all purposes of the Employment Agreement, Unified Trust shall be substituted for Health Financial as a party to the Employment Agreement and for every reference to Health Financial (other than references in the first paragraph of the Employment Agreement), (ii) Unified Trust shall be entitled to all rights and benefits that Health Financial was entitled under the Employment Agreement including, among other things, the covenants of Employee set forth in Section 5, and (iii) Health Financial shall immediately cease to have any further rights, obligations or duties whatsoever under the Employment Agreement. Employee acknowledges and agrees that he has been paid all compensation to which he was entitled pursuant to the Employment Agreement through the pay period ended June 8, 2002. 4. Notwithstanding the provisions of Section 2.3(a) of the Employment Agreement, Employee hereby acknowledges, accepts, consents to and ratifies (i) the $100,000 per annum reduction in his Annual Base Salary ($600,000 per annum to $500,000 per annum), which reduction was effective as of June 1, 2001, (ii) the $100,000 per annum reduction in his Annual Base Salary ($500,000 per annum to $400,000 per annum), which reduction was effective as of March 17, 2002 and (ii) the $100,000 per annum reduction in his Annual Base Salary ($400,000 per annum to $300,000 per annum), which reduction was effective as of May 12, 2002. Employee hereby acknowledges and agrees that such salary reductions shall not constitute a breach of the Employment Agreement. Employee and Unified Trust hereby acknowledge and agree that for all purposes of the Employment Agreement, Employee's Annual Base Salary shall now be $300,000 per annum. Employee and Unified Trust further acknowledge and agree that Employee's Annual Base Salary shall remain $300,000 until such time as Employee provides written notice to Unified Trust that his Annual Base Salary shall be increased, which rate of salary may be increased by Employee up to $500,000 per annum (any such increase to be effective upon receipt by Unified Trust of such written notice from Employee); PROVIDED, HOWEVER, in no event shall Employee be entitled to increase his Annual Base Salary pursuant to this Section 4 before January 1,2003. Employee's Annual Base Salary also may be increased from time to time by the board of directors of Unified Trust. 5. If Employee is suspended and/or temporarily prohibited from participating in the conduct of Unified Trust's affairs by notice served by a Federal or state banking or securities regulatory authority under the National Bank Act, the Federal Deposit Insurance Act or any other Federal or state banking or securities statute, Unified Trust's obligations under the Employment Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, or the suspension or temporary prohibition is otherwise removed or terminated, Unified Trust shall (i) pay Employee all of the compensation withheld while its obligations under the Employment Agreement were suspended and (ii) reinstate all of its obligations that were suspended. If Employee is permanently removed or prohibited from participating in the conduct of Unified Trust's affairs by an order issued by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission or any other Federal or state banking or securities regulator, all obligations of Unified Trust under the Employment Agreement shall terminate as of the effective date of the order. All obligations under the Employment Agreement may be terminated, except to the extent determined that continuation of the Employment Agreement is necessary for the continued operation of Unified Trust: (i) by the Comptroller of the Currency or any other Federal or state bank regulatory authority, at the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of Unified Trust under the authority contained in the Federal Deposit Insurance Act; or (ii) by the Comptroller of the Currency or any other Federal or state bank regulatory authority, at the time the Comptroller of the Currency or his or her designee approves a supervisory merger to resolve problems related to operation of Unified Trust or when Unified Trust is determined by the Comptroller of the Currency or his or her designee to be in an unsafe or unsound condition; PROVIDED, HOWEVER, Employee shall be paid, at his then existing rate, for any services that he performs for Unified Trust after any such termination of the Employment Agreement and Employee shall be paid the Annual Noncompete Payments (as defined in the Employment Agreement) to the extent the Comptroller of the Currency or his or her designee shall seek to enforce the provisions of Section 5 of the Employment Agreement following any such termination of the Employment Agreement. 6. The parties hereto acknowledge and agree that this Agreement shall serve as an amendment to Section 7.1 of the Employment Agreement, which shall now provide that notices to Unified Trust (as successor to Health Financial) shall be sent to: Unified Trust Company, National Association c/o Unified Financial Services, Inc. 2424 Harrodsburg Road Lexington, Kentucky 40503 Attention: President With a copy to: Charles H. Binger, Esq. Unified Financial Services, Inc. One US Bank Plaza, Suite 2100 St. Louis, Missouri 63101 -2- 7. Other than as amended hereby, the Employment Agreement remains in full force and effect. This Agreement 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. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed as of the day and year first written above. /s/ Gregory W. Kasten --------------------------------------------------------- Dr. Gregory W. Kasten UNIFIED TRUST COMPANY, NATIONAL ASSOCIATION By: /s/ William C. Presson ------------------------------------------------------ Name: William C. Presson Title: Executive Vice President HEALTH FINANCIAL, INC. By: /s/ Michele V. Hardesty ------------------------------------------------------ Name: Michele V. Hardesty Title: Vice President -3-
EX-10 4 ex102.txt EXHIBIT 10.2 WAIVER OF PROVISIONS OF EMPLOYMENT AGREEMENT This Agreement is entered into this 15th day of May 2002, effective as of the 17th day of March 2002, by and between Unified Financial Services, Inc., a Delaware corporation ("Unified"), and Charles H. Binger, an individual ("Executive"). WHEREAS, Unified and Executive entered into that certain Employment Agreement dated December 31, 1999 (the "Employment Agreement"); and WHEREAS, Unified has requested and Executive agreed to waive certain terms of the Employment Agreement in calendar 2001, which the parties hereto intend to memorialize; and WHEREAS, Unified has requested Executive to waive certain additional terms of the Employment Agreement which Executive has agreed to waive; and WHEREAS, the parties acknowledge that Unified intends to conduct further negotiations in respect of the Employment Agreement; and WHEREAS, Unified was represented by independent counsel (Hogan & Hartson) with regard to this Agreement. NOW, THEREFORE, it is agreed as follows: 1. Executive waives his right to receive the options he became entitled to as of January 1, 2001 under Section 2.3(c) of the Employment Agreement. Executive remains entitled to receive options on January 1, 2002 and subsequent years, as provided in Section 2.3(c) of the Employment Agreement. 2. Executive waives his rights under Section 2.3(b) of the Employment Agreement with regard to the $150,000 bonus awarded to John S. Penn on December 18, 2001. 3. Executive waives his rights under Section 2.3(d) of the Employment Agreement with respect to the car allowance paid to Timothy L. Ashburn and J. Robert Owens prior to the date hereof. 4. Executive waives his rights under Section 2.3(i) of the Employment Agreement insofar as it pertains to the four legal education seminars in respect of calendar 2000 and calendar 2001 which Executive was entitled to attend but did not attend. 5. Executive agrees that the bonus awarded to Executive in December 2001 in the amount of $55,000.00 is in lieu of an identical amount of the Annual Base Salary Executive is entitled to in respect of calendar 2002. The remaining 2002 Annual Base Salary shall be paid in installments of $12,057.84 per pay period, except as other wise provided in this Agreement. Notwithstanding any other provision of this Agreement, for all purposes of the Employment Agreement (including without limitation the determination of Executive's 2003 Annual Base Salary and Section 2.3(c) of the Employment Agreement with regard to options awarded as of January 1, 2002), Executive's 2002 Annual Base Salary shall remain $368,836.62. 6. Unified and Executive agree that Executive previously made payments of $8,765.00 and other concessions during 2000 in the amount of $14,663.00, which payments and concessions entitle executive to a 70.1% undivided joint interest in the furniture purchased from Boyles as set forth on Exhibit A hereto. Upon the termination of Executive's employment for any reason, Executive shall be entitled to purchase (within 120 days after such termination) Unified's interest in such furniture at a price equal to Unified's investment in such furniture (i.e., $10,000.00) if such purchase occurs during calendar 2000, $8,000.00 if such purchase occurs during 2001, $6,000.00 if such purchase occurs during 2002, $4,000.00 if such purchase occurs during 2003, $2,000.00 if such purchase occurs during 2004, and $500 thereafter. 7. Executive acknowledges that Timothy L. Ashburn may resign his position as Chief Executive Officer (but remain as Chairman of the Board) of Unified, effective in April 2002, and may be replaced by John S. Penn in such position. Executive and Unified acknowledge that such resignation would constitute a Change in Control under Section 1.1(b)(vi) of the Employment Agreement. Executive agrees that for so long as Mr. Ashburn remains in the full-time employ (i.e., 40 hours per week) of the Unified Group (as that term is defined in the Employment Agreement) and his compensation for that employment is his primary source of income, Mr. Ashburn's resignation as Chief Executive Officer in April 2002 shall not constitute a Change in Control for purposes of the Employment Agreement. Unified and Executive agree that for all purposes of this Agreement and the Employment Agreement, each of the following events (in addition to the other events currently specified in the Employment Agreement, as amended by the preceding sentence) shall constitute a Change in Control: (x) Mr.Ashburn shall cease to serve as Chairman of the Board of Directors of Unified; and (y) Mr. Ashburn shall cease to be employed and involved in Unified's affairs as more fully described in first sentence of this Paragraph 7. The final sentence of Section 2.2(a) of the Employment Agreement shall be amended in its entirety to read as follows: "The Executive shall report to the Chairman of Unified." 8. (a) Salary Reductions; Duration and Conditions. Unified and Executive agree that if ------------------------------------------ each of Messrs. Orben, Kasten, Ashburn, Morris, Penn, Napurano and Ghoston (the "Benchmark Employees") agrees to a reduction in their gross compensation (such compensation to be determined by reference to the amount paid to each Benchmark Employee in respect of January 2002) of not less than fifteen percent in respect of the remainder of calendar 2002 (the "Benchmark Reduction"), then Unified may pay to Executive in lieu of the amount otherwise required to be paid him during such period as Annual Base Salary under the Employment Agreement (which amount is currently $12,057.84 per pay period, after reduction for the advance described above), $9646.27 per pay period (beginning as of and after March 17, 2002) in respect of the weeks remaining in calendar 2002. (b) Restoration of Salary Reduction. In December 2002, Unified shall provide ------------------------------- Executive with the amount of each Benchmark Employee's annualized compensation as of January 1, 2002 and with the actual amount of each Benchmark Employee's compensation for the calendar 2002 year (in each case, taking into account any bonus or any other incentive payment of any kind in respect of 2002 and prior years, including any commission based on sales or production). The parties acknowledge that the purpose of this information is to allow Executive to determine whether and to what extent the Benchmark Employees accepted salary reductions, but that the failure of one or more of the Benchmark Employees to accept and adhere to salary reductions shall have no consequence for purposes of this Agreement. Upon termination by Unified of Executive's employment for any reason other than Cause or by Executive for Good Reason, each pursuant to the Employment Agreement, Unified shall immediately pay to Executive the Foregone Compensation. Upon the occurrence of any Change in Control under the Employment Agreement, Unified shall immediately pay to Executive the entire amount of the reduction in his gross compensation calculated under this Paragraph 8. Notwithstanding any other provision of this Agreement, for all purposes of the Employment Agreement (including without limitation the determination of Executive's 2003 Annual Base Salary and Section 2.3(c) of the Employment Agreement with regard to options awarded as of January 1, 2002), Executive's 2002 Annual Base Salary shall remain $368,836.62. Notwithstanding any other provision of this Agreement, this Agreement shall have no effect upon the application of Section 2.3(b) of the Employment Agreement. -2- 9. Other than as amended hereby, the Employment Agreement shall remain in full force and effect. This Agreement 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. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "EXECUTIVE" /s/ Charles H. Binger ----------------------------------------------------- Charles H. Binger UNIFIED FINANCIAL SERVICES, INC. By: /s/ John S. Penn -------------------------------------------------- John S. Penn, President -3-
EX-10 5 ex103.txt EXHIBIT 10.3 WAIVER OF PROVISIONS OF EMPLOYMENT AGREEMENT This Agreement is entered into this 15th day of May 2002, effective as of the 17th day of March 2002, by and between Unified Financial Services, Inc., a Delaware corporation ("Unified"), and David F. Morris, an individual ("Executive"). WHEREAS, Unified and Executive entered into that certain Employment Agreement dated December 31, 1999 (the "Employment Agreement"); and WHEREAS, Unified has requested and Executive agreed to waive certain terms of the Employment Agreement in calendar 2001, which the parties hereto intend to memorialize; and WHEREAS, Unified has requested Executive to waive certain additional terms of the Employment Agreement which Executive has agreed to waive; and WHEREAS, the parties acknowledge that Unified intends to conduct further negotiations in respect of the Employment Agreement; and WHEREAS, Unified was represented by independent counsel (Hogan & Hartson) with regard to this Agreement. NOW, THEREFORE, it is agreed as follows: 1. Executive waives his right to receive the options he became entitled to as of January 1, 2001 under Section 2.3(c) of the Employment Agreement. Executive remains entitled to receive options on January 1, 2002 and subsequent years, as provided in Section 2.3(c) of the Employment Agreement. 2. Executive waives his rights under Section 2.3(b) of the Employment Agreement with regard to the $150,000 bonus awarded to John S. Penn on December 18, 2001. 3. Executive waives his rights under Section 2.3(d) of the Employment Agreement with respect to the car allowance paid to Timothy L. Ashburn and J. Robert Owens prior to the date hereof. 4. Executive waives his rights under Section 2.3(i) of the Employment Agreement insofar as it pertains to the four legal education seminars in respect of calendar 2000 and calendar 2001 which Executive was entitled to attend but did not attend. 5. Executive agrees that the bonus awarded to Executive in December 2001 in the amount of $20,000.00 is in lieu of an identical amount of the Annual Base Salary Executive is entitled to in respect of calendar 2002. The remaining 2002 Annual Base Salary shall be paid in installments of $7,113.45 per pay period, except as other wise provided in this Agreement. Notwithstanding any other provision of this Agreement, for all purposes of the Employment Agreement (including without limitation the determination of Executive's 2003 Annual Base Salary and Section 2.3(c) of the Employment Agreement with regard to options awarded as of January 1, 2002), Executive's 2002 Annual Base Salary shall remain $204,646.38. 6. Unified and Executive agree that Executive previously made payments of $4,162.00 and other concessions during 2000 in the amount of $5,942.00, which payments and concessions entitle Executive to a 50.3% undivided joint interest in the furniture purchased from Boyles as set forth on Exhibit A hereto. Upon the termination of Executive's employment for any reason, Executive shall be entitled to purchase (within 120 days after such termination) Unified's interest in such furniture at a price equal to Unified's investment in such furniture (i.e., $10,000.00) if such purchase occurs during calendar 2000, $8,000.00 if such purchase occurs during 2001, $6,000.00 if such purchase occurs during 2002, $4,000.00 if such purchase occurs during 2003, $2,000.00 if such purchase occurs during 2004, and $500 thereafter. 7. Executive acknowledges that Timothy L. Ashburn may resign his position as Chief Executive Officer (but remain as Chairman of the Board) of Unified, effective in April 2002, and may be replaced by John S. Penn in such position. Executive and Unified acknowledge that such resignation would constitute a Change in Control under Section 1.1(b)(vi) of the Employment Agreement. Executive agrees that for so long as Mr. Ashburn remains in the full-time employ (i.e., 40 hours per week) of the Unified Group (as that term is defined in the Employment Agreement) and his compensation for that employment is his primary source of income, Mr. Ashburn's resignation as Chief Executive Officer in April 2002 shall not constitute a Change in Control for purposes of the Employment Agreement. Unified and Executive agree that for all purposes of this Agreement and the Employment Agreement, each of the following events (in addition to the other events currently specified in the Employment Agreement, as amended by the preceding sentence) shall constitute a Change in Control: (x) Mr.Ashburn shall cease to serve as Chairman of the Board of Directors of Unified; and (y) Mr. Ashburn shall cease to be employed and involved in Unified's affairs as more fully described in the first sentence of this Paragraph 7. The final sentence of Section 2.2(a) of the Employment Agreement shall be amended in its entirety to read as follows: "The Executive shall report to the Chairman of Unified." 8. (a) Salary Reductions; Duration and Conditions. Unified and Executive agree that if ------------------------------------------ each of Messrs. Orben, Kasten, Ashburn, Binger, Penn, Napurano and Ghoston (the "Benchmark Employees") agrees to a reduction in their gross compensation (such compensation to be determined by reference to the amount paid to each Benchmark Employee in respect of January 2002) of not less than fifteen percent in respect of the remainder of calendar 2002 (the "Benchmark Reduction"), then Unified may pay to Executive in lieu of the amount otherwise required to be paid him during such period as Annual Base Salary under the Employment Agreement (which amount is currently $7,113.45 per pay period, after reduction for the advance described above), $5,690.74 per pay period (beginning as of and after March 17, 2002) in respect of the weeks remaining in calendar 2002. (b) Restoration of Salary Reduction. In December 2002, Unified shall provide Executive ------------------------------- with the amount of each Benchmark Employee's annualized compensation as of January 1, 2002 and with the actual amount of each Benchmark Employee's compensation for the calendar 2002 year (in each case, taking into account any bonus or any other incentive payment of any kind in respect of 2002 and prior years, including any commission based on sales or production). The parties acknowledge that the purpose of this information is to allow Executive to determine whether and to what extent the Benchmark Employees accepted salary reductions, but that the failure of one or more of the Benchmark Employees to accept and adhere to salary reductions shall have no consequence for purposes of this Agreement. Upon termination by Unified of Executive's employment for any reason other than Cause or by Executive for Good Reason, each pursuant to the Employment Agreement, Unified shall immediately pay to Executive the Foregone Compensation. Upon the occurrence of any Change in Control under the Employment Agreement, Unified shall immediately pay to Executive the entire amount of the reduction in his gross compensation calculated under this Paragraph 8. Notwithstanding any other provision of this Agreement, for all purposes of the Employment Agreement (including without limitation the determination of Executive's 2003 Annual Base Salary and Section 2.3(c) of the Employment Agreement with regard to options awarded as of January 1, 2002), Executive's 2002 Annual Base Salary shall remain $204,646.38. -2- Notwithstanding any other provision of this Agreement, this Agreement shall have no effect upon the application of Section 2.3(b) of the Employment Agreement. 9. Other than as amended hereby, the Employment Agreement shall remain in full force and effect. This Agreement 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. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "EXECUTIVE" /s/ David F. Morris ----------------------------------------------------- David F. Morris UNIFIED FINANCIAL SERVICES, INC. By: /s/ John S. Penn -------------------------------------------------- John S. Penn, President -3-
EX-10 6 ex104.txt EXHIBIT 10.4 [Bank One Logo] LINE OF CREDIT NOTE $2,500,000.00 DATE: JULY 22, 2002 DUE: JUNE 30, 2003 PROMISE TO PAY. On or before June 30, 2003, for value received, Commonwealth Premium Finance Corporation (the "Borrower") promises to pay to Bank One, Kentucky, NA, whose address is 201 East Main Street, Lexington, KY 40507 (the "Bank") or order, in lawful money of the United States of America, the sum of Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00) or such lesser sum as is indicated on Bank records, plus interest computed on the basis of the actual number of days elapsed in a year of 360 days at the rate of 0% per annum above the Prime Rate (the "Note Rate"), and at the rate of 3.00% per annum above the Note Rate, at the Bank's option, upon the occurrence of any default under this Note, whether or not the Bank elects to accelerate the maturity of this Note, from the date such increased rate is imposed by the Bank. In this Note, "Prime Rate" means a rate per annum equal to the prime rate of interest announced from time to time by the Bank or its parent (which rate is not necessarily the lowest rate charged to any customer), changing when and as the prime rate changes. In no event shall the interest rate exceed the maximum rate allowed by law. Any interest payment that would for any reason be unlawful under applicable law shall be applied to principal. Interest will be computed on unpaid principal balance from the date of each borrowing. Until maturity, the Borrower will pay consecutive monthly installments of interest only commencing July 30, 2002. The Borrower will pay, without setoff, deduction, or counterclaim, the Bank at the Bank's address above or at such other place as the Bank may designate in writing. If any payment of principal or interest on this Note shall become due on a day that is not a Business Day, the payment will be made on the next succeeding Business Day. The term "Business Day" in this Note means a day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed. Payments shall be allocated among principal, interest and fees at the discretion of the Bank unless otherwise agreed or required by applicable law. Acceptance by the Bank of any payment that is less than the payment due at that time shall not constitute a waiver of the Bank's right to receive payment in full at that time or any other time. LATE FEE. If any payment is not received by the Bank within ten (10) days after its due date, the Bank may assess and the Borrower agrees to pay a late fee equal to the greater of: (a) five percent (5.00%) of the past due amount or (b)Twenty Five and 00/100 Dollars ($25.00), up to the maximum amount of One Thousand Five Hundred and 00/100 Dollars ($1,500.00) per late charge. BUSINESS LOAN. The Borrower acknowledges and agrees that this Note evidences a loan for a business, commercial, agricultural or similar commercial enterprise purpose, and that all advances made under this Note shall not be used for any personal, family or household purpose. CREDIT FACILITY. The Bank has approved a credit facility to the Borrower in a principal amount not to exceed the face amount of this Note. The credit facility is in the form of advances made from time to time by the Bank to the Borrower. This Note evidences the Borrower's obligation to repay those advances. The aggregate principal amount of debt evidenced by this Note is the amount reflected from time to time in the records of the Bank. Until the earliest of maturity, the occurrence of any default, or the occurrence of any event that would constitute the occurrence of any default but for the lapse of time until the end of any grace or cure period, the Borrower may borrow, pay down and reborrow under this Note. LIABILITIES. The term "Liabilities" in this Note means all obligations, indebtedness and liabilities of the Borrower to any one or more of the Bank, BANK ONE CORPORATION, and any of their subsidiaries, affiliates or successors, now existing or later arising, including, without limitation, all loans, advances, interest, costs, overdraft indebtedness, credit card indebtedness, lease obligations, or obligations relating to any Rate Management Transaction, all monetary obligations incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceedings, regardless of whether allowed or allowable in such proceeding, and all renewals, extensions, modifications, consolidations or substitutions of any of the foregoing, whether the Borrower may be liable jointly with others or individually liable as a debtor, maker, co-maker, drawer, endorser, guarantor, surety or otherwise, and whether voluntarily or involuntarily incurred, due or not due, absolute or contingent, direct or indirect, liquidated or unliquidated. The term "Rate Management Transaction" in this Note means any transaction (including an agreement with respect thereto) now existing or hereafter entered into among the Borrower, the Bank or BANK ONE CORPORATION, or any of its subsidiaries or affiliates or their successors, which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other 2 similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. RELATED DOCUMENTS. The term "Related Documents" in this Note means all loan agreements, credit agreements, reimbursement agreements, security agreements, mortgages, deeds of trust, pledge agreements, assignments, guaranties, or any other instrument or document executed in connection with this Note or in connection with any of the Liabilities. SECURITY. The term "Collateral" in this Note means all real or personal property described in all security agreements, pledge agreements, mortgages, deeds of trust, assignments, or other instruments now or hereafter executed in connection with this Note or in connection with any of the Liabilities. If applicable, the Collateral secures the payment of this Note and the Liabilities. BANK'S RIGHT OF SETOFF. In addition to the Collateral, if any, the Borrower grants to the Bank a security interest in, and the Bank is authorized to setoff and apply, all Accounts, Securities and Other Property, and Bank Debt against any and all Liabilities of the Borrower. This right of setoff may be exercised at any time and from time to time, and without prior notice to the Borrower. This security interest and right of setoff may be enforced or exercised by the Bank regardless of whether or not the Bank has made any demand under this paragraph or whether the Liabilities are contingent, matured, or unmatured. Any delay, neglect or conduct by the Bank in exercising its rights under this paragraph will not be a waiver of the right to exercise this right of setoff or enforce this security interest. The rights of the Bank under this paragraph are in addition to other rights the Bank may have in the Related Documents or by law. In this paragraph: (a) the term "Accounts" means any and all accounts and deposits of the Borrower (whether general, special, time, demand, provisional or final) at any time held by the Bank (including all Accounts held jointly with another, but excluding any IRA or Keogh Account, or any trust Account in which a security interest would be prohibited by law); (b) the term "Securities and Other Property" means any and all securities and other property of the Borrower in the custody, possession or control of the Bank (other than property held by the Bank in a fiduciary capacity); and (c) the term "Bank Debt" means all indebtedness at any time owing by the Bank, to or for the credit or account of the Borrower. REPRESENTATIONS BY BORROWER. Each Borrower represents that: (a) the execution and delivery of this Note and the performance of the obligations it imposes do not violate any law, conflict with any agreement by which it is bound, or require the consent or approval of any governmental authority or other third party; (b) this Note is a valid and binding agreement, enforceable according to its terms; and (c) all balance sheets, profit and loss statements, and other financial statements furnished to the Bank in connection with the Liabilities are accurate and fairly reflect the financial condition of the organizations and persons to which they apply on their effective dates, including contingent liabilities of every type, which financial condition has not changed materially and adversely since those dates. Each Borrower, other than a natural person, further represents that: (a) it is duly organized, existing and in good standing pursuant to the laws under which it is organized; and (b) the execution and delivery of this Note and the performance of the obligations it imposes (i) are within its powers and have been duly authorized by all necessary action of its governing body, and (ii) do not contravene the terms of its articles of incorporation or organization, its by-laws, or any partnership, operating or other agreement governing its affairs. EVENTS OF DEFAULT/ACCELERATION. If any of the following events occurs this Note shall become due immediately, without notice, at the Bank's option: 1. The Borrower, or any guarantor of this Note (the "Guarantor"), fails to pay when due any amount payable under this Note, or under any of the Liabilities, or under any agreement or instrument evidencing debt to any creditor. 2. The Borrower or any Guarantor (a) fails to observe or perform any other term of this Note; (b) makes any materially incorrect or misleading representation, warranty, or certificate to the Bank; (c) makes any materially incorrect or misleading representation in any financial statement or other information delivered to the Bank; or (d) defaults under the terms of any agreement or instrument relating to any debt for borrowed money (other than the debt evidenced by this Note) and the effect of such default will allow the creditor to declare the debt due before its maturity. 3. In the event (a) there is a default under the terms of any Related Document, (b) any guaranty of the loan evidenced by this Note is terminated or becomes unenforceable in whole or in part, (c) any Guarantor fails to promptly perform under its guaranty, or (d) the Borrower fails to comply with, or pay, or perform under any agreement, now or hereafter in effect, between the Borrower and BANK ONE CORPORATION, or any of its subsidiaries or affiliates or their successors. 4. There is any loss, theft, damage, or destruction of any Collateral not covered by insurance. 5. A "reportable event" (as defined in the Employee Retirement Income Security Act of 1974 as amended) occurs that would permit the Pension Benefit Guaranty Corporation to terminate any employee benefit plan of the Borrower or any affiliate of the Borrower. 6. The Borrower or any Guarantor becomes insolvent or unable to pay its debts as they become due. 7. The Borrower or any Guarantor (a) makes an assignment for the benefit of creditors; (b) consents to the appointment of a custodian, receiver, or trustee for itself or for a substantial part of its assets; or (c)commences any proceeding under any bankruptcy, reorganization, liquidation, insolvency or similar laws of any jurisdiction, other than the commencement of any proceeding by Borrower against or with respect to any person or entity for the purpose of enforcing a promise to pay from such person or entity to the Borrower. -2- 8. A custodian, receiver, or trustee is appointed for the Borrower or any Guarantor or for a substantial part of its assets without its consent. 9. Proceedings are commenced against the Borrower or any Guarantor under any bankruptcy, reorganization, liquidation, or similar laws of any jurisdiction, and they remain undismissed for thirty (30) days after commencement; or the Borrower or the Guarantor consents to the commencement of those proceedings. 10. Any judgment is entered against the Borrower or any Guarantor, or any attachment, levy, or garnishment is issued against any property of the Borrower or any Guarantor. 11. The Borrower or any Guarantor dies. 12. The Borrower or any Guarantor, without the Bank's written consent (a) is dissolved, (b) merges or consolidates with any third party, (c) leases, sells or otherwise conveys a material part of its assets or business outside the ordinary course of its business, (d) leases, purchases, or otherwise acquires a material part of the assets of any other business entity, except in the ordinary course of its business, or (e) agrees to do any of the foregoing (notwithstanding the foregoing, any subsidiary may merge or consolidate with any other subsidiary, or with the Borrower, so long as the Borrower is the survivor). 13. There is a substantial change in the existing or prospective financial condition of the Borrower or any Guarantor that the Bank in good faith determines to be materially adverse. 14. The Bank in good faith deems itself insecure. REMEDIES. If this Note is not paid at maturity, whether by acceleration or otherwise, the Bank shall have all of the rights and remedies provided by any law or agreement. The Bank is authorized to cause all or any part of the Collateral to be transferred to or registered in its name or in the name of any other person or business entity, with or without designating the capacity of that nominee. Without limiting any other available remedy, the Borrower is liable for any deficiency remaining after disposition of any Collateral. The Borrower is liable to the Bank for all reasonable costs and expenses of every kind incurred in the making or collection of this Note, including without limitation reasonable attorneys' fees and court costs. These costs and expenses include without limitation any costs or expenses incurred by the Bank in any bankruptcy, reorganization, insolvency or other similar proceeding. WAIVERS. Any party liable on this Note waives (a) to the extent permitted by law, all rights and benefits under any laws or statutes regarding sureties, as may be amended; (b) any right to receive notice of the following matters before the Bank enforces any of its rights: (i) the Bank's acceptance of this Note, (ii) any credit that the Bank extends to the Borrower, (iii) the Borrower's default, (iv) any demand, diligence, presentment, dishonor and protest, or (v) any action that the Bank takes regarding the Borrower, anyone else, any Collateral, or any of the Liabilities, that it might be entitled to by law or under any other agreement; (c) any right to require the Bank to proceed against the Borrower, any other obligor or guarantor of the Liabilities, or any Collateral, or pursue any remedy in the Bank's power to pursue; (d) any defense based on any claim that any endorser or other parties' obligations exceed or are more burdensome than those of the Borrower; (e) the benefit of any statute of limitations affecting liability of any endorser or other party liable hereunder or the enforcement hereof; (f) any defense arising by reason of any disability or other defense of the Borrower or by reason of the cessation from any cause whatsoever (other than payment in full) of the obligation of the Borrower for the Liabilities; and (g) any defense based on or arising out of any defense that the Borrower may have to the payment or performance of the Liabilities or any portion thereof. Any party liable on this Note consents to any extension or postponement of time of its payment without limit as to the number or period, to any substitution, exchange or release of all or any part of the Collateral, to the addition of any other party, and to the release or discharge of, or suspension of any rights and remedies against, any person who may be liable for the payment of this Note. The Bank may waive or delay enforcing any of its rights without losing them. Any waiver affects only the specific terms and time period stated in the waiver. No modification or waiver of any provision of this Note is effective unless it is in writing and signed by the party against whom it is being enforced. SUBORDINATION. Any rights of any party liable on this Note, whether now existing or hereafter arising, to receive payment on account of any indebtedness (including interest) owed to any party liable on this Note by the Borrower, or to withdraw capital invested by it in the Borrower, or to receive distributions from the Borrower, shall at all times be subordinate to the full and prior repayment to the Bank of the Liabilities. No party liable on this Note shall be entitled to enforce or receive payment of any sums hereby subordinated until the Liabilities have been paid in full and any such sums received in violation of this paragraph shall be received by such party in trust for the Bank. Any party liable on this Note agrees to stand still with regard to the Bank's enforcement of its rights, including taking no action to delay, impede or otherwise interfere with the Bank's rights to realize on the Collateral. The foregoing notwithstanding, until the occurrence of any default, any party liable on this Note is not prohibited from receiving distributions from the Borrower in an amount equal to any income tax liability imposed on such party liable on this Note attributable to an ownership interest in the Borrower, if any. RIGHTS OF SUBROGATION. Any party liable on this Note waives and agrees not to enforce any rights of subrogation, contribution or indemnification that it may have against the Borrower, any person liable on the Liabilities, or the Collateral, until the Borrower and such party liable on this Note have fully performed all their obligations to the Bank, even if those obligations are not covered by this Note. REINSTATEMENT. All parties liable on this Note agree that to the extent any payment is received by the Bank in connection with the Liabilities, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or -3- 4 required to be repaid by the Bank or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise (any such payment is hereinafter referred to as a "Preferential Payment"), then this Note shall continue to be effective or shall be reinstated, as the case may be, and whether or not the Bank is in possession of this Note, and, to the extent of such payment or repayment by the Bank, the Liabilities or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made. GOVERNING LAW AND VENUE. This Note is delivered in the State of Kentucky and governed by Kentucky law (without giving effect to its laws of conflicts). The Borrower agrees that any legal action or proceeding with respect to any of its obligations under this Note may be brought by the Bank in any state or federal court located in the State of Kentucky, as the Bank in its sole discretion may elect. By the execution and delivery of this Note, the Borrower submits to and accepts, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of those courts. The Borrower waives any claim that the State of Kentucky is not a convenient forum or the proper venue for any such suit, action or proceeding. RENEWAL AND EXTENSION. This Note is given in replacement, renewal and/or extension of, but not extinguishing the indebtedness evidenced by, that Promissory Note dated June 30, 2001 executed by the Borrower in the original principal amount of Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00), including previous renewals or modifications thereof, if any (the "Prior Note"), and is not a novation thereof. All interest evidenced by the Prior Note shall continue to be due and payable until paid. If applicable, all Collateral continues to secure the payment of this Note and the Liabilities. The provisions of this Note are effective on July 22, 2002. MISCELLANEOUS. The Borrower, if more than one, is jointly and severally liable for the obligations represented by this Note, the term "Borrower" means any one or more of them, and the receipt of value by any one of them constitutes the receipt of value by the others. This Note binds the Borrower and its successors, and benefits the Bank, its successors and assigns. Any reference to the Bank includes any holder of this Note. Section headings are for convenience of reference only and do not affect the interpretation of this Note. Any notices and demands under or related to this document shall be in writing and delivered to the intended party at its address stated herein, and if to the Bank, at its main office if no other address of the Bank is specified herein, by one of the following means: (a) by hand, (b) by a nationally recognized overnight courier service, or (c) by certified mail, postage prepaid, with return receipt requested. Notice shall be deemed given: (a) upon receipt if delivered by hand, (b) on the Delivery Day after the day of deposit with a nationally recognized courier service, or (c) on the third Delivery Day after the notice is deposited in the mail. "Delivery Day" means a day other than a Saturday, a Sunday, or any other day on which national banking associations are authorized to be closed. Any party may change its address for purposes of the receipt of notices and demands by giving notice of such change in the manner provided in this provision. This Note and any Related Documents embody the entire agreement between the Borrower and the Bank regarding the terms of the loan evidenced by this Note and supercede all oral statements and prior writings relating to that loan. If any provision of this Note cannot be enforced, the remaining portions of this Note shall continue in effect. The Borrower agrees that the Bank may provide any information or knowledge the Bank may have about the Borrower or about any matter relating to this Note or the Related Documents to BANK ONE CORPORATION, or any of its subsidiaries or affiliates or their successors, or to any one or more purchasers or potential purchasers of this Note or the Related Documents. The Borrower agrees that the Bank may at any time sell, assign or transfer one or more interests or participations in all or any part of its rights and obligations in this Note to one or more purchasers whether or not related to the Bank. WAIVER OF SPECIAL DAMAGES. THE BORROWER WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT THE UNDERSIGNED MAY HAVE TO CLAIM OR RECOVER FROM THE BANK IN ANY LEGAL ACTION OR PROCEEDING ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. JURY WAIVER. THE BORROWER AND THE BANK (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) BETWEEN THE BORROWER AND THE BANK ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE OR THE OTHER RELATED DOCUMENTS. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE BANK TO PROVIDE THE FINANCING EVIDENCED BY THIS NOTE. BORROWER: Address: 2424 Harrodsburg Road Lexington, KY 40503 Commonwealth Premium Finance Corporation By: /s/ Olin W. Bryant, Jr. --------------------------------------------------- Olin W. Bryant, Jr. President /CEO --------------------------------------------------- Printed Name Title -4-
EX-10 7 ex105.txt EXHIBIT 10.5 [Bank One Logo] CONTINUING GUARANTY GUARANTY. To induce Bank One, Kentucky, NA, whose address is 201 East Main Street, Lexington, KY 40507 (the "Bank"), and its successors and assigns, at its option, to make loans, extend or continue credit or some other benefit, including letters of credit and foreign exchange contracts, present or future, direct or indirect, and whether several, joint or joint and several, to Commonwealth Premium Finance Corporation alone, and its successors (the "Borrower") or to the Borrower and others, and because the undersigned(the "Guarantor") has determined that executing this Guaranty is in its interest and to its financial benefit, the Guarantor absolutely and unconditionally guarantees to the Bank, as primary obligor and not merely as surety, the full and prompt payment of the Liabilities when due, whether at stated maturity, by acceleration or otherwise. The Guarantor will not only pay the Liabilities, but will also reimburse the Bank for any costs and expenses, including reasonable attorneys' fees, that the Bank may pay in collecting from the Borrower or the Guarantor, and for liquidating any Collateral or this Guaranty. The Guarantor's obligations under this Guaranty shall be payable in lawful money of the United States of America. LIABILITIES. The term "Liabilities" in this Guaranty means all obligations, indebtedness and liabilities of the Borrower to the Bank or to BANK ONE CORPORATION, or any of its subsidiaries or affiliates or their successors, now existing or later arising related to that certain Line of Credit Note dated July 22, 2002, by and between the Borrower and the Bank in the original principal amount of Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00), any obligations relating to any Rate Management Transaction, all monetary obligations incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or similar proceedings related to the above-referenced note, regardless of whether allowed or allowable in such proceeding, and all renewals, extensions, modifications, consolidations or substitutions of any of the foregoing, whether the Borrower may be liable jointly with others or individually liable as a debtor, maker, co-maker, drawer, endorser, guarantor, surety or otherwise, and whether voluntarily or involuntarily incurred, due or not due, absolute or contingent, direct or indirect, liquidated or unliquidated. The term "Rate Management Transaction" in this Guaranty means any transaction (including an agreement with respect thereto) now existing or hereafter entered into between the Borrower and the Bank or BANK ONE CORPORATION, or any of its subsidiaries or affiliates or their successors which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. LIMITATION; EXPIRATION. This Guaranty is a continuing guaranty and shall remain in full force and effect so long as any of the Liabilities have not been fully paid or performed; provided, however, anything in this Guaranty to the contrary notwithstanding, this Guaranty shall terminate on June 30, 2003, except that such termination shall not affect the liability of the Guarantor with respect to (a) Liabilities created or incurred before such date, or (b) extensions or renewals of, interest accruing on, or fees, costs or expenses, including reasonable attorneys' fees, incurred with respect to, such Liabilities on or after such date. CONTINUED RELIANCE. The Bank may continue to make loans or extend credit to the Borrower based on this Guaranty until it receives written notice of termination from the Guarantor, regardless of whether at any time or from time to time there are no existing Liabilities or commitment by the Bank to make advances or other financial accommodations for Borrower. Notwithstanding the provisions for notices in this Guaranty, such notice shall be effective at the opening of the Bank for business on the third business day after actual receipt of the notice. If terminated, the Guarantor will continue to be liable to the Bank for any Liabilities in existence, created, assumed or committed to at the time the termination becomes effective, and all subsequent renewals, extensions, modifications and amendments of the Liabilities. SECURITY. The term "Collateral" in this Guaranty means all real or personal property described in all security agreements, pledge agreements, mortgages, deeds of trust, assignments, or other instruments now or hereafter executed in connection with any of the Liabilities. If applicable, the Collateral secures the payment of the Liabilities. BANK'S RIGHT OF SETOFF. In addition to the Collateral, if any, the Guarantor grants to the Bank a security interest in, and the Bank is authorized to setoff and apply, all Accounts, Securities and Other Property, and Bank Debt against any and all Liabilities of the Borrower and all obligations of the Guarantor under this Guaranty. This right of setoff may be exercised at any time and from time to time, and without prior notice to the Guarantor. This security interest and right of setoff may be enforced or exercised by the Bank regardless of whether or not the Bank has made any demand under this paragraph or whether the Liabilities are contingent, matured, or unmatured. Any delay, neglect or conduct by the Bank in exercising its rights under this paragraph will not be a waiver of the right to exercise this right of setoff or enforce this security interest. The rights of the Bank under this paragraph are in addition to other rights the Bank may have by law. In this paragraph: (a) the term "Accounts" means any and all accounts and deposits of the Guarantor (whether general, special, time, demand, provisional or final) at any time held by the Bank (including all Accounts held jointly with another, but excluding any IRA or Keogh Account, or any trust Account in which a security interest would be prohibited by law); (b) the term "Securities and Other Property" means any and all securities and other property of the Guarantor in the custody, possession or control of the Bank (other than property held by the Bank in a fiduciary capacity); and (c) the term "Bank Debt" means all indebtedness at any time owing by the Bank to or for the credit or account of the Guarantor. REMEDIES. If the Guarantor fails to pay any amount owing under this Guaranty, the Bank shall have all of the rights and remedies provided by law or under any other agreement. The Bank is authorized to cause all or any part of the Collateral to be transferred to or registered in its name or in the name of any other person or business entity with or without designation of the capacity of that nominee. The Guarantor is liable for any deficiency remaining after disposition of any Collateral. The Guarantor is liable to the Bank for all reasonable costs and expenses of any kind incurred in the making and collection of this Guaranty, including without limitation reasonable attorneys' fees and court costs. These costs and expenses include without limitation any costs or expenses incurred by the Bank in any bankruptcy, reorganization, insolvency or other similar proceeding. PERMISSIBLE ACTIONS. If any monies become available from any source other than the Guarantor that the Bank can apply to the Liabilities, the Bank may apply them in any manner it chooses, including but not limited to applying them against obligations, indebtedness or liabilities which are not covered by this Guaranty. The Bank may take any action against the Borrower, the Collateral, or any other person liable for any of the Liabilities. The Bank may release the Borrower or anyone else from the Liabilities, either in whole or in part, or release the Collateral, and need not perfect a security interest in the Collateral. The Bank does not have to exercise any rights that it has against the Borrower or anyone else, or make any effort to realize on the Collateral or any other collateral for the Liabilities, or exercise any right of set-off. The Guarantor authorizes the Bank, without notice or demand and without affecting the Guarantor's obligations hereunder, from time to time, to: (a) renew, modify, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of the Liabilities or any part thereof, including increasing or decreasing the rate of interest thereon; (b) release, substitute or add any one or more endorsers, Guarantor or other guarantors; (c) take and hold Collateral for the payment of this Guaranty or the Liabilities, and enforce, exchange, substitute, subordinate, waive or release any such Collateral; (d) proceed against such Collateral and direct the order or manner of sale of such Collateral as the Bank in its discretion may determine; and (e) apply any and all payments from the Borrower, the Guarantor or any other guarantor, or recoveries from such Collateral, in such order or manner as the Bank in its discretion may determine. The Guarantor's obligations under this Guaranty shall not be released, diminished or affected by (i) any act or omission of the Bank, (ii) the voluntary or involuntary liquidation, sale or other disposition of all or substantially all of the assets of the Borrower, or any receivership, insolvency, bankruptcy, reorganization, or other similar proceedings affecting the Borrower or any of its assets, (iii) any change in the composition or structure of the Borrower or the Guarantor, including a merger or consolidation with any other person or entity, or (iv) any payments made upon the Liabilities. The Guarantor hereby expressly consents to any impairment of Collateral, including, but not limited to, failure to perfect a security interest and release Collateral and any such impairment or release shall not affect the Guarantor's obligations hereunder. NATURE OF GUARANTY. This Guaranty is a guaranty of payment and not of collection. Therefore, the Bank may insist that the Guarantor pay immediately, and the Bank is not required to attempt to collect first from the Borrower, the Collateral, or any other person liable for the Liabilities. The obligation of the Guarantor shall be unconditional and absolute even if all or any part of any agreement between the Bank and the Borrower is unenforceable, void, voidable or illegal, and regardless of the existence of any defense, setoff or counterclaim which the Borrower may assert. If the Borrower is a corporation, limited liability company, partnership or trust, it is not necessary for the Bank to inquire into the powers of the Borrower or the officers, directors, members, managers, partners, trustees or agents acting or purporting to act on its behalf, and any of the Liabilities made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. OTHER GUARANTORS. If there is more than one Guarantor, the obligations under this Guaranty are joint and several. In addition, each Guarantor under this Guaranty shall be jointly and severally liable with any other guarantor of the Liabilities. If the Bank elects to enforce its rights against fewer than all guarantors of the Liabilities, that election does not release the Guarantor from its obligations under this Guaranty. The compromise or release of any of the obligations of any of the other guarantors or the Borrower shall not serve to waive, alter or release the Guarantor's obligations. RIGHTS OF SUBROGATION. The Guarantor waives and agrees not to enforce any rights of subrogation, contribution or indemnification that it may have against the Borrower, any person liable on the Liabilities, or the Collateral, until the Borrower and the Guarantor have fully performed all their obligations to the Bank, even if those obligations are not covered by this Guaranty. WAIVERS. The Guarantor waives (a) to the extent permitted by law, all rights and benefits under any laws or statutes regarding sureties, as may be amended, and (b) any right the Guarantor may have to receive notice of the following matters before the Bank enforces any of its rights: (i) the Bank's acceptance of this Guaranty, (ii) any credit that the Bank extends to the Borrower, (iii) the Borrower's default, (iv) any demand, diligence, presentment, dishonor and protest, or (v) any action that the Bank takes regarding the Borrower, anyone else, the Collateral, or any of the Liabilities, which it might be entitled to by law or under any other agreement, (c) any right it may have to require the Bank to proceed against the Borrower, any other obligor or guarantor of the Liabilities, or the Collateral for the Liabilities or the Guarantor's obligations under this Guaranty, or pursue any remedy in the Bank's power to pursue, (d) any defense based on any claim that the Guarantor's obligations exceed or are more burdensome than those of the Borrower, (e) the benefit of any statute of limitations affecting the Guarantor's obligations hereunder or the enforcement hereof, (f) any defense arising by reason of any disability or other defense of the Borrower or by reason of the cessation from any cause whatsoever (other than payment in full) of -2- the obligation of the Borrower for the Liabilities, and (g) any defense based on or arising out of any defense that the Borrower may have to the payment or performance of the Liabilities or any portion thereof. The Bank may waive or delay enforcing any of its rights without losing them. Any waiver affects only the specific terms and time period stated in the waiver. No modification or waiver of this Guaranty is effective unless it is in writing and signed by the party against whom it is being enforced. SUBORDINATION. Any rights of the Guarantor, whether now existing or hereafter arising, to receive payment on account of any indebtedness (including interest) owed to the Guarantor by the Borrower, or to withdraw capital invested by it in the Borrower, or to receive distributions from the Borrower, shall at all times be subordinate to the full and prior repayment to the Bank of the Liabilities. The Guarantor shall not be entitled to enforce or receive payment of any sums hereby subordinated until the Liabilities have been paid in full and any such sums received in violation of this Guaranty shall be received by the Guarantor in trust for the Bank. The Guarantor agrees to fully cooperate with the Bank and not to delay, impede or otherwise interfere with the efforts of the Bank to secure payment from the assets which secure the Liabilities including actions, proceedings, motions, orders, agreements or other matters relating to relief from automatic stay, abandonment of property, use of cash collateral and sale of the Bank's collateral free and clear of all liens. The foregoing notwithstanding, until the occurrence of any default, the Guarantor is not prohibited from receiving distributions from the Borrower in an amount equal to any income tax liability imposed on the Guarantor attributable to the Guarantor's ownership interest in the Borrower, if any. REINSTATEMENT. The Guarantor agrees that to the extent any payment is received by the Bank in connection with the Liabilities, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by the Bank or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise (any such payment is hereinafter referred to as a "Preferential Payment"), then this Guaranty shall continue to be effective or shall be reinstated, as the case may be, and whether or not the Bank is in possession of this Guaranty, and, to the extent of such payment or repayment by the Bank, the Liabilities or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made. INFORMATION. The Guarantor assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Liabilities and the nature, scope and extent of the risks that the Guarantor assumes and incurs under this Guaranty, and agrees that the Bank does not have any duty to advise the Guarantor of information known to it regarding those circumstances or risks. SEVERABILITY. The provisions of this Guaranty are severable, and in any action or proceeding involving any state corporate law, or any state, federal or foreign bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of the Guarantor under this Guaranty would otherwise be held or determined to be avoidable, invalid or unenforceable on account of the amount of the Guarantor's liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by the Guarantor or the Bank, be automatically limited and reduced to the highest amount that is valid and enforceable as determined in such action or proceeding. REPRESENTATIONS BY GUARANTOR. Each Guarantor represents that: (a) the execution and delivery of this Guaranty and the performance of the obligations it imposes do not violate any law, do not conflict with any agreement by which it is bound, or require the consent or approval of any governmental authority or any third party, (b) this Guaranty is a valid and binding agreement, enforceable according to its terms, and (c) all balance sheets, profit and loss statements, and other financial statements furnished to the Bank in connection with the Liabilities are accurate and fairly reflect the financial condition of the organizations and persons to which they apply on their effective dates, including contingent liabilities of every type, which financial condition has not changed materially and adversely since those dates. Each Guarantor, other than a natural person, further represents that: (a) it is duly organized, existing and in good standing under the laws where it is organized, and (b) the execution and delivery of this Guaranty and the performance of the obligations it imposes (i) are within its powers and have been duly authorized by all necessary action of its governing body, and (ii) do not contravene the terms of its articles of incorporation or organization, its by-laws, or any agreement governing its affairs. NOTICE. Any notices and demands under or related to this document shall be in writing and delivered to the intended party at its address stated herein, and if to the Bank, at its main office if no other address of the Bank is specified herein, by one of the following means: (a) by hand, (b) by a nationally recognized overnight courier service, or (c) by certified mail, postage prepaid, with return receipt requested. Notice shall be deemed given: (a) upon receipt if delivered by hand, (b) on the Delivery Day after the day of deposit with a nationally recognized courier service, or (c) on the third Delivery Day after the notice is deposited in the mail. "Delivery Day" means a day other than a Saturday, a Sunday, or any other day on which national banking associations are authorized to be closed. Any party may change its address for purposes of the receipt of notices and demands by giving notice of such change in the manner provided in this provision. GOVERNING LAW AND VENUE. This agreement is delivered in the State of Kentucky and governed by Kentucky law (without giving effect to its laws of conflicts). The Guarantor agrees that any legal action or proceeding with respect to any of its obligations under this agreement may be brought by the Bank in any state or federal court located in the State of Kentucky, as the Bank in its sole discretion may elect. By the execution and delivery of this agreement, the Guarantor submits to and accepts, for itself and in respect of its -3- property, generally and unconditionally, the non-exclusive jurisdiction of those courts. The Guarantor waives any claim that the State of Kentucky is not a convenient forum or the proper venue for any such suit, action or proceeding. MISCELLANEOUS. The Guarantor's liability under this Guaranty is independent of its liability under any other guaranty previously or subsequently executed by the Guarantor or any one of them, singularly or together with others, as to all or any part of the Liabilities, and may be enforced for the full amount of this Guaranty regardless of the Guarantor's liability under any other guaranty. This Guaranty binds the Guarantor's heirs, successors and assigns, and benefits the Bank and its successors and assigns. The Bank may assign this Guaranty in whole or in part without notice. The Guarantor agrees that the Bank may provide any information or knowledge the Bank may have about the Guarantor or about any matter relating to this Guaranty to BANK ONE CORPORATION, or any of its subsidiaries or affiliates or their successors, or to one or more purchasers or potential purchasers of this Guaranty or the Liabilities guaranteed hereby. The use of headings does not limit the provisions of this Guaranty. WAIVER OF SPECIAL DAMAGES. THE GUARANTOR WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT THE UNDERSIGNED MAY HAVE TO CLAIM OR RECOVER FROM THE BANK IN ANY LEGAL ACTION OR PROCEEDING ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. JURY WAIVER. THE GUARANTOR AND THE BANK (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) BETWEEN THE GUARANTOR AND THE BANK ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE BANK TOPROVIDE THE FINANCING DESCRIBED HEREIN. Dated: July 22, 2002 GUARANTOR: Address: 2424 Harrodsburg Road Unified Financial Services, Inc. Lexington, KY 40503 By: /s/ John S. Penn ----------------------------------------- John Penn President ----------------------------------------- Printed Name Title -4-
EX-11 8 ex111.txt EXHIBIT 11.1 EXHIBIT 11.1 UNIFIED FINANCIAL SERVICES, INC. EARNINGS PER SHARE CALCULATION NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ---------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- INCOME AVAILABLE TO COMMON STOCKHOLDERS Net loss.................................... $ (1,003,523) $ (390,816) $ (132,560) $(353,184) ------------- ----------- ------------ ---------- CALCULATION OF COMMON STOCK Common shares outstanding at beginning of period................................ 2,877,634 2,880,028 2,858,972 2,880,028 ----------- ----------- ----------- --------- Acquisition of shares during period......... (18,662) -- -- -- ----------- ----------- ----------- --------- Common shares used in basic calculation.. 2,858,972 2,880,028 2,858,972 2,880,028 ----------- ----------- ----------- --------- Common stock equivalent of dilutive options. -- 25,536 -- 25,536 ----------- ----------- ----------- --------- Common shares used in fully diluted calculation............................ 2,858,972 2,905,564 2,858,972 2,905,564 ----------- ----------- ----------- --------- LOSS PER SHARE - -------------- Basic........................................ $ (0.35) $ (0.14) $ (0.05) $ (0.12) ============ =========== ============ ========== Fully diluted............................... $ (0.35) $ (0.13) $ (0.05) $ (0.12) ============ =========== ============ ==========
EX-99 9 ex991.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Unified Financial Services, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2002 (the "Report"), I, John S. Penn, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John S. Penn -------------------------------------------------------------- John S. Penn, Chief Executive Officer of Unified Financial Services, Inc. November 8, 2002 This certificate accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
EX-99 10 ex992.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Unified Financial Services, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2002 (the "Report"), I, Thomas G. Napurano, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas G. Napurano ----------------------------------------------------- Thomas G. Napurano, Chief Financial Officer of Unified Financial Services, Inc. November 8, 2002 This certificate accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
-----END PRIVACY-ENHANCED MESSAGE-----