-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C+9Chc3IGjquV1F9fF5bXI9xpCQVaM5mVtR1IfZZYeo0EsLtOyCUKmnxFKtyKR3l nkzsRT16+cl2Sofw+G5Sgw== 0001035449-98-000073.txt : 19980813 0001035449-98-000073.hdr.sgml : 19980813 ACCESSION NUMBER: 0001035449-98-000073 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIFIED FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0001033926 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 351797759 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-22629 FILM NUMBER: 98683614 BUSINESS ADDRESS: STREET 1: 431 N PENNSYLVANIA ST. CITY: INDIANAPOLIS STATE: IN ZIP: 46204-1873 BUSINESS PHONE: 3146343301 MAIL ADDRESS: STREET 1: 431 N PENNSYLVANIA ST CITY: INDIANAPOLIS STATE: IN ZIP: 46204-1873 FORMER COMPANY: FORMER CONFORMED NAME: UNIFIED HOLDINGS INC DATE OF NAME CHANGE: 19970218 10QSB 1 FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-QSB Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1998 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 of (I.R.S. Employer incorporation or organization) Identification No.) 429-431 North Pennsylvania Street Indianapolis, Indiana 46204-1873 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (317) 634-3301 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] On July 23, 1998, the registrant had 1,460,714 outstanding shares of Common Stock, $.01 par value. TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets 3 Consolidated Statements of Income 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Overview 13 Comparison of Results for the Six Months Ended June 30, 1998 and 1997 13 Comparison of Results for the Quarter Ended June 30, 1998 and 1997 14 Liquidity and Capital Resources 14 Part II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURE PAGE 17 EXHIBIT INDEX 18
-2- Part 1. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS: UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS
June 30,1998 Dec 31,1997 ------------ ----------- (unaudited) ASSETS: CURRENT ASSETS: Cash and cash equivalents $ 8,646,373 $ 605,654 Investments in affiliated mutual funds 474,168 520,334 Investments in non-affiliated mutual funds 204,830 187,603 Notes receivable, affiliated company - 50,000 Notes receivable - 4,502 Accounts receivable (net of allowance for doubtful accounts of $2,041 for 1998 and 1997) 1,631,525 1,505,600 Prepaid and sundry assets 145,707 141,042 -------------- -------------- Total current assets 11,102,603 3,014,735 -------------- -------------- NON-CURRENT ASSETS: Investment in debt securities 864,175 958,604 Organization cost net of accumulated amortization of $213,295 and $4,900, respectively 376,150 2,100 Equity in and advances to affiliates - 284,994 Notes receivable, net of current maturity - 8,090 FIXED ASSETS, AT COST: Equipment and furniture (net of accumulated depreciation of $802,354 and $590,887, respectively) 582,621 590,059 Capitalized leased equipment (net of accumulated depreciation of $18,845 and $55,465, respectively) 40,464 74,762 -------------- -------------- 623,085 664,821 -------------- -------------- Total non-current and fixed assets 1,863,410 1,918,609 -------------- -------------- TOTAL ASSETS $ 12,966,013 $ 4,933,344 ============== ============== See notes to consolidated financial statements.
-3- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS
June 30,1998 Dec 31,1997 ------------ ----------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Current portion of capitalized leases $ 18,746 $ 30,090 Current portion of bank, line-of-credit 30,719 30,719 Accounts payable and accrued expenses 728,610 617,637 Accrued compensation and benefits 292,041 162,273 Payable to broker/dealers 337,659 274,046 Income taxes payable 5,548 14,355 Deferred income taxes 59,918 24,700 Other liabilities 1,115,477 740,055 ------------ ------------ Total current liabilities 2,588,718 1,893,875 ------------ ------------ LONG-TERM LIABILITIES: Long-term capitalized lease obligations, net of current portion 10,860 21,374 Bank line-of-credit, net of current portion 306,217 92,158 Deferred income taxes 800 800 ------------ ------------ Total long-term liabilities 317,877 114,332 ------------ ------------ TOTAL LIABILITIES 2,906,595 2,008,207 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common Stock, par value $.01 per share, authorized - 10,000,000 shares; outstanding 1,425,133 shares and 1,027,776 shares, respectively 18,748 14,778 Preferred Stock Series A, par value $.01 per share, authorized - 10,000 shares; outstanding 0 and 8,486 shares, respectively - 8,486 Preferred Stock Series B, par value $.01 per share, authorized - 10,000 shares; outstanding 0 and 8,486 shares, respectively - 8,583 Preferred Stock Series C, par value $.01 per share, authorized - 2,100 shares; outstanding 2,100 and 0 shares, respectively 2,100 - Additional paid-in capital 9,116,116 1,977,788 Retained earnings 922,454 915,502 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 10,059,418 2,925,137 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,966,013 $ 4,933,344 ============ ============ See notes to consolidated financial statements.
-4- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Six Months Ended Three Months Ended June 30, June 30, ----------------------------------- ----------------------------- 1998 1997 1998 1997 -------------- --------------- ------------- ----------- REVENUE: Brokerage $ 1,604,177 $ 1,206,557 $ 856,353 $ 546,591 Fund services 545,776 627,569 308,294 227,039 Investment advisory 1,343,715 900,556 665,546 547,677 Trust and administration services 561,589 385,152 254,798 313,449 Software and programming services 16,502 94,808 7,651 47,610 Other income 177,406 109,089 113,961 69,050 ---------- ---------- ---------- --------- Total revenue 4,249,165 3,323,731 2,206,603 1,751,416 ---------- ---------- ---------- --------- COST OF SALES: Brokerage revenue charges 582,410 801,535 69,202 365,640 Investment fees 66,273 36,693 29,306 18,865 Administration fees 43,829 25,290 25,843 9,941 ---------- ---------- ---------- --------- Total cost of sales 692,512 863,518 124,351 394,446 ---------- ---------- ---------- ---------- Gross profit 3,556,653 2,460,213 2,082,252 1,356,970 ---------- ---------- ---------- ---------- EXPENSES: Employee compensation and benefits 1,341,078 1,527,647 674,795 779,021 Brokerage operating charges 187,146 134,194 106,262 64,237 Fund services operating charges 311,716 132,128 293,788 75,129 Mail and courier service 49,027 21,384 27,313 10,997 Telephone 57,699 57,794 33,650 25,508 Equipment rental and maintenance 72,701 30,535 40,328 10,725 Occupancy 143,463 97,444 73,444 49,093 Depreciation 141,702 84,842 68,947 36,544 All other 507,535 278,219 285,394 158,433 ---------- ---------- ---------- ---------- Total expenses 2,812,067 2,364,187 1,603,921 1,209,687 ---------- ---------- ---------- ---------- Income from operations 744,586 96,026 478,331 147,283 ---------- ---------- ---------- ---------- OTHER INCOME (LOSS): Unrealized gain or (loss) on securities 30,119 44,050 (6,278) 49,242 Realized gain on securities 6,250 23,898 914 23,898 Results of loss (gain) of affiliate (39,945) 79,930 - 94,344 Gain or (loss) on sale/disposal of fixed assets 5,140 - (143) - ---------- ---------- ---------- ---------- Total other income (loss) 1,564 147,878 (5,507) 167,484 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 746,150 243,904 472,824 314,767 INCOME TAXES: Current 1,904 3,458 1,304 2,858 Deferred (6,080) 1,627 (254) (2,048) ---------- ---------- ---------- ---------- NET INCOME $ 750,326 $ 238,819 $ 471,774 $ 313,957 ========== ========== ========== ========== Preferred Dividends $ 65,844 $ 67,530 $ 31,426 $ 33,205 ---------- ---------- ---------- ---------- Income available to common stockholders $ 684,482 $ 171,289 $ 440,348 $ 280,752 ========== ========== ========== ========== Weighted average common shares outstanding: Basic 1,259,445 455,008 1,394,493 455,008 Diluted 1,708,633 1,027,776 1,708,633 1,027,776 Earnings per share of common stock: Basic $ 0.54 $ 0.38 $ 0.32 $ 0.62 ---------- ---------- ---------- ---------- Diluted $ 0.40 $ 0.17 $ 0.26 $ 0.27 ---------- ---------- ---------- ---------- See notes to consolidated financial statements.
-5- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended Three Months Ended June 30, June 30, -------------------------------- ----------------------------- 1998 1997 1998 1997 ------------ ------------- ------------- ----------- OPERATING ACTIVITIES: Net income $ 750,326 $ 238,819 $ 471,774 $ 313,957 Adjustment to reconcile net income to net cash provided (used) in operating activities: Deferred income taxes (6,080) - - 1,154 Provision for depreciation and amortization 162,451 84,842 89,696 36,544 Amortization of bond discount (448) - (226) - Unrealized gain/(loss) on investments (5,140) - 31,257 (5,192) Results of affiliated company 39,945 (79,929) - (94,343) Loss on sale/disposal of fixed assets (30,119) (44,050) (24,836) (44,050) Excess of net assets of Unified Investment - - - - Advisers, Inc. (814,347) - - - (Increase) decrease in operating assets: Receivables 100,135 (57,472) (309,473) (153,621) Prepaid and sundry assets (4,665) 13,919 27,488 7,418 Increase (decrease) in liabilities: Accounts payable and accrued expenses 29,122 (115,863) (123,183) 16,599 Accrued compensation and benefits 117,819 71,537 23,133 101,615 Payable to broker/dealers 63,613 (26,374) 43,770 (72,766) Accrued income taxes (8,807) (9,200) - (2,465) Other liabilities 293,274 736,497 391,027 626,755 ----------- ------------- ------------ ---------- Net cash from operating activities 687,079 812,726 620,427 731,605 ----------- ------------- ------------ ---------- INVESTING ACTIVITIES: Purchase of equipment (64,654) (57,387) (46,318) (22,514) Proceeds from sale of fixed assets 12,379 128,851 2,411 128,851 Proceeds from note receivable - 27,496 - 26,234 Investments in mutual funds 59,058 (318,777) 2,322 (318,777) Investments in debt securities 94,877 (115,642) 24,576 (115,642) ----------- ------------- ------------ ---------- Net cash from investing activities 101,660 (335,459) (17,009) (301,848) ----------- ------------- ------------ ---------- FINANCING ACTIVITIES: Dividends to preferred stockholders (65,844) (67,530) (31,426) (33,205) Dividends to Health common stockholder - (157,007) - (157,007) Net proceeds from issuance of common stock 8,624,109 2,553 8,444,109 - Issuance of Preferred Stock Series C 210,000 - 210,000 - Redemption of Preferred Stock Series A and Series B (1,706,900) - (1,706,900) - Repayment of borrowing (10,240) - (2,560) - Borrowing bank line-of-credit 224,299 - (5,120) - Borrowing of capitalized leases - 24,190 - 24,190 Repayment of capitalized lease obligations (21,858) (25,392) (8,074) (14,605) ----------- ------------- ------------ ---------- Net cash provided/(used) in financing activities 7,253,566 (223,186) 6,900,029 (180,627) ----------- ------------- ------------ ---------- NET CHANGE IN CASH AND CASH EQUIVALENTS 8,042,305 254,081 7,503,447 249,130 CASH AND CASH EQUIVALENTS Beginning of period 604,068 538,030 1,142,926 542,981 ----------- ------------- ------------ ---------- End of period $8,646,373 $ 792,111 $ 8,646,373 $ 792,111 =========== ============= ============ ========== SUPPLEMENTARY INFORMATION Interest paid $ 18,714 $ 3,958 $ 9,791 $ 2,641 ----------- ------------- ------------ ---------- Income taxes paid $ 10,712 $ 16,785 $ 1,905 $ 12,285 ----------- ------------- ------------ ---------- See notes to consolidated financial statements.
-6- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. NATURE OF OPERATIONS The accompanying consolidated financial statements include the accounts of Unified Financial Services, Inc., a Delaware corporation ("Unified" or the "Company"), and its subsidiaries: Unified Management Corporation, Unified Fund Services, Inc., Health Financial, Inc., First Lexington Trust Company, Resource Benefit Planners, Inc., Unified Investment Advisers, Inc. and Unified Internet Services, Inc. Unless the context otherwise indicates, references to "Unified" or the "Company" include Unified and its subsidiaries. Unified Management Corporation ("Management"), an Indiana corporation, is a registered broker dealer under the Securities Exchange Act of 1934, as amended, and is a member of the National Association of Securities Dealers, Inc. Unified Fund Services, Inc. ("Services"), an Indiana corporation, is a registered investment adviser under the Investment Advisers Act of 1940, as amended, and provides investment advisory, transfer agent, dividend disbursing, transfer agency system software licensing and fund accounting services to investment companies. Health Financial, Inc. ("Health"), a Kentucky corporation, is an investment advisory business providing services to trusts, retirement plans, business and individuals located primarily in Kentucky. First Lexington Trust Company ("Lexington"), a Kentucky corporation, is a non-bank trust company regulated by the Department of Financial Institutions, Commonwealth Kentucky. The company received its trust charter in March 1994. On March 10, 1998, the Company acquired Resource Benefit Planners, Inc. ("Benefit Planners"). Benefit Planners, a Kentucky corporation, is a professional services firm that provides consulting, recordkeeping and trust accounting services for qualified retirement and cafeteria plans. The Company issued 12,000 shares of common stock, $0.01 par value, of the Company ("Common Stock") in exchange for all the outstanding common stock of Benefit Planners. As of March 10, 1998, Benefit Planners reported total assets of $282,724 and shareholder's equity of $37,543. On March 31, 1998, Unified Investment Advisers, Inc. ("Advisers"), a Delaware corporation, became a wholly owned subsidiary of the Company upon surrender to Advisers by all stockholders of Advisers (other than the Company) of their capital stock of Advisers. The stock surrender occurred upon approval of the shareholders of the Unified family of mutual funds and upon receipt of the required regulatory approval. As of March 31, 1998, Advisers reported total assets of $617,773 and shareholders' equity of $(469,548). In March 1998, the Company formed Unified Internet Services, Inc. ("Unified Internet Services"), an Indiana corporation, to develop the Company's website, website television programming and its proprietary search engine for the financial services industry. It currently is anticipated that Unified Internet Services will develop the Company's other industry-related internet products, including an interactive "switch" that will allow consumers access to the Company's products via their television, cable and satellite stations. The Company anticipates development of such products to be completed by the end of 1999. The unaudited interim financial statements of the Company have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-QSB 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 considered necessary for a fair presentation of the unaudited interim consolidated financial statements have been included herein and are of a normal recurring nature. The 1998 unaudited consolidated financial statements of the Company give effect to the acquisition by the Company of Benefit Planners on March 10, 1998, which transaction was accounted for under the pooling-of-interest method of accounting. Due to the immateriality of the financial condition and -7- results of operations of Benefit Planners to the Company, the consolidated financial statements of the Company as of and for the three years ended December 31, 1997 have not been restated to give effect to the acquisition of Benefit Planners. The results of operations of Benefit Planners have been included in the Company's consolidated financial statements since January 1, 1998. The results of operations for the six months ended June 30, 1998 are not necessarily indicative of the results that may be obtained for the full year ended December 31, 1998. . 2. PROPOSED ACQUISITIONS On July 8, 1998, the Company entered into an agreement to acquire Estate Management Company, Inc. ("EMCO"). EMCO is a wealth management firm based in New York City. Since 1921, EMCO has been providing fee only services to individuals, families and fiduciaries. EMCO professionals assist clients in a variety of disciplines, including the following: financial, tax and estate planning; family office services such as budgeting, bill paying and payroll administration; trust administration; and income tax return preparation and filing for individuals, trusts, partnerships and small businesses. This acquisition will be accounted for under the pooling-of-interest method of accounting. In connection with the acquisition, the Company will issue 11,000 shares of Common Stock based upon an exchange ratio of 1,100 shares of Common Stock for each outstanding share of EMCO common stock. The acquisition is anticipated to be completed during the third quarter of 1998 and is subject to, among other things, regulatory approval and the approval of the stockholders of EMCO. As of June 30, 1998, EMCO reported total assets of $72,264 and stockholders' equity of $(123,316). On July 10, 1998, the Company entered into an agreement to acquire Fiduciary Counsel, Inc. ("Fiduciary Counsel"). Fiduciary Counsel, which is based in New York City, is one of the nation's oldest investment counsel organizations and provides professional investment management to individuals and institutions on a customized basis. Fiduciary Counsel. This acquisition will be accounted for under the purchase method of accounting. In connection with the acquisition, the Company will issue 36,110 shares of Common Stock and pay $800,835 in cash in exchange for all the outstanding shares of Fiduciary Counsel common stock. The acquisition is anticipated to be completed during the third quarter of 1998 and is subject to, among other things, regulatory approval and the approval of the stockholders of Fiduciary Counsel. As of June 30, 1998, Fiduciary Counsel reported total assets of $686,445 and total stockholders' equity of $254,664. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation --------------------- The consolidated financial statements include the accounts of the Company, Management, Services, Health, Lexington, Benefit Planners, Advisers and Unified Internet Services. All intercompany transactions and balances between the Company and its subsidiaries have been eliminated. Effective March 10, 1998, the Company acquired Benefit Planners in a transaction accounted for under the pooling-of-interests method of accounting. Due to the immateriality of the financial condition and results of operations of Benefit Planners to the Company, the consolidated financial statements of the Company as of and for the three years ended December 31, 1997 have not been restated to give effect to the acquisition of Benefit Planners. The results of operations of Benefit Planners have been included in the Company's consolidated financial statements since January 1, 1998. In connection with such acquisition, the Company issued 12,000 shares of Common Stock. -8- Effective March 31, 1998, Advisers became a wholly owned subsidiary of the Company upon surrender to Advisers of all the capital stock of Advisers by all stockholders of Advisers (other than the Company). Prior to the surrender of capital stock to Advisers, the Company accounted for its 33.3% ownership in Advisers on the equity method of accounting. Advisers reported gross revenue for the four months (Advisers' fiscal year end is November 30) ended March 31, 1998 of $146,519 and loss for the period of $195,967. Advisers reported total assets as of March 31, 1998 of $617,773 and shareholders' equity of $(469,548). Fees and Commissions -------------------- The Company records revenue on the accrual basis of accounting. For the brokerage operations, commissions and clearing revenue are recorded on the settlement date of the related security transactions. This does not materially differ from recording commissions based upon the trade date. The investment advisory business revenue, as well as the investment adviser fees earned by third party advisers, is recorded on the accrual basis. The fees earned by the operation and paid to the sub-advisers are based on established fee schedules and contracts. Generally, fees may be collected from the invested assets. Thus, collection of the fees is reasonably certain. The fund services operation provides administrative and investment services to investment companies and separate accounts. Revenue is recorded as it is earned per month based upon accounts and account balances. In connection with this, the Company earns income on the accounts established to transfer these funds for customers. Property and Equipment ---------------------- Property and equipment is stated at cost. Depreciation, including the depreciation of capital leased equipment, is provided on the straight-line or accelerated methods over the estimated useful life of the assets for financial statement purposes. Investments and Investment in Debt Securities --------------------------------------------- Investments, which consists primarily of an investment in a mutual fund (affiliated or non-affiliated), are recorded and adjusted to the fair market value as of the date of the financial statements and reported on the statement of operations as unrealized gain or loss on securities. Investment in debt securities are recorded at cost and amortized over the period to maturity for the premium or discount from par value under generally accepted accounting principles. Lexington is required by the Kentucky Department of Financial Institutions to maintain a minimum of $800,000 capital as long as trust assets under management do not exceed $100,000,000. When trust assets under management exceed $100,000,000, the capital requirement will be increased by $350,000. Currently, Lexington has approximately $63,000,000 of trust assets under management. Income Taxes ------------ The Company files a consolidated federal and state income tax return with its subsidiaries. Benefit Planners, prior to its acquisition by the Company, filed as an S-corporation on the cash basis of accounting. As a result, federal and state taxable income and losses were passed through to its sole stockholder. Subsequent to the acquisition by the Company, Benefit Planners will be included in the consolidated tax returns of the Company, which uses the accrual method of tax and accounting reporting. The Company has adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). SFAS 109 requires use of the liability method of accounting for deferred income taxes. Use of Estimates ---------------- The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. -9- Statement of Cash Flows ----------------------- For purposes of the statements of cash flows, the Company considers all liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains money market investments that are not insured by the Federal Deposit Insurance Corporation (the "FDIC") and bank accounts that periodically exceed the FDIC insurance limit during the year. Financial Statement Presentation -------------------------------- Certain amounts in the 1997 financial statements have been reclassified to conform to the 1998 presentation. 4. OPTIONS On May 20, 1998, the stockholders of the Company adopted the Unified Financial Services, Inc. 1998 Stock Incentive Plan (the "Plan") which provides for the granting of stock options and other stock-based awards. The total number of shares of Common Stock issuable under the Plan is not to exceed 1,500,000 shares, subject to adjustment in the event of any change in the outstanding shares of such stock by reason of a stock dividend, stock split, capitalization, merger, consolidation or other similar changes generally affecting stockholders of the Company. Of these 1,500,000 shares of stock, no more than 250,000 shares may be issued to participants in the Plan in any plan year. Under the terms of the Plan, employees, directors, advisors and consultants of the Company and its subsidiaries will be eligible to receive the following: (a) Incentive Stock Options; (b) Nonqualified Stock Options; (c) Stock appreciation Rights ("SAR"); (d) Restricted Stock; (e) Restricted Stock Units; and (f) Performance Awards. On May 20, 1998, the Board of Directors of the Company granted options to acquire 6,800 shares of Common Stock to certain employees, directors and advisors of the Company. Such options were fully vested on the date of grant and have an excercise price of $25.00 per share. Of such options, 6,500 options are intended to qualify as incentive stock options pursuant to Section 422 of the Internal Revenue Code of 1986, as amended. 5. FINANCING The Company has obtained a line of credit financing totaling a maximum borrowing capacity of Five Hundred Thousand Dollars ($500,000) for the purpose of purchasing various communication and computer hardware and software to support future operating needs. As of June 30, 1998, the amount outstanding under this credit facility was $336,936. The financing converts to a four-year term loan payable in equal monthly principal payments plus interest at 0.5% above bank prime rate. Property, supplies, inventory and intangible assets of the Company are security for this financing. 6. COMMITMENTS AND CONTINGENCIES The Company through its subsidiary, Management, leases its corporate headquarters and administrative office facilities located at 431 N. Pennsylvania Street, Indianapolis, Indiana, which facility has approximately 10,820 square feet, and is leased pursuant to an operating lease expiring in 2007 for office facilities and equipment. The lease includes provisions for adjustment of operating costs and real estate taxes. Such obligations are allocated between Services and Management based on estimated usage. The Company also maintains administrative offices at the corporate offices of Lexington, Health and Benefit Planners, each of which is located at 2353 Alexandria Drive, Suite 100, Lexington, Kentucky. -10- The aggregate minimum rental commitments required under operating leases for office space and equipment at June 30, 1998 were as follows: For the Twelve Months Ended June 30 Lease commitments ------- ----------------- 1999 $ 291,310 2000 274,394 2001 254,551 2002 254,551 Thereafter 1,021,843 ---------- Total $ 2,096,649 ============ Total rental expense was $143,463 and $97,444 for the six months ended June 30, 1998 and 1997, respectively. 7. CAPITALIZED LEASE OBLIGATIONS The Company's capitalized lease obligations are payable over a 36-month period. The following is a summary of future minimum lease payments under capitalized lease obligations as of June 30, 1998: For the Twelve Months Ended June 30 Amount --------- ------ 1999 $ 22,163 2000 10,741 --------- -------- Subtotal 32,904 Less: amount representing interest 3,298 -------- Net present value $ 29,606 ======== The Company acquired equipment through capital lease obligations in the amount of $0 and $24,190 during the six month periods ended June 30, 1998 and 1997, respectively. 8. CASH SEGREGATED UNDER FEDERAL REGULATION and NET CAPITAL REQUIREMENTS FOR MANAGEMENT Management is subject to the Securities and Exchange Commission (the "SEC"), Uniform Net Capital Rule ("Rule 15c3-1"), which requires the maintenance of minimum net capital, as defined, of 6-2/3% of aggregate indebtedness or $50,000, whichever is greater, and a ratio of aggregate indebtedness to net capital of not more than 15 to 1. At June 30, 1998, Management had net capital of $730,093, which was in excess of its required net capital of $50,000 and a net capital ratio of 0.53 to 1. Pursuant to Rule 15c3-3 as promulgated by the SEC, Management calculates its reserve requirement and segregates cash and/or securities for the exclusive benefit of the customers on a periodic basis. The reserve requirement calculated by Management was $0 at June 30, 1998. Balances segregated in excess of reserve requirements are not restricted. 9. COMMON AND PREFERRED STOCK Common Stock: Acquisition of Resource Benefit Planners, Inc. The Company has 10,000,000 authorized shares of Common Stock. In connection with the acquisition of Benefit Planners on March 10, 1998, the Company issued 12,000 shares of Common Stock, as reflected in Note 1 of the notes to the financial statements. -11- Private Placement Offering Effective January 22, 1998, the Company commenced a private placement offering to sell a maximum of 600,000 shares of Common Stock. The first 400,000 shares offered were offered at a price of $25.00 per share and, upon acceptance by the Company of subscriptions for such 400,000 shares, the remaining 200,000 shares were offered at a price of $27.50 for share. All of the shares of Common Stock offered in the private placement were sold by the Company on a best efforts basis. The offering terminated on June 30, 1998. As of June 30, 1998, The Company had accepted subscriptions for 442,338 shares of Common Stock pursuant to the private placement. Preferred Stock: As of June 30, 1998, the total preferred shares authorized for the Company was 1,000,000 with a par value of $.01 per share, of which 22,100 shares were designated as follows:
Shares Shares issued and Stated Par Designated outstanding value value ---------- ----------- ----- ----- Preferred Stock Series A 10,000 --- $100 $0.01 Preferred Stock Series B 10,000 --- 100 0.01 Preferred Stock Series C 2,100 2,100 100 0.01
Series C Preferred Stock Issuance: In May 1998, the Company issued 2,100 shares of Series C 6.75% Cumulative Convertible Preferred Stock to certain directors, executive officers and agents of the Company for total consideration of $210,000. Each share of Series C Preferred Stock is convertible, at any time at the option of the holder thereof and without the payment of any additional consideration with respect thereto, into 135 shares of Common Stock. Series A and Series B Preferred Stock Redemption: On April 25, 1998, the Company redeemed the outstanding Series A and Series B Preferred Stock of the Company. Total consideration of $1,738,326, consisting of principal and accrued interest, was paid to the holders of the Series A and Series B Preferred stock in connection with the redemption of such shares. -12- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Overview The Company was organized on December 7, 1989. As of June 30, 1998, Unified owned all of the capital stock of: Management, Indianapolis, Indiana, a licensed National Association of Securities Dealers, Inc. ("NASD") broker-dealer; Services, Indianapolis, Indiana, a registered investment adviser and transfer agent; Health, Lexington, Kentucky, a registered investment adviser; Lexington, Lexington, Kentucky, a non-bank affiliated trust company that is regulated by the Department of Financial Institutions, Commonwealth of Kentucky; Unified Internet Services, Indianapolis, Indiana, an internet services company; Benefit Planners, Lexington, Kentucky, a professional services firm; Advisers, a Delaware corporation and mutual fund advisory firm; HFI Acquisition Corporation, a Kentucky corporation ("HFAC"), and VAI Acquisition Corporation, a Delaware corporation ("VAC"). Each of HFAC and VAC currently does not conduct any operations. References in this filing to the "Company" or "Unified" include Unified and its wholly owned subsidiaries. The Company provides management services, working capital and equipment for its wholly owned financial services subsidiaries. The Company's principal business is providing for its subsidiaries a platform for attaining and maintaining vertical integration in the financial services industry by means of an aggressive merger and acquisition program featuring stock-for-stock pooling of interests transactions and providing management services and equipment for its wholly owned subsidiaries, which, in turn, concentrate their services over the following lines of business in the financial services industry: mutual fund services, including transfer agency, shareholder and administrative services, fund accounting, compliance and distribution; brokerage and securities services, including third-party introduced clearing services; investment advisory and asset management services for various asset management categories and objectives; tax-free reorganizations, consolidations and start-ups of small mutual funds; certain non-bank custodial services; trust and retirement services; qualified plan services, including plan participant education; internal and external proprietary product and systems development for the mutual fund industry; asset allocation services; and financial services institutions, predominately mutual funds, including the Unified Funds, a family of four no-load mutual funds sponsored by Advisers. The following presents management's discussion and analysis of the Company's consolidated financial condition and results of operations as of the dates and for the periods indicated. This discussion should be read in conjunction with the other information set forth in this quarterly report on Form 10-QSB, including the Company's unaudited, consolidated financial statements and the accompanying notes thereto. Comparison of Results for the Six Months Ended June 30, 1998 and 1997 Total revenue for the six months ended June 30, 1998, as compared to the six months ended June 30, 1997, increased $925,434, or 27.8%, from $3,323,731 to $4,249,165. For such periods, revenue from investment advisory and trust and administration services increased 48.2% from $1,285,708 to $1,905,304. The increase in these revenues was due to the growth in assets under management. Increased brokerage revenue (up 33%) offset the lower Software and Programming and Fund Service revenue comparedt o the first six months of the prior year. Gross profit of $3,556,653 for the six months ended June 30, 1998, as compared to the six months ended June 30, 1997, increased $1,096,440, or 44.6%, from $2,460,213. For such periods, gross profit as a percentage of revenue increased to 83.7% from 74.0%. Brokerage revenue charges, investment advisory and trust and administration gross profit percentages improved for the year-to-date. As a percentage of total revenue, expenses for the six months ended June 30, 1998, as compared to the six months ended June 30, 1997, decreased from 71.1% to 66.2%, due to the increase in revenue coupled with lower employee compensation expense for the six months ended June 30, 1998 (a decrease of $185,569 as compared to the same period in 1997), partially offsetting increases in fund services operating charges and other expenses. For such periods, expenses increased 18.9% from $2,364,187 to $2,812,067. Unified's portion of the loss at Advisers through March 31, 1998 compares with the favorable results from affiliates during the six-month period ended June 30, 1997, coupled with greater realized gains on securities during the six months ended June 30, 1997 versus the six months ended June 30 1998. Net income for the six months ended June 30, 1998 of $750,326 compares favorably to the net income of $238,819 during the first six months of 1997. The improvement was a result of increased assets under management, which resulted in higher revenue, lower cost of sales and expenses, which are relatively fixed, and the growth in the stock market during the first half of 1998. -13- Comparison of Results for the Quarter Ended June 30, 1998 and 1997 Total revenue for the quarter ended June 30, 1998, as compared to the same quarter of 1997, increased $455,187, or 26.0%, from $1,751,416 to $2,206,603. For such periods, revenue from investment advisory and brokerage increased 39.1% from $1,094,268 to $1,521,899. The increase in revenues was due to the growth in assets under management, which offset lower software and programming and fund services revenue. Gross profit of $2,082,252 for the quarter ended June 30, 1998, as compared to the same quarter of 1997, increased $725,282, or 53.4%, from $1,356,972. For such periods, gross profit as a percentage of revenue increased to 94.4% from 77.5%. Brokerage revenue charges, investment advisory and trust and administration gross profit percentage also improved for the quarter. For the quarter ended June 30, 1998, as compared to the same quarter of 1997, expenses increased 32.6% from $1,209,687 to $1,603,921. As a percentage of total revenue, expenses increased from 69.1% to 72.7% for such periods, with lower employee compensation expense for the quarter ended June 30, 1998 (a decrease of $104,226 as compared to the same period in 1997) partially offsetting increased fund services operating charges and other expenses. The increase in the securities market is reflected in the improvement of other income from the gain on unrealized and realized security transactions coupled with Unified's portion of the loss at Advisers through June 30, 1998 compared to the profit during the second quarter of 1997. Net income of $471,744 for the quarter ended June 30, 1998 compares favorably to the net income of $313,957 during the quarter ended June 30, 1997. The improvement was a result of increased assets under management that resulted in higher revenue, lower cost of sales, which offset higher expenses. Liquidity and Capital Resources The Company's primary source of liquidity historically has been and continues to be cash flow from operating activities, available borrowing capacity from capitalized leases and a loan from a regional bank to finance capital equipment. The net increase in cash and cash equivalents during the first half of 1998 from year-end 1997 was $8,042,305. The principal increase reflects net proceeds from the private placement of $8,624,109 and bank borrowing for equipment of $224,299, which proceeds offset the redemption of the Series A and Series B Preferred Stock. For the six months ended June 30, 1998, the Company issued 397,357 shares of Common Stock. In addition, during May 1998, the Company issued 2,100 shares of Series C Preferred Stock to certain directors, executive officers and agents of the Company for total consideration of $210,000. On April 25, 1998, the Company utilized $1,706,900 of the private placement proceeds to redeem the outstanding shares of Series A and Series B Preferred Stock. Pending usage, the Company may invest the remaining net proceeds from the private placement in its own no-load mutual fund portfolios. The private placement should have a positive effect on the Company, assisting further development, marketing, expansion and support of the Company's products and services, some of which are proprietary, promoting aggressive advertising and publicity programs for our niche products and services, especially the V.O.I.C.Esm program and the Company's vision for the financial services industry, and expanding the Company's internet investment activities. As of July 23, 1998, the Company had accepted subscriptions for 442,338 of Common Stock, for total consideration of $11,152,425. * * * * The forward-looking statements contained in this report are inherently subject to risks and uncertainties. The Company's actual results could differ materially from those in the forward-looking statements. Potential risks and uncertainties include a number of factors, including the Company's ability to manage rapid growth, economic conditions generally and in particular those affecting bond and securities markets. An increase in federal and state regulation of the mutual fund industry or the imposition of regulatory penalties also could have an effect on operating results of the Company. -14- PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities and Use of Proceeds For the three months ended June 30, 1998, the only sales of the Company's securities were: (i) 378,157 shares of Common Stock issued in connection with a private offering of up to 600,000 shares of Common Stock and (ii) 2,100 shares of Series C 6.75% Cumulative Convertible Preferred Stock of the Company, which shares were issued to certain directors, officers and agents of the Company at an offering price of $100 per share. Of the 378,157 shares of Common Stock issued pursuant to the private placement, 350,849 shares were issued at a price of $25.00 per share and 27,308 shares were issued at a price of $27.50 per share. All shares of stock issued by the Company during such period were issued pursuant to the exemption provided by Rule 506, as promulgated by the Commission. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders The 1998 annual meeting of stockholders of the Company was held on May 20, 1998. Of 1,046,976 shares issued, outstanding and eligible to be voted at the meeting, 967,801 shares, constituting a quorum, were represented in person or by proxy at the meeting. Two (2) matters were submitted to a vote of the security holders at the meeting. 1. Election of Class I Directors. The first matter submitted was the election of two Class I director nominees to the Board of Directors, each to continue in office until the year 2001. There is no cumulative voting in the election of directors. Upon tabulation of the votes cast, it was determined that both director nominees had been elected. The voting results are set forth below:
Name For Against Withheld ---- --- ------- -------- Timothy L. Ashburn 967,801 -- -- Dr. Gregory W. Kasten 967,801 -- --
Because the Company has a staggered Board, the term of office of the following Class II and Class III directors, who were not up for election at the 1998 annual meeting, continued after the meeting: Class II (to continue in office until 1999) Thomas G. Napurano Lynn E. Wood Class III to continue in office until (2000) Weaver H. Gaines Jack R. Orben 2. Adoption of the Unified Financial Services, Inc. 1998 Stock Incentive Plan. The second matter, a proposal to adopt the Unified Financial Services, Inc. 1998 Stock Incentive Plan, which provides for the granting of stock options and other stock-based awards, was approved by a majority of the 1,046,976 shares of Common Stock which were issued, outstanding and eligible to vote. The voting results on this matter were as follows: For 967,801 Against -- Abstain -- -15- Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: See Exhibit Index hereto. (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the quarter ended June 30, 1998. -16- 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) July 31, 1998 By: /s/ Timothy L. Ashburn Timothy L. Ashburn, President and Chief Executive Officer -17- EXHIBIT INDEX
Ex. No. Description - ------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company, filed as Exhibit 4.1(a) to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 3.2 By-laws of the Company, filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 4.1 Certificate of Designations, Preferences, and Relative Rights, Qualifications and Restrictions of the Series A 8% Cumulative Preferred Stock, of the Company, filed as Exhibit 4.1(b) to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 4.2 Certificate of Designations, Preferences, and Relative Rights, Qualifications and Restrictions of the Series B 8% Cumulative Preferred Stock of the Company, filed as Exhibit 4.1(c) to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 4.3 Certificate of Designations, Preferences, and Relative Rights, Qualifications and Restrictions of the Series C 6.75% Cumulative Convertible Preferred Stock of the Company, filed as Exhibit 4.1(d) to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 10.1 Agreement and Plan of Merger dated April 25, 1997 by and among the Company, HFI Acquisition Corporation, Health Financial, Inc. and Dr. Gregory W. Kasten, filed as Exhibit 2.1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.2 Amended and Restated Agreement and Plan of Merger dated as of April 25, 1997 by and among the Company, FLTC Acquisition Corporation, First Lexington Trust Company and Dr. Gregory W. Kasten, filed as Exhibit 2.2 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.3 Agreement and Plan of Merger dated as of May 8, 1997 by and among the Company, VAI Acquisition Corporation, Vintage Advisers, Inc. and Timothy L. Ashburn, filed as Exhibit 2.3 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.4 First Amendment to Agreement and Plan of Merger dated as of May 31, 1997 by and among the Company, HFI Acquisition Corporation, Health Financial, Inc. and Dr. Gregory W. Kasten, filed as Exhibit 2.4 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.5 Termination Agreement dated as of December 1, 1997 by and among the Company, VAI Acquisition Corporation, Vintage Advisers, Inc. and Timothy L. Ashburn, filed as Exhibit 2.5 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.6 Release and Surrender Agreement dated as of December 1, 1997 by and among the Company, Vintage Advisers, Inc., Timothy L. Ashburn and Jack R. Orben, filed as Exhibit 2.6 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.7 Employment Agreement dated as of June 1, 1997 by and between Health Financial, Inc. and Dr. Gregory W. Kasten, filed as Exhibit 10.1 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.8 Business Loan Agreement dated as of September 10, 1997 by and between the Company and Bank One, Indiana, N.A., filed as Exhibit 10.2 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.9 Commercial Security Agreement dated as of September 10, 1997 by and between the Company and Bank One, Indiana, N.A., filed as Exhibit 10.3 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.10 Promissory Note dated as of September 10, 1997 issued by the Company in favor of Bank One, Indiana, N.A., filed as Exhibit 10.4 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.11 Unified Financial Services, Inc. 1998 Stock Incentive Plan, filed as Annex A to the Company's Proxy Statement for the Company's 1998 Annual Meeting, is incorporated herein by reference. 11.1 Computation of Per Share Earnings. 27.1 Financial Data Schedule (June 30, 1998).
-18- EX-11 2 CALCULATION OF EARNINGS PER SHARE Unified Financial Services, Inc Earnings per share calculation
For the six months ended For the three months ended ---------------------------------- ------------------------------------- June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 ------------- ------------- ------------- ------------- Net income $ 750,326 $ 238,819 $ 471,774 $ 313,957 Dividends on Preferred Stock 65,844 67,530 31,426 33,205 ------------- ------------- ------------- ------------- Results after preferred dividend $ 684,482 $ 171,289 $ 440,348 $ 280,752 ------------- ------------- ------------- ------------- Basic: Weighted average number of common shares outstanding 1,027,776 455,008 1,027,776 455,008 Weighted average number of common shares related to acquisition of Resource Benefit Planners, Inc. 12,000 - 12,000 - Weighted average number of common shares related to private placement 141,354 276,402 Weighted average common stock equivalent shares related to the conversion of Preferred Stock Series C 78,315 - 78,315 - ------------- ------------- ------------- ------------- Total weighted average shares 1,259,445 455,008 1,394,493 455,008 ------------- ------------- ------------- ------------- Basic earnings per share $ 0.54 $ 0.38 $ 0.32 $ 0.62 ------------- ------------- ------------- ------------- Fully diluted: Weighted average number of common shares outstanding 1,027,776 1,027,776 1,027,776 1,027,776 Weighted average number of common shares related to acquisition of Resource Benefit Planners, Inc. 12,000 - 12,000 - Weighted average number of common shares related to private placement 385,357 385,357 Weighted average common stock equivalent shares related to conversion of Preferred Stock Series C 283,500 - 283,500 - ------------ ------------- ------------- ------------- Total weighted average shares 1,708,633 1,027,776 1,708,633 1,027,776 ------------ ------------- ------------- ------------- Fully diluted earnings per share $ 0.40 $ 0.17 $ 0.26 $ 0.27 ------------ ------------- ------------- -------------
EX-27.1 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated statements of financial condition and the consolidated statements of operation of Unified Financial Services, Inc. filed as a part of the Company's quarterly report on Form 10-QSB and is qualified in its entirety by reference to such report. 6-MOS Dec-31-1998 Jan-01-1998 Jun-30-1998 8,646,373 1,543,173 1,633,566 2,041 0 11,102,603 1,444,284 821,199 12,966,013 2,588,718 0 0 210,000 18,748 0 12,966,013 0 4,249,165 0 692,512 2,791,789 0 18,714 746,160 (4,176) 750,326 0 0 0 750,326 0.54 0.40
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