10-Q 1 aug03-10q.txt 10Q FOR 7/31/03 FOR UNIFIED FIN. SERVICES, INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2003 ----------------------------------------------- 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No Number of shares Title of class outstanding as of August 4, 2003 -------------------------------------- ------------------------------------ Common stock, $0.01 par value 2,829,117 UNIFIED FINANCIAL SERVICES, INC. FORM 10-Q INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition - June 30, 2003 (Unaudited) and December 31, 2002.................................1 Consolidated Statements of Operations (Unaudited) - Six and Three Months Ended June 30, 2003 and 2002...............................3 Consolidated Statements of Comprehensive Income (Unaudited) - Six and Three Months Ended June 30, 2003 and 2002.....................4 Consolidated Statements of Cash Flow (Unaudited) - Six Months Ended June 30, 2003 and 2002......................................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 Six Months Ended June 30, 2003 and 2002.........................................................17 Comparison of Results for the Three Months Ended June 30, 2003 and 2002.........................................................19 Liquidity and Capital Resources..................................23 Item 3. Quantitative and Qualitative Disclosure About Market Risk........24 Item 4. Controls and Procedures..........................................28 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.................................29 SIGNATURES....................................................................30 CERTIFICATION.................................................................31 EXHIBIT INDEX.................................................................35 -i- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS ------ JUNE 30, DECEMBER 31, 2003 2002 -------------- ---------------- Current Assets Cash and cash equivalents (see note 12)........................... $ 5,598,217 $ 4,564,949 Due from banks.................................................... 1,734,835 1,656,549 Federal funds sold................................................ 5,977,000 1,479,000 Bond investments (see note 12).................................... 10,239,945 15,685,987 Investment in securities and non-affiliated mutual funds.......... 727,250 709,687 Note receivable................................................... -- 800,000 Loans (net of allowance for loan losses of $622,864 for 2003 and $550,216 for 2002)................................. 55,790,324 57,579,002 Accounts receivable (net of allowance for doubtful accounts of $72,781 for 2003 and $68,715 for 2002)....................... 2,388,984 2,607,547 Receivables from premium financings............................... 3,499,011 2,960,344 Prepaid and deposits.............................................. 366,057 830,512 Deferred income tax benefit....................................... 338,350 -- -------------- -------------- Total current assets.......................................... 86,659,973 88,873,577 -------------- -------------- Fixed Assets, at cost Equipment and furniture (net of accumulated depreciation of $2,564,723 for 2003 and $2,308,646 for 2002)................. 1,809,822 2,028,716 -------------- -------------- Total fixed assets............................................ 1,809,822 2,028,716 -------------- -------------- Non-Current Assets Investment in affiliate (see note 10)............................. 1,010 1,010 Goodwill (net of accumulated amortization of $347,734 for 2003 and 2002) .................................... 1,006,061 1,006,061 Other non-current assets.......................................... 112,060 120,534 -------------- -------------- Total non-current assets...................................... 1,119,131 1,127,605 -------------- -------------- TOTAL ASSETS............................................. $ 89,588,926 $ 92,029,898 ============== ============= (Continued on next page) See accompanying notes.
-1- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ JUNE 30, DECEMBER 31, 2003 2002 ---------------- ---------------- Current Liabilities: Borrowed funds..................................................... $ 3,872,233 $ 4,742,783 Deposits (see note 12)............................................. 67,309,323 67,277,222 Accounts payable and accrued expenses.............................. 1,343,387 1,766,741 Accrued compensation and benefits.................................. 406,526 491,334 Payable to broker-dealers.......................................... 42,727 79,962 Income taxes payable............................................... 88,924 144,204 Other liabilities.................................................. 1,438,551 1,975,261 ------------- ------------- Total current liabilities...................................... 74,501,671 76,477,507 ------------- ------------- Long-Term Liabilities Other long-term liabilities........................................ 70,501 57,570 ------------- ------------- Total long-term liabilities.................................... 70,501 57,570 ------------- ------------- Total liabilities......................................... 74,572,172 76,535,077 ------------- ------------- Commitments and Contingencies........................................... -- -- ------------- ------------- Stockholders' Equity Common stock, par value $.01 per share (authorized shares - 20,000,000; issued and outstanding shares - 2,829,117 for 2003 and 2,844,246 for 2002)..................................... 32,791 32,943 Additional paid-in capital......................................... 15,703,815 16,004,747 Retained earnings.................................................. (1,107,327) (1,114,514) Accumulated other comprehensive income............................. 387,475 571,645 ------------- ------------- Total stockholders' equity................................ 15,016,754 15,494,821 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 89,588,926 $ 92,029,898 ============= ============= See accompanying notes.
-2- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------- ------------------------------ 2003 2002 2003 2002 -------------- ------------- ------------- ------------- REVENUE: Gross revenue (see note 9)............... $ 7,036,025 $ 7,755,145 $ 3,399,274 $ 3,882,241 ------------- ------------- ------------- -------------- Total gross revenue.................... 7,036,025 7,755,145 3,399,274 3,882,241 ------------- ------------- ------------- -------------- COST OF SALES: Cost of sales (see note 9)............... 1,073,163 1,805,741 479,961 982,068 ------------- ------------- ------------- -------------- Total cost of sales.................... 1,073,163 1,805,741 479,961 982,068 ------------- ------------- ------------- -------------- GROSS PROFIT (see note 9)................... 5,962,862 5,949,404 2,919,313 2,900,173 ------------- ------------- ------------- -------------- EXPENSES: Employee compensation.................... 3,392,909 3,887,554 1,720,139 1,892,514 Employee insurance and benefits.......... 588,808 651,200 291,246 295,696 Data processing.......................... 404,007 286,284 214,532 156,917 Mail and courier......................... 52,301 65,124 27,038 35,200 Telephone................................ 88,027 127,425 43,872 61,552 Equipment rental and maintenance......... 186,041 211,258 103,522 82,203 Occupancy................................ 416,708 402,194 216,601 209,783 Provision for depreciation and amortization (see note 2).............. 182,648 144,454 88,511 97,290 Professional fees........................ 256,572 282,846 193,725 245,822 Travel and entertainment................. 83,587 78,431 18,664 77,045 Interest................................. 1,396 (7,697) 698 522 Errors expense........................... (75,466) (137,245) (100,823) 31,768 Provision for bad debt................... 113,385 31,407 68,045 3,198 Business development costs............... -- 11,250 (12,000) (25,400) Insurance................................ 194,984 101,916 81,197 57,240 Other operating expenses (see note 10)... 275,525 150,840 161,699 92,507 ------------- ------------- ------------- -------------- Total expenses......................... 6,161,432 6,287,241 3,116,666 3,313,857 ------------- ------------- ------------- -------------- Loss from continuing operations.......... (198,570) (337,837) (197,353) (413,684) Other income (loss)...................... 5,991 (24,202) 10,519 (18,107) Income tax benefit (expense)............. 43,930 3,177 53,930 (1,935) ------------- ------------- ------------- -------------- Net loss from continuing operations......... (148,649) (358,862) (132,904) (433,726) Gain on sale of operations (net of income taxes of $63,930, $0, $63,930 and $0, respectively)........................ 93,534 -- 93,534 -- Income (loss) from discontinued operations (net of income taxes of $0, $8,177, $0 and $(1,935), respectively)........... 62,301 (512,101) 36,905 (430,189) ------------- ------------- ------------- -------------- Net income (loss)........................... $ 7,186 $ (870,963) $ (2,465) $ (863,915) ============= ============= ============= ============== Per share income (loss) Basic common shares outstanding.......... 2,829,117 2,858,972 2,829,117 2,858,972 Net income (loss) - basic................ $ -- $ (0.30) $ -- $ (0.30) Fully diluted common shares outstanding (see note 11)......................... 2,829,117 2,858,972 2,829,117 2,858,972 Net income (loss) - fully diluted........ $ -- $ (0.30) $ -- $ (0.30) See accompanying notes.
-3- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------- ------------------------------ 2003 2002 2003 2002 -------------- ------------- ------------- ------------- Net income (loss)........................... $ 7,186 $ (870,963) $ (2,465) $ (863,915) Other comprehensive income (loss), net of tax Unrealized loss on securities, net of reclassification adjustment............ (184,170) 151,134 (111,832) 210,252 ------------- ------------- ------------- -------------- Comprehensive loss.......................... $ (176,984) $ (719,829) $ (114,297) $ (653,663) ============= ============= ============= ============== See accompanying notes.
-4- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) SIX MONTHS ENDED JUNE 30, ----------------------------------- 2003 2002 -------------- -------------- CASH FLOW FROM OPERATING ACTIVITIES Net income (loss).............................................. $ 7,186 $ (870,963) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Income tax payable, net of deferred tax..................... (298,755) 4,671 Provision for depreciation and amortization (see note 2).... 256,829 221,523 Provision for loan losses................................... 72,000 544,403 Provision for bad debt...................................... 112,385 33,352 Bond accretion.............................................. (14,044) (13,315) Unrealized (gain)/loss on securities........................ (6,102) 10,603 Loss on disposal of fixed assets............................ 111 13,599 (Increase) decrease in operating assets: Receivables.............................................. 106,180 (340,949) Receivables from premium financings...................... (538,667) (647,618) Loan receivables, net of repayments...................... 1,716,678 (13,834,058) Prepaid and sundry assets................................ 485,859 172,523 Notes receivable......................................... 800,000 -- Increase (decrease) in operating liabilities: Deposits................................................. 32,101 10,074,008 Accounts payable and accrued expenses.................... (460,589) (1,192,327) Accrued compensation and benefits........................ (84,808) (216,760) Other liabilities........................................ (536,708) (305,440) ------------- ------------- Net cash provide by (used in) operating activities... 1,649,656 (6,346,748) ------------- ------------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of equipment.......................................... (38,047) (132,233) Due from banks................................................. (78,287) (62,442) Bond investments............................................... 5,181,041 (4,438,789) Federal funds sold/(purchased)................................. (4,498,000) 3,592,000 Securities sold/purchased under agreement to repurchase........ -- 163,500 Borrowed funds................................................. (870,550) 4,888,763 Proceeds from sale of securities............................... -- 234,556 Investment in securities and mutual funds...................... (11,461) (303,910) ------------- ------------- Net cash provided by (used in) investing activities.. (315,304) 3,941,445 ------------- ------------- CASH FLOW FROM FINANCING ACTIVITIES Retirement of common stock..................................... (301,084) (7,920) Borrowings on line of credit................................... -- 795,220 Repayment of borrowings........................................ -- (443,154) Repayment of capital lease obligations......................... -- (285) ------------- ------------- Net cash provided by (used in) financing activities.. (301,084) 343,861 ------------- ------------- Net increase (decrease) in cash and cash equivalents............... 1,033,268 (2,061,442) Cash and cash equivalents - beginning of year...................... 4,564,949 8,844,482 ------------- ------------- Cash and cash equivalents - end of period.......................... $ 5,598,217 $ 6,783,040 ============= ============= See accompanying notes.
-5- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2003 AND 2002 ---------------------- 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 three lines of business: trust and retirement services; mutual fund administration services; 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 six- and three-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The balance sheet at December 31, 2002 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, 2002. Financial Statement Presentation -------------------------------- Certain amounts in the 2002 financial statements have been reclassified to conform to the 2003 presentation. For segment report purposes, Unified Financial Securities (our brokerage subsidiary) has been included in mutual fund administration services based upon management's decision to exit the clearing, discount and full services brokerage operations and concentrate on mutual fund distribution. Commonwealth Premium Finance Corporation has been included in the corporate segment due to Unified Banking Company being reflected as a discontinued operation based upon the Company's agreement to sell Unified Banking Company. -6- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2003 AND 2002 ---------------------- Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The provision for depreciation and amortization expense on our Consolidated Statements of Cash Flow includes depreciation and amortization from continuing and discontinued operations for the six months ended June 30, 2003 and 2002. On our Consolidated Statements of Operations for the six and three months ended June 30, 2003 and 2002, the provision for amortization and depreciation is for our continuing operations, and does not include a provision for discontinued operations. Use of Estimates ---------------- During 2002, we experienced operational issues with respect to our mutual fund administrative services affiliate, which issues primarily are related to problems associated with our reconciliation of various accounts. In connection therewith, we established an $854,000 reserve, $454,000 of which is related to possible reconciliation losses and $400,000 of which is related to estimated costs to ascertain the extent and nature of such losses and to design control procedures and system enhancements to ensure that such reconciliation issues do not recur. During the six and three months ended June 30, 2003, we expended $251,179 and $206,618, respectively, of the $400,000 reserve. Note 3 - DISCONTINUED OPERATIONS Sale of Unified Banking Company ------------------------------- On June 9, 2003, we entered into a Stock Purchase Agreement with Blue River Bancshares, Inc., an Indiana corporation. Pursuant to such agreement, Blue River Bancshares would acquire all of the outstanding shares of capital stock of our wholly owned banking subsidiary, Unified Banking Company, for $8.2 million in cash. The consummation of the transaction is contingent upon various contingencies and conditions, including approval of the Stock Purchase Agreement by our stockholders, regulatory approvals and completion by Blue River Bancshares of certain financing arrangements for the transaction. The transaction is expected to close in the fourth quarter of 2003. Unified Banking Company commenced operations on November 1, 1999. Included in our consolidated financial statements at June 30, 2003 and 2002 were the bank's total assets of $79,118,270 and $81,861,987 respectively, and total liabilities of $73,465,742 and $76,410,959, respectively. As of such dates, certain components of Unified Banking Company's unconsolidated assets and liabilities were as follows: -7- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2003 AND 2002 ---------------------- Note 3 - DISCONTINUED OPERATIONS (continued) JUNE 30, --------------------------- 2003 2002 ---------- ----------- Due from banks.............................................. $1,734,835 $ 1,419,925 Federal funds sold.......................................... 5,977,000 441,000 Investments in securities: US agency securities (includes $1,854,461 for 2003 and $4,943,491 for 2002, see note 12)...................... 12,094,406 20,999,118 FHLB stock................................................ 518,900 497,300 Loans: Real estate loans......................................... 34,927,666 36,883,451 Commercial loans (includes a $1,900,000 loan to our premium finance company, see note 12).......................... 18,680,106 12,990,171 Installment loans......................................... 4,697,303 7,962,549 Other loans............................................... 8,113 104,061 Allowance for loan losses................................. 622,864 490,000 Bank deposits: Demand deposits (includes $1,854,461 for 2003 and $4,943,491 for 2002, see note 12)...................... 7,350,303 11,104,796 Official checks........................................... 368,365 93,126 NOW accounts.............................................. 3,826,619 3,697,056 Money market accounts..................................... 10,192,859 11,030,744 Savings accounts.......................................... 92,101 71,438 Time deposits............................................. 41,408,329 39,753,253 Other interest-bearing deposits........................... 5,925,208 5,172,627 Federal and borrowed funds.................................. 3,872,233 5,052,263
Sale of Insurance Operations ---------------------------- On December 17, 2001, we sold substantially all of 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 was subject to possible indemnification claims of Arthur J. Gallagher & Co. pursuant to the sale agreement. As of December 31, 2001, we established a liability of $800,000 related to the escrow. As of June 30, 2003, we believed there was a current potential for approximately $250,000 in claims against the escrow, which amount is $170,000 less than our December 31, 2002 estimate. Based thereupon, we recorded $175,000 of the escrow as gain on sale of operations during the quarter ended June 30, 2002 (such amount is in addition to the $280,000 we recorded as income related to the sale during the year ended December 31, 2002). As of June 30, 2003, we had recorded to income $455,000 of the $800,000, with $345,000 remaining for claims against the escrow ($250,000 reserved for submitted claims and $95,000 reserved for possible future claims). -8- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2003 AND 2002 ---------------------- 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. As of June 30, 2003 and 2002, options to acquire 104,986 and 126,621 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 50,000 and 54,545 shares, respectively, of our common stock outside of such plan (see note 10). A summary of our outstanding stock options as of June 30, 2003 and 2002 is as follows: JUNE 30, ------------------------------------------------ 2003 2002 --------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ------ ----- ------ ----- Options outstanding at beginning of year...... 161,986 $38.24 149,396 $41.94 Granted....................................... -- -- 38,050 16.50 Option to acquire 60,000 shares at $50.00 per share converted to option to acquire 54,545 shares at $55.00 per share.................. -- -- (5,455) n/a Option to acquire 54,545 shares at $55.00 per share converted to option to acquire 50,000 shares at $60.00 per share.................. (4,545) n/a -- -- Forfeitures................................... (2,455) 17.02 (825) 37.37 Options outstanding at end of period.......... 154,986 39.69 181,166 37.88 Options exercisable at end of period.......... 154,653 39.69 166,301 37.82 Options available for future grants........... 145,014 n/a 123,379 n/a
As of June 30, 2003, 82,681 of such options were intended to qualify as incentive stock options pursuant to Section 422 of the Internal Revenue Code of 1986, as amended. 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, -9- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2003 AND 2002 ---------------------- Note 4 - OPTIONS (continued) "Accounting for Stock-Based Compensation," the effect would have been immaterial for the three and six months ended June 30, 2003 and 2002 (based upon the Black-Scholes option pricing model). Note 5 - RENTAL AND LEASE INFORMATION We lease certain office facilities and equipment. Continuing operations' rental expense for the six months ended June 30, 2003 and 2002 was $416,708 and $402,194, respectively. Our discontinued operation's rental expense for the six months ended June 30, 2003 and 2002 was $67,428 and $67,428, respectively. At June 30, 2003, we were committed to minimal rental payments under certain noncancellable operating leases. As of June 30, 2003, the minimum future rental commitments for each of the succeeding five years subsequent to June 30, 2003 were as follows: 2004..................................... $ 654,964 2005..................................... 644,977 2006..................................... 626,984 2007..................................... 613,241 2008..................................... 378,895 Thereafter............................... 484,950 ------------ Total............................... $ 3,404,011 ============ Note 6 - 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 7 - REGULATORY 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 June 30, 2003, the net capital and ratio of aggregate indebtedness for Unified Financial Securities were $143,085 and 0.5 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. Under the Office of Thrift Supervision's regulatory capital requirements, savings associations must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core" capital equal to at least 4.0% of adjusted total assets and "total" capital (a combination of "core" and "supplementary" capital) equal to 8.0% of risk-weighted assets. In addition, the Office of -10- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2003 AND 2002 ---------------------- Note 7 - REGULATORY REQUIREMENTS (continued) Thrift Supervision has adopted regulations that impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0%. As of June 30, 2003, Unified Banking Company had a total risk-based capital ratio of 11.1%, a ratio of Tier 1 capital to risk-weighted assets of 10.1% and a ratio of Tier 1 capital to adjusted total assets of 8.3%. Unified Trust Company, National Association, a limited purpose national trust company, is chartered, regulated and examined by the Office of the Comptroller of the Currency. Unified Trust Company, NA also is a member of the Federal Reserve System. As a national trust company, the activities of Unified Trust Company, NA must comply with various statutory and regulatory requirements, including, among other things, the maintenance of adequate capital and the exercise of fiduciary powers. Currently, Unified Trust Company, NA is required to maintain a minimum of $2.0 million in capital, and may be required to maintain additional minimum capital as assets under management at the trust company increase. As of June 30, 2003, Unified Trust Company, NA had $2,245,007 in capital. Note 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair value of our financial instruments at June 30, 2003 and 2002. 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. JUNE 30, ------------------------------------------------------- 2003 2002 -------------------------- ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- (IN THOUSANDS) Financial assets: Cash and cash equivalents............ $ 5,598 $ 5,598 $ 6,783 $ 6,783 Due from banks....................... 1,735 1,735 1,420 1,420 Federal funds sold...................... 5,977 5,977 441 441 Bond investments..................... 10,240 10,240 16,056 16,056 Securities and mutual funds.......... 727 727 600 600 Notes receivable..................... -- -- 800 800 Loans, net of allowance.............. 55,790 55,790 56,995 56,995 Receivable from premium financings... 3,499 3,499 2,864 2,864 Receivables (trade), net of allowance 2,389 2,389 3,571 3,571 Prepaid and deposits................. 366 366 253 253 Financial liabilities: Current liabilities.................. 74,502 74,502 76,472 76,472
-11- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2003 AND 2002 ---------------------- Note 9 - DISCLOSURES ABOUT REPORTING SEGMENTS We have three reportable operating segments: trust and retirement services; mutual fund administration services; and investment advisory services. In addition, we also report corporate as a separate segment, which includes our premium finance company. 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 non-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 three or six months ended June 30, 2003 and 2002: -12- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2003 AND 2002 ---------------------- Note 9 - DISCLOSURES ABOUT REPORTING SEGMENTS (continued) AS AND FOR THE FOR THE SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------- ------------------------------ 2003 2002 2003 2002 -------------- ------------- ------------- ------------- Revenue: -------- Trust and retirement..................... $ 2,484,204 $ 2,665,403 $ 1,229,770 $ 1,336,981 Mutual fund administration............... 3,447,970 3,994,863 1,641,558 2,002,972 Investment advisory...................... 708,205 803,630 337,079 387,700 Corporate................................ 395,646 291,249 190,867 154,588 ------------- ------------- ------------- -------------- Total............................... $ 7,036,025 $ 7,755,145 $ 3,399,274 $ 3,882,241 ============= ============= ============= ============== Gross profit: ------------- Trust and retirement..................... $ 2,054,022 $ 2,171,023 $ 1,017,085 $ 1,064,446 Mutual fund administration............... 2,920,763 2,814,314 1,423,481 1,360,754 Investment advisory...................... 592,431 672,818 287,880 320,385 Corporate................................ 395,646 291,249 190,867 154,588 ------------- ------------- --------------- -------------- Total............................... $ 5,962,862 $ 5,949,404 $ 2,919,313 $ 2,900,173 ============= ============= =============== ============== Total assets: ------------- Trust and retirement..................... $ 2,567,274 $ 2,926,323 Mutual fund administration............... 2,460,476 2,490,872 Investment advisory...................... 1,328,400 1,512,745 Corporate................................ 4,114,506 4,409,374 Unified Banking Company.................. 79,118,270 81,861,987 ------------- ------------- Total............................... $ 89,588,926 $ 93,201,301 ============= ============= Depreciation and amortization: ------------------------------ Trust and retirement..................... $ 65,406 $ 59,285 Mutual fund administration............... 89,710 64,691 Investment advisory...................... 4,833 9,988 Corporate................................ 22,699 10,490 ------------- ------------- Total............................... $ 182,648 $ 144,454 ============= ============= Capital expenditures: --------------------- Trust and retirement..................... $ -- $ 28,995 Mutual fund administration............... 24,810 87,990 Investment advisory...................... -- 1,204 Corporate................................ 3,240 8,244 Unified Banking Company.................. 9,997 5,800 ------------- ------------- Total............................... $ 38,047 $ 132,233 ============= =============
-13- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2003 AND 2002 ---------------------- Note 10 - 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, 2004 and 2005, the exercise price per share of our common stock subject to the option will be $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, 2004 by the holder of the note (whether the investor, the executive officers or any other holder): (a) we would issue 50,000 shares of stock (46,153 after May 23, 2004) 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 six months ended June 30, 2003 and 2002, and the three months ended June 30, 2003 and 2002, we received payments totaling $55,621 and $219,455, respectively, and $29,771 and $99,889, 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) JUNE 30, 2003 AND 2002 ---------------------- Note 11 - 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 six and three months ended June 30, 2003 and 2002, all potential common shares were considered to be anti-dilutive and were excluded from the calculation of diluted earnings/loss per share. Note 12 - RELATED PARTY TRANSACTION As of June 30, 2003, December 31, 2002 and June 30, 2002, $1,854,461, $1,799,220 and $4,943,491, respectively, were eliminated from both bond investments and deposits on our Consolidated Statements of Financial Condition, which amounts represented cash on deposit at our bank from various subsidiaries of our company. We also have eliminated in consolidation $1,900,000 outstanding as of June 30, 2003 under a line of credit from Unified Banking Company to Commonwealth Premium Finance Corporation. -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 allowance for loan losses 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 three 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, 2002. 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 o Management of wealth for individuals through a suite of family-office services. -16- 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 SIX MONTHS ENDED JUNE 30, 2003 AND 2002 Revenue for the six months ended June 30, 2003 compared to the same period of 2002 declined $719,120, or 9.3%, from $7,755,145 to $7,036,025. For such periods, gross profit increased by $13,458, or 0.2%, from $5,949,404 to $5,962,862. For the first six months of 2003 compared to the same period of 2002, trust and retirement services revenue and gross profit declined by $181,199, or 6.8%, and $117,001, or 5.4%, respectively, primarily due to a decline in the average level of assets under management. For the six months ended June 30, 2003, our trust and retirement services operation experienced an increase in assets under management, but such increase occurred in the later part of such six-month period, which resulted in a decline in average assets during such period. During the six months ended June 30, 2003, our trust and retirement services operation added 54 new accounts, representing approximately $69.7 million in assets under management, but also lost 28 accounts representing approximately $18.2 million in assets under management. As of June 30, 2003, our trust and retirement services operation had approximately $582.0 million in assets under management compared to $525.1 million as of June 30, 2002, an increase of approximately 10.8%. While trust and retirement services assets under management increased, the financial markets, in general, declined, as was reflected by a 1.5% decline in the S&P 500 from June 30, 2002 to June 30, 2003. For such periods, mutual fund administration services revenue, which now includes Unified Financial Securities, our broker-dealer subsidiary, declined $546,893, or 13.7%, and gross profit increased $106,449, or 3.8%, each primarily due to the inclusion of Unified Financial Securities in the results of our mutual fund administration services operation. As previously disclosed, management made the decision to exit the retail and discount brokerage business and focus the efforts of our brokerage subsidiary on the distribution of mutual funds. For such periods, transfer agency revenue and gross profit increased $437,562, or 46.3%, and $477,192, or 61.0%, respectively, due to the addition of the Huntington Funds in June 2002, which added approximately $3.0 billion in assets for the entire period of 2003. Fund accounting revenue and gross profit decreased $43,389, or 5.4%, and $66,606, or 9.5%, respectively. Administration revenue and gross profit decreased $114,214, or 15.7%, as more fund clients discontinued operations due to continuing poor market conditions. Trail income declined by $122,800, due to a decrease in basis points received from one of our mutual fund providers. Investment management fee income and gross -17- profit declined $173,525 due to Unified Investment Advisers, Inc. ceasing to serve as the investment advisor to the Liquid Green Money Market Fund. As of June 30, 2003, we provided mutual fund administrative services to 29 mutual fund families consisting of approximately 168 portfolios and approximately $11.5 billion in assets under service, compared to 30 mutual fund families consisting of approximately 192 portfolios and approximately $8.9 billion in mutual fund assets under service as of June 30, 2002. For the six months ended June 30, 2003 compared to the same period of 2002, Unified Financial Securities' gross revenue declined $533,014, or 56.8%, and gross profit declined $9,995, or 4.7%. The decline in revenue primarily was attributable to a decline of $337,548 in clearing revenue due to our termination of most of our clearing relationships, with the remainder anticipated to occur during the third quarter of 2003. Commission revenue from our full service and CPA business, which ceased at June 30, 2003, decreased $44,858. Trail commission revenue declined $108,101, or 40.5%, as a result of lower asset levels attributable to the terminated relationships discussed above and a reduction in the basis points received from one of our mutual fund relationships. For the six months ended June 30, 2003 compared to the same period of 2002, investment advisory revenue and gross profit declined $95,425, or 11.9%, and $80,387, or 11.9%, respectively. Such declines primarily were due to the lower market values of assets under management at such operation. Assets under management at our investment advisory operation declined $54.4 million, or 18.9%, from $287.8 million at June 30, 2002 to $233.4 million at June 30, 2003. Of such decline, approximately $37.9 million, or 13.2%, was attributable to the transfer of assets in the Liquid Green Money Market Fund to the Huntington Funds. For such periods, corporate revenue and gross profit increased $104,397, or 35.8%, from $291,249 to $395,646, primarily due to a $80,432, or 27.8%, increase in revenues at our premium finance company. Revenues at such company increased primarily as the result of an increased volume of loans outstanding and an increased interest spread due to a reduction in the cost of borrowed funds. Total expenses declined $125,809, or 2.0%, for the six months ended June 30, 2003 compared to the same period of 2002. Employee compensation expense declined by $494,645, or 12.7%. This decline primarily was attributable to salary reductions taken by certain officers of our company during March and April of 2002, which reductions ranged from 20% to 40% of such officers' annualized salary, and a reduced employee workforce. Employee insurance and benefits expense declined $62,392, or 9.6%, primarily due to reduced staffing, partially offset by an increase in insurance premiums. Data processing expense increased $117,723, or 41.1%, primarily due to a $104,000 increase at our trust and retirement services operation due to its expanded usage of vendor products. Telephone costs declined $39,398, or 30.9%, primarily due to the elimination of our wide area network. Equipment rental and maintenance expense declined by $25,217, or 11.9%. During the first half of 2002, our mutual fund administration services operation and our trust and retirement services operation upgraded various software products, without any corresponding expenses for the first half of 2003. Also contributing to the decline was the termination of a clearing relationship. For such periods, depreciation and amortization expense increased $38,194, or 26.4%. The depreciation and amortization expense recorded for the first half of 2003 is typical of our normal, recurring expense. The expense recorded for the first half of 2002 included a reversal of an accrual made during a previous year, which resulted in a reduction of amortization and depreciation expense for the first half of 2002 compared to the same period of 2003. Insurance expense increased $93,068, or 91.3%, primarily due to our purchase of expanded insurance coverage and due to increased insurance premiums charged for coverage due to a hardening of the insurance markets. For such -18- periods, errors expense increased $61,779 to a credit of $75,466 for the first half of 2003 from a credit of $137,245 for the same period of 2002, primarily due to a $140,000 net recovery during 2002 from an insurance carrier with respect to a previously recorded loss at our mutual fund administration services operation versus a $100,000 recovery in 2003. Our provision for bad debt increased $81,978, or 261.0%, due to management's assessment of the collectibility of certain receivables at our mutual fund administration services operation. For such periods, other operating expenses increased $124,685, or 82.7%, primarily due to a $163,834 net decrease in the benefit received from VSX Holdings during the first half of 2003 compared to the same period of 2002. Removing the effect of the VSX Holdings expense reimbursement, we experienced a $39,149 decline in other operating expenses. For the six months ended June 30, 2003, we recorded income of $175,000 from the escrow established for possible indemnification claims of Arthur J. Gallagher & Co. pursuant to the sale agreement dated December 17, 2001. Expenses related to the pending sale of Unified Banking Company were deducted from such amount. For the six months ended June 30, 2003, we recorded a $93,534 gain on sale of operations, net of income taxes, compared to $0 for the same period of the prior year. Income from discontinued operations for the first six months of 2003 was $62,301 compared to a loss of $512,101 for the same period of 2002. Income for the six months ended June 30, 2003 at Unified Banking Company was $63,101 compared to a loss of $525,466 for the same period of 2002. During June 2002, Unified Banking Company charged-off a $455,000 loan, which charge-off accounted for most of the 2002 loss. Net income increased $878,149 from a loss of $870,963 for the six months ended June 30, 2002 to a profit of $7,186 for the same period of 2003. Income from discontinued operations improved $574,402 with Unified Banking Company accounting for $588,567 of the improvement (as previously discussed, $455,000 of the $588,567 was related to one loan that was written off in 2002). In addition, we recorded a net gain on the sale of operations of $93,534 without a corresponding charge in the prior year. The loss from continuing operations reflected an improvement of $139,267 from a loss of $337,837 in 2002 to a loss of $198,570 for the six months ended June 30, 2003. Expenses declined $125,809 and gross profit increased $13,458. Also contributing to the improve was an unrealized gain on securities of $5,991 for the six months ended June 30, 2003 compared to a loss of $24,202 for the same period of 2002, and continuing operations received an income tax benefit of $43,930 during 2003 compared to a $3,177 tax benefit recorded during 2002. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002 Revenue for the quarter ended June 30, 2003 compared to the same quarter of 2002 declined $482,967, or 12.4%, from $3,882,241 to $3,399,274. For such quarters, gross profit increased by $19,140, or 0.7%. For the quarter ended June 30, 2003 compared to the same quarter of 2002, trust and retirement services revenue declined $107,211, or 8.0%, and gross profit declined $47,361, or 4.4%, primarily for the reasons previously discussed. For such quarters, mutual fund administration services revenue declined $361,414, or 18.0%, and gross profit increased $62,727, or 4.6%, primarily due to the inclusion of the results of Unified Financial Securities in mutual fund administration services operation. Unified Fund Services' gross revenue for the quarter ended June 30, 2003 declined $62,353, or 4.0%, and gross profit increased $42,424, or 3.3%. For such quarters, transfer agency revenue and gross profit increased $181,738, or 35.5%, and $221,852, or 54.8%, respectively, due to the addition of the Huntington Funds in June 2002. Fund accounting revenue and gross profit declined $42,176, and $42,330, -19- respectively. Administration revenue and gross profit declined $62,015, or 16.7%. Investment management income and gross profit declined $85,710, due to Unified Investment Advisers ceasing to serve as the advisor to the Liquid Green Money Market Fund. For the second quarter of 2003 gross revenue attributable to our brokerage subsidiary declined $299,061, or 54.1%, and gross profit increased $20,303, or 32.4%. The decline in revenue was, in large part, attributable to a decline of $216,241 in clearing revenue due to our termination of most of our clearing relationships. For such quarters, trail commission revenue decreased $39,396 and gross profit increased $33,308. Commission revenue from our full service and CPA business, which ceased at June 30, 2003, decreased $32,818. For the quarter ended June 30, 2003 compared to the same quarter of 2002, investment advisory revenue and gross profit declined $50,621, or 13.1%, and $32,505, or 10.1%, respectively. Such declines primarily were due to the lower market values of assets under management at such operation. For such quarters, corporate revenue and gross profit increased $36,279, or 23.5%, primarily due to a $37,808, or 24.7%, increase in revenues at our premium finance company. Revenues increased primarily as the result of an increased volume of loans outstanding and an increased interest spread due to a reduction in the cost of borrowed funds. Total expenses declined $197,191, or 6.0%, for the quarter ended June 30, 2003 compared to the same quarter of 2002. Employee compensation expense declined by $172,375, or 9.1%. This decline primarily was attributable to a reduced employee workforce. Data processing expense increased $57,615, or 36.7%, primarily due to a $61,000 increase at our trust and retirement services operation due to its expanded usage of vendor products. Telephone costs declined $17,680, or 28.7%, primarily due to the elimination of our wide area network. Equipment rental and maintenance expense for our mutual fund administrative services operation increased by $21,319, or 25.9%, primarily due to an increase in phone service maintenance in the second quarter and a maintenance agreement on an imaging scanner. Also contributing to the increase was a $15,500 accrual in June 2003 for a new cash management system for our mutual fund administrative services operation. For such quarters, professional fees declined $52,097, or 21.2%, primarily due to a $30,000 reimbursement received from a third party with respect to legal fees previously paid by our brokerage subsidiary. Travel and entertainment costs decreased $58,381, or 75.8%, primarily due to the reversal of a $35,720 accrual taken in the first quarter of 2002. Also contributing was less travel at the corporate and mutual fund administration services segments. Insurance expense increased $23,957, or 41.9%, primarily due to our purchase of expanded insurance coverage and due to increased insurance premiums charged for coverage due to a hardening of the insurance markets. For such quarters, errors expense decreased $132,591, to a credit of $100,823 for the second quarter of 2003 from an expense of $31,768 for the same period of 2002, primarily due to a $100,000 recovery in 2003. Our provision for bad debt increased $64,847 due to management's assessment of the collectibility of certain receivables at our mutual fund administrative services operation. For such quarters, other operating expenses increased $69,192, or 74.8%, primarily due to a $70,118 net decrease in the benefit received from VSX Holdings during the second quarter of 2003 compared to the same period of 2002. Income from discontinued operations for the second quarter of 2003 increased $467,094 compared to the same quarter of 2002. For the quarter ended June 30, 2003, Unified Banking Company recorded income of $37,406 compared to a loss of $427,027 for the same quarter 2002. As previously discussed, the increase from 2002 to 2003 primarily was attributable to the $455,000 loan that Unified Banking Company charged-off in June 2002. For such quarters, our net loss declined $861,450, from a loss of $863,915 in the second quarter of 2002 to a loss of $2,465 for the same quarter of 2003, primarily due to income from discontinued operations of $36,905 in 2003 compared to a loss from discontinued operations of $430,189 in 2002, and the $93,534 income recorded (net of income taxes) during 2003, which principally was -20- related to the gain on sale of operations. Also, contributing to the improvement was a decrease in the net loss from continuing operations of $300,822, primarily due to a reduction in expenses of $197,191. CRITICAL ACCOUNTING POLICIES AND ESTIMATES GENERAL. Management's Discussion and Analysis of Financial Condition and Results of Operations is based on the consolidated financial statements and accompanying notes that have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). Our significant accounting policies are described in note 2 to the consolidated financial statements contained in this report and in note 2 to the audited, consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2002. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carry values of assets and liabilities that are not readily apparent from other sources. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such, have a greater possibility of producing results that could be materially different than originally reported. However, we are not currently aware of any reasonable likely events or circumstances that would result in materially different results. Senior management has discussed the development, selection and disclosure of these policies and estimates with our company's independent auditor and the members of the audit, nominating and compensation committee of our board of directors. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the consolidated financial statements. This discussion should be read in conjunction with the audited, consolidated financial statements and the related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2002. VALUATION OF LONG-LIVED ASSETS, INCLUDING GOODWILL. We review intangible assets and our operating assets, including goodwill, for impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Our asset impairment review assesses the fair value of assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. This approach uses our estimates of future market growth, forecasted revenue and costs, expected periods the assets will be utilized and the appropriate discount methods. Such evaluations of impairment of long-lived assets, including goodwill, are an integral part of, but not limited to, our strategic reviews of our business and operations performed in conjunction with restructuring actions. When an impairment is identified, the carrying value of the asset is reduced to its estimated fair value. Deterioration of our business in a geographic region or within a business segment in the future could also lead to impairment adjustments as such issues are identified. Critical estimates in valuing goodwill include, but are not limited to, those discussed above. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Effective January 1, 2002, we adopted Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets," at which time goodwill amortization ceased. Goodwill was tested for impairment by comparing implied value to its -21- carry value. Based upon a third-party valuation as of December 31, 2002, we have determined that our recorded goodwill was not impaired during the quarter ended June 30, 2003. Impairment adjustments after adoption of the accounting rule, if any, are required to be recognized as operating expense when determined. ACCRUED LIABILITY FOR OPERATIONAL ISSUES. During 2002, we experienced operational issues at our mutual fund administration services affiliate, primarily relating to reconciliation issues. In connection therewith, we established an $854,000 reserve, $454,000 of which is related to possible reconciliation losses, which may or may not be recoverable, and $400,000 of which is related to estimated costs for professional fees, related travel and administration expenses to ascertain the nature and extent of such losses and to redesign control procedures and make other system enhancements to ensure that such reconciliation issues do not recur. Management's estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the six and three months ended June 30, 2003, we expended $251,179 and $206,618, respectively, of the $400,000 reserve. Management is acutely aware of opportunities for enhanced controls at our mutual fund services administration operation. In fact, three initiatives are underway that should have a dramatic positive impact on quality. They are introduction of new systems, more front-end editing and personnel reorganization at such operation that will allow for additional management oversight in all operating areas. REVENUE RECOGNITION. Our trust and retirement services operation's revenue reflects a revenue sharing arrangement, as well as investment adviser fees earned by third party advisers, which are recorded on the accrual basis. The fees earned by the operation and paid to sub-advisers are based on established fee schedules and contracts. Generally, fees paid to our trust and retirement services operation by the various mutual funds in which client assets are invested are used to offset the fees due from the client. In the event such fees do not cover all fees due to our operation, the remainder is collected from the client. In the event such fees exceed the fees due, a credit is given to the client. Revenue is recorded as it is earned each month based upon assets under management times a stated fee schedule. Historically, we have experienced very low levels of deviation from recorded estimates, and we assume the estimates are reasonable. INVESTMENT SECURITIES AVAILABLE-FOR-SALE AT UNIFIED BANKING COMPANY. Securities expected to be held for an indefinite period of time are classified as available-for-sale and carried at fair value. Unrealized gains and losses are reported as a separate component of stockholders' equity, net of estimated income taxes. Substantially all of our securities have readily determinable market prices that are derived from third party pricing services. Decisions to purchase or sell these securities are based on economic conditions, including changes in interest rates, liquidity and asset/liability management strategies. At June 30, 2003, we reported accumulative other comprehensive income of $387,475. The net change during the six months ended June 30, 2003 from December 31, 2002 was a decline of $184,170. ALLOWANCES FOR DOUBTFUL ACCOUNTS AND LOAN LOSSES. We evaluate the collectibility of our trade and financing receivables based on a combination of factors. We regularly analyze our customer accounts and, in the event we become aware of a specific customer's inability to meet its financial obligations to us (such as in the case of bankruptcy filings or deterioration in the client's financial position or operating results), we record a reserve for bad debt or loan loss to reduce the related receivable to an amount we reasonably believe is collectible. We also record reserves for loan losses for clients based on requirements of the Office of Trust Supervision, which requires an allowance based upon a specific percentage of loans outstanding. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further adjusted. -22- TAXES ON EARNINGS. Our effective tax rate is low because of our federal income tax net operating loss carryforwards. We record the tax benefit of the net operating loss when realized. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY. Our primary sources of liquidity historically have been and continue to be cash flow from operating activities, as well as cash generated through our private placements in 1998 and 1999. We also received $800,000 and $8.4 million in cash for the six months ended June 30, 2003 and the year ended December 31, 2001, respectively, in connection with the sale of the assets of our insurance subsidiaries in 2001. The net increase in cash and cash equivalents at June 30, 2003 from December 31, 2002 was $1,033,268. Of the inflow, we received $800,000 in cash from the note receivable recorded in connection with the sale of the assets of our insurance subsidiaries in 2001. Operating assets such as loans to customers, premium financing loans, trade receivables, due from banks, federal funds sold and bond investments accounted for $2,363,343 in sources of cash, and operating liabilities such as accounts payable and other liabilities accounted for $2,219,309 in uses of cash. Cash provided from operating activities, including depreciation and amortization, provisions for loan loss and bad debt, generated cash in the amount of $428,365. Additionally, retirement of common stock resulted in a usage of cash of $301,084, as did capital expenditures of $38,047. We also received $55,621 from VSX Holdings, LLC during the six-month period ended June 30, 2003 in connection with services we provided relating to the construction and development of the VSX marketplace and its corresponding products. 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 or 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. 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 $15,016,754 at June 30, 2003 compared to $15,494,821 at December 31, 2002. The decline in total equity was due to the retirement of common stock and our comprehensive loss, partially offset by our net income. We had no material commitments for capital expenditures as of June 30, 2003. -23- 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 quarterly 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. -24- The following table illustrates Unified Banking Company's estimated static gap with prepayments calculated as of June 30, 2003: 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 Federal Funds sold......... $ 5,977 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 5,977 Securities................. U.S. agencies............ - 629 596 556 1,444 1,145 900 5,143 270 824 11,507 FHLB stock............... 519 - - - - - - - - - 519 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total securities....... 519 629 596 556 1,444 1,145 900 5,143 270 824 12,206 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Loans Commercial Fixed.................. - 86 56 67 221 173 183 3,157 164 41 4,148 Variable............... 14,532 - - - - - - - - - 14,532 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total commercial..... 14,532 86 56 67 221 173 183 3,157 164 41 18,680 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Real Estate Commercial Fixed................ - 418 41 42 1,131 578 363 4,977 - - 7,550 Variable............. 3,063 - - - - - - - - - 3,063 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total commercial... 3,063 418 41 42 1,131 578 363 4,977 - - 10,613 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Residential Fixed................ - 510 99 98 287 727 383 4,684 495 217 7,500 Variable............. 3,976 - - - - - - - - - 3,976 Other................ - 6 6 6 478 18 18 682 11 30 1,255 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total residential.. 3,976 516 105 104 765 745 401 5,366 506 247 12,731 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total real estate 7,039 934 146 146 1,896 1,323 764 10,343 506 247 23,344 ------- ------ ----- ------ ------- ------- -------- -------- ------- ------- -------- Construction Fixed.................. - 1 1 1 3 3 97 38 7 178 328 Variable............... 2,199 - - - - - - - - - 2,199 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total construction... 2,199 1 1 1 3 3 97 38 7 178 2,527 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Personal Home equity loans...... 9,098 - - - - - - - - - 9,098 Installment loans...... - 876 337 303 296 148 519 1,009 19 9 3,517 Cash reserve loan...... 2 - - - - - - - - - 2 Personal open end letters of credit.... 1,148 - - - - - - - - - 1,148 Loans secured by deposits............. - 10 - - 1 14 2 4 - - 33 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total personal....... 10,248 886 338 304 297 162 521 1,103 19 9 13,798 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- Total loans................ 34,018 1,907 540 517 2,417 1,661 1,565 14,551 696 475 58,349 -------- ------- ------ ----- ------ ------- ------- -------- ------ ------- -------- TOTAL RATE SENSITIVE ASSETS....... $ 40,514 $ 2,535 $1,137 $1,073 $3,861 $ 2,807 $ 2,465 $ 19,694 $ 966 $ 1,299 $ 76,352 ======== ======= ====== ====== ====== ======= ======= ======== ====== ======= ========
-25- 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............. $ 3,830 $ - $ - $ - $ - $ - $ - $ - $ - $ - $3,830 Money market accounts Market rate accounts... 4,131 - - - - - - - - - 4,131 Business market rate accounts............. 350 - - - - - - - - - 350 Special personal MMDA................. 1,069 - - - - - - - - - 1,069 Special business MMDA................. 4,643 - - - - - - - - - 4,643 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Total money market accounts........... 10,193 - - - - - - - - - 10,193 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Savings accounts......... 92 - - - - - - - - - 92 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Time deposits CD's > 100K............ - 1,302 502 404 2,421 2,853 3,755 5,561 - 115 16,915 CD's < 100K............ - 1,049 735 564 3,397 5,106 3,030 10,456 52 105 24,493 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Total time deposits.. - 2,351 1,237 968 5,818 7,959 6,785 16,017 52 220 41,408 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Individual retirement accounts............. - - 132 68 96 281 271 5,015 4 58 5,925 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Total interest bearing deposits... 14,115 2,351 1,369 1,036 5,914 8,240 7,056 21,032 56 278 61,448 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Borrowed funds Repurchase agreements.. - 9 - - - - - - - - 9 FHLB borrowings........ - 27 25 25 75 594 66 1,667 90 1,294 3,863 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Total borrowed funds. - 36 25 25 75 594 66 1,667 90 1,294 3,872 -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- TOTAL RATE SENSITIVE LIABILITIES.. $ 14,115 $ 2,387 $ 1,394 $ 1,062 $ 5,989 $ 8,834 $ 7,123 $22,699 $ 145 $ 1,573 $ 65,320 ======== ======== ======= ======== ======== ======== ======== ======= ======= ======== ======== INCREMENTAL GAP REPORT SUMMARY INFORMATION Total rate sensitive assets $ 40,514 $ 2,535 $ 1,137 $ 1,073 $ 3,861 $ 2,807 $ 2,465 $19,694 $ 966 $ 1,299 Total rate sensitive liabilities.............. 14,115 2,387 1,394 1,062 5,989 8,834 7,123 22,699 145 1,573 Gap........................ 26,399 148 (257) 11 (2,128) (6,027) (4,658) (3,005) 821 (274) RSA/RSL.................... 2.87x 1.06x 0.82x 1.01x 0.64x 0.32x 0.35x 0.87x 6.66x 0.83x RSA/assets................. 0.51 0.03 0.01 0.01 0.05 0.04 0.03 0.25 0.01 0.02 RSL/assets................. 0.18 0.03 0.02 0.01 0.08 0.11 0.09 0.29 0.00 0.02 Gap/assets................. 33.37% 0.19% -0.32% 0.01% -2.69% -7.62% -5.89% -3.80% 1.04% -0.35% Gap/RSA.................... 65.16 5.84 -22.60 1.03 -55.12 -214.71 -188.97 -15.26 84.99 -21.09 CUMULATIVE GAP REPORT SUMMARY INFORMATION Total rate sensitive assets $ 40,514 $ 43,049 $44,186 $45,259 $ 49,120 $ 51,927 $ 54,392 $74,086 $ 75,052 $ 76,351 Total rate sensitive liabilities............. 14,115 16,502 17,896 18,958 24,947 33,781 40,904 63,603 63,748 65,321 Gap........................ 26,399 26,547 26,290 26,301 24,173 18,146 13,488 10,483 11,304 11,030 RSA/RSL.................... 2.87x 2.61x 2.47x 2.39x 1.97x 1.54x 1.33x 1.16x 1.18x 1.17x RSA/assets................. 0.51 0.54 0.56 0.57 0.62 0.66 0.69 0.94 0.95 0.97 RSL/assets................. 0.18 0.21 0.23 0.24 0.32 0.43 0.52 0.80 0.81 0.83 Gap/assets................. 33.37% 33.55% 33.23% 33.24% 30.55% 22.94% 17.05% 13.25% 14.29% 13.94% Gap/RSA.................... 65.16 61.67 59.50 58.11 49.21 34.95 24.80 14.15 15.06 14.45
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. -26- 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. PERCENTAGE CHANGE IN BASIS POINT -------------------------------------------------------------- CHANGE IN NET INTEREST INCOME MARKET VALUE OF PORTFOLIO EQUITY INTEREST RATES PROJECTED CHANGE PROJECTED CHANGE -------------- -------------------------------------------------------------- -200 -14.96 -10.28 -100 -7.43 -6.55 0 0.00 0.00 100 7.18 3.36 200 14.36 4.23
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 financial 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. -27- 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. This evaluation included a review of revised procedures put in place at our mutual fund services administration operation following the discovery in the fourth quarter of 2002 of potential reconciliation losses at such operation. 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. -28- 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. On June 10, 2003, we filed a Current Report on Form 8-K, dated June 9, 2003, to report under Item 5 our execution of a Stock Purchase Agreement, dated June 9, 2003, whereby we will sell our wholly owned banking subsidiary, Unified Banking Company, to Blue River Bancshares, Inc. -29- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNIFIED FINANCIAL SERVICES, INC. (Registrant) Dated: August 4, 2003 By: /s/ John S. Penn ----------------------------------------- John S. Penn, President and Chief Executive Officer Dated: August 4, 2003 By: /s/ Thomas G. Napurano ----------------------------------------- Thomas G. Napurano, Executive Vice President and Chief Financial Officer -30- 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 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 and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of 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 -31- role in the registrant's internal controls; and -31- (6) The registrant's other certifying officers and I have indicated in this quarterly report whether 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. August 4, 2003 /s/ John S. Penn -------------------------------------------- John S. Penn President and Chief Executive Officer -32- 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 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 and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of 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 -33- (6) The registrant's other certifying officers and I have indicated in this quarterly report whether 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. August 4, 2003 /s/ Thomas G. Napurano ----------------------------------------------- Thomas G. Napurano Chief Financial Officer -34- EXHIBIT INDEX Ex. No. Description ------- ----------- 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 -35-