-----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, IJkLjEiMKkYccnUKNm5cqPmlSIEo6B+UoCC6ZlQsEOmRyA6O9bjBQUHT0HTv3dFv iJR4D+G1FbYQcDjGS0hbJw== 0001068800-00-000199.txt : 20000523 0001068800-00-000199.hdr.sgml : 20000523 ACCESSION NUMBER: 0001068800-00-000199 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000522 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIFIED FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0001033926 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 351797759 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22629 FILM NUMBER: 640826 BUSINESS ADDRESS: STREET 1: 431 N PENNSYLVANIA ST. CITY: INDIANAPOLIS STATE: IN ZIP: 46204-1873 BUSINESS PHONE: 3179177001 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 10-Q 1 UNIFIED FINANCIAL SERVICES, INC. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2000 ------------------------------------------------ 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) 431 NORTH PENNSYLVANIA STREET INDIANAPOLIS, INDIANA 46204 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (317) 634-3301 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /x/ Yes / / No Number of shares Title of class outstanding as of May 15, 2000 - ----------------------------------- ---------------------------------- Common stock, $0.01 par value 2,879,712 UNIFIED FINANCIAL SERVICES, INC. FORM 10-Q INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Statements of Financial Condition - March 31, 2000 (Unaudited) and December 31, 1999 1 Consolidated Statements of Operations (Unaudited) - Three Months Ended March 31, 2000 and 1999 3 Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31, 2000 and 1999 4 Consolidated Statements of Cash Flow (Unaudited) - Three Months Ended March 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Cautionary Statement Regarding Forward-Looking Statements 14 General 14 Comparison of Results for the Three Months March 31, 2000 and 1999 15 Liquidity and Capital Resources 18 Risk Factors 18 Item 3. Quantitative and Qualitative Disclosure About Market Risk 22 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 23 Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24 EXHIBIT INDEX 25
- i - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS ------ MARCH 31, 2000 DECEMBER 31, (UNAUDITED) 1999 ----------- ---- Current Assets Cash and cash equivalents $ 5,079,541 $ 5,709,082 Due from banks 521,077 314,815 Federal funds sold -- 4,922,000 Bond investments 11,966,442 5,515,156 Investment in affiliated mutual funds 338,075 326,271 Investment in securities and non-affiliated mutual funds 543,202 424,547 Loans receivable (net of allowance for loan losses of $95,000 for 2000 and $33,000 for 1999) 7,377,808 2,810,876 Accounts receivable (net of allowance for doubtful accounts of $24,100 for 2000 and $38,326 for 1999) 9,669,115 9,604,833 Prepaid assets and deposits 557,884 899,867 Deferred tax asset -- 5,707 ----------- ----------- Total current assets 36,053,144 30,533,154 ----------- ----------- Fixed Assets, at cost Equipment and furniture (net of accumulated depreciation of $3,685,676 for 2000 and $3,512,135 for 1999) 2,975,621 2,944,610 ----------- ----------- Total fixed assets 2,975,621 2,944,610 ----------- ----------- Non-Current Assets Investment in debt securities 882,780 1,073,621 Organization cost (net of accumulated amortization of $64,318 for 2000 and $32,019 for 1999) 608,497 641,688 Goodwill (net of accumulated amortization of $165,173 for 2000 and $139,093 for 1999) 1,188,621 1,214,701 Other non-current assets 431,950 341,220 ----------- ----------- Total non-current assets 3,111,848 3,271,230 ----------- ----------- TOTAL ASSETS $42,140,613 $36,748,994 =========== =========== (Continued on next page) See accompanying notes. - 1 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ MARCH 31, DECEMBER 31, 2000 1999 ----------- ------------ (UNAUDITED) Current Liabilities: Current portion of capital lease obligations $ 22,095 $ 30,073 Current portion of bank borrowings 2,056,647 2,343,965 Line-of-credit 1,850,000 1,727,003 Federal and borrowed funds 438,525 -- Customer deposits 13,779,147 7,331,853 Accounts payable and accrued expenses 1,837,361 2,731,970 Accrued compensation and benefits 552,978 549,093 Payable to insurance companies 6,096,288 5,670,974 Payable to broker-dealers 493,555 255,158 Income taxes payable, current 109,728 136,630 Income taxes payable, deferred 91,115 83,157 Other liabilities 665,543 597,646 ----------- ----------- Total current liabilities 27,992,982 21,457,522 ----------- ----------- Long-Term Liabilities Long-term portion of capital lease obligations 5,705 8,933 Long-term portion of borrowings 471,221 514,031 Other long-term liabilities 5,423 104,742 Deferred income taxes 102,520 85,779 ----------- ----------- Total long-term liabilities 584,869 713,485 ----------- ----------- Total liabilities 28,577,851 22,171,007 ----------- ----------- Commitments and Contingencies -- -- ----------- ----------- Stockholders' Equity Common stock, par value $.01 per share 33,294 33,294 Additional paid-in capital 16,141,349 16,050,189 Retained deficit (2,509,339) (1,292,794) Accumulated other comprehensive income (84,660) (35,463) ----------- ----------- 13,580,644 14,755,226 Treasury stock, at cost (17,882) (177,239) ----------- ----------- Total stockholders' equity 13,562,762 14,577,987 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $42,140,613 $36,748,994 =========== =========== See accompanying notes.
- 2 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------------- 2000 1999 ---- ---- REVENUES: Gross revenue (see Note 12) $ 6,938,506 $6,633,903 ----------- ---------- Total gross revenue 6,938,506 6,633,903 ----------- ---------- COST OF SALES: Cost of sales 2,154,585 1,640,216 ----------- ---------- Total cost of sales 2,154,585 1,640,216 ----------- ---------- Gross profit (see note 12) 4,783,921 4,993,687 ----------- ---------- EXPENSES: Employee compensation and benefits 3,176,625 2,417,639 Brokerage operating charges 141,191 174,079 Fund services operating expenses 166,507 41,328 Mail and courier 155,060 122,116 Telephone 147,199 73,814 Equipment rental and maintenance 130,289 85,449 Occupancy 245,485 210,879 Depreciation and amortization 235,498 222,995 Professional fees 603,954 466,146 Travel and entertainment 233,514 94,124 Other operating expenses 804,562 873,861 ----------- ---------- Total expenses 6,039,884 4,782,430 ----------- ---------- Income (loss) from operations (1,255,963) 211,257 ----------- ---------- OTHER INCOME (LOSS) Unrealized gain (loss) on securities 4,959 (30,126) Realized gain (loss) on securities 14,838 (813) Loss on sale/disposal of fixed assets (436) -- All other 32,667 7,143 ----------- ---------- Total other income (loss) 52,028 (23,796) ----------- ---------- Income (loss) before income taxes (1,203,935) 187,461 Income taxes 12,610 4,562 ----------- ---------- Net income (loss) $(1,216,545) $ 182,899 =========== ========== Per share earnings Basic common shares outstanding 2,878,462 1,722,821 Net income (loss) - basic $ (0.42) $ 0.09 Fully diluted common shares outstanding 2,979,868 1,729,621 Net income (loss) - fully diluted $ (0.41) $ 0.09 See accompanying notes.
- 3 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------------- 2000 1999 ---- ---- Net income (loss) $(1,216,545) $182,899 Other comprehensive income (loss), net of tax Unrealized loss on securities, net of reclassification adjustment (49,197) -- ----------- -------- Comprehensive income (loss) $(1,265,742) $182,899 =========== ======== See accompanying notes
- 4 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------------- 2000 1999 ---- ---- CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) $(1,216,545) $ 182,899 Adjustments to reconcile net income to cash provided by (used) in operating activities: Deferred income taxes 30,406 (99,969) Provision for depreciation and amortization 235,498 222,995 Unrealized gain (loss) on investments (78,210) -- Loss on disposal of fixed assets 436 -- Loss on disposal of investment of debt securities 9,791 -- Results of affiliate/minority interest -- (6,841) Deferred start-up costs -- (100,000) (Increase) decrease in operating assets Receivables (64,282) (1,251,247) Prepaid and sundry assets 341,983 63,663 Net loans receivable (4,566,932) -- Bond investments (6,451,286) -- Federal funds sold 4,922,000 -- Due from banks (206,262) -- Other non-current assets (90,730) -- Increase (decrease) in operating liabilities Customer deposits 6,447,294 -- Payable to insurance companies 425,314 -- Payable to broker/dealer 238,397 -- Accounts payable and accrued expenses (894,609) (14,018) Accrued compensation and benefits 3,885 315,905 Other liabilities 67,897 (161,495) Accrued income taxes (26,902) (1,450) Other non-current liabilities (99,319) -- ----------- ----------- Net cash used in operating activities (972,176) (849,558) ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of equipment (207,995) (769,972) Proceeds from sale of fixed assets 80 -- Investment in securities and mutual funds (101,446) 50,320 Proceeds from sale of debt securities 181,291 -- ----------- ----------- Net cash used in investing activities (128,070) (719,652) ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issuance of common stock -- 179,800 Proceeds from reissuance of treasury stock 250,517 -- Proceeds from borrowings -- 373,700 Dividends to Unified Investment Services and Fully Armed Production shareholders -- (3,435) Proceeds from Federal and borrowed funds 438,525 -- Proceeds from line of credit borrowing 122,997 -- Repayment of borrowings (330,128) (1,271,509) Repayment of capital lease obligations (11,206) (13,679) ----------- ----------- Net cash provided (used) in financing activities 470,705 (735,123) ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (629,541) (2,304,333) CASH AND CASH EQUIVALENTS -- Beginning of year 5,709,082 10,380,848 ----------- ----------- CASH AND CASH EQUIVALENTS -- End of period $ 5,079,541 $ 8,076,515 =========== =========== See accompanying notes.
- 5 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2000 AND 1999 ----------------------- Note 1 - NATURE OF OPERATIONS Unified Financial Services, Inc., a Delaware holding company for various financial services companies that also does business as Unified.com, was organized on December 7, 1989. We distribute a vertically integrated financial services platform via the Internet and via the traditional industry channels of our subsidiaries. As of March 31, 2000, we maintained in excess of $1.5 billion of assets under management and $5 billion of assets under service. Through our subsidiaries, all of which are wholly owned, we provide services primarily in six lines of business: investment advisory, trust and retirement services; administrative and back office support services; brokerage and brokerage services; finance; insurance brokerage; and corporate and start-up. 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 three-month period ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The balance sheet at December 31, 1999 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-KSB for the year ended December 31, 1999. The consolidated financial statements give retroactive effect to our pooling-of-interest transactions. As a result, the consolidated statements of financial condition, statements of operations and statements of cash flows are consolidated for all periods presented. As required by generally accepted accounting principles, the consolidated financial statements become our historical consolidated financial statements upon issuance of the financial statements for the periods that include the date of the transaction. - 6 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2000 AND 1999 ----------------------- Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial Statement Presentation -------------------------------- Certain amounts in the 1999 financial statements have been reclassified to conform to the 2000 presentation. Note 3 - INVESTMENTS IN DEBT AND EQUITY SECURITIES First Lexington Trust Company, a subsidiary of our company, was required by the Kentucky Department of Financial Institutions to maintain a minimum of $800,000 capital while trust assets under management did not exceed $100,000,000. When trust assets under management exceeded $100,000,000, the capital requirement increased by $350,000. Each incremental increase of $25,000,000 in assets under management over $100,000,000 requires the capital requirement to increase by $90,000. First Lexington Trust Company's capital requirement as of March 31, 2000 and December 31, 1999 was $1,690,000 and $1,510,000, respectively. It is our intention to hold the required capital in debt securities and cash accounts to conform to this requirement. 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. As of March 31, 2000, our board of directors had granted options to acquire 101,406 shares of our common stock to certain of our employees, directors and advisers. Such options have exercise prices as follows: 6,400 share at $25.00 per share 19,231 share at $27.50 per share 500 share at $30.25 per share 74,775 share at $40.00 per share 500 share at $44.00 per share As of March 31, 2000, 99,106 of such options were intended to qualify as incentive stock options pursuant to Section 422 of the Internal Revenue Code of 1986, as amended. Options outstanding at December 31, 1999 105,961 Options issued during period at exercise price of $40.00 per share 6,650 Options exercised during period -- Forfeitures At $27.50 per share 320 At $40.00 per share 10,885 Options outstanding at March 31, 2000 101,406 - 7 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2000 AND 1999 ----------------------- Note 5 - DEBT AND RELATED MATTERS Debt at March 31, 2000 consisted of the following: Bank notes payable: ------------------- Payable in monthly installments including interest at prime plus .5%, final payment due December 31, 2001, collateralized by communication and computer hardware and software $ 145,737 Payable in monthly installments including interest at 8.5%, final payment due June 30, 2000, secured by assignment of receivables 1,993,750 Payable at maturity, June 30, 2000, interest at prime, secured by assignment of receivables 1,850,000 Payable in monthly installments including interest at 8.25%, final payment due March 31, 2014, collateralized by equipment 361,400 Payable in monthly installments including interest at 10.4%, final payment due April 26, 2002, collateralized by equipment 14,466 Loan payable at maturity, December 31, 2000, interest at 10.25% 12,515 ---------- 4,377,868 Less current maturities 3,906,647 ---------- Long-term portion $ 471,221 ==========
The maturities of long-term debt maturity for each of the succeeding five years subsequent to March 31, 2000, are as follows: 2000--$3,906,648; 2001--$53,694; 2002--$48,410; 2003--$49,231; 2004 and beyond--$319,885. - 8 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2000 AND 1999 ----------------------- Note 6 - CAPITAL LEASE OBLIGATIONS We lease both computer and office equipment under capital leases. The lease obligations are payable over a 60-month period. The following is a summary of future minimum lease payments under capitalized lease obligations as of March 31, 2000: YEAR ENDED MARCH 31, AMOUNT -------------------- ------ 2000 $23,672 2001 5,085 2002 724 2003 301 ------- 29,782 Less: amount representing interest 1,982 ------- Total $27,800 ======= Note 7 - RENTAL AND LEASE INFORMATION We lease certain office facilities and equipment. Rental expense for the three months ended March 31, 2000 and 1999 was $245,485 and $206,374, respectively. At March 31, 2000, we were committed to minimal rental payments under certain noncancellable operating leases. Generally, these leases include cancellation clauses. As of March 31, 2000, the minimum future rental commitments for each of the succeeding five years subsequent to March 31, 2000 were as follows: 2001--$1,722,292; 2002--$1,653,798; 2003--$738,461; 2004--$558,108; and 2005 and thereafter--$1,555,660. Note 8 - 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, 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 financial position or results of operations. Note 9 - CASH SEGREGATED UNDER FEDERAL REGULATION AND NET CAPITAL REQUIREMENTS Unified Management Corporation, Unified Investment Services and AmeriPrime Financial Securities are subject to the Securities and Exchange Commission's Uniform Net Capital Rule ("Rule 15c3-1"), which requires the maintenance of minimum net capital, as defined, of the greater of (i) 6-2/3% of aggregate indebtedness or (ii) $50,000 for Unified Management Corporation, and $5,000 for Unified Investment Services and AmeriPrime Financial Securities, whichever is greater, and a ratio of aggregate indebtedness to net capital of not more than 15 to 1. At March 31, 2000, the net capital and ratio of aggregate indebtedness for each of these entities was as follows: - 9 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2000 AND 1999 ----------------------- Note 9 - CASH SEGREGATED UNDER FEDERAL REGULATION AND NET CAPITAL REQUIREMENTS (continued) MARCH 31, 2000 ---------- Net capital: Unified Management Corporation $358,972 Unified Investment Services 6,700 AmeriPrime Financial Securities 279,544 Ratio of aggregate indebtedness: Unified Management Corporation 1.93 to 1 Unified Investment Services .03 to 1 AmeriPrime Financial Securities 0 to 1 Pursuant to Rule 15c3-3 as promulgated by the Securities and Exchange Commission, Unified Management Corporation, Unified Investment Services and AmeriPrime Financial Securities calculate their reserve requirement and segregate cash and/or securities for the exclusive benefit of their customers on a periodic basis. The reserve requirement for Unified Management Corporation, Unified Investment Services and AmeriPrime Financial Securities was $-0- at March 31, 2000. Balances segregated in excess of reserve requirements are not restricted. Note 10 - COMMON STOCK Effective December 10, 1998, we commenced a private placement offering to sell a maximum of 1,750,000 shares of our common stock. Effective September 27, 1999, the size of the offering was reduced to 750,000 shares of our common stock, which shares were offered at a price of $40.00 per share. The offering terminated on March 31, 2000. For the three months ended March 31, 2000 and 1999, we issued 8,600 and 4,495 shares, respectively, of our common stock. For the three months ended March 31, 2000 and 1999, aggregate brokerage fees of $34,400 and $0, respectively, were paid to Unified Management Corporation and Unified Investment Services in connection with this private placement offering, which amount is inclusive of $18,300 and $0, respectively, paid to external brokerage firms. In our private placement, all shares of our common stock were offered on a best efforts basis. There is no public market for any of our securities and there can be no assurance that a market will develop in the future. The securities offered and sold by us in our private placement will not be and have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. - 10 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2000 AND 1999 ----------------------- Note 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair value of our financial instruments at March 31, 2000 and 1999. 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.
MARCH 31, --------------------------------------------------------------- 2000 1999 --------------------------- --------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------- --------- --------- --------- (IN THOUSANDS) Financial assets: Cash and cash equivalents $ 5,079.5 $ 5,079.5 $ 8,076.5 $ 8,076.5 Investment in: Debt securities 882.8 882.8 994.2 994.2 Mutual funds 881.3 881.3 690.8 690.8 Loans receivable 7,377.8 7,377.8 -- -- Receivables (trade) 9,669.1 9,669.1 10,161.8 10,161.8 Prepaid and sundry 557.8 557.8 215.2 215.2 Financial liabilities: Current liabilities 25,914.3 25,914.3 10,717.7 10,717.7 Capital lease obligation 27.8 27.8 78.5 78.5 Long-term debt 2,527.9 2,527.9 5,059.0 5,059.0
Note 12 - DISCLOSURES ABOUT REPORTING SEGMENTS We have six reportable segments: investment advisory, trust and retirement services; administrative and back office support services, brokerage and brokerage services; finance; insurance brokerage; and corporate and start-up. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on profit or loss from operations before income taxes, not including recurring gains and losses. Our reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were acquired as a unit and the management at the time of the acquisition was retained. Reportable segment revenues, gross margin, total assets, capital expenditures and depreciation and amortization were as follows as of and for the three months ended March 31, 2000 and 1999: - 11 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2000 AND 1999 ----------------------- Note 12 - DISCLOSURES ABOUT REPORTING SEGMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, --------------------------- 2000 1999 ---- ---- (IN THOUSANDS) Revenues: Investment advisory, trust and retirement services $ 1,642.1 $ 1,480.3 Administrative and back office support services 1,413.3 941.1 Brokerage and brokerage services 1,000.8 887.6 Finance 109.4 109.3 Insurance brokerage 2,235.0 2,319.9 Corporate and start-up 537.9 895.6 --------- --------- Total $ 6,938.5 $ 6,633.8 ========= ========= Gross margin: Investment advisory, trust and retirement services $ 1,585.7 $ 1,418.4 Administrative and back office support services 1,253.8 837.3 Brokerage and brokerage services 360.3 447.9 Finance 107.7 109.3 Insurance brokerage 1,160.0 1,285.1 Corporate and start-up 316.4 895.6 --------- --------- Total $ 4,783.9 $ 4,993.6 ========= ========= Total assets Investment advisory, trust and retirement services $ 6,147.1 $ 5,958.5 Administrative and back office support services 2,186.5 1,421.2 Brokerage and brokerage services 1,600.0 1,351.4 Finance 2,273.4 1,963.7 Insurance brokerage 6,549.3 7,920.9 Corporate and start-up 23,384.3 7,704.9 --------- --------- Total $42,140.6 $26,320.6 ========= ========= Capital expenditures: Investment advisory, trust and retirement services $ 56.2 $ 25.7 Administrative and back office support services 11.2 35.3 Brokerage and brokerage services 1.8 14.3 Finance 13.9 5.9 Insurance brokerage 13.8 31.9 Corporate and start-up 111.0 656.9 --------- --------- Total $ 207.9 $ 770.0 ========= ========= Depreciation and amortization: Investment advisory, trust and retirement services $ 52.3 $ 70.1 Administrative and back office support services 21.5 19.3 Brokerage and brokerage services 8.4 8.1 Finance 11.2 15.3 Insurance brokerage 29.4 55.8 Corporate and start-up 112.6 54.3 --------- --------- Total $ 235.4 $ 222.9 ========= =========
- 12 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2000 AND 1999 ----------------------- Note 13 - SUBSEQUENT EVENTS On February 10, 2000, First Lexington Trust Company, a subsidiary of our company, filed applications with the Office of the Comptroller of the Currency to convert to a limited purpose national banking association. On May 9, 2000, the Office of the Comptroller of the Currency approved our applications. Upon consummation of the proposed transaction, First Lexington Trust Company will be renamed "Unified Trust Company, National Association." We believe that a national charter will more easily allow First Lexington Trust Company to pursue its business strategy of expanding its business outside of the Commonwealth of Kentucky. We anticipate consummating the conversion by June 30, 2000. - 13 - 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 down turn in economic conditions generally and in particular those affecting bond and securities markets could lead to an exit of investors from mutual funds. Similarly, an increase in Federal and state regulations of the mutual fund, insurance or banking industries or the imposition of regulatory penalties could have an effect on our operating results. These uncertainties, as well as others, are present in the financial services industry and stockholders are cautioned that management's view of the future on which we price and distribute our products and estimate costs of operations and regulations may prove to be other than as anticipated. 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 set forth herein under "Risk Factors." 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 for various financial services companies that also does business as Unified.com, was organized on December 7, 1989. We distribute a vertically integrated financial services platform via the Internet and via the traditional industry channels of our subsidiaries. Our principal business is: (1) to provide and maintain vertical integration in the financial services industry for our subsidiaries, a platform that creates synergy and revenues among our subsidiaries from the fees associated with gathering, managing, maintaining and servicing assets under management; (2) to distribute our products and services platform via the Internet through a "plug in" marketing and distribution strategy to a number of compatible Internet channels via Unified.com; and (3) to distribute our platform through the traditional industry outlets of our subsidiaries' retail and institutional customers. Our subsidiaries concentrate their services over the following six business lines: investment advisory, trust and retirement services; administrative and back office support services; brokerage and brokerage services; finance; insurance brokerage; and corporate and start-up. We provide management services, working capital, systems support and development and equipment for our subsidiaries. Maintaining the vertically integrated platform is primarily accomplished through three strategies: (1) consolidating financial services companies that expand or deepen the integration by eliminating cost centers, increasing distribution and/or increasing products and services by means of tax-free, stock-for-stock transactions (This particular consolidation strategy is driven by our goal to protect, maintain, nurture and advance the entrepreneurial spirit of small businesses by providing capital, synergy and vertical integration in an "autonomous" subsidiary environment.); (2) the formation of new subsidiaries to develop proprietary products and services that deepen the integration by eliminating cost centers, increasing distribution and/or increasing products and services that enhance and advance the synergy and - 14 - revenues among our subsidiaries; and (3) consolidating small mutual funds into our mutual fund families by means of tax-free reorganizations (The mutual fund consolidation strategy is assisted by our mutual fund services capabilities and a highly qualified systems staff which provides innovative and flexible programming options, alternatives and solutions required by small mutual funds to compete against the larger capitalized mutual fund families.) Once a component of our vertically integrated network, each subsidiary then implements its individual business plan in an autonomous environment and achieves its growth and thereby increases earnings predominantly by: (1) distributing our products and services through the Internet and through its traditional retail and institutional "industry" outlets; (2) leveraging the existing infrastructure and utilizing the vertically integrated platform to fully realize and affect the synergy and the related earnings impact to our stock; (3) acquisitions by the subsidiary, using our stock and/or capital, to obtain important and critical business components that complement and enhance its operations; (4) utilizing our capital for necessary expansion; (5) traditional advertising, marketing and selling of the subsidiary's products and services; and (6) networking with our subsidiaries. Our principal executive offices are located at 431 North Pennsylvania Street, Indianapolis, Indiana 46204, and our telephone number is (317) 917-7001. We also maintain administrative offices at 2353 Alexandria Drive, Suite 100, Lexington, Kentucky 40504, telephone number (606) 296-4407; 220 Lexington Green Circle, Suite 600, Lexington, Kentucky 40512, telephone number (606) 245-2500; 1793 Kingswood Drive, Southlake, Texas 76092, telephone number (817) 431-2197; and at 36 West 44th Street, The Bar Association Building, Suite 1310, New York, New York 10036, telephone number (212) 852-8852; and One Firstar Plaza, Suite 2605, St. Louis, Missouri 63101, telephone number (314) 552-6440. COMPARISON OF RESULTS FOR THE THREE MONTHS MARCH 31, 2000 AND 1999 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. Revenues for the quarter ended March 31, 2000 compared to the quarter ended March 31, 1999 increased $304,603, or 4.6%, from $6,633,903 to $6,938,506. For such periods, investment advisory, trust and retirement services revenues increased $161,780, or 10.9%, from $1,480,368 to $1,642,148, administrative and back office support services revenues increased $472,253, or 50.2%, from $941,059 to $1,413,312, brokerage and brokerage services revenues increased $113,126, or 12.7%, from $887,649 to $1,000,774, finance revenues increased $149, or 0.1%, from $109,286 to $109,435, insurance brokerage revenues declined $85,076, or 3.7%, from $2,319,981 to $2,234,905, and corporate and start-up revenues declined $357,629, or 39.9%, from $895,628 to $537,932. Investment advisory, trust and retirement services revenues increased principally due to the growth in assets under management and an increase in the number of retirement accounts serviced. Our assets under management increased approximately $100 million from March 31, 1999 to March 31, 2000, while average revenues per assets under management declined slightly. The increase in administrative and back office support services revenues principally was due to an increase in the number of mutual fund clients serviced and growth in assets under service. Fund services revenues, a component of administrative and back office support services revenues, increased $507,142, or 91.3%, for the first quarter of 2000 compared to the first quarter of 1999, which amount was partially offset by a $30,016, or 12.5%, decline in claims services revenues and a $26,660, or 53.5%, decline in financial administration revenues for such quarters. The increase in brokerage and brokerage services revenues for the quarter - 15 - ended March 31, 2000 compared to the quarter ended March 31, 1999 was due to an increase in trading volume due to the volatile market conditions experienced in early 2000. For such periods, non-Internet trades increased by approximately 39.3% and the ratio of gross revenue per trade increased from $27.79 per trade during the first quarter of 1999 to $36.03 per trade during the first quarter of 2000. Our Internet trading operation, which we started late in the first quarter of 1999, experienced a significant increase in the number of trades and an increase in the amount of revenue per trade. During the quarter ended March 31, 2000, commissions received by Unified Management Corporation in connection with the private placement of our common stock were approximately $34,400. Offsetting the increase in gross revenue was a decline in brokerage revenues at our Texas operation, which, during the first quarter of 1999, had a one-time commission of fund sales of approximately $100,000. Finance revenues, which are related to our insurance activities, remained constant between quarters. Insurance brokerage revenues declined for the quarter ended March 31, 2000 compared to the quarter ended March 31, 1999 due to the sale of our Chicago insurance operations' book of business at year-end 1999. For the quarter ended March 31, 2000, revenues from our continuing insurance operations increased approximately 14.5% compared to the first quarter of 1999 due to an increase in overall premiums written. Current quarter premiums written totaled $9,417,000 as compared to $8,263,000 for the first quarter of 1999, an increase of 13.9%. Personal lines business premiums, which accounted for approximately 26% of the total premium volume, increased approximately 13.0% to $2,431,000 for the first quarter of 2000 compared to $2,151,000 during the first quarter of 1999. Commercial lines business premiums rose approximately 14.3% to $6,985,000 for the quarter ended March 31, 2000 compared to $6,112,000 during the first quarter of 1999. For the quarter ended March 31, 2000, corporate and start-up revenues declined compared to the first quarter of 1999 due to a one-time revenue item included in the 1999 results, partially offset by $310,000 in revenues at Unified Banking Company, which commenced business on November 11, 1999. Gross profit for the quarter ended March 31, 2000 compared to the quarter ended March 31, 1999 declined $209,766, or 4.2%, from $4,993,687 to $4,783,921. For such periods, gross profit as a percentage of revenue declined to 68.9% from 75.3%. Investment advisory, trust and retirement services gross profit increased to $1,585,717 for the quarter ended March 31, 2000 from $1,418,368 for the quarter ended March 31, 1999 due to increased assets under management. Administration and back office support services gross profit increased to $1,253,789 for the quarter ended March 31, 2000 from $837,313 for the quarter ended March 31, 1999, primarily due to an increase in assets under service and the number of mutual fund clients served. Brokerage and brokerage services gross profit declined to $360,301 for the quarter ended March 31, 2000 from $447,586 for the first quarter of 1999 due to the loss of one client, partially offset by an increase in the number of securities and mutual funds trades, higher commissions on trades and trail commissions from mutual funds and the commissions received in connection with our private placement. The unit cost per trade remained consistent on the increased volume. Our finance operations gross margin of $107,652 for the first quarter of 2000 was comparable to the gross margin of $109,286 for the first quarter of 1999. Insurance brokerage gross profit of $1,160,041 declined $125,086 for the quarter ended March 31, 2000 compared to the first quarter of 1999. Our sale of the book of business of our Chicago insurance brokerage operation accounted for $174,358 of the difference, and was partially offset by an increase in business written by our continuing insurance operations. For the quarter ended March 31, 2000 compared to the quarter ended March 31, 1999, corporate and start-up gross profit declined due to a non-recurring revenue item that was included in the 1999 results and a decline in interest income earned on the proceeds of our private placements, partially offset by the results of Unified Banking Company, which was not included in our results of operations for the first quarter of 1999. Results from operations for the quarter ended March 31, 2000 was a loss of $1,255,963 compared to income from operations of $211,257 for the same quarter last year. Total expenses for the quarter ended March 31, 2000 were $6,039,884, or 87.0% of total revenue, as compared to $4,782,430, or 72.1% of total revenue, for the quarter ended March 31, 1999. Expenses during the quarter ended March 31, - 16 - 2000 were up significantly due to the following: (i) additional staffing at our administrative and back office support services and investment advisory, trust and retirement operations which have experienced significant growth in new clients and assets under services and assets under management, coupled with an increased marketing effort (represented a $175,000 increase for the first quarter of 2000 compared to the same period last year); (ii) the re-engineering of trust services with the hiring of additional technical personnel and additional spending to improve recordkeeping and computer systems to provide clients with the highest quality services (represented $40,000 of total expenses for the quarter ended March 31, 2000 compared to $10,000 for the first quarter of 1999); (iii) our Internet on-line brokerage service, which required additional staff, website development and other website costs (represented $91,000 of the total expenses for the first quarter of 2000 compared to $0 for the first quarter of 1999); (iv) the ability of our clients to view their accounts via the Internet and the development of websites for us and each of our subsidiaries (represented a $35,000 increase for the first quarter of 2000 compared to the first quarter of 1999); and (v) our management expansion program which started in late 1998 and which has resulted in the hiring of numerous individuals who should contribute significantly to our future results (represented an increase of $217,000 for the quarter ended March 31, 2000 compared the quarter ended March 31, 1999). In addition, our start-up companies, VSX Technologies, Archer Trading, Unified Banking Company, Unified Capital Resources and Unified Employee Services added $1,113,000 in expense to the first quarter of 2000 compared to $31,000 for the first quarter of 1999. For the first quarter of 2000, employee compensation and benefits expense increased $759,000, or 31.4%, compared to the first quarter of 1999 due to personnel associated with our start-up companies, which accounted for $333,151 of the increase in expenses, expansion of our senior management team and the hiring of additional accounting and information services personnel, which accounted for $250,000 of the increase in expenses, and the hiring of additional personnel at our administration and back office support services operations in response in the increase in the volume of business of this operation. Fund services operating expenses increased $125,000, or 302.9%, due to an increase in pricing from third-party vendors, the number of user licenses we require and investment advisory expenses. Mail and courier expense increased $33,000, or 27.0%, from the first quarter of 1999 to the first quarter of 2000 due to additional marketing efforts at our insurance brokerage operations, Unified Banking Company and certain other start-up companies. For the first quarter of 2000, telephone expense increased $73,000, or 99.4%, compared to the first quarter of 1999 due to telephone costs associated with our start-up companies as well as increased marketing efforts by our insurance brokerage operations. Professional fees increased $138,000, or 29.6%, for the first quarter of 2000 compared to the first quarter of 1999 due to certain one-time consulting fees paid by us in the first quarter of 2000. Travel and entertainment expense increased $139,000, or 148.1%, for the first quarter of 2000 compared to the first quarter of 1999 due to costs associated with our private placement, the opening of Unified Banking Company and certain other start-up companies as well as additional travel by systems, legal and accounting personnel. Total other income was $52,028 for the first quarter of 2000, an increase of $75,824 from the $23,796 loss reported for the first quarter of 1999. Unrealized gain on securities of $4,959 during the quarter ended March 31, 2000 compared to a $30,126 loss during the quarter ended March 31, 1999. Realized gain on securities of $14,838 during the quarter ended March 31, 2000 compared to a $813 loss during the quarter ended March 31, 1999. All other income of $32,667 for the first quarter of 2000 compared to $7,143 for the first quarter of 1999. Net loss was $1,216,545 for the quarter ended March 31, 2000 compared with net income of $182,899 for the quarter ended March 31, 1999. For the quarter ended March 31, 2000, the increase in revenues, 4.6%, was offset by the increase in expenses, 26.3%, as compared to the first quarter of 1999. - 17 - LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity historically have been and continue 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 decrease in cash and cash equivalents at March 31, 2000 from December 31, 1999 was $629,541. The net decrease reflected the repayment of borrowings, the purchase of fixed assets and a decline in accounts payable. We received $344,000 from the issuance of 8,600 shares of common stock in our private placement during the three months ended March 31, 2000. Subject to the receipt of the required regulatory approvals, management anticipates that Phase I of the VSX.com business model will be completed by the end of the fourth quarter of 2000. We will begin taking the necessary actions to complete Phase II and Phase III of the business model upon completion of Phase I. We currently estimate that we will incur approximately $3.0-$5.0 million of costs (expenses and capital expenditures) in connection with Phase I of the project. Management estimates that an additional $5.0-$10.0 million of costs will be incurred with Phase II and Phase III of the project. The anticipated costs to build the VSX.com "brand" are not part of the estimated expenditures of Phases I, II and III. Management currently is negotiating to obtain third-party financing with respect to Phase I of the project. Management believes that Phase II and Phase III will be funded from revenues generated by VSX.com upon completion of Phase I. There can be no assurance that we will be successful in securing the required financing, in launching any phase of the VSX.com project or that the project will be a commercial success. We believe that anticipated revenues from operations should be adequate for the working capital requirements of our existing core businesses over the next twelve months. In the event that our plans or assumptions change, or if our resources available to meet unanticipated changes in business conditions prove to be insufficient to fund operations, we could be required to seek additional financing prior to that time. RISK FACTORS You should carefully consider the risks described below before making a decision to invest in Unified Financial Services. The risks and uncertainties described below are not the only risks that we face. If any of the following risks actually occur, our business, financial condition or results of future operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. NEED FOR ADDITIONAL CAPITAL; RISK RELATING TO ACQUISITIONS. Our pending and proposed projects have required and will continue to require substantial capital for investments in and development of such projects. There can be no assurance that we will be able to raise the capital necessary to fund our projects. The failure to raise or generate such funds may require us to delay or abandon some of our planned future expansion or expenditures, which could have a material adverse effect on our growth. To expand our markets and take advantage of the consolidation trend in the financial services industry, our business strategy includes growth through acquisitions. Although we believe that the operations of the companies we have acquired since June 1, 1997 are being successfully integrated with our operations, there can be no assurance that such integration will continue to be successful, that future acquisitions can be consummated on acceptable terms or that any acquired companies can be successfully - 18 - integrated into our operations. We also are continually investigating opportunities for acquisitions. In connection with future acquisitions, we may incur additional indebtedness or may issue additional equity. Our ability to make future acquisitions may be constrained by our ability to obtain such additional financing. To the extent we use equity to finance future acquisitions, there is a risk of dilution to holders of our common stock. In addition, acquisitions may involve a number of special risks, including: initial reductions in our reported operating results; diversion of management's attention; unanticipated problems or legal liabilities; and a possible reduction in reported earnings due to amortization of acquired intangible assets in the event that such acquisitions are made at levels that exceed the fair market value of net tangible assets. Some or all of these items could have a material adverse effect on us. There can be no assurance that businesses acquired in the future will achieve sales and profitability that justify the investment therein. In addition, to the extent that consolidation becomes more prevalent in the industry, the prices for attractive acquisition candidates may increase to unacceptable levels. ANTICIPATE TO INCUR OPERATING LOSSES FOR THE FORESEEABLE FUTURE. In connection with our shift from traditional distribution channels to an Internet distribution strategy and the development of new distribution channels, we anticipate that we will incur operating losses for the foreseeable future. We believe that our revenues will continue to increase but that operating expenses will increase significantly due to the costs associated with the implementation of our business plan. In addition, we will incur non-recurring costs in connection with exiting certain businesses that are not now part of our business strategy. REVENUE GROWTH FROM ELECTRONIC COMMERCE MAY NOT DEVELOP. Our growth strategy is based upon a shift from traditional distribution channels to distribution via the Internet. If we do not generate increased revenues from electronic commerce, our business, financial condition and operating results could be materially adversely affected. To generate significant electronic revenues, we will have to successfully implement our business plan. DEVELOPMENT OF THE ELECTRONIC COMMERCE MARKET IS UNCERTAIN. If electronic commerce does not grow or grows slower than expected, our business may suffer. Our Internet distribution strategy depends upon widespread market acceptance of electronic commerce. A number of factors could prevent such acceptance, including the following: * electronic commerce is at an early stage and buyers may be unwilling to shift their purchasing from traditional vendors to online vendors; * the necessary network infrastructure for substantial growth in usage of the Internet may not be adequately developed; * increased government regulation or taxation may adversely affect the viability of electronic commerce; * insufficient availability of telecommunication services or changes in telecommunication services could result in slower response times; and * adverse publicity and consumer concern about the security of electronic commerce transactions could discourage its acceptance and growth. THERE IS INTENSE COMPETITION FOR INTERNET PRODUCTS AND SERVICES, ADVERTISING AND SALES OF GOODS AND SERVICES. Competition for Internet products and services, advertising and electronic commerce is intense. We expect that competition will continue to intensify. Barriers to entry are minimal, and competitors can launch new Web sites at a relatively low cost. Our competitors may - 19 - develop Internet products and services that are superior to, or have greater market acceptance than, our solutions. If we are unable to compete successfully against our competitors, our business, financial condition and operating results will be adversely affected. Many of our competitors have greater brand recognition and greater financial, marketing and other resources than us. This may place us at a disadvantage in responding to our competitors' pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. RISKS ASSOCIATED WITH RAPID GROWTH. We have experienced rapid growth in net revenues and expansion of our operations and anticipate that further significant expansion will be required to address potential growth in our customer base and market opportunities. Such growth has placed, and, if sustained, will continue to place, strain on our management, information systems, operation and resources. Our ability to manage any future growth will continue to depend upon the successful expansion of our sales, marketing, customer support, administrative infrastructure and the ongoing implementation and improvement of a variety of internal management systems, procedures and controls. Continued growth also will require us to hire more personnel, and expand management information systems. Recruiting qualified personnel is an intensely competitive and time-consuming process. There can be no assurance that we will be able to attract and retain the necessary personnel to accomplish our growth strategies or that we will not experience constraints that will adversely affect our ability to support satisfactorily our clients and operations. There can be no assurance that we will be able to attract, manage and retain additional personnel to support any future growth, if any, or will not experience significant problems with respect to any infrastructure expansion or the attempted implementation of systems, procedures and controls. If our management is unable to manage growth effectively, our business, financial condition and results of operations could be materially adversely affected. DEPENDENCE UPON TECHNOLOGY; PROPRIETARY RIGHTS. Our success and ability to compete is dependent in part upon our technology, although we believe that our success is more dependent upon our technical expertise than our proprietary rights. We principally rely upon a combination of copyright, trademark and trade secret laws and contractual restrictions to protect our proprietary technology. It may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization or to develop similar technology independently, and there can be no assurance that such measures have been, or will be, adequate to protect our proprietary technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. We propose to operate a substantial portion of our business over the Internet, which is subject to a variety of risks. Such risks include, but are not limited to, the substantial uncertainties that exist regarding the system for assigning domain names and the status of private rules for resolution of disputes regarding rights to domain names. There can be no assurance that we will continue to be able to employ our current domain names in the future or that the loss of rights to one or more domain names will not have a material adverse effect on our business and results of operations. Although we do not believe that we infringe the proprietary rights of any third parties, there can be no assurance that third parties will not assert such claims against us in the future or that such claims will not be successful. We could incur substantial costs and diversion of management resources with respect to the defense of any claims relating to proprietary rights, which could have a material adverse effect on our business, financial condition and results of operations. In addition, we may become obligated under certain agreements to indemnify another party in connection with infringement by us of the proprietary rights of third parties. In the event we are required to indemnify parties under these agreements, it could have a material adverse effect on our business, financial condition and results of operations. In the event a claim relating to proprietary technology or information is asserted against us, we may seek licenses to such intellectual property. There can be no assurance, however, that licenses could be obtained on commercially reasonable terms, if at all, or that the terms of any offered licenses - 20 - would be acceptable to us. The failure to obtain the necessary licenses or other rights could have a material adverse effect on our business, financial condition and results of operations. RISKS TO PHYSICAL NETWORK; RISKS TO INTEGRITY OF DATA ON NETWORK. Our operations are partially dependent upon our ability to protect our network infrastructure against damage from fire, earthquakes, severe flooding, mudslides, power loss, telecommunications failures and similar events or to construct networks that are not vulnerable to the effects of these events. The occurrence of a natural disaster or other unanticipated problems at our network in the future could cause additional major interruptions in the services provided by us. In addition, some networks may experience interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. Unauthorized use of our network could jeopardize the security of confidential information stored in our computer systems, which may result in liability to our customers or deter potential customers. Our failure to adequately manage service disruptions resulting from physical damage to our network or breaches of the network's integrity, could have a material adverse effect on our business, financial condition and results of operations. SECURITY RISKS. Despite the implementation of network security measures by us, such as limiting physical and network access to our routers, our Internet access systems and information services are vulnerable to computer viruses, break-ins and similar disruptive problems caused by our customers or other Internet users. Such problems caused by third parties could lead to interruption, delays or cessation in service to our customers. Furthermore, such inappropriate use of the Internet by third parties also could potentially jeopardize the security of confidential information stored in the computer systems of our customers and other parties connected to the Internet, which may deter potential subscribers. Persistent security problems continue to plague public and private data networks. Recent break-ins reported in the press and otherwise have reached computers connected to the Internet at major corporations and Internet access providers and have involved the theft of information, including incidents in which hackers bypassed firewalls by posing as trusted computers. Alleviating problems caused by computer viruses, break-ins or other problems caused by third parties may require significant expenditures of capital and resources by us, which could have a material adverse effect on us. Until more comprehensive security technologies are developed, the security and privacy concerns of existing and potential customers may inhibit the growth of the Internet service industry in general and our customer base and revenues in particular. Moreover, if we experience a breach of network security or privacy, there can be no assurance that our customers will not assert or threaten claims against us based on or arising out of such breach, or that any such claims will not be upheld, which could have a material adverse effect on our business, financial condition and results of operation. NO ASSURANCE OF FUTURE GROWTH. There can be no assurance that we will continue to achieve growth in assets or earnings. Our ability to achieve such growth will be dependent upon numerous factors including, but not limited to, general economic conditions, our ability to recruit qualified personnel, our ability to promptly and successfully integrate acquired businesses with our existing operations and our ability to execute our business plan. COMPETITION. We encounter substantial competition in the businesses in which we compete. Our principal competitors include mutual funds, investment advisers, investment counsel firms and financial institutions such as banks, savings and loan institutions and credit unions. Many of the institutions with which we compete are larger and have substantially greater financial resources than us. - 21 - 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 our long-term profitability. 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. 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 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. We have a hands-on management philosophy, which provides for clear communication between all responsible parties for handling of fixed-income and equity securities. We do not act as a dealer, trader or end-user of complex derivative products, such as swaps, collars or caps nor do we provide advice or guidance on complex derivative products to clients. Interest rate risk refers to the risk of changes in the level or volatility of interest rates, the speed of payments on loans and the shape of yield curve and credit spreads. On November 1, 1999, Unified Banking Company, a federal savings bank and wholly owned subsidiary of our company, began operations. Unified Banking Company offer to the general public traditional banking products and services. On or before June 30, 2000, Unified Banking Company will establish guidelines, which will be approved by its board of directors, to monitor changes in net interest income due to movements in interest rates. The primary purpose of interest rate risk management is to control the effects of interest rate movements on net income. Unified Banking Company intends to develop computer simulation models, which will give an indication of the effect of interest rate movements. We consider interest rate risk to be the most important market risk. Unified Banking Company's pricing policy is that generally all earning assets and interest bearing liabilities be either based on floating rates or have a fixed rate not exceeding five years. Real estate mortgages originated by Unified Banking Company and held on its books, while having longer that five-year amortization schedules, are comprised of five-year or less fixed rates or variable rate loans. To reduce exposure to interest rate movements, Unified Banking Company originates and sells in the secondary market those real estate loans with longer than five year fixed rates. - 22 - PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS For the three months ended March 31, 2000, the only sales of our securities were 8,600 shares of our common stock issued by us in connection with our private placement at a price of $40.00 per share. All shares of stock issued by us during such period were issued pursuant to the exemption provided by Rule 506, as promulgated by the Securities and Exchange Commission. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index attached hereto. (b) Reports on Form 8-K. On February 4, 2000, we filed a Current Report on Form 8-K to report that we had terminated negotiations with Medical Acceptance Corporation regarding our proposed acquisition of Medical Acceptance Corporation, a Kentucky corporation that specialized in health care self-pay and billing accounts. - 23 - SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIFIED FINANCIAL SERVICES, INC. (Registrant) Dated: May 19, 2000 By: /s/ Timothy L. Ashburn --------------------------------------- Timothy L. Ashburn, Chairman and Chief Executive Officer Dated: May 19, 2000 By: /s/ Thomas G. Napurano --------------------------------------- Thomas G. Napurano, Executive Vice President and Chief Financial Officer - 24 - EXHIBIT INDEX Ex. No. Description - ------- ----------- 11.1 Computations of Earnings per Share. 27.1 Financial Data Schedule (March 31, 2000). 27.2 Restated Financial Data Schedule (March 31, 1999). - 25 - EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 UNIFIED FINANCIAL SERVICES, INC. EARNINGS PER SHARE CALCULATION
THREE MONTHS ENDED MARCH 31, ------------------------- 2000 1999 ----------- ---------- INCOME AVAILABLE TO COMMON STOCKHOLDERS Net income (loss) $(1,216,545) $ 182,899 Preferred dividends -- -- ----------- ---------- Income available to common stockholders $(1,216,545) $ 182,899 =========== ========== CALCULATION OF COMMON STOCK Common shares outstanding at beginning of period 2,869,862 2,267,449 Shares issues re: acquisition of M. Wilson and Associates -- 33,636 Shares issued re: acquisition of Fully Armed Production -- 18,182 Shares issued re: acquisition of Commonwealth Investment Services -- 27,500 Shares issued in private placement during period 8,600 4,495 ----------- ---------- Common shares used in basic calculation 2,878,462 2,351,262 ----------- ---------- Common stock equivalent of options 101,406 6,800 Preferred stock Series C conversion in common stock -- 100,713 ----------- ---------- Common shares used in fully diluted calculation 2,979,868 2,458,775 ----------- ---------- EARNINGS PER SHARE Basic $ (0.42) $ 0.08 =========== ========== Fully diluted (0.41) 0.07 =========== ==========
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 part of the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2000 and is qualified in its entirety by reference to such report. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 5,079,541 12,847,719 9,669,115 119,100 0 36,053,144 6,661,297 3,685,676 42,140,613 27,992,982 0 33,294 0 0 13,632,010 42,140,613 0 6,938,506 2,154,585 2,154,585 6,039,884 62,000 127,564 (1,203,935) 12,610 (1,216,545) 0 0 0 (1,216,545) (0.42) (0.41)
EX-27.2 4 RESTATED 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 part of the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2000 and is qualified in its entirety by reference to such report. 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 8,076,515 690,811 10,200,196 38,326 0 19,144,442 5,322,952 3,113,538 26,320,579 13,916,510 0 27,677 0 1,672 10,002,470 26,320,579 0 6,633,903 1,640,216 1,640,216 4,782,430 0 125,053 187,461 4,562 182,899 0 0 0 182,899 0.08 0.07
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